SUMMARY AND CONCLUSIONS

The main objective of this study was to critically

examine· the financial performance in relation to the pricing

policies of the Tamil Nadu and the Uttar Pradesh State

Electricity Undertakings, and to work out the appropriate

price structures with a view to achieving the best possible

levels of economic efficiency.

A financial analysis of the Tamil Nadu State Electricity

Board and the Uttar Pradesh State. Electricity Board, for the

period 1971-72 to 1984-85 ind~cates that looked at from the

point of view of rate of return their performance has not

been satisfactory. It is discovered that the rate of return

on the average capital base excluding state subventions in

the case of Tamil Nadu varied between 9. 0 per cent to (-)

19.7 per cent. In the case of Uttar Pradesh, the rate of

return on the average capital base varied between 5. 9 per

cent and (-) 1.7 per cent. The Venkataraman Committee (1964)

had recommended that the gross rate of return should be 11

per cent out of which 6 per cent was estimated to be the

average rate of interest, 1.1/2 per cent electricity duty and

1/2 per cent general reserve. Thus, 11 per cent gross return

would leave 3 per cent as a pure profit which could be used

for further reinvestment. However, the rate of return

achieved in Tamil Nadu and Uttar Pradesh for many years was

less than the average rate of interest on the loan capital.

Thus, the Electricity Boards even failed to pay their

3~,(!
--
interest obligations. The accumulated interest liability of

the Tamil Nadu State Electricity Board as on 31st March 1985

was Rs. 27 7. 9 crores and that of the Uttar Pradesh State

Electricity Board was Rs.1007.4 crores. This shows that the

financial performance of these Electricity Boards was highly

unsatisfactory.
An analysis of some of the financial parameters has

shown that the rigid capital structure of the Boards and some

accounting practices like debiting interest on work-in-

progress to the revenue account has further accentuated the

financial difficulties of the Boards which get reflected in

their commercial losses, debt-servicing capacity and sel £-

financing ratio. Technical and operational parameters like

plant load factor, fuel consumption, energy consumption in

generating auxiliaries, losses in transmission and

distribution systems, operation and maintenance expenditure

and establishment costs have been examined to determine the

extent to which these are mainly responsible for high

operating ratios adversely affecting the financial

performance of the two Boards. In eighties the operating

efficiency of Tamil Nadu Electricity Board has substantially

improved with phenomenal increase in plant load factor of

thermal stations, reduction in consumption of fuel per unit

generation and that of electricity used in station

auxiliaries although transmission and distribution losses and

establishment cost per unit continued to be higher than the

desired normative levels. In Uttar Pradesh despite consistent

improvement in plant load factor, it has always remained

below the All-India level. The improvement in physical

performance due to higher PLF was offset by the deterioration

in transmission and distribution losses. Other physical

factors like auxiliary consumption, fuel consumption, over-

staffing were also affecting the performance of the Uttar

Pradesh State Electricity Board rather adversely as these

were higher than the established norms as well as national

averages. In 1987-88 the position in respect of some of these

parameters of the two Boards was as under:

Tamil Uttar Norms

Nadu Pradesh
----- ------- -----
1) Plant Load Factor ( %) 68.7 47.1 58·0
2) Fuel consumption
i) Coal kg/kWh 0.69 0.81 0.65
ii) oil ml/kWh 10.43 13.82 10·00
3) Auxiliary consump-
tion(%) 9. 3 11.39 10·00
4) T&D losses 18.69 26.80 15 .oo
5) No.of Employees* 8.6 9.5 5.5
per MU
-------------------------------------------------------------
*Relates to 1985-86.
1

The tariff structure evolved over time was examined to

bring out the rationality behind the pricing policy being

followed by the State Electricity Boards. The average cost

of supplying power to each consumer class at various voltage

levels was estimated and compared to the average revenue

earned per unit of energy supplied for the period 1980-81 to

1986-87. It helped to bring out. the extent to which energy

sale to each consumer class involved profit earning or

subsidisation. The price paid by a consumer consists of two

components viz. tariff rate plus the electricity duty. The

tariff constitutes the revenue of the State Electricity Board

and the electricity duty goes to the State Government in the

form of a tax. The analysis shows that in Tamil Nadu, in the

seven year period under consideration 1980-81 to 1986-87, the

average tariff rate assuming excise duty to be zero was less

than the average cost of supplying electricity to the

domestic consumers and small industrial consumers in all the

years. Even the large industrial consumers receiving supplies

on high voltage were subsidised in four out of seven years.

The Commercial Consumers paid higher price than the average

cost of supply. The agricultural consumers were being highly

subsidised and the price charged was even less than the half

of the cost of supplying power to them. The extent of subsidy

involved was very high because about 27 to 30 per cent of the

total energy consumed within the State went to the

agricultural sector. The picture that emerges in Uttar

Pradesh is rather worse than that in Tamil Nadu where even

.
commercial supplies were being subsidised.

In both the states, the agricultural consumers emerge as

a most favoured class. There are two serious objections to

the pricing policy towards the agricultural consumpers. In

the sixties, the subsidised supply of electricity to

agriculture could be justified as the objective was to

provide incentives to the farmers to switch over to tubewell

irrigation to increase agricultural productivity. This was

important as the country was heavily dependent on food grain

imports. In the last 15 years or so, the rich peasants and

big farmers have multiplied their incomes manifolds. There is

absolutely no justification in their being subsidised.

339
334
Secondly, the tubewell tariff is at a flat rate system which

is arbitrary and unscientific. It was introduced as a matter

of convenience to the Boards as well as the agricultural

consumers. But, it leads to the wasteful consumption of the

precious energy as there is no incentive to economise. It

also breeds corruption as the agriculturist may sell energy

or water to others and also resort to other unauthorised

operations. As it becomes difficult to measure the exact

consumption of electricity, even the transmission and

distribution losses cannot be measured with precision. This

leads to inefficiency. It has been noted that the State

Electricity Boards transfer a part of their transmission and

distribution losses to the agricultural consumption.

Therefore, one of the important policy conclusion is that the

flat rate system should immediately be discarded and the

agricultural sector should be charged at least for the cost

of supplying power to it.

It has been argued that if certain consumer class or a

backward region is to be supplied power at subsidised rate to

encourage certain industries or develop certain backward

regions, such subsidies should be separately quantified and

the State Government should pay these to the Boards. If the

Boards are asked to absorb the subsidies arbitrarily, there

will be cross-subsidisation and no incentive to the

management and the workers to improve their efficiency.

It has been noted that the State Electricity duty in

Uttar Pradesh was between 2.5 per cent and 7.63 per cent of

the total revenue of the Board. A central excise duty was

340
34c
also imposed on electricity generation from 1978-79. There is

no justification for such a taxation when the Boards are

incurring losses. In fact, the whole of the tariff structure

appears to be historically evolved and the tariff is raised

here or there on adhoc basis without proper economic

analysis.

Though the financial performance of the State

Electricity Boards has been examined in relation to the

pricing policy only, there is ample scope for improving the

financial position through non-price measures also. The

transmission and distribution losses which constitute about

19 per cent or more of the total energy supplied need to be

reduced. The scope for electricity thefts could be reduced.

The financial performance can be significantly improved by

proper material management and by improving the operational

efficiency of thermal plants.

Theoretically, price mechanism discharges allocative as

well as distributive functions. It has been argued that for

public enterprises also, the price should signal to the

consumer the social resource value embodied in the unit of

commodity he proposes to purchase in the market. This will

bring about the best possible resource allocation. A review

of literature on the public enterprise pricing shows that the

Pareto Optimality may not be achievable if the market

imperfections exist. However, some scholars have proposed

Second Best solutions. Ralph Turvey and Marcel Boiteux have

t;,•orked out the Second Best marginal costs for electricity

pricing. They dynamised the concept of marginal cost and

suggested that during the peak periods, the price charged
should be equal to the energy cost (fuel cost) plus marginal
capacity cost. During the off-peak periods, on. the other
hand, price should equal the marginal energy cost only.
Indivisibilities of the factors like Capital pose a
problem in the operationalisation of the marginal costs. In
literature, three alternate methods of estimating marginal
cost have been advocated. They differ only in the way the
problem of indivisibilities has been resolved. They are: (a)
Long Run Incremental Cost Method; (b) Present Worth of the
System Incremental Cost Method; and (c) Average Incremental
Cost Metod. The average Incremental Cost Method has been

found to be most suitable for pricing purposes and has been

used in this study to estimate the long run marginal costs
for the two Electricity Boards under consideration.
.
The Tamil Nadu and Uttar Pradesh Electric Power Systems
are mixed systems consisting of both hydro and thermal power

stations. The Tamil Nadu installed capacity mix at the

beginning of Seventh Plan had 41 per cent hydro, 52 per cent

thermal and 7 per cent nuclear. The Uttar Pradesh, on the

other hand, had 32.4 per cent hydro and 67.6 per cent
thermal. While Tamil Nadu has a limited hydel potential, the
Uttar Pradesh's potential is vast. In the period 1970-71 to
1984-85, in the Tamil Nadu, the generation capacity,

sustained peak demand and energy consumption grew at compound

rates of 3. 9 per cent, 4. 5 per cent and 5. 6 per cent

respectively. The Uttar Pradesh system on the contrary grew

faster and the corresponding rates of growth for the Uttar

Pradesh were 8. 3 per cent, 4. 3 per cent and 7. 1 per cent
respectively. Both the systems, however, are facing shortage
of power as the energy demand has increased at a faster rate
than the energy supplied. The future projections show that
these states will have to bear with power cuts for quite some
time in future as well. There is an acute shortage of power,
the load is being phased consumer class-wise as well as
region wise. The daily load pattern reflects infact the
supply pattern over the 24 hours· daily cycle. It was
determined that the potentially peak hours in both the states

were generally between 6 P.M. to 10 P.M.

On the basis of certain assumptions regarding the

parameters of both the systems, the marginal energy cost and

the marginal capacity cost were estimated by the application

of the Average Incremental Cost method. The Average

.
Incremental Cost method pre-supposes that the generation,

transmission and distribution systems are optimally adjusted.

However, this assumption is not quite satisfactory

particularly because of poor transmission and distribution

system planning. Implementation of most of the projects is
quite adhoc. This has made the estimates of the marginal

capacity costs of transmission and distribution systems

relatively less accurate. The phasing of the generation
system investment is non-optimal. So, due to escalation of

prices, the Marginal Capacity Costs of the generation system

have become quite high. Given these constraints, the marginal

capacity cost per kW per month at various voltage levels were

estimated by annuitising the capital costs at 12 per cent

34G
social rate of discount. Two independent sets of assumptions
regarding parameters like reserve capacity margin, fuel
consumption and transmission and distribution losses were
made for getting two scenarios. One set of assumptions was
based on the projection of past trend of different
parameters. The other set was based on the standard norms for
various parameters. Scenario I assumed no major changes in
physical performance whereas scenario II assumed more
efficient operation of the system as per standard norms. Then
the· marginal cost based prices were worked out for various
consumer classes for both the scenarios. As per scenario I,
the second best solution turns out to be that at peak periods
(6 P.M. to 10 P.M.) in Tamil Nadu, price from the low tension
consumers (domestic, commercial, public lighting and small
industrial consumers) should be equal to Rs.516.36 per month
per kW demanded plus energy cost 77.08 paise per unit of
energy consumed. At off peak periods, price should equal
77.08 paise per unit of electricity consumption. In Uttar
Pradesh, at peak period, price for L.T. consumers should be
Rs.497.71 per kW per month plus 68.22 paise per unit of
energy consumption. From High Voltage Consumers, it should be
Rs. 422.13 per kW per month plus energy charges 61.46 paise
per unit. From tubewells, price should be Rs. 528.51 per kW
per month plus 68.22 paise per unit for supplies during peak
hours and 68.22 paise per unit during off-peak hours. It is
apparent from the marginal cost based pricing that price
structures which emerge for both the systems are not very
dissimilar.
 If the systems operate as per norms, LRMC at all levels

will be lower than these estimates and all categories of

consumers will be paying much less than they would be

expected to pay on the trend value of system efficiency.

As the difference between the peak and off-peak period

prices is very large, introduction of time-of-use prices as

is being planned in the case of Tamil Nadu will perhaps

flatten/shorten the peak to some extent. This would narrow

the gap between anticipated increase in demand and planned

installed capacity. But as little is known about peak period

elasticities in the country, it is not possible to know about

the peak hours groups that would emerge with changes in

electricity tariff in either of the states.

However, both in Tamil Nadu and Uttar Pradesh, the

distinction between peak and off-peak periods is generall¥

blurred because of frequent cuts and phasing of supply to

various regions as well as to various consumer categories.

Because of inadequate capacity additions this situation is

likely to continue in future also. It is recommended that

full marginal capacity costs be charged from the consumers

for every unit of energy supplied at all the times in order

to conserve energy.

The total marginal cost (energy cost plus capacity cost)

based flat rates of supplying power at 230 volts/400 volts

and High Voltage supply have been worked out for both the

scenarios. These are summarised as under:

33i.5
 Flat Tariff Rates Based on LRMC

(Paise/kWh)
Tamil Nadu Uttar Pradesh

HV LT HV LT
Scenario I 117.5 147.81 119.29 136.40

Scenario II* 96.57 107.29 102.07 112.98

(82.2) (72.6) (85.6) (82.8)
Current effective rate 92 <i!I"D 55 70-/00
-------------------------------------------------------------
*figures in brackets indicate Scenario II tariff rates as per
centage of Scenario I rates.

The comparison with the existing tariff structure shows that

the tariffs currently employed are far below LRMC and

consequently, the average returns earned by the two Boards

have either been negative or far below the norms that have

been recommended by the various committees from time to time.

The prices, therefore, need to be revised upwards. If the

operating efficiency of the systems' parameters can be

brought closer to the standard norms for them, long run

marginal cost can be brought down to the estimates as per

Scenario II which are less than Scenario I estimates by 18 to

27 per cent in the case of Tamil Nadu and 14 to 17 per cent

in the case of Uttar Pradesh. Increase in operating

efficiency will thus substantially improve operating ratios

of the two Boards.

The study highlights the fact that the existing price

policies followed by the two State Electricity Boards do not

meet the test of economic efficiency. The divergence of

marginal costs from the actual prices charged from various

3~6
categories of consumers has led to fairly serious distortions

in both resource allocation and income distribution. Apart

from non-price factors, agriculture sector subsidisation have

landed the Boards into a serious financial crisis. It has

been advocated that these distortions be remedied and

efficiency based prices be introduced. This will put the
Electricity Boards in a sound financial position and help the
efficient allocation of resources as well. If certain regions

or categories of consumers have to be supplied power on rates

below long-run marginal costs, such subsidisation should be
explicit.