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Team artis - January 02, 2014

CAG Audit of power firms started!..

Even before proving its majority on the floor of the house, Aam Aadmi Party (AAP) has implemented two of its poll promises. It is commendable simply because we are used to promises not being fulfilled even after five years of a government staying in power.

But giving away subsidies is often the easiest thing to do, political gains are far too much than the small economic burden. Tax payers are at the receiving end of such subsidies.  In the case of reduction in power tariff in Delhi the entire cost will be borne by the government. Neither the power generating company nor the distribution companies will have to take a hit. What have been slashed are rates paid by the consumer and not the tariff. Distribution companies will now receive part of their money from the consumers and the remaining part will be given by the government. But unlike other political parties, AAP has used the corruption and theft logic for reducing power tariff and giving free water. Their point is power companies are over charging the consumer by at least 50 per cent and hence the reduction is justified. In order to prove the point they have asked the books of these companies to be audited by the Comptroller and Auditor General (CAG).

In Delhi power tariff is fixed by Delhi Electricity Regulatory Commission (DERC) after a detailed exercise. DERC in turn relies on the figures given by the auditors of the companies and announces a tariff based on ‘reasonable return’ to the cost incurred the by companies. By asking CAG to carry out an audit, AAP wants to prove that the auditors of the distribution companies (Reliance Energy and Tata Power) have padded up cost. But mandates of CAG and an external auditor are different. Unlike the true-and-fair nature of evidence based on which audit firms conducts their audits, CAG goes into the proprietary and accountability angle of auditing. It goes through the process involved in incurring an expense.

In the power case there are two keep observations that can come out. First is on the purchase price of power. CAG can question the logic of these companies not buying power from the exchanges and getting in an agreement with power generators. Exchange traded rates can be lower at times, but at that price the quantity and quality of power to be supplied will not be sufficient for the distribution companies.

The second contentious issue can be transmission and distribution (T&D) losses, especially the theft angle. Though T&D losses has been brought down from 57 per cent to 17 per cent levels since the time of privatisation, these are still high. Further these will be difficult to prove through audits and will require a physical check. In any case, the conclusion that will be reached through the CAG audit will be nothing short of catastrophic. If CAG proves that there is large scale padding of costs by the distribution companies then AAP can rightly claim a big moral and political victory. This would however open the Pandora’s Box as consumers from other states would demand a similar review. But what if there is not too much material difference. Reversing a subsidy is politically suicidal, especially for a new party.