Making Metered Tariff Regime Work

Arguments in favour of metered tariff regime are several. First, it is considered essential for SEBs to manage their commercial losses; you cannot manage what you do not monitor, and you cannot monitor what you do not measure. Second, once farm power is metered, SEBs cannot use agricultural consumption as a carpet under which they can sweep their T&D losses in other segments. Third, metering would give farmers correct signals about the real cost of power and water, and force them to economize on their use. Fourth, for reasons that are not entirely clear, it is often suggested that compared to flat tariff regime, metered tariff would be less amenable to political manipulation and easier to raise as the cost of supplying power rises. Finally, flat tariff is widely argued to be inequitable towards small landowners and to irrigators in regions with limited availability of groundwater.

The logic in support of metered tariff is obvious and unexceptionable. The problem is how to make metered tariff work as envisaged. Two issues seem critical: (i) How to deal with the relentless opposition from farmers to metering? (ii) How will SEBs now deal with the problems that forced them to switch to flat tariff during the 1970s in the first place?

The extent of farmer resistance to metering is evident in the repeated failure of SEBs in various states to entice farmers to accept metering by offering metered power at subsidized rates ranging from Rs 0.20 to Rs 0.70 ($0.4-1.3)/kWh as against the actual cost of supply of about Rs 2.50 to Rs 3.80 ($5-8)/kWh. In late 2002, Batra and Singh (2003) interviewed 188 water extraction mechanism

(WEM) owners in Punjab, Haryana and western Uttar Pradesh to understand their WEM pumping behaviour. They noted that in Punjab and Haryana, an average electric WEM owner would spend Rs 2529.65 ($54.99) and Rs 6805.42 ($147.94)/year less on their total power bill if they accepted metering at prevailing rates of Rs 0.50 ($1)/kWh and Rs 0.65 ($1.4)/kWh, respectively, and yet would not accept metering. In effect, this is the price they are willing to pay to avoid the hassle and costs of metering.8

Besides dealing with mass farmer resistence, protagonists of metering also need to consider that the numbers of electric tube wells - and alongside, the problems associated with metering them - are now ten times larger than when flat tariff was first introduced. Before 1975, when all SEBs charged farm power on metered basis, the logistical difficulty and transaction costs of metering had become so high that flat tariff seemed the only way of containing it. A 1985 study by the Rural Electrification Corporation in Uttar Pradesh and Maharashtra had estimated that the cost of metering rural power supply was 26% and 16%, respectively, of the total revenue of the SEB from the farm sector (Shah, 1993). This estimate included only the direct costs, such as those of the meter, its maintenance, the power it consumes, its reading, billing and collecting. These costs are not insignificant9; however, the far bigger part of the transaction costs of metering is the cost of containing pilferage, tampering with meters, underreading and underbilling by meter readers in cohort with farmers.

All in all, the power sector's aggressive advocacy for introducing metered tariff regime in agriculture is based, in our view, on an excessively low estimation of the transaction costs of metering, meter reading, billing and collecting from several hundred thousand tube well connections scattered over a vast area10 that each SEB serves. Most SEBs find it difficult to manage metered power supply even in industrial and domestic sectors where the transaction costs involved are bound to be lower than in the agriculture sector. Even where meters are installed, many SEBs are unable to collect based on metered consumption. In Uttar Pradesh, 40% of low tension (LT) consumers are metered but only 11% are billed on the basis of metered use; the remaining are billed based on minimum charge or an average of past months of metered use (Kishore and Sharma, 2002). In Orissa, under far-reaching power sector reforms, private distribution companies have brought all users under the metered tariff regime; however, 100% collection of amounts billed has worked only for industries, as in the domestic and farm sector - subject to a large number of scattered small users - collection as a percentage of billing declined from 90.5% in 1995/1996 to 74.6% in 1999/2000 (Panda, 2002).

In order to make metered tariff regime work reasonably well, three things are essential: (i) the metering and collection agent must have the requisite authority to deal with deviant behaviour amongst users; (ii) the agent should be subject to a tight control system so that he or she can neither behave arbitrarily with consumers11 nor form an unholy collusion with them; and (iii) the agent must have proper incentives to enforce metered tariff regime. In agrarian conditions comparable to South Asia's, a quick assessment by Shah et al. (2003) suggested that all these conditions obtain in some way, and therefore metered tariff regime works reasonably well in North China (Shah et al., 2004b).

The Chinese electricity supply industry operates on two principles: (i) total cost recovery in generation, transmission and distribution at each level with some minor cross-subsidization across user groups and areas; and (ii) each user pays in proportion to his or her use. Unlike in much of India where farmers pay either nothing or much less than domestic and industrial consumers do for power, agricultural electricity use in many parts of North China attracts the highest charge per unit, followed by household users and then industries. Operation and maintenance of local power infrastructure is the responsibility of local units, the village committee at the village level, the Township Electricity Bureau at the township level and the County Electricity Bureau at the county level. The responsibility of collecting electricity charges is also vested in local units in ways that ensure that the power used at each level is paid for in full. At the village level, this implies that the sum of power use recorded in the meters attached to all irrigation pumps has to tally with the power supply recorded at the transformer for any given period. The unit or person charged with the fee collection responsibility has to pay the Township Electricity Bureau for power use recorded at the transformer level. In many areas, where power supply infrastructure is old and worn out, line losses below the transformer make this difficult. To allow for normal line losses, 10% allowance is given by the Township Electricity Bureau to the village unit. However, even this made it difficult for the latter to tally the two; as a result, an Electricity Network Reform programme was undertaken by the National Government to modernize and rehabilitate rural power infrastructure. Where this was done, line losses fell sharply12; among the nine villages Shah visited in three counties of Hanan and Hebei provinces in early 2002, none of the village electricians he interviewed had a problem tallying power consumption recorded at the transformer level with the sum of the consumption recorded by individual users, especially with the line loss allowance of 10%.

An important reason why this institutional arrangement works is the strong local authority structures in Chinese villages: the electrician is feared because he is backed by the village committee and the powerful party leader at the village level; and the new service orientation is designed partly to project the electrician as the friend of the people. The same village committee and party leader can also keep in check flagrantly arbitrary behaviour of the electrician with the users. The hypothesis that with better quality of power and support service, farmers would be willing to pay a high price for power is best exemplified in Hanan where at 0.7 yuan ($8.75; Rs 4.03)/kWh13 farmers pay a higher electricity rate compared to most categories of users in India and Pakistan, as also compared to the diesel price at 2.1 yuan/l.

In India, there has been some discussion about the level of incentive needed to make privatization of electricity retailing attractive at the village level. The village electrician in Hanan and Hebei is able to deliver on a reward of 200 yuan/month, which is equivalent to half the value of wheat produced on a mu (or one-thirtieth of the value of output on a hectare of land). For this rather modest wage, the village electrician undertakes to make good to the Township Electricity Bureau full amount on line and commercial losses in excess of 10% of the power consumption recorded on the transformers. If he can manage to keep losses to less than 10%, he can keep 40% of the value of power saved.

All in all, the Chinese have all along had a working solution to a problem that has befuddled South Asia for nearly two decades. Following Deng

Xiaoping who famously asserted that 'it does not matter whether the cat is black or white, as long as it catches mice', the Chinese built an incentive-compatible system that delivered quickly rather than wasting time on rural electricity cooperatives and village Vidyut Sanghas (electricity user associations) being tried in India and Bangladesh. The way the Chinese collect metered electricity charges, it is well nigh impossible for the power industry to lose money in distribution since losses there are firmly passed on downstream from one level to the one below.

If South Asia is to revert to metered tariff regime, the Chinese offer a good model. But there are two problems. First, the Chinese agricultural productivity is so much higher than most regions in South Asia that even with power charged for at real cost, the cost of tube well irrigation constitutes a relatively small proportion of the gross value of output. In South Asia, irrigation cost of this order - i.e. Rs 2100-8600 ($45.65-186.96)/ha - would make groundwater irrigation unviable in all regions except parts of Punjab and Haryana where farm productivity approaches the Chinese levels.

The second problem is that while South Asian power industry can mimic -or even outdo - the Chinese incentive system, it cannot replicate the Chinese authority system at the village level. Absence of an effective local authority that can guard the farmers from arbitrary behaviour of the metering agent or protect the latter from non-compliance by the users may create unforeseen complications in adapting the Chinese model to South Asia. India has begun experiments to find new metering solutions only recently. Indian Grameen Services, a non-governmental organization (NGO), tried an experiment to organize Transformer User Associations in Hoshangabad district of Madhya Pradesh; the idea was that the SEB would set up a dedicated plant if farmers paid up unpaid past dues and agreed to metered tariff. However, before the 2004 elections, the chief minister 'waved' past dues of farmers, and the Hoshangabad association disintegrated, its members disillusioned. Orissa organized similar village Vidyut Sanghas in thousands under its reforms; while these lie defunct, Orissa has achieved modest success in improving metered charge collection by using local entrepreneurs as billing and collection agents. It is difficult to foresee if this would work elsewhere because less than 5% of rural load in Orissa is agricultural; it is equally difficult to see what kind of treatment collection agents would receive in Gujarat villages where agricultural load may be 50-80% of total rural load. Although it is early times yet to learn lessons from these, it is all too clear that the old system of metering and billing - in which SEBs employed an army of unionized meter readers - would just not work.14 That model seems passé; in power as well as surface water, volumetric pricing can work, where needed, only by smartly designed incentive contracts.

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