AAP’s Delhi Power Policy: Higher benefits for the better-off?
Vivek Khaitan 06 January 2014

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?

  • The subsidy in metered energy charge is indeed 50% when calculated from the base rate without taking earlier applicable subsidy into account
  • However, whereas, the earlier subsidy regime established a clear distinction between consumers in 0-200 and 200-400 units slab and gave more benefit to consumers in 0-200 units slab, such distinction is erased in the new subsidy regime. Consumers in both categories are considered eligible for progressively higher subsidy
  • As a result, consumers in the 0-200 units consumption category would get an additional benefit of Rs170 per month at the most which is less than 25% of their earlier bill. There is no 50% cut for them
  • However, households who consume more than 200 units but less than 400 units are the real beneficiaries of new subsidy regime whose bills would go down by 43%

 

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)

Comments
Ashok Kumar Rastogi
8 years ago
Reduction in tariff is because of subsidy not because of the Hera feri in account as claimed by Kejriwal.It is to be seen how AAP would arrange subsidy . Either they have to raise taxes or borrow from central govt. What AAP claimed in their manifesto that they would catch the corruption of discoms & bring down the rates. AAP is inhurry to reduce rate as populist measure through which many parties like cong,bjp have been doing.He should have given almost free power to poors who live in one room & use only one bulb & one fan i.e. up to 50 units per month.
Dayananda Kamath k
Replied to Ashok Kumar Rastogi comment 8 years ago
it is biggest curruption by a party which took birth from india against curruption. it is bribe given to voters if congress were not to support confidence motion. so there is nothing different in aap it is on among the aam parties.
MOHAN
8 years ago
A A P has only one Policy - "Power".
Dayananda Kamath k
8 years ago
you have ignored one more aspect many a times there wil be submeters 2 to 3 in each metre becasue of renting out. and actually many who are tenents who deserve but will not get it as combined bill will show more than 400 units. further earlier his argument was that due to curuption and connivance of congress govt electricity charge are high. but now by giving subsidy he has justified the higher rate. he is more dangerous politician than all prevailing now.
rajivahuja
Replied to Dayananda Kamath k comment 8 years ago
This precise practice is used by the landlords
Rita Krishna
8 years ago
Another excellent article. Look forward to the sequel. When electricity bills in Delhi are higher than they are in Zurich (my source is a friend in New Rajinder Nagar, but fact could easily be verified), then it does seem that the entirety of the middle class SHOULD benefit. This and the water article have illumined the complexity that exemplifies day to day Delhi life.

As a principle, would you not agree that any tariff system should be simple, both to understand and to administer? Otherwise in the name of meeting the needs of ever more artificially created segments of population you set up bureaucratic edifices to check bills while having no-one, apparently (from water article), to either repair or check meters.
Vivek Khaitan
Replied to Rita Krishna comment 8 years ago
I completely agree with the principle that unwarranted complexity in the system increases inspector raj.

Any dent in corruption that AAP may wish to make would necessarily have to be anchored in reducing complexities, reducing discretionary power of officials. It needs to be anchored in large governance reforms. Even the idea of Lokpal which made them into heroes is not a great idea because this institution would be reactive and not pro-active to attack the source/incentive structure of corruption
Rita Krishna
Replied to Vivek Khaitan comment 8 years ago
The reason I think they are right is that it appears that, setting the question of who is being subsidised aside, this step does actually reducie the numbers of separate possible categories of bill - it creates a larger middle category, does it not? This is then leading to interesting questions in the private rented sector about the behaviour of private landlords to their tenants. It is like the layers of an onion! Is it the responsibility of government to make private landlords behave responsibly towards their tenants? Or should the landlord pass on the benefits anyway? Look forward to your next piece. In my opinion large scale governance reforms could very well have less impact than this incremental approach.
Abhijit Gosavi
Replied to Rita Krishna comment 8 years ago
Large-scale governance reforms could have less impact than this incremental approach? I think there is no evidence in economics (anywhere in the world) to support that argument. Reminds me of V.P. Singh who had inspired us as teenagers, only to disappoint very badly later.

Look at all those folks entering AAP today. A danseuse who considers GDP to be of little significance for a nation's future; a failed businessperson who bankrupted airline firms; an opportunist who was an "independent" politician for so long; an academic with almost no background in economics but claiming to be an adviser on everything under the sun.
R Varadarajan
Replied to Abhijit Gosavi comment 8 years ago
Good observation. But every publicity move would be welcome for AAP
Abhijit Gosavi
Replied to R Varadarajan comment 8 years ago
Sadly that's true.
Rita Krishna
Replied to Abhijit Gosavi comment 8 years ago
I was expressing an opinion, rather than asserting a fact. Also VP Singh attempted large scale rather than incremental. Based on the analyses in Mr Khaitans articles, it does appear that these steps will make a difference to consumers.

How can it be represented as a bad thing that dancers and others of whatever professional background want to get involved in politics and the good governance of the country? Is it not right that parliament should be made up of people who have had a range of different life experiences?
Abhijit Gosavi
Replied to Rita Krishna comment 8 years ago
I think the incremental change is what you referred to w.r.t this electricity policy. And I doubt if Vivek is praising the new policy. So not sure what you mean by saying that his analysis shows this will make a difference to consumers (unless you mean a negative difference). Such pricing policies are known to encourage wastage and to eventually burden taxpayers (the very same people who are seeing the benefits now).

VP Singh carried out a LARGE-SCALE (agree!) social experiment that left the country maimed for decades. Mr. YY is suggesting something similar. That's why AAP reminds me of VP.

I have no problems with a diverse set of ppl (from any party for that matter) in politics. In fact, I am all for it, but not if they think GDP, or other economic indices, are of no significance in decision-making.

Ask these newly inducted high-profile AAP members how GDP is measured or how infrastructure can impact GDP in a developing nation, and they'll look at you like you have a hole in your brain :(

Developing nations need infrastructure, reduced red tape, a well-regulated stock market, and an environment conducive to business. These opportunists in AAP don't care for any of this. They are there for an LS ticket, my friend! I am too old to be fooled!

The wonderful Kiran Bedi (one generation older than me) knew better and stayed away from AAP.
Vivek Khaitan
Replied to Abhijit Gosavi comment 8 years ago
Brilliantly put Sir

Just to add, I am not too old but old enough to recognize the benefits millions like me reaped from post-91 freeing of economy unlike 20-somethings who perhaps do not appreciate enough the perils of 'socialist' doles economy
Rita Krishna
Replied to Abhijit Gosavi comment 8 years ago
This has been a rapidly implemented policy, as was the water one. Vivek clearly was not praising either policy, however both his analyses were enlightening. There is a further analysis to come I believe, but my question was, is it not the case that the policy has in effect simplified the 'system' by reducing the number of subcategories of bill and creating a larger 'middle' category of consumer, many of whom may see some immediate relief in their cost of living. Has it been suggested that subsidy is the mid to long term strategy of the Delhi Govt? I don't see that there is anything intrinsically socialistic in this current subsidy, given that there are many non-functioning parts of the 'system' (water meters being one example), which need to be attended to properly, and which can't be fixed by waving a magic wand. As to Kiran Bedi, there is nothing surprising about her decision. With a background in the police her choices are likely - this is an opinion - to err on the side of the conservative and known, rather than the radical and untested. As long as there are people, senior people in a political party who do understand GDP and growth - pretty fundamental for governing after all - there should surely also be room for others, and for other priorities. When you say infrastructure, do you include in that the infrastructure of governance?
Dayananda Kamath k
Replied to Abhijit Gosavi comment 8 years ago
aap is being mobbed by people who are conscious of their right than conscious of their duty. then it will lead to caos because every one is fighting for his right than performing his duty.
Abhijit Gosavi
Replied to Dayananda Kamath k comment 8 years ago
Agree! It's a lot like VP Singh's Janata Dal (or whatever it was called). Full of opportunists wanting to be MPs. There were some honest ppl there just there are in AAP.
R Varadarajan
8 years ago
Reduction of any charge through subsidy is nothing but juggling of accounts and will not provide any solution in the long term. I would have admired AAP had they promissed to enforce discipline, transperancy and improve efficiency in the EB to provide power at cost+ x% ( to cover the future capital expenses,besides fixed costs and oil prices) instead of blind offer of 50% ( which also comes through subsidy ) This is nothing but tempting the public with some sort of of bribe. It is an irony that the party wanting to eradicate bribe has come to power through bribing people. Thye are enalrging the options with new reservations, and others. This indicates that AAP has arrived in the Political arena and are not much different from others.
Rita Krishna
Replied to R Varadarajan comment 8 years ago
I fail to see how it is a bribe, to offer hard-pressed consumers some immediate relief, while in parallel working out the best means of 'enforcing discipline, transparency etc.' Those are words which are easy to say, and moreover to appear to be doing something. What they have done is very concrete.
Dayananda Kamath k
Replied to Rita Krishna comment 8 years ago
it is just like colour tv, laptop, cooker etc announcing these things in election is bribing the voters only and today we are seing the result of these feebees. we elect people to mainain law and order and not to indulge in such gimmicks.
Rita Krishna
Replied to Dayananda Kamath k comment 8 years ago
They are in government and have implemented a policy which i believe is offering relief to hard pressed consumers - month on month, not a one-off TV or something like that. Cost of living is an economic concern - or not?
Dayananda Kamath k
Replied to Rita Krishna comment 8 years ago
govt giving subsidy is nothing but moving cash from one pocket to other pocket. it will be recovered from you through other taxes and inflation. so wrong policies of robing john to provide for robert will not serve any pupose. and this is being used to the hilt now a days and people have started believing these tactics are part of governance and fooling themselves.
Abhijit Gosavi
Replied to Dayananda Kamath k comment 8 years ago
Actually, it is difficult to make any sense of what Mr. AK is doing --- subsidy or no subsidy. He's the same age as me, but he thinks people have forgotten VP Singh and his double talk.

After all the claims made during the campaign about Sheila D's corruption, he now says he knows nothing about it (exactly what VP did after becoming PM!). One day his closest associate asks for a referendum in JK (have they ever talked to any JK Pandits?), and the next day, he dissociates himself from those comments. Then, he goes to hug Sibal (poor Anna doesn't need to see that photo!), and today his "law" minister is in legal trouble from the courts, but he is defending him --- saying the court is wrong!

Boy, have you ever seen a more rocky start to a CM's tenure?
Rita Krishna
Replied to Dayananda Kamath k comment 8 years ago
Of course law and order is a matter for government but so is cost of living and hundreds of other things.
Dayananda Kamath k
Replied to R Varadarajan comment 8 years ago
all these half hearted moves are taken in a hurry to ensure themselves reelection if congress do not support their confidence motion and reelection were to be held. this is biggest curruption by a party which came to politics with lokpal.
Yerram Raju Behara
Replied to R Varadarajan comment 8 years ago
I fully agree Mr Varadarajan. By agreeing to provide subsidy the AAP conceded to the pricing of the previous government that carried with it all the leakages and outages. It is necessary to reduce the costs of delivery and reduce the price per se as a reform measure. Does not matter if AAP govt takes a little more time to do such exercise. It is worthwhile examining whether every dwelling unit should have independent meters instead of sub-meters when it would be possible for any concessionary or regulatory measure can easily be taken care of better. Further, most houses use non-standard electrical wires and switches and switch boards as also main switches. By adopting standard electric ware and having a plan for modification, transmission leakages can be arrested. The costs incurred for this purpose can be subsidized by the Government to the extent feasible. This subsidy would add efficiency to the system on a permanent basis. Sale of non-standard items should be banned legally by amending the State Acts.
R Varadarajan
Replied to Yerram Raju Behara comment 8 years ago
Yes I agree. It is important that the Govt Looks at cutting the losses at every stage - by replacing Transformers, and Cables, besides maintining the transformers periodically. They should also spend money on replacing the meters and providing digital meters to all tenants. In fact, it would be worthwhile long term measure to improve efficiency and recovery, instead of draining the Govt funds by way of subsidies
Vivek Khaitan
Replied to R Varadarajan comment 8 years ago
One of the reasons that politicians encourage this subsidy culture is the rewards they reap due to immense attraction of freebies in our society. Like any other human being, politicians respond to the way their incentives are structured.

True that such subsidies are more of account juggling and at best a short-term palliative with deleterious long-terms consequences
MOHAN
8 years ago
AAM ADMI PARTY or AMIR ADMI PARTY?

Are Mr. Balakrishnan (INFOSYS) and Captain Gopinath AAM ADMI?

Shivangni Sharma
8 years ago
Well at least some people are not swayed by the half baked, ill thought out populist promises of this new kid in town.

I hope the scales fall off the eyes of rest of the intelligentsia and media soon or we might see instability or worse communists as our rulers.
Dr Paresh Vaidya
8 years ago
The source of anomaly such that the upper middle class and rich benefits more from AAP's new tariff stems from the fact that they have broadened the concessions upto 400 Units. Poor man uses less than 100 units and middle class should be upto 180 units. Anyone using more electricity than this is using sophisticated gadgets beyond the reach of 'common man'. As a wise energy policy concession should not be extended to those who consume large amount.

(Incidentally the debate so far on this page seems to be political than economic.)
MOHAN
8 years ago
.

AAP's "power" policy itself is defective in a democratic country as its leadership is a secret society. Now they are panning to contest Lok Sabha elections. Only God knows whether AAP supports Congress or not after the Lok Sabha elections.

Are Kejriwal & Co., Congress 'B' team?



Yerram Raju Behara
8 years ago
Leave off the party leanings. How do these measures measure up to the electoral promises? AAP delivered its promise. The implications will come to a cross during the course of implementation. When the State Budget goes for a toss, the real economics will come to play. You have to rob the Paul to pay the Peter if distributive justice has to play its part sooner than later. The rich would have to pay - the middle class of which so much noise is made have always been at the worst paying end. The rich get away with their ability to bear the burden; the poor have the subsidies with no income tax to pay as they are within the threshold level; it is the middle class who pay all taxes and cess. I do not see any reason for the growl when they get a cake of what they pay through their other valet.
NARENDRA GUPTA
8 years ago
Whatever given in the Article is Fact, But this may not be intentional. Arvind Kejriwal is really a person with High integrity. Give him sometime to rectify these errors.
MOHAN
Replied to NARENDRA GUPTA comment 8 years ago
What integrity Mr. Gupta?

How did he become the CM of Delhi?

Ashish Singh
Replied to MOHAN comment 8 years ago
He became CM becoz people wanted so.
MOHAN
Replied to Ashish Singh comment 8 years ago
Which people ? CONGRESS PEOPLE?
Ashish Singh
Replied to MOHAN comment 8 years ago
Seems you didn't saw TV or news those days ;)
MOHAN
Replied to Ashish Singh comment 8 years ago
While watching soap opera you may read the following also ;-)

Mani Shankar Aiyar hints at Congress tie-up with AAP


http://www.firstpost.com/politics/mani-s...
Ashish Singh
Replied to MOHAN comment 8 years ago
Mani Shankar Aiyar hints or thinks.
Its his choice ;)
Abhijit Gosavi
Replied to NARENDRA GUPTA comment 8 years ago
Intention is not everything! Well-meaning policies often produce the opposite effect: increase corruption and poverty. Eliminating loopholes and red tape helps reduce corruption. But hiring 40 additional "anti-corruption" officers doesn't! Surely, those officers could themselves become corrupt?

But, it's been a while since AK took a basic course on engineering economics at the IIT. My fear is he doesn't read: which country pursuing leftist economic policies has prospered?

And who is Mr YY? What are his credentials on economics? How come he's your economic advisor? He is not going to let you fix any errors!

Saddest thing, though, is the latest double talk on evidence related to Sheila D. And you are fighting corruption?
Amith
8 years ago
Again moneylife comes up with a nice analysis and shows the facts. AAP is just like BJP/Congress. I believe we need 'Poor' aadmi party now, anyone up for grabs?
uttamkumar dubey
Replied to Amith comment 8 years ago
yes you can leave your job and replace kejriwal.i cannot do thats y asking.
But gauze urself before commenting on kejriwal otherwise CONG-BJP wont let u live/breath.
Abhijit Gosavi
Replied to uttamkumar dubey comment 8 years ago
The article is about an AAP policy which appears to be economically flawed. Great article, btw, and look forward to the next part.
Eajaz Hussain
8 years ago
we all know Money Life is PRO BJP, kindly dont stoop so low, if you wish to highlight, please do write to them AAP of the apprehensions you had mentioned, then based on their response, do comment. It will be a trust worthy behaviour.
uttamkumar dubey
Replied to Eajaz Hussain comment 8 years ago
BJP will make Moneylife financial adviser or so? so we will be safe from SEBI /NSE-BSE and UID.
Suiketu Shah
Replied to Eajaz Hussain comment 8 years ago
After elections you wl have to say whole India is pro-BJP!lol
Ashish Singh
8 years ago
May I know ur political inclination and OR affiliation ;)
Sachin
Replied to Ashish Singh comment 8 years ago
How does political inclination matters in bringing facts with data. Did you do your maths before commenting ? If the above data in article is wrong then post it here and then argue.
Ashish Singh
Replied to Sachin comment 8 years ago
Higher benefits for the better-off?
To me it seems like comparing ,
Get 10% off on purchase up to Rs 10K and 15% off on purchase more than 10K.

The greater you spend, may or will result in greater saving.
Vivek Khaitan
Replied to Ashish Singh comment 8 years ago
And nothing off if you spend more than 20K :)

I don't think it ever occurred to anyone that the policy was designed to enhance consumption :)
Ashish Singh
Replied to Vivek Khaitan comment 8 years ago
Its not designed to enhance consumption. A simple waiver till use of 400 Units. And 400 units in a billing cycle is normal consumption for common man with family. The real problem with most of us is defination of Aam Aadmi. We don't expect them to own a car, AC or a 2BHK or watch movies at multiplex. If someone who finds tough to arrange for 2 meals a day, we call him Aam Aadmi.
Abhijit Gosavi
Replied to Sachin comment 8 years ago
Authors seeking to avoid questions about political inclinations should end like this:

This is a big blow to Modi!!! ;)
Vivek Khaitan
Replied to Abhijit Gosavi comment 8 years ago
Ha ha ha.. I was thinking of declaring my political inclination as Zionist neo-con fundamentalist! Putatatively, that would put the article beyond the pale of rational discussion :)
sreenath
Replied to Ashish Singh comment 8 years ago
sathyacumaran
operational head india
singapore media and channel group
its not the political inclination or affliation as far moenylife is concerned they analyse the situation with full facts and figures and bring out in their website and pass to memebers like us and we should encourage the boldness of moenylife in the goonda based indian political system where we jorunalist are threatened more frequently we really appreciate the boldness of susheta dalal she is not going to achieve anything form this infact if she soft peddalas you said to which policitcal party she can very live and luxurious life without any threat or any fear please support the insitution hats off to madam
Narain Jagirdar
Replied to Ashish Singh comment 8 years ago
How does that matter?
He has analysed and placed the facts.
Ashish Singh
Replied to Narain Jagirdar comment 8 years ago
Higher benefits for the better-off?
To me it seems like comparing ,
Get 10% off on purchase up to Rs 10K and 15% off on purchase more than 10K.

The greater you spend, may or will result in greater saving.
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