In defence of the power regulator
In the trade-off between availability of power and its pricing, CERC has opted for the latter
Over the weekend of 21 February, the Central Electricity Regulatory Commission (CERC), the apex power sector regulator, allowed two power companies to increase their tariffs as compensation for the additional fuel costs accruing on account of increase in the prices of imported coal. It was a long pending case where Tata Power Co. Ltd and Adani Power Ltd had appealed to CERC for easing the price cap they had previously committed to for delivering power to the local discoms to accommodate the increased cost of coal imports.
It is a trend-setting order as it opens the door for projects facing a similar predicament. The move was met with a predictable howl of protest from a section of commentators who argued that this was an unwarranted bailout to these two power companies. Indeed that is one, though simplistic, way of looking at things.
But there can also be another view: In the trade-off between availability of power and its pricing, CERC has opted for the latter. This is actually a significant choice, albeit unpopular with consumers, and something that regulators have been making of late. Of course, care has to be taken that this be treated as a special circumstance and bogus claims not entertained.
CERC would not have been faulted if it had gone the other way and disallowed any increase in tariffs. But what surely has transpired is that the private companies would have put the brakes on the project and taken legal recourse. Inevitably, as we have seen in numerous instances, the case would have been dragged on for years clearing the various judicial hoops. In the resulting logjam not only would the country have been denied the desired addition to its already woefully short power capacity, it could also jeopardize the loans owed to banks and other financial institutions.
In defence of the regulator, it was a fait accompli. It would never have had to make this choice if the policy planners had undertaken due diligence before contracting the power projects. It was, as is with so many other infrastructure projects, based on the lowest price bids for delivering power. On the face of it a clever idea because it eventually means lower retail price of power.
In practice, it is an idea that is more likely to fail, as we have seen in the case of numerous road projects stuck for similar reasons. Delivery of infrastructure services is not like selling a commodity; its pricing is linked to a host of variables such as traffic, input costs, affordability of user charges and so on. (For instance, in the case of the much maligned Gurgaon toll, traffic on day one of its existence was what was projected to be five years later; obviously the existing capacity of the toll was incapable of handling the volume.) So to simply seek out the lowest price is not a smart idea at all.
Instead, as an insider in government told me, the bidding should be based on an economic cost. (And this is not a unique idea, it is already in vogue internationally.) Anyone bidding too far below the economic cost (which should be kept confidential and will vary from project to project; it should, keeping with norms of transparency, be made public after the contract is awarded) should be disqualified and a beauty parade conducted among those who bid above it; companies will need to prove their ability to implement the project and also showcase a viable business model. This is certainly not rocket science and it is amazing as to why this has not been attempted despite the wealth of in house talent in government.
What it also does is eschew any attempts at crony capitalism. Because once a project is stuck for such unforeseen circumstances, the government is vested with enormous discretionary powers. This temptation would cease once you have a more transparent bidding process in play.
To be sure, I am not making a case here for unjustified increase in power tariffs. At the same time, it is clear that consumers too are now distinguishing between cheap power that is promised (especially in the run up to the elections) but rarely delivered and power that is available but costlier. An analysis undertaken by two of Mint’s reporters last year had revealed that in fiscal year 2013, 23 states and five Union territories increased electricity tariffs, ranging from a 2% increase in Karnataka to a 73% jump in Tripura. Significantly, West Bengal, ruled out by the self-styled champion of the masses, had the highest domestic tariff in the country at ₹ 6.02 per unit.
This trend is partly due to the fact that consumers, due to improved material well-being, are able to afford better power, or at least willing to make the choice and bat for reliable but expensive power. What about those who can’t afford it, especially since we know that electricity availability and road connectivity are closely associated with the alleviation of poverty? That is where the much-maligned idea of the Aam Aadmi Party (AAP) makes sense, guarantee a minimum amount of power at a subsidized price (as a cash transfer) to those at the bottom of the pyramid.
Presumably, the next government in New Delhi will revisit the present flawed model of bidding for infrastructure projects.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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