Monday, February 17, 2014

AAP's Case for Lower Electricity Tariffs in Delhi

My article with this title appears in the Feb 22, 2014 issue of the Economic & Political Weekly as a commentary. It is reproduced below.


The Aam Aadmi Party (AAP) announced a 50% subsidy for electricity consumers using under 400 units a month within a few days of forming its government in Delhi. While the major political parties criticized the move, the state governments of Haryana and Maharashtra quickly followed suit announcing their own subsidies.

There is a strong public perception in Delhi that bills are inflated and that electricity distribution companies (discoms) have managed this by installing fast running meters and obtaining tariff increases by dubious means. The stiff resistance of the discoms to providing information under the RTI Act or to submit to a CAG audit served to strengthen this perception.The former Delhi Government also compromised itself in the public eye by stonewalling a CAG audit.

The AAP’s election promises spoke to these public concerns and its government has taken steps to fulfil them, including pushing for a CAG audit.AAP’s expectation is that the audit results will provide grounds for reducing the tariff. The subsidy has therefore been announced only for three months and its impact is less than 1% on the Delhi budget.

This commentary takes a critical look at the case made out by AAP for an audit of the discoms and lower tariffs after providing a brief introduction to the tariff fixing process. For more details on the subject of tariff determination as well as the disaggregated components of tariff of Delhi discoms, the reader is referred to Kasturi (2013).

Electricity distribution in Delhi, with the exception of the New Delhi Municipal Council area and the cantonment, is split between the Tata Power Delhi Distribution Ltd. (TPDDL) belonging to the Tata group, and BSES Rajdhani Power Ltd. (BRPL) and BSES Yamuna Power Ltd. (BYPL), both belonging to the Reliance ADAG group.

The tariff process requires the discoms to submit a multi-year plan to the Delhi Electricity Regulatory Commission (DERC) stating their annual revenue requirement that includes the cost of power, operation and maintenance expenses, depreciation, and a guaranteed return on capital employed. After review, the DERC approves the requirement for each utility and fixes a tariff structure that will enable all the utilities to meet their revenue requirements.

The actual performance of a discom in any year may differ from plan because of factors beyond its control. The discom gets an opportunity through a ‘true up’ petition to the DERC to ask for recognition of variation in expenditure and revenue from plan. The DERC, after validating the discom’s claims, issues a ‘true up’ order that spells out the revenue requirement and the revenue actually realized from sales that year, as recognized by the commission. A gap between the two provides the case for a revision of tariff.

‘True up’s’ happen after considerable delay. Discoms in Delhi submit their ‘true up’ petitions for any year, only a year later. The DERC then takes several months to arrive at its order. The last true up orders for Delhi discoms (as of writing in Feb 2014) were passed by DERC in July 2013 and square up the accounts of 2011-12.

For better clarity, the revenue requirement of the discom may be represented by its average cost per unit of power provided to the consumer. This cost is composed of the cost of the power procured, the cost associated with distribution loses (due to theft or technical loss) and the cost of distribution (including the profits guaranteed to the discom). The latter two, clubbed together is termed ‘distribution overhead’ in this commentary. The revenues realized by the discom from electricity sale may be represented, similarly, by an average billing rate.

Table 1 illustrates the average operational costs and billing rates for the three Delhi discoms for 2011-12. The discoms used the gap between average billing rate and operational cost to press for higher tariffs. We will proceed to examine in detail each component of cost and the revenue along with AAP’s contentions about them.

Table 1: Average operational costs and billing rates of Delhi discoms for 2011-12


TPDDL
BRPL
BYPL
Power purchase cost A
5.10
5.15
5.30
Distribution overhead B
1.61
1.96
2.50
Total cost C = A + B
6.72
7.10
7.80
Billing rate
5.24
5.16
5.11

All costs and rates are in Rs/unit; Power purchase cost is based on total number of units available at the discom network periphery. Other costs and rates are based on total number of units billed to customers.
Source: Respective 2011-12 ‘true up’ orders

Energy purchase and sales

The bulk of Delhi’s power requirement is met through long term purchase agreements with generation plants in the central and state sectors. Discoms enter the short term power market to meet peak loads and sell surplus power during lean periods. Table 2 shows the power purchase costs for TPDDL and BRPL.

Table 2: Power purchase cost of TPDDL and BRPL




2008-09
2009-10
2010-11
2011-12


%age
Rate
%age
Rate
%age
Rate
%age
Rate
NDPL
Long term purchase
89.7%
2.59
80.2%
2.81
82.4%
3.20
92.7%
3.88

Short term purchase
10.3%
4.35
19.8%
5.25
17.6%
5.56
7.3%
3.93

Transmission costs and losses

0.33

0.42

0.48

0.82

Surplus sales
11.3%
5.00
9.4%
4.11
12.7%
2.96
18.2%
2.94

Net for customers
88.7%
2.86
90.6%
3.68
87.3%
4.25
81.8%
5.10

Cost escalation due to short term trades
-1.8%

14.7%

16.4%

8.4%

BRPL










Long term purchase
91.1%
2.57
81.5%
2.81
80.9%
3.20
87.6%
4.04

Short term purchase
8.9%
4.54
18.5%
5.36
19.1%
5.12
12.4%
3.69

Transmission costs and losses

0.36

0.38

0.55

0.80

Surplus sales
9.2%
5.17
13.8%
3.66
18.0%
3.21
18.0%
3.23

Net for customers
90.8%
2.89
86.2%
3.66
82.0%
4.31
82.0%
5.15

Cost escalation due to short term trades
-0.8%

15.6%

15.7%

6.2%


Rates are in Rs/unit
Source: DERC ‘true up’ orders

Up till 2008-09, surplus power was sold at high rates and more than made up for the higher cost of short term purchases. In 2009-10 and 2010-11, this situation was reversed. Discoms bought larger amounts of short term power at high rates and sold surplus power at lower rates leading to an overall increase in the cost of power of 15-16%.

Based on the high rates obtained for surplus power in 2008-09 and projecting a greater surplus for 2010-11, the DERC in May 2010 was on the point of issuing an order reducing tariffs. The discoms complained against this to the Delhi Government which promptly stopped the DERC from making the order. The High Court, hearing a challenge to this government intervention in the DERC’s work, ruled a year later directing the government to desist from such interventions in future and asking the DERC to proceed with a new tariff order.

The DERC, by now under a new chairman, was presented with the 2009-10 accounts by the discoms which included huge overruns in power purchase costs. It accepted these cost overruns without questioning and increased tariffs through its tariff orders of August 2011.The above events are at the centre of AAP’s assertion that the tariff increases since August 2011 are unjustified.

A year later, in July 2012, the DERC acknowledged irregularities in power trades of the discoms in the ‘true up’ orders of 2010-11 accounts, stating that:

 “a competitive bidding process was not followed and power has been contracted on the basis of request for offers from traders (through verbal communication). As such, there were no supporting documents to validate the selection of the contracts against all the offers that may have been received” (BRPL) and

“Contracts for short term power purchase were finalized very early in the year and for most of them, competitive process was not followed…..it appears that that no efforts were made to sell through exchange or bilateral sources where better yields are expected.”(TPDDL)

After making these observations, the commission was content to rest the matter with the advice to the discoms that “there were scope for better management of the process of short term power purchase and sale of the surplus power so as to significantly promote the interests of the consumers.”

Another year on, things had still not been set right with power trading as is visible in DERC’s stricture to BYPL in Aug 2013:

“Contracts for sale of short-term power were finalized early in the year and no competitive process seems to have been followed. It is noted that substantial quantum of short-term power was sold through Exchange and UI…..”

These were not the only disquieting practices in power trades. Power purchases and sales of the discoms were often mediated by power trading companies including those belonging to the Tata & Reliance ADAG groups and the ultimate seller / buyer was not revealed.

Clearly the discoms at a minimum were not putting in their best efforts to manage power costs. This would not be surprising, given that the cost of power is a pass through to the customer. The AAP alleges worse - that the discoms converted what should have been a revenue surplus from sale of surplus power into losses in their books. Its election manifesto contains a promise to make the buying and selling of electricity by the discoms transparent and to take steps to bring them under the RTI Act.

Distribution overheads and average billing rates

Distribution overhead has two components as explained earlier – the cost associated with distribution losses and the distribution costs. Table 3 shows the distribution losses and the distribution overheads over the years for the Delhi discoms and for BEST, a public sector Mumbai discom. All four are of comparable size having between 1.1 and 1.7 million customers.

Table 3: Distribution losses and distribution overheads of discoms



2007-08
2008-09
2009-10
2010-11
2011-12
TPDDL
Loses
20.72%
19.00%
16.51%
12.39%
11.63%
Overheads
1.79
1.61
1.94
1.55
1.61
BRPL
Losses
30.89%
21.47%
20.08%
19.64%
18.94%
Overheads
1.97
1.45
1.95
1.92
1.96
BYPL
Losses
33.42%
24.93%
24.90%
23.40%
22.71%
Overheads
1.85
1.51
2.29
2.35
2.50
BEST
Losses
9.35%
8.01%
7.69%
Overheads


1.75
1.70
1.86

Overheads are in Rs/unit and based on the total number of billed units
Source: DERC true up orders for Delhi discoms; MERC for BEST

While the three Delhi discoms had comparable overheads in 2007-08 and 2008-09, BYPL started showing much higher overheads than TDPL from 2009-10 and BRPL the same from 2010-11. These two companies failed to progressively cut down distribution losses, a major reason for their high overheads. Their losses were much higher even in comparison to BEST, a public sector company operating in Mumbai city.

At the time of the privatization of electricity distribution in Delhi, the major benefit held out was that distribution losses would be dramatically cut down. The disincentives for not meeting the distribution loss targets do not seem to have worked for these two discoms.

So what is the reason for BRPL and BYPL failure to cut down their distribution losses?

The AAP alleges that the Reliance ADAG group discoms have been manipulating accounts showing lower billing (and revenue collections) in their books; consequently the calculated distribution losses turn out higher than what they actually are. A higher distribution loss pushes up the cost of power available for distribution to the consumer while lower collection pushes down the average billing rate. A larger gap between the two (see Table 1) would allow a discom to make a case for a larger tariff hike.

In support of its allegations, the AAP has drawn attention to the sudden increase in distribution losses in a number of circles of BRPL in 2010-11 reversing the steadily decreasing trend of several years. It has also pointed to the extremely damaging findings of the DERC during the validation of the 2010-11 billing of BRPL and BYPL.

The commission found numerous instances of customers with zero consumption or zero rate billing and many customer categories with average billing rates lower than the prescribed tariff in a sampling of the billing database of these two discoms. Summing up the validation exercise in connection with BRPL the commission noted:

The information provided by the Petitioner during the entire validation session was inconsistent and changed many times. …. the Petitioner could not provide clarifications to the satisfaction of the Commission.

The findings of the DERC from the validation exercise relating to the 2010-11 true up throw up the question of how a regulator should deal with a discom if data presented for a true up petition is unsupported by evidence or does not stand up to scrutiny. DERC penalised BRPL by an estimated Rs 52 crores in 2010-11, just over 1% of its revenue requirement for that year. The AAP would have the regulator take stringent action, including prosecution for cheating, in case of serious discrepancies in the accounts presented to the commission.

A visit to the DERC website, the repository of all data relating to tariff fixation, is utterly disappointing. There are no metrics or time series data available to help the public judge the performance of discoms. The latest true up petitions of the discoms of 2013 that would contain all the data submitted to the DERC, are not available. The most recent minutes of the meetings of the ‘State Advisory Committee’, a body mandated under the Electricity Act to advise the commission on matters including “protection of consumer interest”, date to Oct 2011.

The discoms have provided enough grounds through their questionable accounting and power trading practices to justify an independent audit of their accounts. In Delhi, they are monopoly providers of an essential public good using infrastructure set up in the course of decades by the state. Leaving aside legal merits, it is entirely reasonable that they come under the ambit of CAG audits and the RTI Act.

The issue however goes beyond an audit to uncover wrongdoings of the past. How are consumer’s interests to be safeguarded in future? If consumer charges are decided on the basis of cost and a regulated profit, surely there should be transparency into the energy and financial accounting of the discoms, at least to the extent that these have a bearing on the tariff. Indeed the Electricity Act provides adequate powers to the State regulatory commissions to make regulations on the information required to be disclosed by discoms. It remains for the government of the day to find ways to persuade the DERC to bring in this transparency.

An earlier article, also published in EPW, on electricity pricing in Delhi is available here
  

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