Policymakers should realise the importance of economic pricing of electricity and allow power distribution companies to hike tariff to save the sector from an impending financial collapse,the Crisil Infrastructure Advisory said on Monday.
In a report on the power sector,the agency has said that Indian consumers can pay more for the electricity they consume and it is necessary that regulators revise tariff at regular intervals depending on the prevailing situation.
Power distribution companies combined losses are estimated to have crossed Rs 2 lakh crore in FY12 due to increasing gap between revenue and expenditure of discoms in the absence of timely revision of tariffs.
Electricity tariff increase has lagged behind the rise in per capita income and the growth in household expenditure during the second half of the past decade. For example,power tariffs grew at 5 per cent annually during the period while per capita income and household expenditure increased by 13.4 per cent and 10.6 per cent a year. Crisil MD Roopa Kudva said: This indicates that Indian consumers can bear higher tariffs,and policymakers may have more flexibility to increase tariffs that they are currently exercising.
To drive home the point that electricity tariffs in the country remain artificially low,Kudva pointed out that energy expenditure accounted for 10 per cent of the average households budget in 2004-05. But the figure fell to 8 per cent in 2009-10. This happened for the first time in 20 years.
Had power tariffs been hiked to keep pace with other household expenses,power utilities would have earned additional revenue of Rs 950 billion in this period. Instead of making aggregate losses of Rs 870 billion,they would have made an aggregate profit of Rs 80 billion, she added.
To restore the viability of the sector,the consultancy firm has suggested implementation of reform measures like publication of commercial and technical losses separately at the circle level,automatic state government funding of subsidy and regulatory assets and pass-through of increase in fuel costs on an automatic basis.