Tripping the Power Supplies

The steps taken by the Delhi government seem short sighted but their impacts are likely to be faced over long term, not just in the State but in the nation. The imitative tendencies have already kicked in a few other States that see lower tariffs as a vote gatherer. Demand for power in the country will grow unabatedly in light of population growth and urbanization, which requires higher generation and transmission capacity addition that have slowed in the recent past. The revival story of power generation sector has been hinged on the financial conditions of the distribution companies. By enhancing subsidies, which in turn result into regulatory assets due to non-payment by the State governments, the sector is being pushed back in time. The recent Financial Restructuring Package (FRP) is only beginning to show some results when Delhi government has sown the seeds of uncertainty. By this, financing power generation projects will remain challenging given these uncertainties about financial conditions of distribution companies.

The financial condition of distribution companies is also closely linked to the generation companies finding imported coal unaffordable and hence, forced to idle than to procure coal from external market when supplies from Coal India and other domestic sources fall short.

Ideally, dispute about the tariffs, payment of dues and applicability of CAG audit may have taken their own course through contractual settlement mechanisms. But announcement of subsidies has created uncertainty in terms of recovery of power costs and ability to liquidate the regulatory assets. These risk perceptions are more damaging for future of the industry than the commercial terms of payment and audits.

Judicial intervention along with regulatory corrections to ensure that subsidies are contained and gradually phased out so that tariffs are cost reflective may help. However, the State Governments decision to provide subsidies may not be called in to question, whereby the riskiness of investments may continue. While the judiciary may obligate payment of subsidies prior to their accrual as is intended by the Electricity Act, the risk of non-compliance in view of fiscal situation of States cannot be ruled out.  

Cancellation of license may not be easy as it may sound since the contractual obligations and compensation for physical assets created may have built-in deterrents. If the cancellation subsequently is challenged in the courts of law, the State may find itself loaded with distribution assets and be unable to conduct another bid process. Also, the new bidders in case cancellation is forced through and remains unchallenged may have high risk perception.  Privatization of distribution companies may find no takers after such an event.

The power sector reforms story hasn't turned sour as yet but has the potential to if the State pursues its policy of un-informed rhetoric. The prudent way could have been to investigate the tariff setting processes, conduct a thorough audit and take appropriate steps in view of the findings rather than implement a populist policy based on a pre-conceived notion and then force the distortions on market forces.