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.
1 comment:
I am working on cross subsidy surcharge issues at work. This was a simple yet good article on the concept! Thanks
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