Karnataka’s power sector: History, politics of development have consequences
When Chief Minister HD Kumaraswamy announced crop loan waivers in his first budget after he came to power in May this year, there was widespread concern about how the state would finance these. Many who thought the loan waiver was a valid response to agrarian distress argued for managing costs by cutting the other biggest subsidy component in the budget – government subvention to the Electricity Supply Companies (ESCOMs).
This is estimated to be ~ 11,048 crores for FY2018-19 according to the most recent tariff order issued by Karnataka Electricity Regulatory Commission (KERC) and is owed by the government to the ESCOMs in the state so that they can provide free electricity to irrigation pump sets below 10 HP, a key plank in the government’s welfare policy.
Electricity subsidies are often attributed to the incompetence of ESCOMs and are rarely interpreted as welfare policy. This has led to a near-complete silence about the continuous cycle of evasion of responsibility in the sector: the government subvention owed to the ESCOMs is only partially-paid; the ESCOMs delay payment for power bought from state-owned generating stations hoping this would be set off against the subsidy owed to them; and in turn, municipal bodies do not pay the ESCOMs for the electricity they consume. In this way, the power sector has become the flexible and convenient current account for the government whenever it needs a bit more fiscal wiggleroom. What seems to make this cycle of evasion acceptable is the widespread belief that subsidy payments to utilities are somehow ill-justified.
This belief stands on a now-familiar storyline which turns the utilities into villains of fiscal problems of the state – inefficient public utilities that have no incentive to improve performance, compromise fiscal prudence and prevent much needed public expenditure on sectors such as health and education, all due to political pressures from rural constituencies. In this story, the solution is straight forward: there must be strong political will at the top of the hierarchy to implement tough measures to reform the sector.
Unfortunately, this kind of thinking that seeks to separate “petty” politics from what are considered technical matters of utility operations has contributed to the obfuscation of the very real political negotiations that have been happening in the sector. This thinking has also stifled what would be a useful debate in the sector on whether and how publicowned companies can be incentivised to become commercially viable and less prone to corruption.
This thinking has restricted the debates in the sector to ways and means to improve technical and commercial efficiency parameters in public utilities without acknowledging the central role that electricity departments and utilities played in agricultural development until the recent past and how to transition out of this regime and at what cost.
Political settlements therefore, have occurred under the guise of techno-economic adjustments. For example higher agricultural tariffs in the northern region are justified on the basis of deeper ground water levels in that region.
The real effect of this adjustment, however, is not on ground water consumption as that is completely free for users. Instead, ESCOMs in the regions with low paying consumers receive a higher allocation of the budgeted power sector subsidy in the State relative to their share of sales to consumers that do not pay for electricity (IP sets account for 97% of this sales revenue).
Historical factors such as structural differences across regions in Karnataka also affect seemingly technical issues such as tariff determination subsidy.
For example, Karnataka’s strategy of relying on a services-led growth around Bengaluru also left most paying consumers concentrated in one region.
The creation of regional ESCOMs as part of the reform in 2002 was meant to create autonomous companies that could operate on commercial principles according to cost of supply in each region.
In practice, however, tariff setting norms and subsidies in the state have evolved an equilibrium that can accommodate the vastly different consumer profiles in various regions of the state so that most of the budgeted power subsidy is allocated to the ESCOMs in the northern region.
The state’s historical context and its politics of development, including the debate on the inequalities between the northern and southern regions, has consequences for the balancing act that is required in the sector- often brokered by the energy department and the regulator. It is useful to be mindful of this political dynamic in the sector rather than relying on measurement and monitoring based on technical parameters alone.