UP Discoms Are Bleeding, Politics Is To Blame: New Study

New Delhi: The electricity distribution companies (discoms) of Uttar Pradesh ran up losses totalling Rs 21,486 crore ($3.2 billion) by 2016, enough to pay the electricity bills of 100 million households for more than a month (at 10 units per day per household at Rs 5 per unit).

Successive governments have kept electricity prices low for political gain, keeping discoms in the red, according to a study by Global Subsidy Initiative (GSI), an arm of the International Institute of Sustainable Development (IISD), a think-tank. Other reasons include technical losses, power theft and failure to collect bills.

The result is that cash-strapped discoms are unable to expand electricity access, and the state has the largest number of people without access to electricity. As many as 49% of the state's 38 million households were without electricity in November 2017, as per government figures. To meet the central government’s ‘24x7 Power For All’ by 2022 target, the state would have to electrify 300,000 houses every month.

UP’s discoms have also failed to benefit from the Ujwal DISCOM Assurance Yojana, launched by the central government in 2015 to bring discoms out of debt, the GSI study said. Since joining the scheme in March 2017, the UP government and the state’s DISCOMs have saved Rs 3,323 crore--just 15.46% of their total losses--and have managed to provide electricity to only 12% of about 18 million unconnected households that were targeted.

Blame lies with political parties

Successive ruling parties have adopted populist measures such as decreasing electricity tariffs for homes and offsetting the reductions by increasing tariffs for industrial and commercial establishments, and by providing free electricity to poor households, GSI cited a June 2017 study by the Centre for Policy Research (CPR), a Delhi-based think-tank, as saying. Each government has left it to succeeding governments to implement reforms.

“This has led to delays in the execution of several reforms, particularly in the electricity sector, where the quantum of subsidies has increased over the years and electricity quality and expansion has been under-served by discoms, which have been in financial difficulties,” the CPR had said.

The CPR study had shown how various political parties exploited the popularity of low-cost electricity for political gain. In the year 2000, UPPCL had had no debt on its books, but the then-ruling Bharatiya Janata Party government under chief minister Rajnath Singh, now the country’s home minister, had refused to hike tariffs in the run-up to the 2002 elections, “thus creating a precedent for other political parties to imitate”, said GSI, citing the CPR study.

Typically, the ruling political party influences discoms to delay tariff hikes, Shruti Sharma, co-author of the GSI study, told IndiaSpend. Sometimes, they lower tariffs for favoured vote-banks--as the Samajwadi Party (SP) did for powerloom weavers, an electorally significant community, before the 2007 elections.

The SP lost the 2007 election to the Bahujan Samaj Party. But on coming back to power after the 2012 elections, the SP again proposed the subsidy, the GSI study said. However, the regulator, the Uttar Pradesh Electricity Regulatory Commission (UPERC), quashed the proposal because the government did not provide upfront financing to discoms as required under the Electricity Act.

Nevertheless, the SP government issued an order to bypass the UPERC and continue to subsidise power supply to powerloom weavers, the study said.

Low revenue recovery from rural consumers

As of March 2017, 31.83% of the total 28.9 million rural households in UP had access to electricity. The number of electrified households in urban areas was higher, with 7.8 million or 84% of the 9.3 million households having access to electricity, the GSI report said.

The remaining 21 million or 55% of households (both urban and rural) are targeted to be connected to the grid before 2022 under the ‘24x7 Power for All’ scheme, which aims to provide all households with 18-20 hours of electricity every day. As mentioned earlier, UP would have to electrify 350,000 households per month to meet this target.

This would only be possible by strengthening discoms, which face many challenges: primarily, substantial losses due to revenue shortfalls, which are blamed on transmission losses, power theft and lack of bill collection, the study said.

Rural power supply causes the biggest deficit in revenue collection, the study found. Rural consumers account for half the total residential consumption, but no more than 25% of rural households using grid electricity have a meter installed; in comparison, 85% of urban households do. Less than 10% of the rural population pays for meter-based grid electricity.

Non-metered households pay only a very low fixed charge regardless of the total volume consumed, significantly impacting revenues, the study noted.

The findings are similar for agricultural consumers. Only 8% of farmers using electric pumps have meters installed, and 53% of them have never received an electricity bill, the study found.

Continued or exacerbated losses will significantly impact discoms’ technical and financial performance, Sharma said, adding that in the past it has lead to blackouts and decreased hours of supply.

With expanding electrification, the subsidy burden on the government will only increase and will further deteriorate the financial health of discoms while impeding infrastructure development, Vibhuti Garg, co-author of the GSI report, told IndiaSpend.​

While efforts to expand electricity coverage are on, just providing a connection serves no purpose unless a reliable and quality supply is delivered, Garg said. In order to achieve this, discoms need to improve their operational and financial performance.

Rural consumers would be worst affected by tariff hike

To recover costs, UPPCL, on behalf of all state discoms, proposed to raise tariffs by 22% for all categories of consumers, the GSI study said, but none of the consumers--residential, agricultural or commercial--find tariff hike justified.

If the hike is approved, rural consumers--both unmetered and metered--would be the most affected, the report said.

The largest hikes in percentage terms would be for unmetered rural consumers, whose fixed monthly charges for 2 kilowatt (kW) connections will increase by more than 200% to Rs 650 per kW from the current Rs 180.

For metered rural consumers, the tariff revisions proposed are Rs 85/kW as a fixed monthly charge and Rs 4.4 per kilowatt-hour (kWh) used. The corresponding charges currently are Rs 50/kW and Rs 2.2/kWh.

The Uttar Pradesh Electricity Regulatory Commission has not yet approved the hike.

Central debt bailout scheme did not help

UDAY, a form of financial assistance launched by the central government in 2015 to bail out debt-ridden discoms, has also failed to help in UP.

The UDAY scheme absorbs discoms’ debt provided discoms improve operational efficiencies, reduce power and interest costs, enforce financial discipline through monitoring of average technical & commercial (AT&C) losses--which include transmission losses, power theft and metering deficiency--and tariff revisions. The debt is financed via bonds with a maturity period of 10-15 years, and discoms are given targets to meet.

Since joining the scheme in March 2017, the UP government and the state’s discoms have issued bonds worth Rs 49,847 crore ($7.5 billion). Reportedly, this has saved the state Rs 3,323 crore ($506 million)--just 15.46% of their total losses--through lowered interest costs, the study said.

Few of the UDAY milestones have been met, the study found.

Progress has been made on metering of feeders (100%; feeders are power lines that transmit electricity), distribution of LEDs (<100%), provision of electricity access to unconnected households (12.5%) and audit of rural feeders (40%), the study noted.

However, little or no progress has been made against other milestones such as distribution transformer metering (13% urban and 1.47% rural), smart metering (0%), feeder segregation (0%), consumer indexing (0%), GIS mapping of losses (0%) and reduction in technical and commercial losses (about 2.46% reduction over a year to 2017 against the target of 9%).

In interviews to GSI researchers, UPPCL officials blamed the delay partly on the fact that although UDAY was signed in January 2016, implementation did not begin until mid-2017.

Consumers find tariff hike unjustified

Any tariff-related reforms need the cooperation of consumers, the largest stakeholder group.

GSI researchers interviewed consumers from different backgrounds to assess if they are aware of the enormous subsidies that go into keeping their electricity bills low and to get their views on tariff hikes.

Almost all the households surveyed were unaware of the proportion of subsidy they receive on electricity. About 10% of farmers using electric pumps said they were aware that their tariffs were subsidized. Households and farmers did not agree with the view that tariff hikes are justified to help discoms recover their costs.

About 80% of rural and urban households said low-income households should get free electricity. Among urban households, only 65% agreed that farmers should receive free electricity; 30% of households explicitly disagreed with this.

Although many respondents said vulnerable households and farmers should be protected, 81% of industrial and 68% of commercial interviewees reported that they were not in favour of continuing cross-subsidies, where they pay higher tariffs to keep agricultural and household tariffs lower.

(Tripathi is a principal correspondent with IndiaSpend.)

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