dna Conversations: Power tariffs need revision

Almost every power producer knows that power tariffs need to be revised upwards. One reason is the surging costs of inputs especially of coal and gas. A second reason is that industry has begun to find solar power cheaper than the price they pay for industrial and commercial power, and thus could reduce their offtake from the grid. That would leave state governments with less money to subsidise cheap power for agriculture and below the poverty line (BPL) families. A third reason is unpaid bills both by consumers and by state distribution companies, threatening to adversely affect power producers. Then there is the problem of losses and theft.

Something needs to be done. Increasing tariffs is one short term solution.

To discuss this, DNA called together a panel comprising (in alphabetical order) G. J. Deshpande, Regional Executive Director, Western Region-I Headquarters, National Thermal Power Corporation; O. P. Gupta, General Manager, BEST [Brihanmumbai Electric Supply and Transport Undertaking]; Ajoy Mehta, Managing Director, Maharashtra State Electricity Distribution Company; S. Padmanabhan, Executive Director, Operations, Tata Power; Moderated by DNA's R.N.Bhaskar with editorial support from Karishma Goenka, the panel discussed the options that lie ahead.

Given below are edited excerpts: Padmanabhan: The need for tariff increase is there across the country. Almost all the state distribution companies have accumulated regulatory assets, and there is a definite need. There are many reasons why we are at this stage.

One is there has not been a steady, annual, regular increases in tariff across all the states. Second, there has been an acute fluctuation in fuel prices in the last two- three years, which was never seen before, both in oil and coal prices.

DNA: And now gas.

Padmanabhan: And now gas.

Then, the third aspect is that even the cost of capital has been going up. Interest rates are ranging from 10% to 12%. So a combination of all of this has created a situation where many companies are looking to an increase in tariffs because, once the tariffs go up, generation companies become that much more viable and are able to bootstrap the whole sector.

So my sense is that tariffs will have to go up. And it is reflected in the last 12 months -- over 10 states have increased tariffs. A state like Tamil Nadu increased it by 35% to 40%, because it had not increased for a long time. And this has happened across the country, but it has not happened enough because, if you see, many state distribution companies still have huge regulatory assets.

And even for a company like Tata Power, in Delhi, we have Rs.4,700 crore of regulatory assets.

So it’s not a small number. If you just take the interest rate alone, 470 crore a year. Finally, it is all going to the consumer. In Mumbai, we have regulatory assets of Rs.3,000 crore.

DNA: Even in Mumbai?

Padmanabhan: And I’m sure state electricity boards, considering the size and the volume that they are dealing with, are also concerned. So I feel broadly there will be tariff increases. And there is a need. Otherwise the generation sector will get impacted broadly.

Deshpande: Speaking from the generator's perspective, [in spite of] our season regulated tariffs with norms and other things, what is happening is that many things force us to raise the supply price. Our tariffs automatically increase.

For instance, since 2009, there is the problem of the FSA (fuel supply agreement). Domestic coal will be 65% of the total quantity. And so our dependence on imported coal is increasing.

So, in the last union budget, the countervailing duty was reduced from 5% to 1%. But on January 30th, again, the Customs Department has issued a circular raising another 10% duty over that [the customs department began levying duty of 11% applicable on bituminous coal import, while earlier it used to levy a 1% duty applicable on steam coal imports. Editor]. .Thus my cost for coal has gone up from say Rs.6,000 to Rs.6,600. And it is with retrospective effect from April 2012 onwards.

We have already taken this up this issue with the Ministry of Power, and the ministry has in turn taken it up with the Ministry of Finance. So this is one issue.

The other issue which is hurting generators is railways transportation logistics. Almost all our generating stations are on the eastern side of the country and unfortunately all our imported coal comes to us through ports on the Western side. For various reasons, the railways cannot bring us coal through the Vizag [Vishakhapatnam] port. But there are new ports available on the Eastern coast with a lot of capacity to spare. But we are still importing coal from the Western ports.

Earlier we used to import it through Mundra. For the Korba plant, which is in MP, we were paying Rs.1,800 per tonne [for transportation]. Then we took it up with the ministry and later on, they agreed to let us import it through Dahej. That brought down by freight to Rs.800-900 to the same plant. We thus reduced the freight by Rs.1,000 a tonne. But we are advocating that we should be allowed to route it through Vizag which could bring down by rail costs to just around Rs.100. In fact, since our coal ships come from Indonesia, the eastern coast makes sense. But the railways have still not agreed. However, after much persuation, we were allowed to import it from Dahej.

So this aspect is hitting us and ultimately if the cost is increasing then my rates will go up.

Moreover, some cheaper power stations that could have helped [reduce the pooled costs] have not yet been scheduled.

To reduce costs, our new specifications for power plants, we added a condition that the boiler should be designed to accommodate 30% blending coal, not 10% or 15%.

But in the last budget too, [the application of] service tax has increased by almost 3.8% our port handling charges.

So such developments increase the cost of fuel and ultimately since the cost of power is going up, backing down will be there. Last year we did almost 10% backing down in coal stations. In many cases cheaper power stations also.

Mehta: When you come to power tariffs you must first realize that you are in a monopoly situation. There is only one supplier. So competition cannot determine tariffs. This will have to be determined by the political philosophy of the government in power.

DNA: True.

Mehta: This is true of all utilities. And their tariffs have to be determined by the political philosophy that the government in power subscribes to. And every law that comes out, emerges from some sort of philosophy. Now that you have a regulator, which is independent, but anyway a regulator cannot transgress or go away from the philosophy that the government subscribes to.

Governments have traditionally used two instruments for bringing about what is called social equalization. One has been the instrument of taxation, or so-called graded taxation.

And second has been controlling or grading tariffs in items, which are either monopolies, essential services or in short supply. It has been there historically. So whenever an item is in short supply or it’s a monopoly or it is something which is an essential service, the government and its political philosophy is bound to control the tariffs.

Then you have to decide whether there is a need to shift the philosophy. If you want to change the philosophy, you can take a re-look at the whole thing.

DNA: Right.

Mehta: And a large chunk of the taxation money flows to achieve those ends. Second, the philosophy of taxation has been that whatever is in short supply, please tax it, so that the price signal should indicate consumption patterns.

DNA: Yes. So that it will reduce its demand.

Mehta: So price is the mechanism to control consumption. So you send a price signal, “Well, I’m going to make this thing expensive. Please, even if you are poor, please use it carefully because this is something, which is in short supply.”

Now, fundamentally, governments have followed this in taxation, whether it is electricity or anything else. For electricity, the government’s philosophy has been that two categories need to be helped. One, the poor, and therefore, you have 0 to 50 units, BPL [below the poverty line] family. If you have a BPL card, you get your power at hardly about Re.1 or so.

The thing is that the bare survival consumption should be one unit a day. So you’re consuming 30 units a month, you pay Rs.30 and you get your electricity, which is highly subsidized because my cost of supply today is Rs.5.56 and you pay just about Re.1 or so. That’s one category the government subsidizes.

The second band in the same category that the government subsidizes through the mechanism of cross-subsidy includes people who consume between 30 and 100 units. Again, that’s one fan, one light and a little equipment at home, a mixer, grinder or a small television or something like that. So we give him, again, a significantly cheaper rate to use electricity.

The second category that’s being cross-subsidized is agriculture. We’ve suffered in the ‘70s on account of food shortage; we went begging to the US, “Give us food”. We got wheat under PL 480 [a section under which the US allowed wheat export to India free of cost, but of very poor quality]. One thing that we’re not going to do is to beg for food. And what do we need to get food going? Agriculture. And in agriculture -- one of the biggest and most important inputs in agriculture is power, along with fertilizer, insecticide and training. So power is an important input. Food security has to be there. We just cannot go around begging for food and therefore power needs to be subsidized for agriculture.

Now, do you say that there should be a shift in this philosophy? That’s the first question. Should you say that the poor may not be subsidized anymore? Or do we want to say that agriculture should not be subsidized anymore? So if you shift your philosophy then we can discuss policies based on that philosophy.

DNA: You can subsidize, but you will have to re-look power tariffs because things are going out of control. You’ve not been able to subsidize properly. Subsidise, yes. But how?

Mehta: First, I’ll get into a larger issue and then I’ll get into what the law says. There are two ways to subsidize. One is you subsidize within the commodity itself and India has done it. We’ve sold levy sugar at Rs.10 a kilo in the ration shop and we’ve allowed free sell sugar to sell at Rs.50 in the open market. We’ve sold edible oil at about a minimum of Rs.15 to Rs.20 a kilo in the ration shop and we allot edible oils to float with the market maybe Rs.100 or 200, and let the market decide.

A basic requirement for the human beings to survive is food and we have followed a policy of cross-subsidies. It has been going on. So what happens is that the industry itself cross-subsidizes, so government picks up levy sugar and that is then loaded on to sugar that is sold in the open market.

So within the commodity itself a subsidy flows. Now in electricity this has been used very hugely. This instrument of subsidizing within the commodity has been leveraged to a huge extent. Now the issue is, should we go on leveraging this instrument.

Coming to the [Electricity] Act, all tariffs should be within plus and minus 20% of your cost of supply. It’s not actually the Act, let me correct myself, it’s the National Tariff Policy. The tariff policy says that all your tariffs should be plus or minus 20% of your cost of supply. Now my cost of supply is Rs.5.56. So plus 20% on that will be about Rs.7 is the maximum and the minimum will be minus about 150, so it should be bought around Rs.4. But where am I today? I’m selling agriculture power at Rs.1.

DNA: Is Re.1 the lowest?

Padmanabhan: That’s the lowest.

Mehta: That is for agriculture power. I’m selling the most expensive power is for hoardings, which is at Rs.14 or maybe if you go to malls, multiplexes or even in offices like this you must be paying on an average about 10Rs..

But you should not be paying less than Rs.4.50 as per the National Tariff Policy. Now how fast do you want to get into the National Tariff Policy or you want to throw out the National Tariff Policy and say “no, I need a new tariff policy in place”, is the question.

DNA: And, what do you think?

Padmanabhan: I think he is not saying there should not be tariff increase, he is saying this is the situation in this country...

How do you first address all these issues and then the quantum of tariff increase? I also want to spend some time addressing other factors which have put us into this situation.

DNA: Go ahead please.

Padmanabhan: We talked about regulatory assets, we talked about different shell pricing, social equity, fuel etc. There are also other factors, which have caused this. The imbalance or the lack of a good grid, which can absorb electricity and distribute it free, is one more factor.

It is also causing some ‘skew-ness’, there is generation capacity in the east, the load centers are in the west and in the north, broadly. And as a result, though electricity is available, capacities are available; it cannot be supplied to the entire country. And that’s a big issue. As a nation we have to address it. Of course, we have a central power grid, which is doing this, but not fast enough.

Your highway should be there before the traffic comes in. Today the traffic is available, but the highway is not there. The demand is there. The other factor is, our coal supplier, which is one large entity in the whole of India. It is operating at 470, 480 million tonnes [a year]. And it is growing very, very slowly, but the demand is growing at a much, much higher speed.

So I feel there is a need to really look at an approach to privatizing this. An approach to improving the efficiencies of the whole of India because otherwise we have to depend on imported gas, coal and oil. Already 300 billion tonnes are available in India and our need is only 600, 700 million tonnes a year today. But this requirement may grow faster.

So there is an opportunity to leverage that huge investment. In its own way, India can implement it, I’m not saying go tomorrow and bring in these companies and privatize everything. But, the inefficiencies are very high and as a result the cost of coal is going up, wholly subsidized, so today even the G grade coal would be Rs. 3,500, Rs. 3,400 [a tonne].

So I feel after the transmission grid this is another aspect. These need to be addressed and also meet some of the issues that have been raised here.

Deshpande: To add to what has been said, the southern grid is yet to be connected. Once that is connected, like my Jhajjar power plant in Haryana, transmission will ease. Today, southern states are buying that power at a very high cost of Rs.8 or Rs.8.50.

So in addition to that, about Coal India, when this UHV [unit heat value grade of coal] to GCV grade change took place last year, and we at NTPC decided that whatever coal we were getting at that time was to be procured on a GCV basis, we found that the difference was 75%.

DNA: What does GCV mean?

Deshpande: Gross Calorific Value. And UHV, Unit Heat Value. So from six categories they have gone to 17 categories.

But the problem is that the infrastructure, sampling and quality checks do not exist in India in the proper format. Yet whatever Coal India is charging, if they charge as per 17 grades or whatever the correct grade, our cost of power will come down at least 25%. That means that if coal costs come down, the cost of power will also decline.

Again I’m talking from the generator point of view. So if the cost comes down then the effect on discoms will certainly minimize.

Gupta: My first view is that electricity is an essential commodity. And that political philosophy dictated its pricing. But the [Electricity Act of] 2003 brought in a change to such practices and reduced political control on the pricing of electricity.

Now why is this pricing going up for a common man? That is the issue. See my submission, especially in respect to Mumbai, is if we want to price electricity for minimum common use for individuals, then I think the pricing will be affordable and manageable. See the base price or the power which we buy now out of the 800 or 900 MW of total power which is our peak load, if you say, general public uses around 400 to 500 megawatt power which is made available at a pretty cheap cost.

And with that power purchase cost if you want to price the electricity in Mumbai, it will be affordable to everybody. The problem comes when we go to higher uses of power and because of the shortage in market you end up buying costly power for higher uses. So Tata is here, their Unit 6 at times produces power at Rs.12 a unit. Now, we have to buy that power to meet peak load demand, and that price also gets distributed across the spectrum.

DNA: Yes.

Gupta: Today there can be more flexibility in pricing. Singapore is a very good example for this. They have something called demand response, where people at the higher end of the spectrum end up paying much more for certain times of uses.

Time of day, the concept has come but the regulators have still not brought it in our setup fully. So, since we are in this shortage scenario, even now that shortage is having an effect, that in peak time you end up buying costly power at that level and then you distribute this tariff and that amounts to a cross subsidy as well. People using power for commercial purposes actually do not pay from their own pocket. That cost of power is always transferred to the people who are buying those products -- malls or multiplexes.

So I just personally don’t see any need for reduction of power tariffs for malls or multiplexes and loading it to common residential users. Today the current power generation tariffs, in majority of the cases, represent economical affordable power to the common public.

DNA: If we assume the political philosophy is not jettisoned, is not discarded, even then there are two factors. One is the sheer inefficiencies and the second is the inevitable increase in the cost of inputs on the other. These two compel us to the question: do power tariffs need to be revisited?

Mehta: Okay. Let’s keep the given which you’ve put to us. The given is that the day to day philosophy doesn’t change.

Mehta: So the political philosophy doesn’t change. The poor needs to be subsidized and the agriculture needs to be subsidized.

Then I bring you to the next issue, where the philosophy really does not tell you – and this is now in the realm of political expediency – the extent to which you want to subsidize. Political philosophy says yes, subsidize and I think across the board everybody in India will agree yes, agriculture needs to subsidized. The poor fellows need it, but by how much? That depends on how much value you put on that political lobby.

DNA: Yes, unless you go by the policy. The policy is quite specific.

Mehta: 20 plus or 20 minus. Now we are coming to a very important issue that is -- as you rightly said – efficiencies. This is where we have learnt a lesson this year in Maharashtra where we faced a severe water drought. We had no shortage of food grain. This is the first time when we had a very severe drought. In ‘71 there was a shortage of food grain. There was starvation looking at us.

But this time starvation was not the issue. The issue was drinking water. So now if agriculture has to be subsidized, yes, subsidize it. But subsidize it in a way that it conserves water. And therefore you need to now look at how much subsidy do I give, who do I give the subsidy to and the manner in which I deliver the subsidy.

DNA: Yes.

Mehta: So water now takes center stage. Now power is not the issue, now water is at center stage. So food we subsidize; but the questions are: how much do I subsidize and how do I deliver the subsidy?

Now if you ask me who do I subsidize, I would like to subsidize the guy who uses his water efficiently.

DNA: Absolutely.

Mehta: So if you are saying that in that one litre of water I am going to grow this much or I am going to create so much of agricultural value, you should be the first one to get it and then I must have a merit order and subsidize crops accordingly. If you are very inefficient in agriculture you will be the last here to get subsidized.

DNA: In other words, you would recommend a kind of policy that Gujarat implemented a few years ago, where if you don’t have drip irrigation, you won’t get a connection. And you make sure that agriculture is controlled through a variety of policies. Would that be the approach here today?

Mehta: That and of course, going a little further.

You subsidize in a manner that whatever money he spends to improve his efficiency has a very short payback period. So if I put in a drip [irrigation system], then I say, all right, you put in the drip system, I’ll give you power at this rate, so that your drip gets paid back in the next three years, four year or five years, whatever, you would define a payback period. Normally a drip’s payback period should be maybe about 10 years. All right, I’ll subsidize you in a manner -- don’t subsidize the drip, subsidize power. So that his drip irrigation pays for itself.

So you don’t have to give subsidy for the drip and then you give subsidy for power and then you give subsidy for his labor. I will use subsidy as an instrument only through power.

DNA: Yes.

Mehta: So in three or ten years, he recovers his drip irrigation.

DNA: Okay.

Mehta: Next comes the question: how you deliver the subsidy. Today what is happening in respect of the delivery of subsidy is that you get one bill, one subsidy. So everybody gets a similar bill, and the bill says, well, this is the cost of power, this has been the subsidy and you pay so much; and that’s it. My feeling is that now you have the UID in place, send the subsidy directly and give him a coupon. I’m subsidizing 200 units, that’s it. You staple that 200 coupon. DNA: A direct benefit transfer.

Mehta: Direct benefit transfer and to the extent that you think is correct.

This is an example I often give. I was doing my MBA in the UK and because I had my family with me, they used to give us what is called heating coupons, because I was student so I couldn’t afford heating for my children. So I would get heating coupons. So in my electricity bill, all I needed to do was just staple the heating coupon and the bill would get subtracted to that extent.

DNA: Yes.

Mehta: So if my electricity bill was £10, they gave me about a pound worth of heating coupon, which I just stapled on it as a student and my electricity bill became 9 pounds. So we believe that for keeping yourself and your children warm, you need £1 worth of electricity, we are giving you that. Rest is your pleasure and your treasure.

DNA: So either you do through coupons or you do it through direct transfer of cash into the bank account. Because the second you print coupons, you’ll have someone making bogus coupons.

Mehta: Those days you didn’t have UIDs and now you have a UID or an electronic system to transfer subsidy, transfer it straight. This is what I’m going to subsidize. You take a call what you want to do with it, rest you pay for it.

Padmanabhan: I realize what you’re saying and I want to link it to efficiencies.

For example, if my bill is Rs.100 for 50 units that I consume at Rs.2 every day. If I pay my bill within 30 days or whatever time, you give me Rs.10 subsidy…

DNA: Yes.

Padmanabhan: That is an example; I am saying that I am also responding back to the system that I am not misusing the system. You have given me a subsidy, I am responding back to the system. But the other big problem that the industry is facing is a huge collection issue.

DNA: Collection issue?

Padmanabhan: That even if you are willing to pay, I do not have the mechanism or you have not actually collected the money. Now, how do you address that aspect – because it too has a bearing on tariff? Because ultimately if I can’t collect 50%, I am going to incur interest on the delayed payment, which I shall pass on to the customers. Again it goes back to tariffs.

So, you link subsidies to efficiency of operation, the collection efficiency or you link the subsidy to better productivity in different industries, like drip irrigation as an example.

Or you create a system which encourages factories to work in shifts when the load is low. That will allow you to move your [electricity supply] load to a uniform pattern to address this costly peaking power. You therefore work on a better allocation rate.

DNA: Correct.

Padmanabhan: You introduce subsidies from an efficiency point of view.

DNA: So time of day would be one very good way, so that you can anticipate load factors in advance.

Padmanabhan: Yes, in fact in Bombay when you say BEST 900MW, Tata Power 900MW, against another 900MW, 2,700 megawatts of utilization. There are two, three hours when you need 10% more and that 10% is the primary cost for the increase in tariffs.

DNA: Absolutely, because that plant goes up only for that period and must recover its entire financing cost during those two hours of operation. That is why base load and peak load costs vary so widely.

Padmanabhan: That is correct. So, if we can shave that off and say one should pay 30% more during that peak load period, you will see things coming back.

You penalize inefficiencies and you reward efficiencies. So that way too your subsidy system can work.

Deshpande: I agree with the views on time of the day tariffs and direct benefit transfer.

The only thing we’ll have to see is how to implement it, so that the correct people get correct subsidy and whatever advantage they are supposed to get. In fact, one or two committees have recommended this, and peak hour power concept is already on.

Basically they are targeting the gas power stations, which are normally for short duration hence for peaking hour periods. And discussions are also on, NTPC has produced a paper also, what will be the tentative cost of power produced considering the life of gas power stations and other things, because we have to frequently start stop, so we have to account all the running hours and that. And I think that discussion has gone to a very advanced level by now, and we may see the concept of having peaking power tariffs at least, if not time-of-day tariffs.

I was also in there one of the committees, but that was dealing with the gas power only. So, if that comes, because in – because we got the message in Haryana and many places, particularly in malls. They are ready to pay any cost of power during peak hours. The alternative is using DG [diesel generator] sets which cost them much more.

Mehta: Gurgaon also.

Deshpande: Gurgaon, yes. Haryana means Gurgaon. DNA: Yes.

Deshpande: And many societies also approach us. Okay, you give us power at Rs.12 or Rs.14 during this duration. Only thing is that we at NTPC cannot distribute power as our generation capacity is already allocated to different discoms. But there are offers from Haryana area, and from many other areas. So let see, if this peaking power concept comes.

DNA: Okay.

Deshpande: But that will mean higher tariffs.

DNA: How do you view this for Maharashtra? If for example, I am a grower of water guzzling crops, should my tariff be higher than let say for a wheat grower?

Mehta: I would for sure. We need a lot of rethinking on agriculture.

I don’t remember, but I read an article in one of the papers that we exported so much of rice in a particular year. But in the process of exporting rice, you have also exported so much of water, fresh water, which is at a premium today.

Now, should you be exporting water and subsidizing its export? Similarly sugar. Maharashtra is one of the biggest sugar producers in the country. Now, yes, it is good that we are producing sugar. It is adding to the wealth of the farmer, yes that’s good. But then in the process also you are sort of supplying water to the various parts of the state and you are using electricity to subsidize the supply of water to other states.

DNA: Yes.

Mehta: Now how do we look at all this? The biggest problem that is coming in is, how do you price agricultural goods?

DNA: How do you price agriculture?

Mehta: Because the agriculture institution, the agriculture lobby, comes back and asks us -- and they are also fairly correct in what they say – that are you pricing the agriculture goods correctly? These are the issues staring at us. So once you price agriculture goods correctly – not just on the mechanism of the capacity to pay, even though every other good is priced on the capacity to pay. How much is a man ready to pay for this bottle of water? Yeah, you can say, all right this place is totally dry, “koi nal nahi hai” [there is no tap]. I can even sell a bottle of water there at Rs.100.

DNA: Absolutely.

Mehta: Whereas if I had a good public water tap, you won’t even get a rupee for it. But agriculture cannot be priced on capacity to pay. To my mind agriculture will have to be priced on the impact, on the environment and what is the country’s need.

DNA: Basically it’s a countries need. The country needs something urgently, pricing is based on needs.

Mehta: In other words, you have to backward price your power. It will not be easy to decide on how you want to price power.

DNA: Is the political establishment willing to consider such a logic?

Mehta: I am a bureaucrat.

DNA: Okay. Now the other question. There’s enough data to show that the biggest wasters of water in India is agriculture. Unfortunately, the waste is the greatest where power pricing is the lowest, most when electricity is free for agriculture. How do you react to such a situation?

Gupta: Partly that answer is already given by Mr. Mehta.

The other issue is the need for food security -- that minimum production required to meet a country’s needs.

Now, agriculture export being a primary export, we will have to study what a lot other countries have done, like manufacturing, export – related exports – that they have promoted much more than agricultural exports.

But, since a low tariff for farmers allows policymakers to allow a low cost of agricultural produce in the open markets, it becomes a distorted subsidy. In the name of the farmer we are actually subsidizing the middle class instead.

Just compare the way price increases in agriculture compared to any manufactured good item like cloth, a shirt. In the last 20 years, prices of manufactured goods may have gone up 20 times, while agricultural goods may have gone up only by 100% from say Rs.10 to Rs.20 or Rs.25.

DNA: Do you see a problem emerging where users of high priced power – namely industry and commercial establishments –switching over to captive solar? For instance, instead of paying Rs. 10-Rs.14/ kWh, I can get solar power at Rs.6-7, thus saving on Rs.3-8 per unit.

That will reduce the money with distribution companies and prevent their ability to subsidise agriculture.

Mehta: Let’s not get into a fight.

Fundamentally the issue is: where is the subsidy to agriculture coming from?

Today, in Maharashtra, for example, the total subsidy flowing into agriculture through the power sector increment of the power is Rs.10,000 crore.

This year it’s likely to get up to almost about 12,000 crore -- in this current financial year. So, power is pushing in a subsidy of about 10,000 crore last year; this year it’s pushing about Rs.12,000 crore into agriculture. Who paid? Last year 7,000 crore came from industry and commercial tariffs, because they were supplied power at a rate higher than the cost of supply. So while my cost of supply is Rs.5.56, they were supplied power at Rs.7, Rs.8, Rs.9 going up to Rs.14 a unit. Thus they gave me 7,000 crore which went into agriculture.

And the Rs.3,000 crore came as direct government subsidy, because whatever the regulator fixes, the government gives a subsidy over and above that, so Rs.3,000 crore came from the government. Thus we could give away a subsidy of Rs.10,000 crore.

Now the first question is, this 7,000 crore where do you want to peg it, do you want to reduce into a 1,000 crore, do you want to reduce it to zero, or do you want to make a 10,000 crore, where do you want to peg it?

DNA: Industry can’t pay more.

Mehta: I also agree that industry can’t pay more. Industry must survive. Tariffs are becoming burdensome.

DNA: Otherwise you have jobs going away. The political establishment knows that jobs must be created.

Mehta: So what you are suggesting now is that 7,000 crore should not shrink?

Now who created this business opportunity? It’s not been created by your innovation or a technology breakthrough that has been created because government decided to give a subsidy.

Mehta: Now what is the solar lobby saying, that there is a business opportunity. I must get that Rs.7,000 crore. Now what are you trying to do? I’ll put a solar panel. You’ve very rightly said its Rs.6. And this power which he was getting at the Rs.8 or Rs.9, now he will displace the Rs.8 power and he will get it at Rs.6.

But why was industry getting it at Rs.8? I could have given him at Rs.5.

So fundamentally solar is not through its technological breakthrough or the great innovative mind.

It is only that you trying to jump on to and existing business opportunity and try to into a business opportunity created by the government.

DNA: In other words, solar is riding piggy back on an irrational pricing by the government?

Mehta: I won’t say irrational. A pricing by the government based on a philosophy that the government subscribed to. It may be right, it may be wrong. Tomorrow you can say no. Why should governments give it to agriculture? It’s a political philosophy. You cannot say a political philosophy is irrational. Finally a political philosophy has come through a process or a democratic election.

DNA: Okay.

Mehta: No political philosophy can be said to be irrational. It is only the people who have elected that government who can decide on that. So, yes, in a dictatorship you can say it’s an irrational policy. But in democracy no – you may not like the policy that’s a different issue, but you cannot call it irrational.

So when the solar people come to me and say, sir, we would like to put up solar panels on multiplexes and on malls and on offices like this. I said, no. Please put it up on the BPL families’ roofs. There you are not viable anymore because he is buying power at Rs.1 and your solar power is going to be Rs.6. You are buying power at Rs.10 and at Rs.6, this becomes viable for you.

So when it comes to solar, you can tell me that it is the power or the energy of the future, that is fine.

But if you are trying to tell me that it is cheaper. It’s not cheaper. It is only trying to get into a business opportunity created by the government.

Now what we are trying to do is -- through the back door -- trying to demolish the philosophy of the government. The government has said well, I must give power to agriculture at Rs.1 and I must give industry at Rs.8. So the back door way of demolishing this political equation is by offering solar at Rs.6.

DNA: Okay.

Mehta: In the name of solar, you are trying to demolish an existing arrangement. If you want solar to come in, please bring it. But bring it into the overall energy basket and then we shall distribute it the way it should get distributed. Don’t, you know, open one door for somebody to escape. So what you’re trying to do in solar today.

DNA: So you want the solar to be sold to the grid and the grid decides.

Mehta: Yes. You put it in the basket, decide how large your basket should be. Then distribute the tariffs to the people, the way you would like to distribute it. This is all back loaded. DNA: So in order words, you are saying no to captive power.

Mehta: Exactly. No.

If you want to do captive, and social good is on the top of your mind, please put it up on the BPL families, then let us see how it survives.

DNA: Any comments.

Padmanabhan: See today if you take electricity generated by DGs, it’s about Rs.14, Rs.15 per unit.

That’s the best you can get at Rs.15,000 a tonne of oil. Technologies of solar and wind, are the displacement of those kinds of high cost coal. That’s one way. I am fully clear that you have to get it into the grid. See if you want to overall bring balance you have to go through the grid.

You thus average out the power cost. Today solar is less than 2% of the basket.

And in the larger context of things today it’s a very small thing. But get on to the grid, wherever the grid is available, get the grid to decide the price. I fully agree with you on that. But there are also areas in India when grid is not available.

DNA: Clusters. decentralized clusters.

Padmanabhan: Yes. Because the grid cost is also not cheap, it is Rs.2- 2.5 crore a kilometer.

The cost of the line plus the 110 kV line plus the tower, etc comes to that kind of price.

Can you look at solar as the possible solution for locations where the grid is not available?

Mehta: Off-grid is welcome and should be encouraged.

DNA: The existing rules do provide for decentralized power for remote clusters.

Mehta: It makes a lot of economic sense, you know, instead of carrying a line and maintaining that line for just two homes.

DNA: Yes. But it has being ignored.

Gupta: So those areas, where local area authority can be set up, they can be given the distribution rights for that particular area.

Mehta: Perfect. Perfect.

Gupta: And where you put up solar power for distribution and consumption then and there only. Deshpande: There is a provision for this in the law.

Padmanabhan: It makes enormous sense. Rs.1-1.5 subsidy from the transmission company, because we are not putting up that grid.

DNA: Plus you capitalize other subsidies that you offer remote areas, and you can pay for the decentralized setup.

Padmanabhan: Yes. So that’s another way to look at solar.

DNA: Yes.

Padmanabhan: But I agree with him, you know, if you put it them as captive industrial energy sources, you are actually not doing the right thing.

And anyway that also create imbalance in the overall decisions making.

DNA: Yeah, make sense. But could we get responses to the original question? With input prices increasing, with the inefficiencies there, with the distribution problems existing, will the policy makers be compelled to change the way tariff is judged?

The regulatory cost that Padmanabhan talked about is unbearable. You can’t go ahead with it, your balance sheet is wonky, everything is wonky.

Padmanabhan: My numbers are very small compared to the state and national numbers. The state distribution company, they are burdened even more. There is no comparison.

DNA: Absolutely.

Gupta: Here see the competitive politics has to really understand this concept. The recent example is U.P. After a long time they’ve revised tariffs and I think there is already a big agitation that has started.

But in this setup again, when you talk about intra-sector subsidies, like agriculture or industry or residential, the current competitive politics usually means that if the party in power allows for a change, the opposition party takes a totally different view.

DNA: No, let me put it differently, a lot of subsidy can still be met if there is no misapplication of subsidy.

Gupta: Yes.

DNA: And if there is no theft of subsidy.

Gupta: Yes.

DNA: In other words a DBT answer seems to the only rational answer the states can introduce as a first measure. Do you see that coming in?

Padmanabhan: It has started happening in the case of consumer gas. So the principle is there, and it is being tested also. Then whether you apply it to food or whether you apply it to electricity, or the coupons that you talked about in the U.K., it’s a method of application.

DNA: Absolutely. Coupon is just a method.

Padmanabhan: Yeah, correct.

DNA: So do you see that happening in electricity?

Mehta: Three things must happen and that will happen.

One is – and I am talking specifically to Maharashtra, I am not talking about the country, because every region in this country has different needs and different problems. Maharashtra, let us realize, is a highly industrialized state, is a highly urbanized state. So if agriculture is important so also is urbanization and industrialization, which is taking place in the state, and it is generating a lot of employment, generating a lot of wealth, generating a lot of prosperity.

DNA: Yes.

Mehta: So, you can’t just say that industrialization is bad. You can’t say malls are bad. Malls employ the poor of the city.

Just as factories employ the people in rural areas and drought areas, so also malls are employing a huge number of this workforce, which is now emerging in the cities, educated, and want better lifestyles. They are not ready to work in your homes anymore, cleaning and washing. They would like to be dressed properly, standing there on the counter, talking to you properly and engaging you. So that’s a huge popular, hugely aspirational population, which is being employed by these malls, by these institutions that have come up in urban areas. Now we can make them financial unviable. But to prevent unemployment, they’ll have to remain viable.

DNA: Yes.

Mehta: So the first and foremost requirement is that we’ll now have to relook how to strike a balance between agriculture and industry.

DNA: Okay. That’s a first thing.

Mehta: Drought on one side and the rate of urbanization. Today, if I’m not mistaken Maharashtra is almost 50% urbanized. 50% of population is in urban areas. So you can’t say that urban population gets a raw deal, whereas, the rural population gets a good deal. Somewhere you have to strike a balance.

Yes, food security is important. But we need to strike a balance between these two, that’s one. Then moving further, there is another thing that also must come about, and that is where I have this great battle with various consumer groups. The true cost of power has to get passed on to people. There cannot be two thoughts about that. The cost true cost must get passed on, and secondly, recovery of the true cost must take place. There cannot be any interference on that.

And luckily in Maharashtra, it has been happening, the true cost of power is getting passed on.

Because let me tell you if the true cost of power cannot get passed on, distribution companies cannot survive. I won’t name states, but I can actually off the record tell you 10 States which are having load shedding because they didn’t pass the true cost of power to their people.

DNA: And they’re realizing it and look at Punjab, they’ve started charging now.

Mehta: Yes. Most of the states are facing load shedding because they never passed on their true cost of power to the people. So, whether you like it or not, the true cost of power has to get passed on and recovery must take place. Today we are load shedding free in Maharashtra because we passed on the true cost of power, and we’re collecting it also. At times we’re labeled ruthless, but that’s the only way out.

DNA: That’s the only way to survive …

Mehta: Because if we didn’t give you power, you need to switch on a generator, which is Rs.15 and our power is Rs.4, Rs.5 for residential power.

DNA: Yes.

Mehta: So these three things must happen.

DNA: You said two things. One is the need for balancing rural and urban, and the second is the true cost of power. What is the third?

Mehta: True cost of power with real recovery and the third issue, which got sort of lost in the noise is the issue of peaking power.

Especially in Maharashtra because in Maharashtra today we’ve now reached the stage of being power surplus. But there are small time windows where we run short of power.

DNA: OK.

Mehta: A small window in the evening 7 to 9, small window in the morning about 7 to 8 when we do face problems of peaking power. You know there are many committees talking of ancillary services, where they are saying, “Well, we will have peaking power stations, which will switch on at that point of time”. Now I have a fundamental dispute at this point. Peaking power is expensive power.

DNA: It is expensive because a plant works only for two hours, but pays interest cost for 24 hours.

Mehta: Now, this peaking power must be paid for. Whether it should be pumped into the grid or not, the choice should be with the consumer.

DNA: Yes.

Mehta: Now, if I am a poor consumer and if you tell me that from 6 to 7, the power is expensive, I might as well go for my morning walk from 6 to 7. Why should I sit at home and pay for expensive power?

DNA: Absolutely.

Mehta: So I’ll switch off everything, take my kids along and say “let’s go for a walk”, come back at 7 o’clock. And again, quoting from my example in the U.K., we did all that masala bhuuning [grinding of spices for cooking] after 10 in the night, because from 10 to 12 at night, the power was the cheapest.

DNA: Absolutely. So it’s a price that determines usage patterns.

Mehta: So basically what I’ve been trying to say is that first get your TOD [time of day] meters in place. Let the people decide whether they want to use your peaking power or not and then get the NTPCs and Tata to generate it. Don’t go the other way around saying, “Oh! I’ll let you put up a peaking plant and I’ll ensure that it is tied around your neck, whether you like it or not”. So first put TOD meters, tell me this is the tariff at this point of time, I’ll tell my kids, guys, no studying at this time, six to seven everything off, we go for a walk. So I change my life, it’s a price sensitive country.

DNA: It’s a price sensitive country.

Mehta: So I’ll change my lifestyle to meet your tariff needs.

DNA: So it’s through price that you would control both the agriculture consumption as well as domestic and industrial consumption.

Mehta: It’s now time for TOD meters.

DNA: What is NTPC? How do you see your establishment working on TOD because you are the nation’s supplier?

Deshpande: In this case, the TOD concept has been applied only to the gas-based power stations we have worked on. Not for the coal power stations.

DNA: But coal was always base power. Coal was meant to be base power.

Deshpande: Coal is always base power but because of the position in the capital of the country after that grid failure, many times even the coal power stations are used for peaking power.

DNA: Are used for peaking?

Deshpande: Are used for peaking only. Means otherwise they are running at a constant technical minimum power, say 500 megawatt will run at 300 megawatt. In the evening peak will run at 500 megawatt.

DNA: So that brings down your PLF [plant load factor].

Deshpande: After the Energy Conservation Act we have introduced the PAT – which stands for Perform Achieve Trade -- Act in 2011.

And as per that every power station has to demonstrate by within three years improvement in our efficiency. Say depending on the capacity of the station and the past three years' performance we shall be evaluated. For at NTPC, if in 2014, I work with the same efficiency at in 2011, then I will have to pay Rs.380 crore as a penalty. It means that the eCertificates concept has already arrived. The reason I talk about this is because when we were talking about water, I wanted to say that FICCI is recommended the same principle for water as well. It means that they are trying to apply this to the Water Conservation Act also. On the same lines as the PAT. From 2014 onwards only we’ll see its effectiveness.

At Kawas, Gandhar power station, I’m paying as on date Rs.16.50 per cubic meter for drawing water and I use huge quantities of water.

DNA: Rs.16?

Deshpande: And every year 15% escalation is there and the same are the rates in many of the states -- Rs.12, Rs.14 -- because of water; and water is a major resource. So what has happened is that we too are concerned with water conservation. Because water costs are not a pass-through item. In NTPC itself our bill has increased by Rs.200 crore across all the stations for water only.

DNA: Sorry for the interruption. But based on what you say, the minimum cost of water would be Rs.12 to Rs.16 per cubic meter?

Deshpande: Per cubic meter. Yes, sir.

So now that FICCI has already made a presentation to all the stakeholders and all the industries [just as it was done in Gujarat]. In the same way they are saying if you reduce your water consumption levels, for last three years, four years by 5% to 10%, 20% which has yet to be decided, then you’ll get water certificates also. Although the concept is being discussed in the ministry only for now, energy saving measures like APC reduction and heat rate improvement, coal consumption have already been introduced.

DNA: Okay.

Deshpande: And one more thing -- solar which we were talking about -- NTPC has gone in for two power plants of 5 megawatt each, which we have made commercial, but then we have gone in for decentralized generation plant also biogas plant where the grids are not there. In Chhattisgarh, for the first plant we went into the Rihand area, but what we found that when we made a society and all those, sustainability is not there.

So in solar case now what we are doing, we are trying to use it to save the fuel. Whatever the heating cycles are there I will use solar panels. During those periods I will put my heaters out. So my coal consumption will be reduced. I will be generating the same power. So now for solar we are trying at Dadri our first experiments. So we’ll be using solar in a major way.

DNA: Excellent.

Deshpande: Apart from wherever we have signed PPAs [power purchase agreements] we are setting up power plants taking into accounts water and solar as well.

Padmanabhan: I just want to add one more. I am thinking of how to reduce tariff. DNA: Good. We are all interested.

Padmanabhan: Absolutely right. Technical and commercial losses is another factor which actually causes an impact on tariffs.

So if you can reduce the losses, and the losses are reduced in different ways by perhaps at some points, introducing better technology, better meter reading technology and improving the quality of the network itself, Mumbai and Maharashtra are lucky places to be in. If you look at the availability of the network in India, there are places where the network is very, very unreliable.

DNA: Yes.

Padmanabhan: So I think by introducing well established technologies we can do a lot. We don’t have to go to the high end. We can start at the low end and start implementing. Your ability to measure correctly and to bill correctly and collect correctly at a lesser cost will improve tariffs.

So you’re improving the productivity of the process of metering, billing, collection and then the recording of the program, all this helps reduce tariff. We all know why tariff is increasing, but what can we do to is to find ways to reduce its impact. …

Gupta: The use of better technology and distribution– distribution network and metering network. Today the amount spent on these as a distribution licensee, on the meter reading and billing and generation all that, takes up one-third of my distribution cost.

Now world over this technology is available. Remote reading is one example. Today our setup and our systems are of one design, and do not always support planning and places where we distribute power. And we’ve always been discussing the issue and I’ve already written to corporation also. Like every building has to have a proper meter room and built as part of the building design which makes it conducive for me to automate meter reading. Today if you see most of these buildings, the meter room will be at some place where there is almost impossible to get any signals out.

DNA: So in other words, building designs also have to be modified?

Gupta: Then you know the streets passing close to the buildings. Now if I need to read meters remotely, I may just need to have a bandwidth. My meters these days have a range of around 50 meters or so. So my person driving the van, close can pick up all the readings.

If all the buildings were to keep the meters close to the read, my van can pick up the signal one man driving can read all the meters. That will bring down the meter reading cost and the total billing cost substantially. Now that is a very clear kind of cost reduction which you can bring in immediately.

DNA: Are the policymakers willing to push through such measures?

Gupta: Fully willing.

DNA: Then why have we not done it?

Gupta: The causes are many: Bureaucracy. Multiple city authorities. Lack of coordinated efforts in terms of town planning and city planning, various other issues, because I run transport also. I can see in transport too the same thing, five authorities doing five different things.

Now here, when we talk about a building design system, each of the authorities has its own ideas -- MMRDA, MHADA, BMC, Urban Development Department -- five departments doing five different things. Now the so called building design code and city planning need some kind of uniformity.

I am now floating the idea to the decision makers that this is something which needs to be considered while doing the city planning and the town planning aspects in the cities.

DNA: In the state, have the TOD concept and metering concepts been accepted?

Mehta: We’ve floated it. We’ve decided two things. All our HT meters are not TOD meters. And we tried that experiment also in the night tariff and industry has given a discount of Rs.2.50.

DNA: Oh, you’ve done that already, okay.

Mehta: It is one of the biggest anywhere in the country today. So night tariff -- if you are operating your plant from 10 in the night to 6 in the morning -- you get a Rs.2.50 discount. That’s pushed a lot of consumption from day time peaks into night. We have introduced this from 1st of January, if I’m not mistaken.

DNA: Okay.

Mehta: And it’s been hugely successful. Industry has been very happy with this, especially the larger industries.

Second thing that we’ve been looking at -- and that’s a philosophy that we are now following in the distribution company -- is that any utility which is a monopoly and dealing with people, it is imperative that the utility’s employee should not interact with people. Instead, technology should interact.

DNA: I see.

Mehta: We are very clear. The minute you have a human resource interacting with your client, you are bound to have rude behaviour; you are bound to have corruption.

DNA: Collusion. Yes.

Mehta: And you are bound to have so many other issues. So we’ve said very clearly, we don’t want our people to interact with the client. We want technology to interact.

And we’re now moving into what is called the IR [infra red] meters in rural areas.

We started in a huge way, IR meters, wherein you just need to get into the line of sight of the meter. What O.P. said is very clear, very correct, about where they install the meter. But I for one believe that if I can’t change the wall at least let me change myself. So I have IR meters where you go into the line of sight of the meter, presses a button and the reading gets dumped. You don’t have to read and write and register. Anybody can do it.

So that’s what we are doing in rural areas. In urban areas like Thane, Belapur -- we also have Pune, Nasik -- we are going in for RF meters. Well, we can’t read it from the road, but definitely if we went close to the reading meter room, if my man stands, he presses a button, all the meter reading gets dumped there.

We’ve seen a huge difference. Nobody likes a rude man coming to your house, ringing the bell and saying, “meter padhna hai, kidhar hai” [I have to read the meter. Where is it?]. You don’t have to enter the house. From outside the house you’re able to read it.

DNA: Excellent.

Mehta: And for industry, almost 90% of the industry we’ve put in AMRs, so all the readings are coming directly to my office in Prakashgad [in Mumbai] to the central control room. We don’t have to go there. That’s something we did over the last one year. So we are very aggressively following industry payments also. No more checks. Please don’t come to us to give the checks, RTGS is the only mechanism we are supporting.

DNA: Oh! Industry pays through RTGS?

Mehta: RTGS. Please don’t come to us. We read your meter through an AMR; we will send you a mail.

DNA: Hats off.

Mehta: And you send us by RTGS. Please don’t come to us. We’re very clearly following a philosophy -- please don’t see us. See technology.

DNA: Is NTPC pushing for such things at States?

Deshpande: No, sir we’re in generation, so the distribution part does not apply to us. But after my joining date the first thing which I saw was that Maharashtra is giving power at Rs.2 less at night. Later on I went through the all details. And we saw that the discom is not making losses, but rather gaining, as industry is gaining, consumption has increased, so night time power demand has also increased.

DNA: And it balances, also it actually improve our financial of the State.

Gupta: In fact, tariffs and metering will be issues in this current election.

DNA: Yes. The Aam Aadmi Party has actually sat down there to discuss that.

Gupta: So this issue is going to come up, privatization, franchise public committees.

DNA: Yes.

Gupta: Because whatever you say this is a commodity.

DNA: But as Ajoy said, you have to tell customers that this is the cost of power. If you don’t educate them the problem lies with us. We won’t be able to educate them.

Mehta: You know that’s where I blame the press also.

Mehta: The fundamentals of journalism, , you know, man bites dog is news, but dog bites men is not news. So when I justify the cost of power that’s not news but when the representatives shout and say, inefficiency, corruption, that’s news.