Dr Bharat Jhunjhunwala
Power cuts have become the norm with the onset of summers. Generation companies are continuously increasing the cost of electricity. They are making huge profits while the consumer continues to suffer. Companies are merrily padding cost of projects and passing off the burden on to the consumers. The 330 MW Srinagar hydro electric project is being implemented by the GVK Group. The project was granted approval by the Central Electricity Authority in 2004 at a cost of Rs 1700 crores with an explicit provision that cost shall not be increased “for any reasons whatsoever.” The Generating Company continued to increase the capital cost anyways. It was increased to Rs 1900 crores in 2006, 2700 crores in 2011, 3700 crores in 2012, 4300 crores in 2013 and, as per my estimate, to Rs 5200 crores at present.
The Company has entered into an agreement with UP Power Corporation (UPPCL) to sell the electricity. The final price of electricity is to be determined by the UP Electricity Regulatory Commission (UPERC). The UPERC takes into consideration two components of the project cost namely, fixed and variable costs. Fixed costs consist of capital cost of the project and interest thereon. Variable costs consist of maintenance expenses.
The UPERC appointed a “Prudent Check Committee” in 2012 to examine whether the cost of Rs 2700 crores claimed by the Company should be accepted for determination of tariff. The Committee was to submit its report in three months. However, the Committee sat on the report for full two years till the cost had been enhanced to Rs 4300 crores by the Company. Then it gave a clean chit to the Company and recommended that a fixed cost of Rs 4200 crores may be accepted. Only an amount of Rs 100 crores incurred due to variation in foreign exchange rates was disallowed. The increase in capital cost made in blatant violation of the approval of Central Electricity Authority was approved.
The Company gave two reasons for the increase in fixed costs. It claimed that it had encountered certain “geological surprises” during construction. These necessitated some changes in design that led to increase in fixed costs. This was a sham argument. According to the approval granted by Central Electricity Authority, the Company had to inform the Government if and when a geological surprise was encountered. The Government was then required to constitute a Committee to look into the matter. But the Company gave no such intimation to the Government. That indicates that the so-called geological surprises were simply made up. Actually the promoters padded up the fixed costs by putting in false bills and took out the money they had invested. Then the Company claimed higher fixed costs in order to pass the burden on to the consumer. The Prudent Check Committee accepted the figures of materials consumed and expenses incurred as stated by the Company. It actually did no prudence check. It also accepted the Company’s sham argument that design changes were necessitated due to geological surprises. It totally abdicated its responsibility and merely became a spokesman for the Company.
The second reason stated by the Company for the increase is fixed cost was the disaster of 2013 in Uttarakhand. Flood water entered the turbines and the Company incurred huge costs. But the Company claimed these damages twice. It lodged a claim with the Insurance Company, I understand, for about Rs 400 crores and even received an initial payment of Rs 35 crores. At the same time the Company showed these losses in fixed costs and claimed them from UPPCL. The company incurred the loss once but claimed compensation twice-once from the insurance company and again from UPPCL. The Prudent Check Committee knew of the receipt of Rs 35 crores by the Company but chose to keep silent indicating its complicity. The combined effect of these two bungling was that the fixed cost component of the price of electricity increased from Rs 2 per unit to Rs 6 per unit. The Company made a clean profit of Rs 4 per unit!
The second component of price of electricity is variable costs such as those of maintenance. Hydro electric plants have virtually zero variable costs. They do not need to buy raw materials such as coal or uranium to run the plant. In comparison, the variable costs for thermal power are large. They have to buy coal or gas. The Power Purchase Agreement between the Company and UPPCL provided that the variable costs will be reckoned equal to the lowest variable cost by a thermal plant in the northern region. This provision is altogether unacceptable. The variable costs of thermal plants are large. Even the minimum variable cost of a thermal plant in the northern region would be large. I understand this is about Rs 1 per unit. The Generating Company thus claimed a variable cost of about Rs 1 per unit while the variable expenses incurred by it were near zero. Altogether the Company claimed a clean profit of Rs 5 per unit-Rs 4 towards inflated fixed costs and Rs 1 towards purchase of coal which it never purchased. The Company wants to sell power at Rs 7 per unit to the consumer while the actual cost is only about Rs 2 per unit.
The Power Purchase Agreement made between the Company and UPPCL provided that generation from the project will start by 2012. The project has not yet been commissioned though. It is possible for UPPCL to cancel the Power Purchase Agreement due to non-observance of the time schedule of generation. But UPPCL is staying mum obviously to protect the interests of the Generating Company rather than protecting the interests of its consumers.
The Company also passed on many costs to the local people in the project area. The hills on the periphery are sliding into the reservoir. House of poor people are developing cracks. The quality of water of the river has deteriorated. Thousands of corpses flowing in the river during the disaster of 2013 are buried in the reservoir. Carbon dioxide and methane gasses are being emitted from the reservoir. The fish are depleting because they are not able to migrate to their spawning grounds that lie upstream. Forests have been inundated leading to loss of grazing, fuel wood and timber and biodiversity. Sediments are trapped in the reservoir leading to coastal erosion at mouths of the Ganga. I have assessed that the cost of these environmental damages is about Rs 6 per unit.
In the end, the consumer pays a high price, the local people bear costs of environment, while the Company makes a huge profit. There is an unholy axis operating between the Generating Companies and Power Corporations that is abetted by the Central Electricity Authority. An unsuspecting Modi will be taken for ride by the Companies. Need is to strengthen the regulatory mechanism and prevent profiteering by the companies.
(The author was formerly Professor of Economics at IIM Bengaluru)
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