Speed bump ahead: Will cheap bijli-paani promise prove to be costly for Kejriwal?

After having won the Delhi elections with a thumping majority, all eyes are on the Aam Aadmi Party's governing agenda. The big question: Just how do they plan to deliver on their key promise of cheaper electricity and power.

AAP has promised to provide 20,000 litres of free water a month to all households, including group housing societies. It also plans to cut electricity rates by half through subsidies until the Comptroller and Auditor General’s audit of the power companies is complete.

But the crux of the problem is this:  Delhi suffers from a power supply deficit and is not capable of producing the electricity required. So it has to buy it at a higher price from other states. Same holds true with water. Delhi buys water from UP and Haryana.

So does AAP have a plan from where it’ll arrange funds to provide discounted electricity and free water?

AAP  has said that electricity distribution companies supply power to Delhi at rates from Rs 1.2 per unit to Rs 12.21 per unit. According to AAP, since Delhi has limited power generation capacity of its own, the prices per unit that the citizens have to pay are high because the city has to rely on external sources for power.

" "It (lower tariffs) can be done by ordering an audit of discoms and getting electricity bills checked by independent agencies and rectifying inflated bills,” Kejriwal told Firstpost. Until then, one presumes that AAP will give power subsidies to the consumer as it did in 2013.

However, if one goes by the calculations provided by power distribution companies, any tariff lower than Rs 3-2.8 per unit is  impossible for the Delhi’s state budget to bear.

 Speed bump ahead: Will cheap bijli-paani promise prove to be costly for Kejriwal?

Reuters

According to a report in the Business Standard, industry calculations peg Delhi’s state budget for FY14 as Rs 35,500 crore while the total subsidy for electricity and water works out to be Rs 1800 crore.

India’s power sector is bleeding profusely. It has accumulated losses exceeding Rs 2,50,000 crore and even today its annual losses exceed Rs 25,000 crore. And this is after more than 17 discoms hiked tariffs by huge amounts in 2012. A Credit Suisse report suggests that if state electricity boards (SEBs) keep raising tariffs by 10 percent every year for the next three years, they will just about break even.

In 2013, the AAP government had reduced electricity rates by half for households consuming up to 400 units a month as soon as it took charge and had estimated the total impact at Rs 200 crore for three months, of which Rs 139 crore was to be borne by power companies.  The subsidy ended March 31.

The power rates were hiked in July 2014 last. Presently, there are five slabs for power rates. For up to 200 units, the actual price is Rs.4 per unit while there is subsidy of Rs.1.20 per unit.  From 201 up to 400 units, the tariff is Rs.5.95. In this slab too, there is a subsidy of 80 paise. From 401 to 800 power units, per unit cost is Rs.7.30. The cost per unit for consumption between 801 and 1,200 units is Rs.8.10. Beyond 1,200 units of consumption, the tariff is Rs.8.75 per unit.

During its previous tenure, AAP had ordered an audit of account books of the power distribution companies. The discoms had approached the Delhi High Court opposing the move. However, the court directed the discoms to cooperate with the CAG. The case is pending in the court.

Power tariff is determined by the Delhi Electricity Regulatory Commission and the city government has no say in it. It can only offer a subsidy. And this time around, AAP  will tread cautiously about cutting tariffs and take a decision only after analyzing the audit report of the power discoms.

According to a report in Times of India, AAP  will think twice before halving electricity tariff this time, because it will have to live with its financial consequences for full five years. But this has not stopped the shares of Anil Ambani-led Reliance Infrastructure that controls BSES Delhi discoms - BSES Yamuna Power and BSES Rajdhani Power - from  plunging by 16% in the last five days. Even Tata Power that operates in Delhi through Tata Power Delhi Distribution fell 11 percent in the same period as CAG officials  visited the offices of these firms again on Tuesday to conduct an audit.

Meanwhile, the Delhi Electricity Regulation Commission (DERC) has also begun its  audit exercise aimed at a detailed verification of the physical infrastructure deployed by the three private power distribution companies operating in the capital. According to a report in Indian Express, DERC, which has faced flak from AAP for being 'partial' and 'incompetent', has asked for a detailed list of their assets that are not in use, alongside reasons for not writing these off.

However,  "at the current power rates, Delhi discoms in spite of least amount of subsidy (Rs 300 crores annually) have regulatory assets of Rs. 22,000 crore. Also, Delhi's bulk power purchase rate was 60 per cent higher than the national average of Rs 3.49 a unit, but power tariff charged from the consumers in the state were the lowest in the country at Rs 2.8 a unit said an executive with one of the distribution companies, a Business Standard report said, quoting an executive from one of the power distribution companies.

Which is why instead of only stressing on an audit of discoms' accounts, the AAP Government in Delhi must look for other ways to make power distribution profitable for the discoms while consumers are also not fleeced. Audit the discoms' books by all means but cost heads of discoms also need to be analysed and the state government should facilitate a Central bailout package for financial restructuring of these firms. As Firstpost said earlier, some reforms are also needed in power production at those state-controlled units from where the discoms purchase power.

As economist Ajay Shah asks, "While auditing of electricity companies is good stance compared to demand in tariff reduction, is the party willing to support increase in electricity prices if it is found that electricity companies are running at a loss?

Firstpost editor Dhiraj Nayyar also raised this point earlier when he said,

How has it (AAP) come to the conclusion that 50 percent is the right figure? Governments are usually bad at figuring out the right prices. Competitive markets do a better job. Veiled threats to private discoms --- special audits, potential cancellation of their licences – may scare away the private sector and take Delhi back to the bad old days of the state-owned DESU (Delhi Electricity Supply Undertaking), when tariffs may have been lower but there was no power for several hours in a day.

Meanwhile, AAP has also promised  700 litre of free water to every household that has piped connection in order to encourage people to put up water meters and conserve water. But this is no easy task as Delhi  gets its water supply from external sources.

Implementation of Yamuna Revival and Rainwater harvesting will take time. Also, Haryana has refused to release water in Munak Canal so far. According to a report in the Times of India, Delhi Jal Board also reported that water level in the Haiderpur pond had started falling in the last couple of days, indicating that Haryana was cutting down supply.

And as economist Ajay Shah noted in this blog post, " Delhi has 11 million (1.10 crore) persons. Assuming 4 persons per family and Rs 5 to produce a kilolitre of water; we would require Rs 94.5 lakh per day or Rs 340 crore for a year. This is the production cost, you cannot wish away. For this to be free, funds will have to be found. Even if corruption is removed, costs will be high. Further, this is not sustainable -- if AAP is successful, corruption will come down and more people will flock to Delhi."

Firstpost editor R Jagannathan also raised this point when AAP's manifesto was first released.

"Free water in an era of impending water shortages will ensure waste and corruption. A better idea is to price water, with maybe a price that moves up with higher usage. Delhi’s poor already pay a lot for tanker water, so paying for water is not likely to be resisted", he said.

In another article,  he  warned that well intentioned 'dole' politics would only see AAP fall into the same trap as Congress, and would only serve to breed more corruption - the plank on which Kejriwal swept so many votes.

"If Kejriwal comes up with his cheap power and free water scheme, he can be sure that every crook will be salivating at the prospect. Kejriwal will be watering the soil of corruption further. A water mafia will develop, and power theft will become endemic."

 

 

Updated Date: Feb 11, 2015 11:01:47 IST