Solving India’s power struggle through tariff reforms

Distribution utility reforms of state power utilities have been work-in-progress for three decades. Nevertheless, the aggregate loss in distribution utilities (among about 100 such utilities) increased from ₹ 340 billion in 2009 to ₹860 billion in FY19, while accumulated losses increased from ₹0.75 trillion to ₹4.9 trillion during the same time, a compounded increase of 21% annually . The increase in losses is not due to lack of intent or even efforts. The Government has made multiple attempts to improve finances through fiscal support and targeted assistance under schemes such as the Accelerated Power Development and Reforms Programme (2002), Restructured Accelerated Power Development and Reforms Programme(2008) and the Ujwal DISCOM Assurance Yoxjana (UDAY) (2015).

The latest is a “liquidity package” and a one-time relaxation in working capital limits by Power Finance Corporation and Rural Electrification Corporation to counter the revenue squeeze from “demand destruction” wreaked by Covid-19. With revenues and bottom lines dropping, the fiscal rescue package is welcome, but longer-term solutions for fiscal sustainability are needed. Tariff reform and a “no subsidy” approach should guide broader reforms to the business model. Three areas need attention: (1) customer service upgrades; (2) effective employee performance management; and (3) empowering customers by using the national power surplus and the steep cost declines in green electricity like solar power as an entry point.

Customer first approach

The late C.K. Prahalad noted that producers who complain about the market not being able to afford their products are those who have a corporate-first, top-down approach with customers as price-takers. Those who achieve global scale, price their products based on customer’s willingness to pay. This strategy has been completely ignored in electricity. Consumers are slotted in two buckets – those who can afford to pay for 24×7 post-paid electricity and are gouged, while others (a much larger segment) are viewed as a financial burden and subjected to poor-quality, unreliable supply for free or at “lifeline rates”. Viewing customers as a burden creates exactly the wrong incentives for utility managers. They should learn from the commercial orientation of FMCG suppliers, who package their services to prioritise scale with affordability.

One way to dilute the cross-subsidy that burdens industry, business, and high-consumption residential users, is to monetize assets such as data, access, and network. Against an annual billing of ₹8 trillion, the aggregate distribution loss is ₹1 trillion. Can this financial drag be reduced by using data on customer behaviour, by generating additional revenue, or by predicting electricity demand better, thereby reducing the cost of power purchased? An average additional revenue of just ₹350 per month from 250 million households can cover the existing loss of the distribution utilities or bring high tariffs more in line with the marginal cost of supply for high-tension users like industry or business, thereby reducing the cost of goods produced in India.

Alternatively, we need to ask if air conditioner producers can be incentivised to reduce prices in exchange for scaled-up sales through higher demand for price-sensitive items. Or if this model could include geysers, washing machines, cleaning robots, hoovers, microwaves, induction stoves, electric irons, kettles, and electric vehicles.

Empower employees

Employees remain the most neglected assets in state-owned distribution companies. However, lagging states are now learning from the leaders – Gujarat; Andhra Pradesh; Tata Power and BSES in Mumbai and Delhi; and CESC in Kolkata. Programs for re-engineering management systems and processes, delegating powers, and empowering employees through sharing of gains from improved performance, are envisaged in Rajasthan.

Employee engagement is critical for customer servicing, as is transitional finance for loan servicing. PFC and REC exist as dedicated financing institutions for power sector. It is time to establish dedicated institutions and cadre for distribution managers and technicians.

Need for a viable business model

Tariff and subsidy reform remain a priority for distribution transformation This is evidenced from states such as Tamil Nadu, which controlled Aggregate Technical & Commercial (ATC) loss (17%), but clocked the highest financial loss of ₹180 bn (20% of national) in FY19. The gap between revenue and cost was nearly thrice the national average (₹1.32 versus ₹0.52 per kWh). The last tariff revision was in 2014. States with high ATC losses like Madhya Pradesh (36%), Uttar Pradesh (33%) and Bihar (31%) need to prioritize loss reduction for financial stability.

The other option is to limit cross-subsidies within customer categories. Large industry could subsidise small industry within limits; rich households could subsidise aspirational ones. One of the preconditions for efficiency enhancement is that each category of customer has a unique marginal cost, which should be reflected in tariff.

Agricultural tariffs need special attention given their history of subsidised supply. The declining cost and increasing reliability of solar power provides an opportunity to encourage farmers to produce power, use some, and utilize remaining for local social and economic needs such as processing agricultural produce and social infrastructure such as schools, street lighting, and hospitals. This, along with enhancements in agricultural productivity, a structural shift to cash crops, a smaller water footprint, and value-addition through processing, can double farmers income and increase their willingness to pay for electricity.

None of these initiatives are easy to implement. But if we do not first imagine the change, we will never create it.