It is on rare occasions that a soft landing results in a crash. One such example is playing out in the power sector. Early last month, the Punjab State Electricity Regulatory Commission, the local regulator, choked power supplies to industries, which were cheaper than the state’s supplies. It slapped a “cross-subsidy surcharge” on cheaper supplies from outside the state. The objective: to “rein in” industrial consumers, a segment that pays 16% more than the average tariff charged by Punjab, an amount that cross-subsidizes domestic and agricultural consumers.
This order is corrosive in nature; it sets the stage for flight of industry to other states. This is particularly so in the case of Punjab where the cost of power from old contracts (like Bhakra hydel set up in the 1960s) pales before those from the new ones that are needed to meet rising demand; especially so since there are no energy resources like coal or gas beneath its land, or for that matter, hydel potential. As a result, electricity or fuel needs to be carted from faraway places.
In other words, industry is faced with the prospect of sharp tariff increases and its only escape route was plugged recently. What is ironical, however, is the institution driving these degenerate contours in the sector. There is danger here that other states will get ideas from this decision and implement what is clearly a bad idea.
Through a legislative measure, regulatory commissions were midwifed in 1999 as an attempt to restore the financial health of power utilities by using rational tariff-setting principles. Another stiff dose of legislation followed in 2003 when the old electricity laws were consolidated, making space for policies that would be followed by regulators. As a result, in 2006, a tariff policy enunciated norms for cross-subsidy across consumer segments—it said no more than 20% by 2010-2011. This “soft landing” was meant to ensure that while domestic consumers were spared tariff shocks, the burden on industry also ameliorated over time. The direction was unmistakable: aligning tariffs across segments with the average cost of supply.
The regulator may be well within its limits, but poor goal setting by the Union government deserves blame. Worse, there are no cross-subsidy targets for the period beyond 2011. And, here the Central legislation, Electricity Act, 2003, is limp—it says a tariff policy will be framed from “time to time”.
Notwithstanding an ineffective legislation and a lazy Central power ministry, the Punjab regulator could have avoided the surcharge imposition on industry and rather raised domestic consumer tariffs. Evidently, it chose to wear a political hat.
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