States must bring an end to ‘competitive populism’ and discipline loss-making power boards. They should check their monopoly over power distribution

The Union Government has set up a committee to look into restructuring tariff to reduce the burden on industrial units, by making domestic and commercial consumers of electricity pay more (most States categorise those consuming more than 800 units a month as large domestic consumers). The committee will work on classifying consumers in two to three categories and sub-categories to bring transparency in power billing.

What is the triggerIJ At the outset, it is important to know as to (i) why industrial consumers are currently paying more, and (ii) what is the justification for seeking reduction in tariff applicable to themIJ The second question has a clear and unambiguous answer.  Electricity is a crucial input, used by manufacturing units. So, the tariff charged to them, has to be necessarily low to ensure that they stay competitive in both domestic and export markets.

As regards first, it is a known fact that power distribution is a ‘monopoly' of State electricity boards (SEBs) and tariff policies are decided by concerned States. Majority of them charge low heavily subsidised tariff from farmers (in some states, this is even 'free') and poor households. They also incur transmission and distribution losses — a sophisticated name for power theft. Together, these impose heavy financial burden on them, which States try to recover from industrial customers, by charging exorbitant rates.

Under the amended Electricity Act (2003), choice is given to bulk consumers — those with consumption, more than one megawatt (MW) — to choose their supplier. But, this is defeated by another provision in the Act, that requires them to pay an ‘open access surcharge (OAC)' to SEBs, whom they want to leave. By fixing surcharge at high level, they ensure that post-switch, effective cost of power tariff, charged by new supplier plus OAC, is higher than what they pay to SEBs. This renders switch un-economical.

The irony is that despite charging high tariff from industrial customers, SEBs incur heavy losses, as revenue from sale of electricity is grossly inadequate, to fully pay for cost of purchase and distribution. Since 2000, Central Government has come out with three financial restructuring packages (2002, 2012, 2015) to address their mounting losses. Yet, the boards have not come out of the red.

This is because States are in no mood to abandon populist policies. Even attempts to rein in cost of generation have not succeeded as independent power producers inflate fuel bills, which are readily allowed by regulators.

The concern for high cost of power to manufacturing units, is genuine. But, shifting burden to domestic consumers is not the way forward. At present, under extant rate structure for households, tariff is hiked with increase in monthly use. In this backdrop, it will be preposterous to further increase the already high charges on supplies to large residential and commercial customers.

Services account for more than 60 per cent of India's GDP. These are provided by tens of thousands entities, who fall in large commercial consumers category. If, tariff charged from them is further hiked from their existing high levels, this will seriously undermine their competitiveness. Clearly, it cannot be the intention of the Government to help manufacturing sector at the cost of making service sector un-competitive.

Clearly, the underlying assumptions behind the mandate given to the committee regarding large domestic consumers have an infinite capacity to pay more, and that this alone would help in easing high burden on industrial units are seriously flawed. Therefore, any move on these lines will only boomerang. It should be avoided.

A viable and sustainable solution to the problem of high tariff currently charged from manufacturing units can only be found within the framework of fundamental causes, behind high losses of SEBs. The Modi Government should goad: (i) States to stop giving subsidised/free power to farmers/households and curb theft; (ii) regulators to enforce strict norms for allowing cost to generators.

When viewed in the backdrop of ‘competitive populism', brazenly practised by political establishments of all hues (it shows no signs of abatement with States facing elections every now and then), this may be a tough call, but it is an inescapable necessity. A beginning could be made with BJP-ruled States.

(The writer is a public policy analyst)