High voltage drama

Sunil Jain / New Delhi
Business Standard
April 12, 2010,

xWhile investors continue to lap up power sector projects, what’s difficult to explain is how they hope things will pan out. Losses of electricity boards and other power utilities owned by state governments were budgeted at Rs 27,317 crore in 2008-09, and according to the 13th Finance Commission’s estimates, these are likely to balloon to Rs 68,643 crore this year, and to Rs 116,089 crore in 2014-15. Coincidentally, the Finance Commission’s estimate of the additional amount that states need to invest in future generation/transmission/distribution is around the same amount as the losses — Rs 75,880 crore in 2010-11, going up to Rs 115,637 crore in 2014-15.

How the states are going to finance this is anyone’s guess since, by March 2008, the states had invested Rs 71,268 crore as equity in these utilities, were owed Rs 70,652 crore by them and had also guaranteed Rs 88,385 crore of their loans — these guarantees allowed the electricity boards to borrow money in order to pay for daily purchases of electricity. So how those investing in new power plants hope to get paid makes the mind boggle — possibly, all investors are convinced the central government will come out with yet another SEB loan write-off scheme.
DANGER: 440 VOLTS
(losses of state T&D utilities, Rs crore)
Losses Financing needs
of power sector
2005-06 18,375 --
2006-07 26,675 --
2007-08 (BE) 26,935 --
2008-09 (RE) 27,317 --
2010-11 (Proj) 68,643 75,880
2011-12 (Proj) 80,319 88,529
2012-13 (Proj) 88,170 93,604
2013-14 (Proj) 98,664 101,271
2014-15 (Proj) 116,089 115,637
*As of 31/3/2008, state governments had an equity of
Rs 71,268 cr in these utilities, outstanding loans of
Rs 70,652 cr and Rs 88,385 cr of outstanding guarantees
Proj. assume 2008 tariffs, but large reductions in T&D losses
Source: 13th Finance Commission

But how did, the obvious question is, losses rise so rapidly, from a budgeted Rs 27,317 crore in 2008-09 to a projected Rs 68,643 crore in 2010-11? Some part, it is obvious, is due to the rise in electricity consumption and costs, but this can’t explain a more than doubling. It is difficult to prove a one-on-one correlation, but my guess is power trading is responsible for a large part of this — with rates that can go as high as Rs 7-8 per unit, this has sky-rocketed in recent times. Around 15 billion units of power, or 2.4 per cent of the total produced, was traded in 2006-07. This shot up to around 64 billion units in 2009-10 (based on data till December), which is around 9.5 per cent of all electricity produced. At an average price of Rs 5 a unit, that’s Rs 32,000 crore of revenues — so, under a tenth of the electricity sold in the country costs more than a fifth of the total revenues from all sales.

While it is desirable that customers pay for the electricity they consume, it cannot be anyone’s case they be asked to pay for profiteering by traders. But where’s the profiteering the pro-trade lobby will argue. The Central Electricity Regulatory Commission (CERC) has a ceiling on trading margins of 4-7 paise and the Supreme Court upheld the CERC’s ruling a few weeks ago. This is true, but neither the CERC ruling nor the Court judgment has the power to change things materially, indeed the CERC has actually gone and made it easier for traders to hike prices artificially.

A good way to see how trading margins get hiked dramatically is to study what happens in Orissa (see http://www.business-standard.com/354878/). The Orissa government trading company Gridco buys power from either government-owned or private power plants there at a price that’s anywhere between Rs 1.5 and Rs 2 per unit. It then sells this to another trading company (Power Trading Corporation, for instance) at Rs 5 per unit within the boundaries of Orissa. PTC, in turn, takes this power across Orissa’s border and then sells it to, say, the Rajasthan SEB, at Rs 5.04. Since CERC guidelines apply only to transactions across states (inter-state) and not to those within the state (intra-state), it is pretty easy to circumvent the law.

The problem, and this is why the CERC needs to review its own guidelines, is that the original regulations made under the Electricity Act banned a trader from selling electricity to another trader (so, Gridco could not sell to PTC). So, despite the inter-state and intra-state issue, CERC could, if it liked, prevent PTC from buying from Gridco. Once CERC changed the law to allow such sales, however, it could no longer do this. Also, there are enough court rulings which say that even if a sale takes place within a state but it is meant for inter-state consumption, it has to be treated as an inter-state transaction. The ball is once again in the CERC’s court — it can prevent the power sector from hurtling into disaster. Or it can let it.