Implications for Government Finances

Once it is accepted that the state governments may not find it possible or be in a hurry to privatise the SEBs wholly, it is imperative to examine as to what implications the Act will have on the finances of the state governments. If the states show unwillingness or are unable to privatise distribution, the paying customers of SEBs, namely, industrial, commercial as also domestic consumers whose consumption is more than, say, 300 units a month and therefore are in the highest slab of tariff for the domestic consumers are likely to desert the SEBs. The ministry of railways has already announced plans to take supply of electricity directly from the central PSUs. This process is expected to be completed in the next five years. It is necessary to note in this context that the Act defines captive generating plant as one “set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association”. This definition is wide and covers a number of situations as compared to the restrictive definition of captive generation adopted in the past. As a result, any consumer can become a shareholder of a co-operative society or a company floated for power generation and distribution. Obviously, consumer groups which are presently being heavily subsidised will not be interested in getting power supply from such new ventures and will continue to be the responsibility of the SEBs functioning as new distribution licensees.

It is important to note that, under the Act, when a consumer is accorded an open access to avail supply from a source other than the distribution licensee of his area, he is liable to pay a transmission charge as also a surcharge. The surcharge is to be levied till such time as the cross-subsidies are not eliminated and is to be used for the purpose of meeting the requirement of current level of cross-subsidy. The Act also lays down that such surcharge and cross-subsidies are to be progressively reduced and eliminated as prescribed by the relevant commission. Most importantly, the Act lays down that such surcharge will not be levied when open access is provided to a person who has established a captive generating plant for carrying electricity to the destination for his own use. These provisions raise a number of pertinent issues. Significantly, the Act does not lay down any definite timeframe either for provision of open access or for abolition of cross-subsidisation and leaves these decisions to the SERCs. As seen earlier, the level of cross-subsidisation has come down steeply over the years due to the decline in the sales to industry and increased sales to domestic and agricultural consumers. The act should have laid down a time limit of say five years within which open access is to be provided or cross-subsidies and the surcharge based thereon is to be abolished. Second, the surcharge is to be based only on current level of cross-subsidy and therefore cannot take note of or compensate for change in future consumer mix and demand elasticities, or backing down of generating sets and costs thereof etc. Third, the surcharge apparently applies to an existing consumer of a distribution licensee and shall not apply to new consumers in the area of a licensee who prefer to take supply directly from a source outside the area. Fourth, since the surcharge is not to apply for captive generation, there will be greater impetus to setting up captive generation. Power from such a source may be cheaper than from the SEB as it does not have to bear the burden of cross-subsidy but it may not be the most cost-effective option. Over a period of time, this will lead to the country being saddled with high cost generation, thereby adversely affecting its international competitiveness.

The central government has, through this Act, half-heartedly and by back door tried to do what it could not do openly due to the opposition of the states to undertaking time-bound reforms in the sector. In the process, it has failed to take the country into confidence about the likely consequences of this so-called forward looking strategy. The state governments too do not seem to have grasped the enormity of the problems they are likely to face. The Tenth Five-Year Plan has accepted the objectives of extending electricity to all villages by 2007 and all households by 2012. The financial implications of this too do not seem to have been taken into account while enacting the new law. It is clear that with the mass exodus of paying customers from the fold of SEBs as distribution licensees, the burden on the state budget would become unsustainable. The new regulatory contract regime being propounded by the World Bank will, in effect, add to this burden. This is likely to lead to demands by the state governments that the central government must come forward to share this burden. According to some news reports, the government of Andhra Pradesh has already made such a demand before the Twelfth Finance Commission. It would not be surprising if this issue becomes a bone of contention between the centre and the states in the coming years. Yet another likely implication also needs to be borne in mind. Currently, 16 states levy state electricity duty (SED). The revenue from SED has nearly tripled from Rs 1,131 crore in 1992-93 to about Rs 3,125 crore in 2000-01 (RE). Gujarat accounted for 36 per cent of the total revenue from SED in 2000-01. Average incidence of SED was about 10.44 paise/Kwh in 2000-01 with wide state-wise variations – Gujarat (38.72), MP (15.51), J and K (15.31), Rajasthan (14.14), Delhi (13.32), Maharashtra (10.27), Karnataka (9.13), AP (3.41) and so on. The SED, as a proportion of average tariff in 2001-02, varied widely from 15.9 per cent in Gujarat and 11.1 per cent in J and K to 0.6 per cent in Assam and 1.5 per cent in Andhra Pradesh. Against this background, driven to the wall of mounting financial burden of subsidising SEBs as new distribution licensees, it would not be surprising if the states which, at present do not levy SED, start levying SED on captive and other private power generation and the other states step up the rates of duty. According to a recent news item, the government of Orissa has, in July 2003, increased SED from 12 paise to 20 paise/Kwh for captive power plants, in addition to the duty on auxiliary consumption. Levy of SED will frustrate the objective of the act to do away with cross-subsidisation, as this would be nothing but cross-subsidisation by another name.⁷