Is Indiscipline the new Discipline?

Just a couple of days after the massive 'grid failure' or GF as I shall call it hereafter, just for the sake of pun, I got a good reason to write something. Not because it was yet another failure of the administration and everybody loves to hear about such failures. Not even to write a prose on anything to do with modern electrical or power systems engineering. The reason I felt a calling towards this platform of communication is that, I believe, if I express my views about the GF through any other media, I may not be able to put my point across since it sounds rather 'contrarytopopularbelief'ish. Thus, I announced my return to blogging.

First, I'd like paint the background for those who are less aware.

If the consumers connected to the electrical network start drawing more power than that which is being injected into it by power generators, the frequency (which is normally 50Hz) starts decreasing. If this is allowed to happen, a chain reaction triggers which shuts down all plants connected to the network and what you get is a black out; or in other words, you get a GF.

Enough painting. Fast forward to what happened immediately after every North Indian got a GF.

While the power distribution companies of the overdrawing states were being censured by North Indians and experts and media and everyone who suddenly discovered that turning on the power button may not always set electricity flowing into their appliances, I wondered. I wondered if anyone who had the controls of the great switch to the Northern grid could, simply out of a whim, turn it off, just for the fun of it? I wondered if the overdrawing states knew exactly how much over drawl would cause a grid failure and they intentionally overdrew just to cause it? Unlikely.

Discoms buy power from generators and sell it to the end users. So, you me and everyone who pay electricity bills are the only source of the discoms' income. So, a good discom is the one which gives a good service to its consumers in terms of 24X7 supply and some other parameters. Now if the consumers of a discom collectively hog more power than that which the discom has been allocated, what is the discom supposed to do? The first time ever that this question was raised by someone on this planet, marked the birth of a term that all regular bill payers have come to hate. Load Shedding.

For an honest consumer, it makes no difference whether the cause is a GF or load shedding as long as the effect is the same; switch on, no power. He will still curse the state electricity board (which have been wiped out of existence after unbundling, but he doesn't know that, you see. He is ignorant and oblivious to how and where the electrons actually come from). Also, when an average guy from anywhere in this country switches on a light bulb, he, under normal circumstances, does not get an information alert of how much over drawl he has contributed to by his act. In fact, neither did the discom knew beforehand that he was going to switch on a light bulb at that exact moment and nor could it come to his house and make him switch it back off upon realization. The discom can only over draw to meet the demand or shed load. What is the probability that an over drawl will cause a GF? Slim. So why not do it? At least the ignorant consumer would be happy.

It is here that my opinion differs from the majority. I do not squarely blame the discoms for the GF; only partly. But thats just me.

On Returning

I have been away from this for almost a year and a half (Yes, I deeply regret it) but now I wish to return to the world of writing and contribute to the extent that the time and my job allow me. This period of hibernation from the sphere of writing has been particularly eventful and insightful for me in other areas, mostly intellectual in nature. While I am fully capable of crying my heart out over my experiences during this period, I shall practice some restrain and come straight to the point I wish to make. Which is; One of the most important things I always learn when I learn something new is that in all my time learning, I had learned absolutely nothing. And I see no end to this.

In the past I have tried to reason the things I saw and tried to arrive at a conclusion (a conclusion which I believed was an intelligent one) but as I read some of my older posts today, I see obvious shortcomings in them. I believe now that if I take a set of numbers to prove a point, a better analyst than yours truly could take another set of readings and prove just the opposite, maybe with more melodrama in his story than mine and a conclusion fit for a Christopher Nolan movie. I lay my arms.

Hereafter, I shall, inspired by my experiences in the past few months, attempt to question, but not to answer (For an incomplete answer is up to 50% better than a wrong one). I wish to provoke thought among the readers and invite comments of those with enthusiasm. The right answer should eventually prevail.

Expect my first contribution to this effect shortly. Its called 'Is Indiscipline the new Discipline?'. No pay hikes for guessing the topic of discussion here.

OPEN ACCESS SURCHARGE

Assume that you were a daily customer at the local tea shop and that your expenditure at this shop significantly contributed to the livelihood of the owner. If you discovered that the tea shop a few paces from the one which serves you daily was charging much lesser compared to the first for the same services, what would you do? In such a case, those who value quality of service more than irrational allegiance would seriously consider moving on to the new one. Now, if the Ministry of Chai-wallas comes out with a rule that if you move to a new tea stall, you would have to pay a nominal surcharge to the first tea stall owner so that he can make up for the lost income? What if the Ministry also announces that the new rule is one of the set of rules which seeks to increase competition, would you agree? The case of open access surcharge is very similar to the one discussed above. But instead of ridiculing, most are lauding the fact that this regulation has made open access feasible for multiple parties. I beg to differ.

Under this regulation if a consumer having a demand of more than 1 MW wishes to purchase power from a supplier other than the local distribution licensee, he may do so. In such a case, apart from other arrangements, the consumer shall be liable to pay the local licensee-whose services the consumer shall discontinue-an open access surcharge. The rationale behind this judgement is simple. In India, the industrial consumer, by paying much higher rates than domestic and rural customers, provides the cross subsidy to cover the losses that the distribution licensee incurs as a result of providing electricity to domestic and rural consumers at rates which are way below the average cost of supply. If the distribution licensee loses a bulk industrial consumer to open access, without the surcharge, the distribution licensee would not even be able to cover its costs. In this sense, the surcharge seems like the oasis in the desert. But doesn’t it hinder the bulk consumer from considering open access? And what if the local distribution licensee is using inefficient methods and ineffective AT&C loss reduction techniques? The open access surcharge would only encourage the local distribution licensee to continue its inefficient practices. Although the law clearly states that the surcharge will have to be successively reduced to eliminate cross subsidy and bring in tariff rationalization, almost all the distribution licensees have conveniently skipped this part in their policies, since the law does not specify any time limit for elimination of surcharge (the one given in the Tariff Policy has been flouted already “The cross-subsidy surcharge should be brought down progressively and, as far as possible, at a linear rate to a maximum of 20% of its opening level by the year 2010-11”). The National Tariff Policy clearly states that the surcharge be so fixed that “it does not constrain introduction of competition through open access” and still “it compensates the distribution licensee”.

I shall, to bolster my position in this argument, elaborate my point of view with the help of examples: Andhra Pradesh (APCPDCL) and Punjab (PSEB).

Andhra Pradesh: 

The chart below, gives us a clear picture of the connected load, demand and the revenue from each type of consumer. It is seen that, whereas agricultural consumers consume about 29% of the total energy, their contribution to the revenue is just about 1%. The average tariff for the agricultural consumers in 2009-10 under APCPDCL is insufficient not only in terms of contribution to the total revenue but also to cover the average cost of supply. This revenue gap is attempted to be filled-although unsuccessfully-by the commercial consumers and industrial consumers. Interestingly, the industrial consumers pay much less in the entire Andhra Pradesh, the average being 3.5-3.75 Rs/Unit. This has created a problem of tariff inadequacy in the state. Paradoxically, the state of Andhra Pradesh which records the lowest AT&C losses in the country also incurs a loss which is one of the highest in the country. Although the tariffs for industrial consumers in Andhra Pradesh obviates the need to opt for open access but the point I am trying to make is that if the concept of cross subsidy is to be eliminated, tariff rationalisation will have to be done.

I assumed an average tariff of 4 Rs/unit (considering the fact that the average cost of supply in AP is around 3.8 Rs/Unit) and computed the revenue then realized and was pleasantly surprised to find that it covers the ARR filed by APCPDCL for the year 2010-11 by a comfortable margin.

	consumption (MU)	percentage consumption	actual revenue (Rs. Crore)	percentage revenue	average tariff (Rs.)	tariff on revision (Rs.)	revised revenue (Rs. Crore)
domestic	4,473.43	19%	1,276.79	20%	2.85	4.00	1,789.37
commercial	1,479.51	6%	890.32	14%	6.02	4.00	591.80
industrial	9,932.39	41%	3,654.18	59%	3.68	5.00	4,966.19
agricultural	7,004.22	29%	34.90	1%	0.05	3.00	2,101.26
others	1,150.40	5%	373.26	6%	3.24	4.00	460.16
total	24,039.95		6,229.44				9,908.80
ARR filed by APCDCL for 2010-11 is Rs 9824.63 Cr.

    
Some may argue that agricultural consumers’ tariff should not be increased as they are poor and cannot pay for the electricity the way other users can. I personally find the claim that the entire 7000 MU is being consumed by those who cannot pay for it, rather inaccurate. The farmers in Andhra Pradesh may not be made to pay as much as those in Punjab are paying, but the level of tariff subsidy to the farmers in AP definitely needs to be revised. There is no meaning of 100% electrification if a large chunk of the consumer base is not being charged for it. If every state was to provide free electricity to rural households, all you need is a cable to connect all houses and 100% electrification would be achieved in no time.

Punjab:

The situation in Punjab is very different. In Punjab, even the agricultural consumers pay 3.2 Rs/unit or Rs 273/BHP/month for pumps according to the latest ARR filed which rationalises the tariff across the consumers. Industrial consumers are charged around Rs 4.51 for every unit.

Having a look at the model open access surcharge calculations, one will not find any cross subsidy surcharge or additional surcharge. The only contributors are transmission charges and T&D losses. 

This, in my opinion, is an extremely forward looking approach and truly representative of the intentions of the Act. PSEB has given due importance to open access and is constantly endeavouring to make the procedure for open access more feasible for large consumers. It realizes that extra power from other states would be beneficial for the power deficient Punjab. The local distribution licensee is also not really worried about losing a consumer to open access as the rates at which it provides electricity are pretty competitive. Even if the consumer does opt for open-access, its costs will be covered by other users. The implementation of MYT in Punjab ensures that the distribution licensee does not get carried away by the reasonable rate of return and compels it to better its performance every year.

The verdict:

The Ministry of Power is constantly endeavouring to introduce competition and privatisation in the distribution segment but the private sector is still very apprehensive of the high level of uncertainty involved in engaging in this business. In such a case, it becomes necessary for the government to frame policies which will encourage private parties to invest in the distribution segment. For this purpose, the concept of surcharge – if it is gradually reduced over a period of time as recommended in the act - is a very practical one. But it is seen that tariff rationalisation which is ultimately the aim of the regulation is getting lost in transition. Like most other problems in the power sector, this issue has a lot to do with political interference (seldom does a politician allow electricity tariff hike for rural areas in his constituency).

It is difficult at the present stage to counter political interference through regulation but steps need to be taken in this direction. It is high time that the SEBs and SERCs be headstrong and take a firm stand and ensure that the reforms that are planned also get implemented.

As far as open access surcharge is concerned, well, I for one would rather pay the new tea stall owner a premium (actually, not even that), than paying the first one a surcharge.

NATURAL RESOURCES = NATIONAL TREASURES?

It was a class which had nothing to do with mining or exploiting natural resources or any such related topic where a question was raised, “Do you think the private sector companies should be allowed to mine coal and use it or sell it in the market?” I was ready with the answer but realized the next moment that the question was rhetorical. It was answered by the lecturer who had asked it with an air that suggested that he was sure the answer was an axiomatic and unanimously agreed “no”.

This was enough provocation for me to delve into the topic and ponder about the pros and cons of allowing private participation in this sector. My views on this were not linear but surely in the opposite direction with respect to those of the lecturer. The question here was not whether the private participation model (PPM), as I shall call it from here on, will work or not, rather, what is the harm. It will surprise me if most people are not of the opinion that it is criminal to use the natural resources; and that’s the school of thought which I wish to contest against.

So, those who oppose the auction of mines to private players for consumption or sale, in my opinion, may present the following arguments:

1. Natural resources are depleting and the demand is increasing. The irrational auction of mines to private players may cause mass exploitation and depletion of already scarce natural resources.
2. The private players may be tempted to sell the mined raw material in the international market if they get higher rates from foreign entities. It is important that these raw materials remain in India to aid sustenance of the current national growth rate.
3. India has had a history of exporting raw materials and importing finished goods. This obviously had come at a steeper price than what it would have if India could produce finished goods of the same quality, in the same quantity. Now that the trend is changing, it is important that the finished goods manufacturing industry be promoted and it be supplied with cheaper domestic raw material compared with the more expensive imported raw material. In such a case, it would be criminal to export raw material if your own industry has a shortage of the same and is compelled to either import it or buy mines abroad.

The above arguments present a pretty strong case against the PPM and I shall address them one by one.

1. Sure the natural resources are depleting but if they were meant to be kept preserved and not allowed to be used, they wouldn’t hold much value. The market value of these resources is determined by the supply, demand and the use. In fact they wouldn’t be called ‘resources’ in the first place if they did not have any market value. On one hand the country aspires to grow at a phenomenal rate and on the other, raw material supply is being purposefully bottle-necked. These are conflicting ideas. Sure there need to be proper regulations on the use of the resources but outright insulation of the private sector from raw material is not the answer.
2. What really is the need of the hour is a gradual shift towards a more capitalistic socialism where the interests and welfare of the public is the governments’ prime concern. This would ensure free market participation, and price moderation due to competition, with restricted participation and more of a regulatory role played by the government. The idea of restricted trade is against the principle of free market operation and price determination through market forces. If companies want raw materials from domestic suppliers, they should use efficient methods and achieve economies of scale so that they are able to quote competitive prices for the raw material. Conversely, they should also have the capability to import the raw materials if they get cheaper raw material from abroad. This would pinch the domestic suppliers and compel the domestic suppliers to achieve certain efficiency levels and economies of scale too.
3. India is a raw material rich country. There are many countries which earn huge profits out of exporting raw material and many of them don’t even have as many reserves as India. Export of raw material is out of question if the domestic suppliers get better rates for their produce from domestic consumers. The consumers’ concern usually is (i) quantity, (ii) price and (iii) quality. The biggest weakness of the Indian raw material suppliers is not the price but the other two. They (mostly Govt. companies) are not able to supply the right quantity of the right quality of raw material. This only compels the consumers to consider foreign sources. If the Indian raw material suppliers use better production and SCM techniques, in my opinion, the problem should be solved. Ideally, an equilibrium condition would prevail between the imports and exports which would only aid the growth of the country without much loss of the treasured resources.

I must add that my brain is subject to extreme volatility and this article is meant to be more argumentative than descriptive. Hence, I shall allow myself to state another point which, in fact, counters the PPM model that I suggested above.

The drawback of the argument that I presented above is that I assumed that India needs a gradual shift towards capitalist-socialist-democracy. This is the pivot about which I made my recommendations and this itself is subject to debate. We have already seen what happened to the US during recession and in contrast what happened in India. Although, India also suffered from deep gashes, but not as much as the US did. A market economy would strengthen the inter-dependence of all the players of the market. This would mean that a few bad areas or sudden spikes in the performance of one section of the market would affect the entire market. The economy of a country might go spiraling down and collapse as a result of a domino effect.

We have been able to maintain a near perfect balance of freedom and restriction in the market which has helped us shape the economy. It is hard to imagine that we could have reached where we are, had the government not maintained its stronghold on the economy all this time. The Indian economy was like an infant in 1947 and it has come a long way under the care of the government. Whether the economy has matured enough over the years; enough that the government, leaves it to its own destiny ( just like every responsible parent someday has to offer their child the independence), is anybody’s’ guess.

The Verdict:

The question still remains; should the natural resources of a country be treated like its national treasures?

Afterthought:

Some privately owned thermal power plants have been allowed to use mines for their own use. The concept of captive coal mines is not new in India but is usually subject to great controversy. Sale of domestic coal is still under the stronghold of CIL, owned by the government.

Lanco Infratech has acquired two Australian coal mines with total reserves of 1.2 BT and 700 MT extractable for A$ 730 million. The annual production of coal from these mines would be around 4MT which can be increased to 15 MT. Lanco is in the process of increasing its generation capacity from about 2100 MW to 15000 MW by 2015. These mines will meet around 30% of the coal requirements of the company. Lanco is not the first company to acquire coal mines from Australia. Last year Adani, Reliance and several other private players acquired coal mines in Australia and Indonesia. This was the second biggest acquisition after Adani's A$ 2.7 billion deal to buy the Australian mine.

Surely, the Indian private players are ready to shell out a little extra to generate enough power and earn more revenue.

It is seen that these companies pay a royalty of around A$ 2 per tonne to export the coal out of Australia.

Coal Shoal

Almost 65% of the country’s total power generated comes from burning coal. If we consider the importance of supply of reliable power in the development and growth of not just the industrial sector but all those sectors which significantly and directly contribute to the country’s growth, 65% is a magnanimous share. Yet, it seems ridiculous that in the country which boasts of the 3^rd highest production of coal in the world, every month a good 20-30 coal based thermal power plants (TPPs) face sub-critical coal stocks. A good share of the total coal consumed comes from countries which have way smaller reserves of coal than India. Surely, those countries are doing some things right that we are not. The problem has its roots spread deep and it is indeed high time that steps be taken to iron out the irregularities.

Going exactly one year back in time, the railways budget, like all other years proved to be a no show for Coal India Limited (CIL). Instead of improving the core business activities, the focus was on the revenue from non-core activities. Apparently, the construction of railway museum, and a number of similar ‘non-core’ activities were allocated funds which in my opinion at least, could have been spent well elsewhere. The freight loading was targeted at 944 million tonnes (MT) for the previous year and 952 MT was achieved. This gave them a reason to rejoice. Alas, even an extra 8 MT that was achieved could not have sufficed the coal shortage even if all of it was taken by coal. This, to my surprise, did not come as a shock to most of the coal industry insiders as they have been habituated to the royal snub by the railway ministry for quite some time. This year’s budget was no different.

No sir, I am not going off on a tangent. To some, the commentary above (of interlinking coal supply to railways budget) would sound like comparing chalk and cheese and some time ago it would have to me too; but that was before I read an article which cleared some of my misgivings. The article said that in 2009-10, the domestic coal demand by the TPPs alone was pegged at 404 MT. CIL could only suffice about 313 MT of it and if we include the supply from captive coal mines, not more than 364 MT could be delivered. This amounts to more than 10% shortage. What the article said further was what took me quite some effort to swallow. CIL had a stockpile of 54 MT which was undelivered. Losses due to theft and spillage aren’t even significant in comparison. According to CIL, they require around 200-220 wagons per day to evacuate their daily production but only about 170 per day are made available to them. Coal is perishable and cannot be stored for a long time. So, CIL has signed an agreement with NTPC to set up a 2000 MW coal based TPP for themselves which will consume the stockpile at least to an extent if not all of it.

The off-shore coal also has it own issues like uncertainties and delays in offloading which are like a large foot in the door but these are outside the scope of this article. If things within India were right, probably there would be no need for imports. Some may argue that the imported coal is of a much better quality but are we forgetting that it is also that much more expensive? The price of the grade E and F of Indian coal that the TPPs usually use, costs around Rs. 800-900 per tonne. If imported coal was more economical or even uneconomical by a small amount, the tariffs of the off-shore coal based TPPs would not have been twice as much as those of the pit-head plants.

All plants that face sub-critical coal stocks have to run at PLFs way below their economic PLF. No surprises that most of these plants are state owned. SEBs already in huge debt, are probably very feeble and soft targets. As they are not able to produce much, the supply (of electricity) dips. The basics of economics tell us that if the supply decreases, the demand will increase. This should ideally increase the prices but electricity tariffs are not so flexible and if it is to do with tariffs of plants run by SEBs, well, lesser said the better. This only aids in piling up of already huge losses of most of the SEBs. The losses reported by all SEBs combined together is equal to a sizable portion of the GDP of the country.

There are many more problems which mar the delivery of adequate coal to the right place and yet many which arise out of the inadequate supply, but first things first. CIL is often made to look like the culprit in the dungeon but it may not really be the case.

Which problem out of so many in the system in place today is dealt with first is probably a matter of opinion and so is the way to tackle those problems. The Government which has been trying to distance itself from the sector gradually over the years have to take some concrete steps in solving some core issues. Maybe the sector is not so mature yet to allow it to develop on its own. We can only hope that the Government doesn’t leave the sector groping in the dark.