In your interest.
Online Personal Finance Magazine
No beating about the bush.
The hard fact: those who consume 0-200 units would benefit by Rs170 per month at the most, or 25%. However, well-off household consuming 200-400 units are the real beneficiaries. They will enjoy upto 43% cut in their bill
Aam Aadmi Party (AAP) has delivered on its promise of reducing electricity rates by 50% within three days of assuming power in Delhi and made its implementation effective from 1 January 2014 for three months. Whereas in case of water, the route adopted by AAP was to cross-subsidize part of the population (read detailed analysis of impact of AAP’s water policy on different consumer classes here), in case of electricity, Delhi government has announced a budgetary subsidy to be paid to distribution companies (discoms) from Delhi exchequer as fixing power tariff comes under the purview of Delhi Electricity Regulatory Commission (DERC) and not the Delhi government. How does the subsidy affect the Aam Aadmi? It may surprise your to know that middle-class is a far bigger beneficiary of the power rate cut than the poorer sections.
Firstly, it has disappointed those who believed that reduction in electricity rates would be across-the-board and that it would be come from the discoms that are suspected to be fudging their accounts, even though AAP has also announced a move to begin audit of discom’s account books.
But the bigger question is as to how does this budgetary subsidy impact different consumer classes in Delhi? Is it a subsidy for the really poor or the middle class? Also, what impact it may have on discom’s finances and government exchequer? Is it a prudent decision or it adds more fire to a ticking time-bomb?
The metered slab-wise energy charge for domestic consumers without subsidy, with subsidy applicable before the new order and current subsidy after the new order is given below. We have not considered consumers in other categories as present subsidy is not applicable to them.
The difference between old and new subsidy is that whereas earlier the applicable subsidy in 0-200 units was not applicable if consumption went beyond 200 units, now, consumers within 400 units consumption level would get benefit of subsidy in both slabs. There is a fixed charge levied as per the sanctioned load which is given in Table 1.2 on which no subsidy is applicable
Additionally, there is an 8% surcharge (levied on metered slab-wise energy charge and fixed charge net of subsidy) and 5% Electricity Tax (levied on final amount). There is one more charge -- Power Purchase Adjustment Charge (PPAC) -- which has been discontinued from 31st July 2013.
So, how does it change the billing for consumers at different consumption points? Below is the table (Table 1.3) and graph (Graph 1.1) for comparison. Also, BSES companies claim a cost of Rs7.40 per unit for supplying power in Delhi, but more on this later.
What are the conclusions from these tables and graph?
Middle-class benefits more, not the poor
The question is: what kind of consumers consume up to 400 units of power in a month? Are they poor households or middle-class households, even assuming they are all Aam Admi? For an answer consider the table below (Table 1.4) of power consumption of different household appliances for a broadly representative household that may limit their consumption up to 400 units.
The purpose of this list is to indicate an approximate level of consumption. While care has been taken to source reliable wattage and consumption data, it should not be taken as precise depiction of consumption
Note that the list indicates that a household would be able to afford 1 AC of 1 Ton for cooling, geyser for heating water and yet limit their consumption within the 400-unit limit to gain from new subsidy regime. In our view, such consumption is possible for a middle-class household and is definitely not indicative of a poor household.
Our experience is that for four winter months in a year when air-conditioning is not required, middle-class households (who use more appliances like microwave oven, food processor, lot more lighting, washing machine, vacuum cleaners etc.) generally do not cross the 400-unit consumption threshold. It is a moot point whether such consumption pattern should be eligible for subsidy. Also, as per the ET report, this move is going to benefit ~80% of household with electricity connection. Again, it’s difficult to understand why the capital of India needs power subsidy for 80% of its population.
Due to middle-class activism, Delhi government had started providing subsidy from around April 2012 for 0-200 units slab and later announced it for 200-400 units slab as well. After the announcement of new tariff order by DERC for FY14, whereby rates were increased by 5%, such increase was made good to discoms by Delhi government by increasing quantum of subsidy (from Rs1 to Rs1.20 in Aug 2013) and therefore there was no impact in billed rates to consumers for consumption up to 400 units. Given this background and widespread support to AAP by middle-class, it is not surprising that Kejriwal has taken care of this constituency by bringing in new subsidy regime.
But what are the implications for this giveaway to the better-off middle-class at the macro level? That will be in the second part of the analysis
(Vivek Khaitan is an MBA from IIM Calcutta and is working as a management consultant for past five years in New Delhi)