Conserve It More and Pay More for It

We live in a world awash with advertisements. Tune in to any TV channel, or a radio station, or you just go for a walk, and you’ll be flooded with appealing models alluring you into buying products that might be entirely irrelevant to you. In a capitalist economy, advertising is the way for entrepreneurs to educate and make the public buy their stuff. When the sales is more, the company stands to gain larger profits for the management, higher dividend for the shareholders, bigger incentives for the employees and more tax for the government. So, every company that wants to stay afloat in the field want people to buy more of their products.

However, this straight logic seems to be not applicable to the Kerala State Electricity Board (KSEB), Kerala’s state-owned enterprise immersed in generation, distribution and transmission of power – all rolled into one. The produce of a power company is electricity and normally they want the customers to consume more of it. But strangely, this one works on the reverse principle – it asks its customers to buy less of it. In fact, they offer an incentive scheme in which the members stand to win prizes if they could reduce their power consumption. Their offers are crafted in such a way as to turn the customers away from their product. When such counterintuitive phenomena is observed in the business world, we must straight away suspect that something is rotten somewhere.

Of course, power is a utility. Utilities like power and water are to be conserved. Thrift should be the watchword when using them – any utility, for that matter. Companies that serve utilities to the society work on a regulated pricing mechanism. An independent regulator keeps watch over them. Power is a commodity for which the distributor can’t fix the price. Conserving anything is a laudable effort too. We should allow at least that much leverage to KSEB.

But, something is still rankling common sense here. True, the regulator fixes the price, but isn’t that price arrived at after factoring in all costs declared by the power company? The regulatory commission does a due diligence study, but generally the figures provided by the distributors regarding costs is accepted with only minor changes. So, where’s the problem?

The root cause of the sorry state of affairs is that KSEB has not been able to increase power generation within the state over the last few decades. Since the power companies of other states and private enterprise have not been afflicted with outdated work culture, KSEB has been fortunate enough to buy power at market rates or receive it as part of the central government’s allocation to Kerala from centrally funded power plants in other states. Especially during summer months, virtually all power consumed in Kerala are generated elsewhere. KSEB has downgraded themselves from the coveted status of a producer of electricity to that of a mere trader. But trading is risky. What if you are not permitted to recover the costs from customers, which you actually paid to your suppliers? But the state-owned utility is not averse to run this risk – they would ascribe this stupid act as a small penalty to pay for being ‘socially responsible’! And they are quite confident that the regulators would factor this also into account in finalizing the energy rates for the next year.

Now, consider this hypothetical position applicable for companies which have high overheads. The public demands 100 units of power in a year, priced at one rupee a unit. The net income of the distribution company is Rs. 100, which is sufficient to meet all of its overheads including maintenance, salaries and depreciation. Suppose the public decide to cut the consumption of energy by 10% in the coming year, motivated by the clever propaganda urging them to do so. The consumption thus falls to 90 units in the next year. But overheads invariably raises year on year, by say 10%. So, in the coming year, the company needs Rs. 110 just to meet its costs, but they have to collect this amount from customers who had already reduced their consumption by 10%. In other words, those 90 units of electricity need to generate a cash flow of Rs. 110 for the company. The unit price must increase to (110 / 90) Rs 1.22 to meet this additional demand by the company. That is, when the consumption is reduced by 10%, the energy charges rise by 22%. The customers are the real losers in this scenario, as they have to cough up extra money for less of the amenities. The power company would be laughing all the way to the bank. (I admit that the calculation is a bit exaggerated, since those companies for which variable costs predominate fixed costs can supply power at reduced rates even with low throughput).

The only way this can be offset is when the company can lineup more power plants so that the excess capacity can be traded gainfully. Unless that happens, customers of brain-dead utilities like KSEB should beware of the pitfalls accompanying outlandish campaigns to save electricity. They will consume less and less, but would end up paying more and more.