FORUM (Spotlight Weekly)

OUR ELECTRICITY TARIFF --- STILL RAAT-TATTING

by SB Pun

With the recent 11% electricity tariff hike, our average tariff has reached Rs. 6.96 per Kwh or about US Cents 9.4 per unit. There is no denying the fact that this tariff as a ratio of the per capita income is one of the highest in this region. But sadly in typical Nepalese fashion, our tendency has been more to howl and wail about it and do precious little on it. It is about time that we sit down without any inhibitions and discuss what the three key players (Nepal Electricity Authority/NEA, the government/HMGN, multilateral financial institutions/Donors) could and should do to stabilize our tariff in the coming years.

Nepal Electricity Authority :

The immediate major task confronting NEA is its looming Energy Surplus once the 842 Gwh Kali Gandaki A comes on stream this winter. There are three options which if tackled judiciously could have very beneficial impact not only on NEA alone but to the country as well. One is to make NEA's tariff more attractive to the existing consumers so that they change their present psyche of consume less to consume more. NEA already has in place the Time of the Day Metering for large high voltage consumers. The incentive to these industrial and commercial consumers may need further reviewing and NEA should not hesitate to provide them. The domestic consumers which represent about 38% of NEA's total revenue have at present a tariff that discourages consumption over 250 units. With the energy glut there is a need to reverse this kind of tariff. NEA is understandably apprehensive that such incentives to the consumers may result in the fall of their revenues. But the transaction in large volumes may offset this revenue fall. The second option is to export this surplus energy to the two Electricity Boards of Uttar Pradesh and Bihar. Though both these Boards are financially bankrupt, Uttar Pradesh has initiated reforms in its power sector whereas Bihar has still stuck to its status quo guns. Unfortunately, we have two 132 Kv interconnections with Bihar while the one and only 132 Kv interconnection with UP is used merely to import the free 70 million units from the Tanakpur. The other irony is that Bihar is in the Eastern Regional Grid that has surplus power whereas UP's Northern Regional Grid has power shortage. The third option to deal with this energy glut is the creation of power intensive industries like the urea fertilizer plants in Nepal. Also we import about 70% of our cement requirement despite having large, rich deposits of limestone. Tiny Bhutan has three cement factories that churn out export materials.

The other major problem confronting NEA is its 24% LOSSES which instead of going down is unfortunately creeping upward. There is no magic wand to solve this problem which has its social dimensions. NEA simply needs to keep on working hard at it, CONTINUOUSLY, day in and day out without any respite. There is a wrong perception floating around that once our Parliament endorses the proposed Theft of Electricity Bill then our loss will start to zoom down. Basically, this Bill will empower NEA and HMGN to produce before the court those defaulting consumers who misuse electricity. If proven guilty, then these consumers will have to undergo jail imprisonment like any other proven thieves. Very harsh and though this may look excellent in theory, in practice very impractical in the present social environment. India does have such a "draconian" law. But look at Delhi Biddhyut Nigam that supplies power to India's prestigious capitol and the officially professed losses there is an unimaginable 48%! It is to tackle this chronic menace that NEA needs to go all out to Lease its distribution system to the community/private operators. Some experience has been gained by leasing out some of the rural areas to the local villages and the districts. NEA should be totally committed to this restructuring process. This process has the inherent beauty that the onus of controlling the losses is on the villagers/consumers' themselves.

If we are to prevent our tariff from rat-tatting further then there are numerous other in-house areas of good governance that NEA can and must implement. The concept of Profit Centres has been on the kettle for quite some time. This is an excellent concept but apparently there are no one around to stoke the fire below the kettle. The heavy arrears to the tune of about Rs. 100/- Crores particularly from the government itself and the municipalities are of great concern. Of greater concern is the "easing out" of the NEA/MD when he "sinned" by disconnecting the electricity supply of the Ministers' Quarters where the Minister of Water Resources cum Chairman of NEA Board resided for non-payment of electricity dues. Procurement needs to be streamlined and tightened as the stores inventory is bulging out. It may not be out of place to state here that the many incoming Minister of Water Resources will want his office REFURNISHED. The Minister's personal secretary, in keeping with the new trend, will want to tot a lap-top computer. Of course, these are all met through the NEA cash box for they devote a good amount of their time in the development of NEA! There is no doubt that the 9,000 plus employees to run a tiny 400 Mw system is a bloated figure. We must ask ourselves how we arrived at this figure and where does the final authority to hire new employees reside. In an employment scarce country, the concept of "golden hand shake" prevalent in developed countries was not only tried but this concept was infinitely refined, by demonstrating who the employer and the employees were, by giving the senior NEA executives the "iron shake" instead to rest at their homes. There are a lot of areas for improvement in the administrative and O&M areas. The classic well known example is the use of NEA vehicles by the "power that be". When NEA's project managers and consultants loll around in Pajeros, what harm is there when the "real employer" also utilize this service. To be Continued

Pun writes on water resources issues

Part II

About a third of NEA's total revenue is taken home by the two major developers of Khimti and Bhote Koshi. This is a major grouse of NEA and at the present level of load it does pinch NEA severely. But do take a look at the performance of these two power stations when compared with NEA built and operated Modi and Puwa. There is no denying that the private sector has the cutting edge over the public sector. So instead of souring over this phenomenon, NEA should don on the salesman's hat and take up the "sales promotion" drive in earnest. The present 12% growth as compared to the forecast of 8% is indeed heartening but how long this will continue is debatable.

The Government/HMGN:

It was at the time of the Arun epic that the World Bank suggested that the Minister of Water Resources should not be the Chairman of the NEA Board. Though this conditionality was vehemently opposed, time was to prove that the two hats on the same individual, particularly a politician with an eye on the next election, does not augur well for the institution. If the objective of the government is to merely govern, then the Water Resources Minister must vacate this Chairman post. The donors for all purposes consider the government the borrower of the loan and NEA ,the recipient. With the government keen on garnering as much soft loan as possible it is normally happy to sign on any dotted line. It is then NEA, which feels the heat , when this loan along with the tough covenants is passed on. This is the case with the 6% rate of return on Revalued Assets and the 23% self-financing ratio that rat-tats our tariff. Similarly, the 8% interest rate for rural electrification works is extremely high. The anomaly here is that NEA is supposed to function as a commercial entity and yet it is burdened with non-paying rural electrification works. The creation of a separate rural electrification institution will help to mitigate this anomaly. There is a necessity to review the government's policy on seeking "rent" from the electricity sold to the consumers: 2% which becomes 10% after 15 years to HMGN, 3% to the districts where the power house is located, tax on profits and may be dividends as well to HMGN. It is true that electricity at present is enjoyed by 16% of the better off society but how much should they be loaded particularly at the cost of our fragile industries. The 70 million units free from Tanakpur has been in this energy glut period literally the grindstone around NEA's neck. Because the government gets it free (not NEA), this energy has to be taken by NEA even at the cost of backing down its own generation, akin to the "take or pay" mode of the IPPs. The government must come to grip with NEA on how best to tackle the country's looming Energy Surplus.

The Donors :

When the donors, again in the epic Arun case, faced governments that were very reluctant to hike up the tariff they felt that this could be handled with the formation of an independent Tariff Fixation Commission. But with the members of the Tariff Commission dominated by the private sector, the donors realized that the Commission could display an "independent" mind. Hence they persuaded the government to make all covenants agreed to between the government and the donors automatically binding on the Commission. This made the Commission a mere tool of the government, not independent and autonomous as envisaged before. The Donors' emphasis now is on the semi-annual automatic tariff increase that is based on an agreed formula in line with our inflation. Experts concur with the donors' view of tariff increase based on the rate of return concept but not necessarily on the Revalued Assets. They, however, do not agree with the self-financing methodology that is primarily responsible for the quick succession of tariff hikes, particularly in a small and fast growing system. The donors have been implementing the tariff portion of the covenants energetically. The annual 1% loss reduction covenants must not be forgotten by both the donors and NEA as well.

Conclusion :

Our Parliament has been making the recent tariff increase quite a big issue with the call to annul this increase. More important for our MPs, executives and policy makers is to chart out our next steps to prevent our next tariff increase. The tackling of the huge Surplus Energy, the fulfillment of the annual 1% Loss Reduction, the commitment of the government to Govern Only and an NEA that is both willing and responsive to the demands of the fast changing power sector are, I believe, the elements that will prevent our tariff from rat-tatting further!

Pun writes on water resources issues