FORUM (Spotlight Weekly)

OUR ELECTRICITY TARIFF --- STILL RAAT-TATTING

By SB Pun

About a third of NEA's total revenue is taken home by the two major developers of Khimti and Bhote Koshi. This is major grouse of NEA and at the present level of load it does pinch NEA severely. But do take a look a 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 bu thow 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, only when this loan along with the tough covenants is passed on to the recipient, that the heat is felt. This is the case with the 6% rate of return on, note, the 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 our fragile industries. The government must note that our industries have to compete with the products from across an Open border where the electricity tariffs are far, far cheaper. 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. Our government must not indulge in the luxuries of always coming too late with too little.

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 annual automatic tariff increase that is based on an agreed formula in line with our inflation. Not many countries have adopted this kind of tariff escalation and the problem with us is that our inflation has been, historically, always hovering around the double digits. 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 with a missionary zeal. However, they must not forget that the covenants on an annual 1% loss reduction is equally binding on them to be implemented with the same zeal.

Conclusion : Electricity tariff hinges primarily on the policies of the Donors, the Government and NEA, in that order of the priority. A comment has been made above on the policy of our government seeking "rent" through the imposition of royalty. It may be worthwhile to know what the World Bank thought of our government's then royalty policy in their July 1, 1985 Project Completion Report of the 60 Mw Kulekhani Hydroelectric Project: "The government levied a royalty surcharge of 7.5 paisa per Kwh sold; during FY76-FY79, this amounted to about 25% of operating expenses and was equivalent to about 30% of the average revenue/Kwh. The surcharge was to have been eliminated in FT76 (para 3.15) but was not discontinued until FY80." Para 3.15 refers to the "abolition of the Government imposed royalty tax. The Government agreed at negotiations to discontinue this tax." This is sufficient to demonstrate the importance of the policy of the two major players.

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 Policies to prevent/mitigate our next tariff increase. There is some silver lining in the form of the hikes in the power tariff of some of the Indian Electricity Boards. This may help us to get better export revenues and induce more IPPs to come to Nepal to invest. But more important is our commitment to do better house-keeping in the areas of : tackling the huge Surplus Energy, fulfilling the annual 1% Loss Reduction, commitment of the government to Govern Only and an NEA that is both committed and responsive to the demands of the fast changing power sector scenerio. I believe the proper policies to tackle these elements will help us to prevent our tariff from rat-tatting further!