Power Sector Reforms - Orissa Perspective

Power Sector Reforms in India: A Critical Appraisal of Orissa’s Reforms Experience A Thesis Submitted to the Utkal University in Partial Fulfilment of the Requirement for the Degree of DOCTOR OF PHILOSOPHY IN COMMERCE

By MR. SARBESH MISHRA

Under The Supervision of PROF. AMBIKA PRASAD DASH DR. MALAY KUMAR MOHANTY

UTKAL UNIVERSITY Bhubaneswar 2008

Department of Commerce Utkal University, Bhubaneswar.

DECLARATION I hereby declare that this thesis entitled “Power Sector Reforms in India: A Critical Appraisal of Orissa’s Reforms Experience” submitted to the Utkal University in fulfillment of the requirements for the award of the Degree of Doctor of Philosophy in Commerce is a bonafide record of original research work done by me under the supervision and guidance of Professor Ambika Prasad Dash and Dr. Malay Kumar Mohanty and the thesis has not been submitted to any other University or Institution for the award of any degree or diploma.

(Signature of the Candidate) SARBESH MISHRA Enrolment No: 6-commerce-2003-2004 Date of Registration: 27.5.2004.

2

Prof. Ambika Prasad Dash

Dr. Malay Kumar Mohanty

Power Management Institute

Ravenshaw University

NOIDA – 201306 (U.P)

Department of Commerce Cuttack – 753003, Orissa.

CERTIFICATE

This is to certify that the thesis titled “Power Sector Reforms in India: A critical Appraisal of Orissa’s Reforms Experience” submitted to the Utkal University, Bhubaneswar in fulfillment of the requirements for the award of the Degree of Doctor of Philosophy in Commerce is a bonafide record of original research work done by Mr. Sarbesh Mishra, under our supervision and guidance and this thesis has not been submitted to any other University or Institution for the award of any degree.

(Ambika Prasad Dash)

(Malay Kumar Mohanty)

3

Prof. Ambika Prasad Dash

Dr. Malay Kumar Mohanty

Power Management Institute

Ravenshaw University

NOIDA – 201306 (U.P)

Department of Commerce Cuttack – 753003, Orissa.

AREA CERTIFICATE

The work done by the candidate is original and within the area of registration for which the candidate has already been for the registration.

(Ambika Prasad Dash)

(Malay Kumar Mohanty)

4

ACKNOWLEDGEMENT I express my profound gratitude to my supervisors, Professor A.P Dash and Dr. M K Mohanty, whose benign guidance has enlightened my path through the course of this work. Besides their dedication to academic life, their disciplined and austere habits have been a source of constant inspiration to me. They are humane with willingness to help others, care for everyone, and always being concerned about the progress. With these rare qualities I have found in them not merely supervisor but a noble soul, a “Guru”. I express my gratitude to Prof. Arabinda Mishra, TERI University, New Delhi, Prof. Tanmay Panda, BITS, PILANI (DUBAI) Campus for their continuous concern about my progress in research. My special thanks to Mr. Sovan Kanungo, IAS, Prof. Rajat Bakshi, MDI, Gurgaon, Mr. P Chanda, AGM, NTPC Ltd. Dr. G N Patel, Registrar, BIMTECH, Prof. Mukesh Chaturvedi, MDI, Gurgaon, Maj. Gen. N. K Dhir, Prof. P K Mishra, HoD, Environmental Science, Jyotivihar, Mr. Dillip Raj Behera, DGM, Public Relations, OPTCL and Mr. S.N Sabat, IPS, DIG of Police, Uttar Pradesh for their guidance during different stages of this research. I am thankful to other teachers of the department Prof. S Moharana, HoD, Department of Commerce, Prof. Ranjan Kumar Bal, Dr. J K Parida, Dr. P K Hota, Dr. K B Das, Dr. M Sahu, Mr. A K Sahu for their encouragement and interest in my academic pursuit. I acknowledge my sincere gratitude to University of Delhi for allowing me to pursue PhD work being a faculty member. I also acknowledge the help and facilities availed from Army Institute of Management & Technology, Greater NOIDA and I extend my profound regards to late Director of the institute Prof. (Brigadier) M. M. Trivedi, VSM for his timely help and encouragement. 5

I cannot express my gratitude in words to my late father Shri Indramadhab Mishra, whose blessings have always been with me throughout this work along with the best wishes from my family members, mother Ms. Puspalata Mishra, my elder brother Mr. Abesh Mishra, my brother-in-law Mr. B P Dwivedi, my sister Ms. Ajanta Dwivedi and my sister-in-law Ms. Saswati Mishra . It’s needless to mention about my wife Sushree’s contribution, in each and every step of this research work she has willingly extended her cooperation My special thanks must go to my guide’s family for their timely help and constant inspiration. My sincere regards and thanks to Prof. Suman Mahapatra, Dean, School of Languages, Ravenshaw University for his painstaking effort of correcting my thesis meticulously and also to Mr. K. Anand, Acquisition Editor, Vikas Publishing House for undertaking to publish my thesis after its acknowledgement. It is my pleasure to acknowledge Mr. Vineet Sahu, Mr. Satya Sundar Panda, Mr. Saurav Rath and Mr. Amarendra Mohanty for their moral support and timely inspiration.

(Sarbesh Mishra)

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LIST OF TABLE Page No.

1.

Table 1: Power Sector Performance: Gaps between Targets and Realities on Key Indicators in a sampling of regions and Countries.

17

2.

Table 2: Generation of Power – Sector wise and Compositions

22

3.

Table 3: Hydel Potential – Global Scenario

23

4.

Table 4: States with substantial undeveloped Hydro potential

23

5.

Table 5: Inter-regional Links under Operation

24

6.

Table 6: Plan Outlay On power Sector (1961-90)

27

7.

Table 7: Installed Power Capacity 1950 to 2000

27

8.

Table 8: Installed Capacity (MW) At a Glance

27

9.

Table 9: Physical Performance (At the All India Level)

28

10.

Table 10: Public Sector Investment In power 1992-2002

32

11.

Table 11: Capacity Addition 1992-2002

32

12.

Table 12: Tenth Plan Power Sector Outlay (2002-07)

36

13.

Table 13: Financing Pattern of Central Sector outlay in Tenth Plan (Rs. Crore at 2001-02 prices)

36

14.

Table 14: Electricity Consumption in Brazil Twh (1994 – 2002)

55

15.

Table 15: Comparative statement of sops extended by different countries

108

16.

Table 16: Estimated Break-up of T& D losses in M.P

149

17.

Table 17: Achievement of OSEB during 35 years

163

18.

Table 18: Accounting P\L

173 7

19.

Table 19: Cash P\L

173

20.

Table 20: Details of Revaluation

178

21.

Table 21: Debt Equity Comparison

180

22.

Table 22: Profit / (Loss) Comparison Over The Years

181

23.

Table 23: Details Of Loans

182

24.

Table 24: Statement Of Power Purchase, Sale, T& D Loss Billing Collection, etc

183

25.

Table 25: Sources & Application of Funds

184

26.

Table 26: Expenditure Incurred On Consultancy Services

185

27.

Table 27: Revaluation of Assets

204

28.

Table 28: Financial Result Analysis of Andhra Pradesh

211

29.

Table 29: Financial Result Analysis of Orissa

211

30.

Table 5.1: Indicators of Access to Electricity by Sample Households

219

31.

Table 5.2: Metering of Households in Rural and Urban areas

222

32.

Table 5.3: Uses of Electricity by Households in Rural and Urban Areas

223

33.

Table 5.4: Economy in use of electricity by members of the household

224

34.

Table 5.5: Reasons for Economy in Use by Households in reform period

225

35.

Table 5.6: Perceived changes in electricity tariff in reform period

226

36.

Table 5.7: Billing frequency as reported by the households

228

37.

Table 5.8: Irregularity in Billing

228

38.

Table 5.9: Billing efficiency in rural and urban areas

230

8

39.

Table 5.10: Consumer perceptions on power supply in the reform period

231

40.

Table 5.11: Duration of Power Failure in pre-reform and reform periods

232

41.

Table 5.12: Duration of power cut during pre reform And reform periods

234

42.

Table 5.13: Alternative sources of lighting used by consumers during power cut/failure

235

43.

Table 5.14: Consumer perceptions on voltage quality in reform period

236

44.

Table 5.15: Difficulties reported due to voltage problem in the reform period

237

45.

Table 5.16: Protective measures by households in case of voltage problem

237

46.

Table-5.17: Consumer perceptions about reform’s impact on education of children

240

47.

Table-5.18: Consumer perceptions about reform’s impact on health services and health care in households

242

48.

Table-5.19: Consumer perceptions about reform’s impact on women

243

49.

Table 5.20: Employment in cottage, tiny and small scale industries

244

50.

Table 5.21 Summary statement of the perceptions of HHs on impact indicators

246

51.

Table 5.22: Consumer’s Willingness to Pay for Electricity at a Hiked Rate of Tariff by Levels of Education

247

52.

Table 5.23: District wise status of Metering of sample units belonging to commercial and industrial category

248

53.

Table 5.24: District wise status of Supply of Electricity to commercial and industrial users

249

54.

Table 5.24: Alternative Sources of Power / Stand by Facilities and the associated cost for commercial and industrial users of different capacity size (KW terms)

250

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List of Charts Page No. 1.

Chart 1: Power generation mix during several plan period

21

2.

Chart 2: Reasons for poor financial health

25

3.

Chart 3: Plant load factor (PLF)

41

4.

Chart 4: Load duration curve

41

5.

Chart 5: T&D loss determination between four states

140

6.

Chart 6: Relationship between different party

161

7.

Chart 7: GRIDCO structure

169

8.

Chart 8: Reasons for economy in use of electricity

218

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CONTENTS Page No. Declaration

ii

Certificate

iii

Area Certificate

iv

Acknowledgements

v

List of Table

vii

List of Charts

x

CHAPTERS 1. INTRODUCTION I. Backdrop of Power Sector Reforms

1

II. Review of Literature

2

III. Significance of Study

10

IV. Objective of the Study

11

V. Hypotheses of the Study

12

VI. Scope and Limitations of the Study

12

VII. Methodology of the Study

13

VIII. Organisation of the Study

14

2. POWER SECTOR REFORMS: A CONCEPTUAL FRAMEWORK i. Introduction

15

ii. What is Reforms

17

iii. Role of Power Sector in Indian Perspective

19

iv. Power Sector in Pre-reform Period (1961 – 90)

26

v. Indian Economy: Growth of Power Sector

26

vi. Power Sector during Reforms period (1992 – 2002)

29

vii. Original Electricity Bill 2001

35

viii. Private Sector Participation in Generation

37

11

III. GROWTH OF POWER SECTOR i. International Scenario of Power Sector

39

United Kingdom (UK)

39

United State of America (USA)

44

Brazil

52

Argentina

56

iii. Indian State’s Experiences

60

Andhra Pradesh Reforms

62

Delhi Reforms

79

IV. POWER SECTOR REFORMS i. Electricity Act. 2003

97

ii. Single Buyer Vs. Multi buyer Model in Distribution

105

iii. World Bank Models on Unbundling of PSUs

109

iv. Reforms in Electricity Tariffs

110

v. Availability Based Tariff

122

vi. Methods of Calculation of Cross Subsidy

132

vii. High Transmission Energy Audit

138

V. RESTRUCTURING INITIATIVES IN ORISSA’S POWER SECTOR i. Introduction

158

ii. First Phase of Reforms

159

iii. Second Phase of Reforms

164

iv. Restructuring of GRIDCO

166

v. Sequence of events of reforms

170

vi. Benefits of Reforms

172

vii. Analysis of Fault lines –

186

Kanungo Committee’s Findings viii. Turnaround of GRIDCO – A Case Study

202

ix. Comparison of Financial Performance:

211

Orissa Vis-à-vis Andhra Pradesh

12

VI. SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR REFORMS i. Introduction

213

ii. Micro level data source: Sampling framework

214

iii. Analysis of household data

216

iv. Uses of Electricity

223

v. Electricity Tariff

226

vi. Problems in supply of Power

230

vii. Socio economic impact of reform on education

238

viii. Socio-economic impact of reforms on Health

241

ix. Socio economic impact of reforms on women

242

x. Impact of power sector reform on livelihood

244

xi. Consumer’s willingness to pay at hiked rate

247

VII. CONCLUSION • Summary

252

• Findings

256

• Suggestions

266

• Scope for further research

268

VIII. SCHEDULE OF ENACTMENTS

269

IX. LIST OF ABBREVIATIONS

270

X. BIBLIOGRAPHY AND REFERENCES

273

13

Backdrop of Power Sector Reforms The Indian constitution has included power in concurrent list, which means both the centre and state share the responsibility for this sector. Article 246 of the constitution vests the parliament as well as the state legislature with the power to frame laws. The Electricity Supplies Act. 1948 was amended in 1991 to permit private sector participation in generation. Many Independent Power Producers (IPPs) came with their proposals but very few could get the financial closure and commissioning of power plants in 10 years. The most important factor was that most of the state electricity boards were fast moving towards bankruptcy. The reforms carried out in 1991 in the area of power generation made us realize that reform has to begin from distribution end for sustainable development of power. The process of distribution reform started with the enactment of regulatory Act. In 1998 to minimize the political interference in power sector and rationalize the tariff. In pursuance to reforms, states started unbundling the vertically integrated structure of state electricity boards (SEBs) into three separate corporate identities of Generation, Transmission and Distribution as a precursor to the participation of private sector in distribution. Learning from the Orissa experience, the main metric for choosing companies was not based on valuation, but on performance improvement goals. In order to promote competition in the electric power sector, the Electricity Act 2003 (E. Act) mandates open access to the transmission and distribution network for any supplier of electricity. Successful implementation of structural reform requires both the hardware of technological advances in the power system and the software of workable contractual relationships. Utilities need to make efforts to identify such links / areas of high losses; there is still significant uncertainty and differences over the real level of total as well as Transmission and HT losses. Even two to three years after the establishment of the SERCs 14

and the reforms process, there is still ambiguity over the real level of T&D losses.

Review of Literature:Industry and Energy Department, World Bank (1996) in its research paper “Power Sector Reforms in Developing Countries and Role of World bank” discusses the experience of the Bank with the sector and the main drivers for sector reform, the expected benefits of reform, the formulation of the Bank's policy in this area, the principles and elements of reform, and the methodologies of bringing about reform. The key message with regard to the last point is that selection and design of the reform process and final sector structure must be adapted to each country. Hence, the country's authorities must make judicious choices among the many power sector restructuring models and concomitant regulatory frameworks. The paper also discusses issues of implementation lessons of experience, and the role of the Bank in the reform process. The precise dimensions of the governmental and sectoral reform may vary, but in each case the reform effort needs to be governed by a set of clear objectives. These are to (a) increase efficiency in generation through competition, whenever possible, or through regulation based on efficient enterprises and energy and other measures; (b) maintain service reliability by setting strict rules to supply and variations from the technical standards (e.g., in voltage and frequency levels); (c) increase the security of supply in terms of numbers of suppliers and types of energy resources; (d) improve environmental protection by establishing clear rules in the construction and operation of energy facilities, coupled with enforcement mechanisms and the requisite penalties or incentives; (e) attract capital, domestic or foreign, by establishing clear and stable" rules of the game" that relieve the government's burden of funding the sector; and develop competition in the electricity 15

services to customers, where viable, as a means of increasing the economic efficiency of the sector. The policy advisory group of Infrastructure Development Finance Company Limited (IDFC), 1998 in its research paper “Power Sector Reform in Orissa: Should and can it be replicated?” This research reviews this process in Orissa, to examine its replicability for other states. It concludes that it should be possible to transfer the reform process well beyond Orissa, subject to a few safeguards. The objective of the privatisation process must be to transfer the companies to the private sector, followed by obtaining a fair price for government assets. At the same time it is imperative to insulate the outcome against the possibility of renegotiations and default. To reiterate, the replicability of the Orissa experience lies in ensuring that the private sector is able to run the privatised entities, i.e., they are fundamentally commercially viable. Doing this will require structuring distribution zones properly and ensuring adequate financial support for the reforming entity, i.e. the DISCOMs, during the transition process, so that it does not end up with an unhealthy balance sheet, even when it is operationally efficient. It is also essential to remember that people are as important as structure. To that end, the selection and continuance of persons in charge of the process is of utmost importance, as is the composition of the regulatory body. Subject to these safeguards, which appear relatively easy to implement, it should be very much possible to transfer the electricity reform process well beyond Orissa. Asian Development Bank (ADB), 2001-02 in its research paper which acted as Blue Print for “Power Sector Development” has identified the fault lines and has found out the probable reasons which have emanated from: • inadequate power generation capacity; • lack of optimum utilisation of the existing generation • capacity; 16

• inadequate inter-regional transmission links; • inadequate and ageing sub-transmission & distribution network leading to power cuts and local failures/faults; • large scale theft and skewed tariff structure; • slow pace of rural electrification; • inefficient use of electricity by the end consumer; • lack of grid discipline In view of the fact that addition of new capacity takes relatively longer time, strategies have also been formulated to augment power supply in short/medium run. These are: • Increased generation through Renovation and Modernization (R&M) of old stations. • Utilisation of the surplus capacity of the captive power plants into the grid • Demand Side Management (DSM) to flatten the demand curves (introducing time of day tariffs and metering). • Introduction of a new system of matching time and load profiles for different zones in the country. • Energy

Conservation

(The

Ministry

is

piloting

the

Energy

Conservation Bill, which, when enacted, will provide necessary legal framework for promoting conservation and efficiency). • Evacuation of power from the power surplus eastern region. Sankar, T.L (2002), Advisor-energy, Administrative Staff College of India, Hyderabad, in his work on “Power Reforms in India – the search for an indigenous model for promoting competition” has identified the major problems namely, the slow rate of addition to power generating capacity; the lack of noticeable improvement in the governance, management and level of service to consumers; the failure of efforts to induct the private sector into 17

distribution; the inability to find a solution to the problem of subsidised supply of power to agriculturists; the chaotic condition of governance of LT distribution with, inter alia, the level of T&D losses remaining undetermined and the annual loss reduction in the system being very slow; the rationalisation or rebalancing of tariffs becoming a losing game because the average cost of supply increases faster than the possible rates of increase of tariffs; and the deficits accumulated over the years imposing an unbearable interest burden limiting the capacity to raise funds in the commercial market. He has also attempted to find out the followings: • Should farmers, like other customers, pay the cost-of-service or the average cost of supply? • If farmers cannot pay the tariff and have to be provided power at subsidised rates, what should be the level of subsidy? • Who should pay the subsidy -- other users of power or all taxpayers through the state government? • Should the Government of India pay part or the entire subsidy as it does in the case of fertilizer? • If the tariff for agriculture is very low, is it worthwhile installing meters for these consumers? He has suggested of Revised Reform Programme (RRP). The RRP should be taken as a comprehensive integral programme consisting of the following elements, which should be implemented together. Declaration that all new generating capacity would serve the consumers or DISCOMs directly, abandoning the single-buyer model. 18

Agricultural pumpsets and small households, which on socio-political considerations have to be provided electricity at below the average cost, should be supplied by an earmarked allocation from the generating plants with the lowest generating costs. The quantity supplied thus as an ‘‘entitlement’’ should be specified by the government. DISCOMs should be much smaller than currently contemplated and have a maximum turnover of Rs. 6-8 billion. All management of the distribution system below 11 kV should be gradually shifted to the consumers themselves, with the requisite technical and investment support coming from the DISCOMs. Regulators should settle within one year the issues of relevance for longterm multi-year tariff fixation, with explicit targets for T&D loss reduction and for various other parameters. Accumulated deficits and securitization and APDRP should be linked as proposed above. Abraham, P (2003), ex-power secretary, Government of India in his work on Power Sector Reforms; Focus on Distribution has emphatically identified as the one of the prime movers of the economic development. In his work he has stated the non-availability of sufficient power and of good quality which is going to be the single most critical constraint for the overall development of the country. Power distribution throughout India is plagued by:• Inadequate and deteriorating physical infrastructure • Skewed tariffs, high T&D losses, theft of energy 19

• Poor collection of revenue • Dissatisfactory

management

practices

and

extreme

consumer

dissatisfaction and more particularly the situation is acute in rural areas. The budgetary provisions of the state governments were reducing and the gap between demand and supply was ever increasing and the gap between cost of supply and tariff was widening. He stressed on the need for a comprehensive accelerated reforms basing on the global experiences particularly from South American Nations and USA, UK, Canada, etc. He has impressed on the need of choosing right kind of reforms model among the laid down models. The pre-requisites for carrying out such reforms and privatization and the road map ahead for bringing the reforms to their logical conclusion, so that a healthy and viable power sector can be created to contribute substantially to the alround growth of our economy. He has elaborated on the need of Government’s support for reforms, including support during the transition period, organisational and financial restructuring, and all other such issues which are germane for reforms. Tongia, Rahul (2003), in his Stanford – CMU Indian Power Sector Reforms Studies has analysed the following things: • Will reforms lead to economic viability of the system? Will this come through tariff increase or cost control (or both)? • What is the best role for the regulator, and are they equipped to be fair, transparent, and independent regulators?

20

• If we open the sector up to privatization (distinct from retail competition), who will come in? Are there enough players? What returns do they want or expect? • Should rapid privatization of viable (urban) areas be done quickly, or will such cherry-picking harm the overall system? To what extent should there be pooling of costs (both at the generation level, and at the retail level)? How fair and effective are such systems? The analysis indicates several important ingredients for successful reform. For starters, initial assumptions must be realistic and accurate, as must targets for the participants. This was one of the major failures in Orissa, where the losses were significantly higher than thought, and the growth of paying customers did not materialize. In addition, there needs to be sustained government support for reforms, ranging from things varying from anti-theft legislation, to managing SEB unions, to overcoming public opposition in general. In addition, if the newly corporatised (or privatized) entities are to behave like companies, any gap between average tariff and average cost of supply must be met through explicit government subsidies (which, ideally, should be target driven and time-bound). At the end of the day, India’s reforms have thus far gone a fair ways towards the ingredients necessary to reaching the goals of increased access, efficiency, and viability, but they have not yet directly done so. These reforms, necessary but perhaps not sufficient, will be the focus of enormous effort and expenditure by the government, funding agencies, and companies in the coming decade.

21

Ranganathan, V and D, Rao Narasimha (2004), IIMB in their research paper on “Power Sector Reforms in India” have analysed the progress of the reforms in India which formally started along-with economic liberalization in 1991-92, though the impetus for private sector participation in the power sector predates this. Despite aggressive reform policies in the 90s, private sector participation was moderate at best, and the financial losses and cash flows of State Electricity Boards (SEBs) reached crisis proportions. They have outlined the stages of power sector reform, placing the development of markets in context. They warn that in a situation of supply scarcity, competitive markets – namely spot markets – can lead to price increases and volatility, which will be slow to change due to short-term supply inelasticity. More important is the need for bilateral trade under open access to better exploit cheap, remote hydro and coal fuel resources in northern India. They envision an environment of managed competition in a bilateral market with regulated (capped) contract prices. Shahi, R V (2005), currently the power secretary of India, in his work on “Indian Power Sector; Challenge and Response” has highlighted the infirmities in the power sector namely:• Power supply to Industry and Agriculture • Poor quality of supply of power • Lack of concern for consumers • Highly skewed tariff structure He has recognised the importance of manufacturing sector as it contributes significantly to the growth of economy and helps in generating employment. For them enabled to be competitive issues such as price of power, supply of power without interruptions and quality of power are all equally important and relevant. Risk perception of developers and lenders has been so high that 22

in spite of best of private power policy formulated and notified in early nineties, active responses were negligible. Having failed to get right and adequate response from private sector, in order that vital infrastructure sector does not get starved of funds for required expansion, during the 10th. Five year plan public sector outlay was substantially enhanced. Continued inflow of Government resources without commensurate commercial revival of this sector would not only be an unsustainable arrangement, but as a matter of fact, this may not even yield desired results. Lesson learnt from Orissa’s privatization is that in India private sector today is not equipped to handle adequately rural electricity distribution. It needs to be recognised that consumers need not and should not wait for improved services only when privatization happens. Competition is needed even within the public sector on basis of performance benchmarks. He has maintained that significant amount of improvement can be brought about even without any substantial investment, just by way of toning up the operational maintenance practices, better inventory management, training and development of people and sharpening of work culture. Significance of the Study: -

The present work aims to highlight the extent of reforms in power sector commenced since Sept. 1991 to till date. It shows the comparative study of rate of growth in generation, distribution and per capita consumption of power along with several developed nations. It also systematically studies the experience of ORISSA, which adopted reforms process in late 1996 and its problems over these years. The findings of the study will highlight the various aspects in this regard, which require attention of the Govt.

23

Objective: -

Orissa is the first state in India to initiate reforms in the Power Sector. It has left a benchmark for the whole of country and for a good experimentation.

Again in this backdrop, the objective of the project would be to study the impact of reforms in the development of Generation, Transmission and above all in the Distribution end. A concerted effort would be made to have comparative analysis among different states that adopted reforms. In an effort to achieve these objectives, the following steps would be undertaken -

To ascertain the provision of quality power on demand to all consumers.

-

To study the different elements which determines the tariff structure? To see whether there’s availability of alternatives to consumers.

-

To verify the creditworthiness of power sector and if it is capable of funding future investment needs.

-

To check the extent of progress made in rural electrification.

-

To measure the degree of transmission and distribution loss, if it’s in the permissible limit.

-

To systematically analyze the reasons for Orissa’s failure to become a financially viable corporation.

-

To make the interstate comparison of efficiency i.e. Orissa with Delhi (Which adopted reforms in 2002) and to bring out the weakness of the previous at the distribution end.

-

To suggest alternatives to increase the cash flow without tariff hike.

-

To examine the existing laws prevailing in different states to curb the menace of power theft (Inter state comparison on state Electricity Act.)

24

Hypotheses: -

-

To study if the power sector reforms have brought in commercial viability in Power Supply Industry.

-

To study if the power sector reforms resulted in the Supply of power at Reasonable and Affordable Rate.

-

To study if the power sector reforms have brought in Fiscal Discipline.

-

To check if the introduction of OERC (Orissa Electricity Regulatory Commission) has led to rationalization of Tariff structure and protected the consumer’s interest.

Scope: The scope of present study has been with an eye on the process of power sector reforms in India that was initiated in early 90’s. The present study is restricted to few aspects i.e. a conceptual background on legislative aspect of Indian Electricity Act. 1910 and Electricity Supplies Act.1948 and its reforms that was initiated by amending them in 1991 and subsequent in Electricity Bill 2003. It also empirically studies the various functional reforms carried out by different state governments. It covers time series and cross section analysis on trend scenario. Limitation of the Study: -

The compilation and execution of the present study have to pass through several constraints due to unavailability of adequate primary data. The available data is very unsystematic which discouraged the systematic 25

treatment of data. Hence the study would have been more systematic if detailed data would have been available.

Methodology: The present study is carried out by using some primary data and rest on secondary statistical data. The data has primarily been obtained from Power Management Institute, NTPC Ltd. POWERGRID, University Library University of Delhi, Corporate Office-GRIDCO/OPTCL and from several sub divisional offices across India. Apart from this, several published journal viz. TERI, Energy Watch, powerline, ADB Review and by interviewing some senior personnel of different areas related to power industry. The method of study includes the following: -A survey of available literature on topic. -Collection of data (Both time series and cross section) -Analysis of published & Non-published Journals. -Analysis of Primary & Secondary Data. -Analysis of circulated Questionnaire. -Classification and tabulation of data. -Preparation of charts, graphs and schedules for proper presentation -Suggestion and remedial measures for overcoming the problems faced by the organization officials and scope for further study.

26

Organisation of the study

I.

INTRODUCTION

II.

POWER SECTOR REFORMS: A CONCEPTUAL FRAMEWORK

III.

GROWTH OF POWER SECTOR

IV.

POWER SECTOR REFORMS

V.

RESTRUCTURING INITIATIVES IN ORISSA’S POWER SECTOR

VI.

SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR REFORMS

VII.

CONCLUSION •

Summary

•

Findings

•

Suggestions

•

Scope for further research

VIII. SCHEDULE OF ENACTMENTS

27

POWER SECTOR REFORMS: A CONCEPTUAL FRAMEWORK

Introduction Electricity was entirely under the provision of the states as per the Government of India Act 1936 but it was because of Dr. Ambedkar, who was a member of the executive council for Power during 1942-46, Power was included in the Concurrent List, Schedule VII of the constitution. Recognizing the potential for the growth of power at that time, Dr. Ambedkar felt the development of electricity in the whole country which cannot be left to the provinces alone. According to Article 246 of the constitution, parliament as well as the state legislatures has the concurrent powers to make laws with respect to electricity. Whenever there is any conflict in the laws, the central law shall prevail over the state laws. Dr. Ambedkar’s philosophy for jurisdiction of central govt. over the electricity had withstood the test of time.

“The most challenging unbundling of all would be that of the bureaucracy” – Editors’ comment, India Infrastructure Report 2002.

Need For Reforms Developing countries needs energy particularly electric power for social and economic development. Many developing countries are unable meet their energy demands of their economies because of the poor performance of their existing plants and the shortage of adequate investment for new facilities to meet the growth in demand. Although the World Bank experience has been mixed, the performance of its client countries electric power utilities has generally been poor to dismal. The sub standard performance is usually reflected in low plant availability and productivity, poor service to customers (Characterized mainly by energy shortages leading to frequent blackouts and substandard system frequency) 28

and poor financial returns. The proximate causes of these problems are, on the physical plant level, lack of readily available spare parts, scarcity or poor quality of operating materials viz. lubricants, chemicals etc, poor maintenance practices, inadequate training of operation and maintenance personnel and lack of investment in necessary upgrading. On financial front, government policies that have kept electricity tariffs well below the cost of supply, combined with weak collection efforts by utilities, have drained government budget resources instead of contributing positively. It has thus been common for World Bank borrowers to request financing of new plant at the same time as they maintain existing plant availabilities of less than 50 percent. A final problem for the power sector is on the institutional side, where governments have controlled their power utilities as if they were departments of the state and have used this control to pursue populist politics and social policies that are incompatible with the commercial objectives. Governments’ inability to continue large subsidies to these utilities for operating purposes and to mobilize funding for large investments needed for new plant to satisfy the growing demand, with the private sector’s reluctance to invest in such poor risk ventures, are leading to further deterioration in the performance of electric utilities.

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Table 1: Power Sector Performance: Gaps between Targets and Realities on Key Indicators in a sampling of regions and Countries INDICATOR

TARGE T 90% Percentage of Population Served Utility management • Customers per employee • Blackouts (hrs. / Yr.) • Load Factor • System Losses Commercial Performance • Accounts receivable (days) Financial Performance • Return on assets • Self-financing ration

REALIT Y 5%

REGION / COUNTRY SSA

150-250 7 70% 10-12%

42 750 46% 35%

Bangladesh Philippines Nepal Bangladesh

30-45

462

Nigeria

8-12% >25%

-19.8% 0%

India Jordan

Note: SSA – Sub- Saharan Africa

What is Reform? Power sector reform consists of process of changes along four different but inter-dependent axes: management, ownership, structure and regulation. The structural change begins with the realization that a monolithic structure, often established as part of a centrally planned or command economy is too inflexible to respond to market forces and to provide appropriate incentives for such responses. The government functions need to be broken into a. That the government cannot relinquish such as the roles of setting general policy & strategy, and sector regulation and supervision. 30

b. Those that are subsidiary to the role of government and that can be transferred, wholly or partially, to the private sector, such as ownership, operation and management of energy facilities. c. Those are not the core functions of the sector & that can be transferred to other sectors such as research & development and construction and manufacturing services. The government’s function can be assumed by a ministry of energy, or state energy commission or state supervisory agency. The ownership function can be retained by the state, or it can be transferred to municipal or regional companies or private sector. In any case the day to day, the day to day management of the enterprises, even if fully state owned, should be exercised by commercially operating entity. Finally the third category of functions should be left to universities, research and development institutes, and independent private sector companies. Thus, the process of reform moves along two intertwined paths, one relating to the other government actions and one relating to sector & enterprise restructuring. The first path involves legal and institutional framework; second involves commercialization and corporatisation of enterprises. It is clear that the type of the regulatory framework and sector structure are closely interconnected. The precise dimension of governmental and sectoral reform may vary, but in each case the reform effort needs to be governed by a set of clear objectives. These are to a. increase efficiency in generation through competition. Or through regulation based on efficient enterprises and energy use, conservation and other measures. b. maintain service reliability by setting strict rules to limit unreasonable interruptions of supply and variations from technical standards ( e.g. voltage and frequency levels) 31

c. increase the security of supply in terms of numbers of suppliers and types of energy resources d. improve environmental protection by establishing clear rules in the construction & operation of energy facilities, coupled with enforcement mechanisms and the requisite penalties or incentives e. attract capital, domestic or foreign, by establishing clear and stable “Rules of the Game” that relieves government’s burden of funding the sector f. develop competition in the supply of electricity services to customers, where viable, a means for increasing the economic efficiency of the sector.

Role of Power Sector in Indian Perspective The growth of economy calls for a matching growth for infrastructural facilities where power is a major tool. Invariably power is an indispensable unit of infrastructure, whose growth can never be compromised with. The growth rate for the demand of power in developing economy like India is generally higher than the growth of GDP (Gross Domestic Product). In order to achieve a healthy growth rate of GDP around 8 per cent per annum, the growth rate for power is prescribed to be more than 10 per cent per annum. So far power sector has been greatly dependent on budgetary support and external borrowings. This thrust on generation, and even expensive IPP power, is best characterized by Homi Bhabha’s oft-quoted statement, “No power is as costly as no power” The power generation grew from one MW in 1900 to 1363 MW during the independence. After independence, the need for wide spread availability of power was felt. Thus Electricity (Supply) Act, 1948 was enacted with an intention to rationalize generation, transmission and distribution of electricity in the country. The state electricity boards (SEBs) were allowed to start their 32

own generating stations except the nuclear power stations. To meet the growing demand of power centrally sponsored Public Sector Enterprises like National Thermal Power Corporation (NTPC) & National Hydro Power Corporation (NHPC) were formed in 1975. Earlier being entrusted with generation of power from coal and gas whereas later was asked to look after the hydro based power generation. Power Grid Corporation of India Ltd. (POWERGRID) was formed in 1989, to look after transmission of power and to develop the interconnected grid system across the country. NTPC was set up in 1975 with a view to promote and develop thermal power in India. The corporation has grown geometrically in terms of both production and quality power supply, within the country. The corporation has 13 coal based thermal power projects and 7 gas / liquid fuels based combined cycle projects. NTPC has adopted multi pronged growth strategy to become 40,000 MW plus company by the end of 2012. It has also acquired 314 MW of captive power plant of SAIL through formation of joint venture with SAIL. National Hydroelectric Power Corporation (NHPC) was set up in 1975 and soon got the title of “Largest Producer” of hydro Power in India. NHPC has commissioned several big hydro based electric generation projects across the country including some in the difficult terrains. It also lends technical advice to different state govts. in their projects. Of course, hydro projects are attractive since, once constructed, they have very low marginal costs (no fuel costs), and they offer reasonably high levels of load control and quick start capabilities (subject to water availability). However, Indian dispatch mechanisms do not fully account for marginal cost pricing. While the ash content is high, the sulphur content is quite low, reducing the need for clean-up technologies. No Indian coal plant today incorporates Flue Gas Desulphurization (FGD) technology.

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Nuclear power generation in India is in its infancy. It hardly meets 2.5% of total generation. So Thorium, like Uranium 238 is the primary raw material whose isotopes are available. (The primary form, or isotope, of natural uranium, is fertile. It can not undergo a fission reaction until converted into another element through a nuclear reaction, such as in a Fast Breeder Reactor). Breeding is the process of producing more fissile material from fertile than consumed to sustain the reaction. India has the largest thorium reserves in the world, which if converted to fissile material, could provide hundreds of thousands of megawatts of power, for many, many centuries. (Chidambaram, R. and C. Ganguly (1996). "Plutonium and Thorium in the Indian Nuclear Programme)

Chart 1: Power generation mix during several plan period

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Table 2: Generation of Power – Sector wise & Compositions

ALL FIGURES IN MW

X PLAN

XI PLAN

TOTAL

23,000 210 1,220 4,055

23,500. 1,500 5,160 6,625

46,500 1,710 6,380 10,680

Total Central Sector

28,485

36,785

65,270

Total State Sector

8,300

10,600

18,900

Total Private Sector

9,400

13,500

22,900

Overall Capacity Addition (approx.)

46,000

61,000

1,07,000

CENTRAL SECTOR • Ministry of Power • Ministry of Coal • Department of Atomic Energy • Ministry of Nonconventional Energy Sources

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Table 3: Hydel Potential – Global Scenario

COUNTRY

Exploitable potential

Installed capacity

% of potential utilised

NORWAY

47,000

27,360

58

CANADA

1,60,000

65,678

41

BRAZIL

17,000

52,427

31

CHINA INDIA

3,10,000 1,50,000

56,000 23,488

18 17

Table 4: States with substantial undeveloped Hydro potential State

Assessed (MW)

In Operation (MW)

Under Construction

Balance (MW)

Arunachal Pradesh U.P. / Uttaranchal Himachal Pradesh Jammu & Kashmir Sikkim Karnataka Meghalaya Mizoram M.P. / Chhattishgarh

50328

10.50

405

49912.50

18898

1609.85

3453

13835.15

18820

3822.95

1926

13071.05

14146

1394.25

469

12282.75

4286 6602 2394 2196 4485

84 2789 185.20 000 898.50

519 222 000 60 1550

3683.00 3590.60 2208.80 2136.00 2036.50

3514 2841 1784 1574 2999

1799.50 300.50 105 75 1837.50

30.25 936 90 24 66

1684.25 1604.50 1598.00 1475.00 1095.50

Kerala West Bengal Manipur Nagaland Orissa

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Table 5: Inter-regional Links under Operation

Name of the Link

Regions interconnected

Capacity (MW)

West and North West and South East and South

500 1000 500

West and East East and South West and South West and South North and East

450 200 300 100 200

North and East East and North-East North and West North-East and East

500 100 200 800

HVDC Links Vindhyachal HVDC back to back Chandrapur HVDC back to back Gazuwaka HVDC back to back AC Links Korba-Budhipadar 220kv 3 ckts Balimela-Upper Sileru 220 kv S/c Kolhapur-Belgaum 220kv D/c Lower Sileru and Burgur Dehri-Sahupuri 220 KV S/c Karmnasa-Sahupuri 132Kv D/c Biharshariff-Sarnath 400 kv D/c Birpara-Salakati 220 kv D/c Auraiya-Malanpur 220Kv D/c Bongaigoan-Malda 400 Kv D/c Total

4850

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Chart 2: Constituents of Financial Parameter REASONS FOR POOR FINANCIAL HEALTH OF SEBs/STATE UTILITIES

Negative Returns on investments

Low PLF

Average cost of power Average Revenue

•

Skewed tariff system subsidising domestic and agricultural consumers at expense of industrial consumers

•

High T &D losses

Inadequate R&M investments resulting in less than optimal PLF

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• •

Technical losses account for about 15-20% of these losses Commercial losses account for 20-25%

High Accounts Receivables

• •

No firm policy on disconnection Varies widely across stats (lower in Tamilnadu and higher in Bihar)

Power Sector in Pre-reform Period (1961-90) Soon after the independence, parliament enacted Electricity (Supply) Act, 1948 bringing the entire power industry in the country into the fold of public sector, establishing separate SEB (State Electricity Board) as a vertically integrated utility in each state and setting up the Central Electricity Authority (CEA) as the apex technical body to oversee the power industry at the national level. But till 1970s the development of power sector was wholly the responsibility of the individual state governments. The government of India decided to play a positive role in augmenting the power generation in the country by establishing NTPC & NHPC in 1975.The idea was to set up large thermal power stations and optimally located large hydropower stations whose benefit can be utilised by the regions of the states as well. From the above table, we can see that central investment in power sector started rising from the 1980s. But the state governments accounted for the major share of the outlay on the power sector and allocations under the state plans were highest among all sectors of development. Because of certain historical reasons, a small share of generating capacity under private ownership was seen in the cities of Ahemadabad, Mumbai and Calcutta. In the early 80s, Rajadhyaksha Committee (Committee on power) stressed on the need for higher investment in the areas of Transmission & Distribution (T&D) was required to overcome the problem of high technical losses.

Indian Economy and Growth of Power Sector Electricity reforms in India formally took off along with the economic liberalization in 1991-92.Prior to this the pattern of investment in the power sector looks like this as mentioned below.

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Table 6: Plan Outlay On power Sector (1961-90) Centre Outlay (Rs. Cr.) 109 Plan

Third (1961-66) Fourth Plan (1969-74) Fifth Plan (1974-79) Sixth Plan ( 1980-85) Seventh Plan (1985-90)

States & UTs % of Outlay Plan (Rs. Cr.) outlay 3.0 903

Total

% of Outlay Plan (Rs. Cr.) Outlay 23.1 1012

% of Plan Outlay 13.5

447

5.0

2001

28.5

2448

15.4

825

4.1

6469

33.4

7294

18.6

4725

10.0

14,540

28.9

19265

19.8

11,051

11.6

23,222

27.5

34,272

19.0

Source: Planning Commission – respective plan documents

Table 7: Installed Power Capacity 1950 to 2000 (MW) Year 1950-51 1970-71 1990-91 2001-02

Public 1,710 14,710 66,100 1,04,900

Non-utilities 590 1560 8,600 16,100

Total 2300 16,270 74,700 1,21,000

Table 8: Installed Capacity (MW) At a Glance Ownership/Mode Hydel Steam Gas Diesel Wind State 22636.02 36302.00 2661.70 582.89 62.86 Central 3049.00 21417.51 4419.00 0.00 0.00 Private 576.20 4411.38 4082.40 551.94 1444.60 Total 26261.22 62130.89 11163.10 1134.83 1507.46 % of Installed 25.03 59.22 10.64 1.08 1.44 Capacity Source: Annual report (2001-02) on working of SEBs by Planning Commission

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Nuclear 0.00 2720.00 0.00 2720.00 2.59

Table 9: Physical Performance (At the All India Level) Year 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

Plant (%)

Availability Plant Load T&D Losses (%) Factor (%) 79.00 64.40 24.53 79.40 64.70 24.79 78.70 64.60 26.45 80.30 67.30 30.80 80.50 69.00 29.90 NA 69.90 27.80

Source: Annual Report (2001-02) on working of SEB by Planning Commission

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Power Sector during Reforms Period (1992-2002) The government realised that the gap between demand and supply of power was widening and requirements of future expansion and improvement of power sector cannot be fully achieved through Public resources alone which augmented the need for encouragement of private players in generation, transmission and distribution of power. The most important factor was that the state electricity boards were fast moving towards bankruptcy. In the Common Minimum National Action Plan for Power (CMNPP), this was approved by chief ministers in the conference convened by Prime Minister in 1996 which ushered in the comprehensive reform programme for power sector, including reforms in the distribution sector. The resolution passed in the CMNPP includes: 1. Establishment of Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commission (SERC) in each state in time bound manner. 2. Rationalization of retail tariff, under which no sector shall pay less than 50 per cent of the average cost of supply and tariffs for agriculture should not be less than fifty paise per unit and should be increased to 50 per cent of the average cost in not more than three years. 3. Finalization of National Energy Policy. 4. Gradual private participation in distribution, initially in one or two viable geographical areas covering both urban and rural areas and extend to other parts of state gradually. 5. Restructuring and corporatisation of SEBs and make them function on commercial basis. 6. Improvement in plant load factor (PLF). 7. Compulsory metering of all sub-stations and all major feeders, all new connections and all connections including agricultural connections should metered by the year 2002. 42

8. Compulsory energy audit for all consumers. 9. Evolvement of a national policy on hydro power development 10. Encouragement for co-generation and captive generation. At the time of approval of CMNPP, the power sector was full of hopes as country was expected to add about 10,000 MW of generation capacity every year and 50,000 MW in next five years out of which three fourth would be coming from the private sector. In the wake of this large number of Memorandum of Understanding (MOUs) were signed between the state government and different prospective investors. As many as 58 schemes having a capacity of 30,000 MW (Approx.) were cleared by CEA. The single most important factor which became a stumbling block in attracting foreign direct investment was the fact that the SEBs were on the verge of bankruptcy. They had defaulted in payment to central PSUs for supply of coal, power etc. The industry was characterized by lack of efficiency, excessive manpower, poor project management, irrational tariffs, and high proportion of Unmetered supply, large scale theft of power in collusion of SEB staffs, poor billing and collection mechanism, perennial problems like theft of cable, wires etc., non payment of government dues and even resistance to disconnection of supply for non-payment of dues, poor customer grievance redressal mechanism by SEBs. Due to ailing state finances, state governments did not show any willingness to stand guarantee for payment for power purchased by the SEBs. In 1992, the government of India offered counter guarantee to few fast track projects but none of these could reach financial closure. Investors had to face formidable procedural hurdles; negotiations had to be carried out with numerous agencies both at centre and state level. Since the raw material for thermal power being 43

coal, so IPPs wanted to ensure the smooth and timely supply of coal. But both coal companies and railways, which transport the coal, expressed their unwillingness to enter in to any legally enforceable fuel supply agreements. The public perception was that power supply from IPP is costlier than from a similar publicly owned generating station which led to the reopening of the Power Purchase Agreements (PPAs). Added to this was the bureaucratic delay. Single window mechanisms proved to be ineffective. This was not conducive in attracting the private investment in the power sector. The questions were raised about the Government commitment to power sector reform especially for the private players. Private players did not show any interest in power transmission. The scope available for the owner of a transmission line to cut costs or maximize revenue is remote because the owner has no control over the flow of power in his line. In developed countries also investors did not show much interest in erecting transmission line. The private sector has to play an important role in power distribution. The sizeable backlog of investment required to reduce technical and commercial loss and keep pace with load growth. More importantly improvement in operational efficiency and quality of service, proper billing and collection mechanism, greater responsiveness to consumer needs will be the principal gains from private ownership and management of distribution network. A successful distribution reform holds the key to success in restructuring of power sector.

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Table 10: Public Sector Investment In power 1992-2002 Centre Investment (Rs. Cr.) Eighth Plan Ninth Plan

30,426 53,299

States and UTS Total % of Investment % of Investment Plan (Rs. Cr.) plan (Rs. Cr.) outlay outlay 11.0 46,251 24.0 76,577 10.8

70,926

18.9

% of Plan outlay 15.8

1,24,526

14.5

Note: In the ‘investment” column, expenditure is shown for eighth plan and outlay for ninth plan. Source: Planning Commission, Annual Report (2001-02) on the working of State Electricity Boards and Electricity Departments. Annexure 2.3 & 2.4

Table 11: Capacity Addition 1992-2002 Central Sector

State Sector

Eighth Plan (1992-97) 3260 5860 Hydro 8498 9010 Thermal Nuclear Total

1100 12858

Ninth Plan (1997-02) 3455 Hydro 7574 Thermal Nuclear Total

880 11909

Private Sector

162 2646

14870

2810

5815 4933

550 17038

10748

17588

Total

Central Sector

State Sector

Private Sector

Total

9282 20,15 6 1100 3053 8

1465 6252

795 6041

168 1262

2428 13,555

440 8157

6835

1430

440 16423

9820 2954 5 880 4024 5

540 3084

3912 5538

86 4975

4538 13597

880 4504

9450

5061

880 19015

Source: Planning Commission, Ninth Plan, Vol II, Chapter 6, Table 14 and Draft Tenth Plan, Vol 2, Table 8.2.2

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From the above two figures namely Public Sector Investment in Power and capacity addition during the ten year period led us to this conclusions1. The central government started spending more money on power in comparison to previous years and a substantial hike in central outlay in ninth plan can be seen. 2. Actual capacity addition fell seriously short of target in both Eighth and Ninth Plan. 3. Private sector participation in capacity addition was worse among these three. In eighth plan actual capacity addition almost 50% of the target set but in ninth plan it was even less than 30% of the target set. 4. Capacity addition of hydro power in state sector was steadily increasing & phenomenal rise can be observed in ninth plan. 5. Actual capacity addition fell seriously short of target both in Eighth and Ninth Plan periods. In short, the post reform performance shows that far from any improvement in power situation, this sector suffered severe setback.

Table 6: Electricity – GDP Elasticity in India Elasticity First Plan 1951-1956 3.14 Second Plan 1956-1961 3.38 Third Plan 1961-1966 5.04 Fourth Plan 1969-1974 1.85 Fifth Plan 1974-1979 1.88 Sixth Plan 1980-1985 1.39 Seventh Plan 1985-1990 1.50 Eighth Plan 1992-1997 0.97 Ninth Plan 1997-2002 0.75 Calculated and compiled from data from the Planning Commission and Ministry of Finance (Economic Surveys) While many Plan documents claim growth targets of 40-60,000 MW for the coming 5 Year Plans, and even segment these into state, central, and private, it is unclear how such growth will be financed or sustained in the current 46

operating environment. Assuming a target of 100,000 MW expansion, which would less than double the per capita consumption given the increase in population over 10 years, the estimated investment would be 150 billion US$, using the rule of thumb (coal-centric) that 1 MW of capacity addition requires 1 billion dollars investment for generation, and half that more for T&D. 15 billion dollars per annum is almost 4% of the GDP, a number too high for domestic savings rates and budgets alone. This was one of the prime reasons that the government wanted foreign investment in the power sector, making this a central feature of the 1991 reforms. (India’s development is largely based on Soviet-style 5 year plans, and a few Annual Plans in between. Critics state that too much effort is placed on Plan (largely capital) expenditure, and not enough focus is there on operating expenditures, like maintenance, monitoring, enforcement, analysis, etc. In most states, if a consumer needs a new connection, they have to pay nontrivial connection fees if the lines need to be extended. The charges vary by state. Part of this may be due to poor metering. Older electromechanical meters have a threshold below which they fail to register consumption. Newer electronic meters only became available in the 1990s.) (The

Indian (British-based) system was supposed to have a near permanent bureaucracy, giving

stability as the elected politicians shifted over time. This is in contrast to the American system, where the new executive office brings in a new (but fixed term) operating staff for the various departments.)

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Electricity Bill 2001(Power for all by 2012) There is a major revamping of India’s power sector planned via the Electricity Bill 2001, which is in Parliament but has not yet been passed. This legislation was originally planned for 2000, and was renamed for 2001, but the act was ratified by the parliament only 2003, referred as Electricity Act. 2003. Main Features of Bill include 1. Formulation of a National Electricity Policy by the Govt. of India 2. Strengthening anti-theft laws 3. Generation free from licensing except for hydro units 4. Requirement of techno-economic approval done away with 5. Captive generation free from controls 6. Open access to transmission lines 7. Setting up of State Electricity Regulatory Commission (SERC) mandatory 8. Open access in distribution to be allowed by SERC in phases 9. Retail tariff to be determined by regulatory commission 10. Trading a distinct activity permitted with licensing 11. Establishment of Appellate Tribunal This would be a major bill, revamping the 1910 and 1948 Laws, and extending reforms further. Fundamentally, it moves the country towards power markets, but it provides very little detail on the operations of such a system, e.g., the role of any Independent System Operator (ISO). It states that Regional Load Dispatch Centres will be responsible for grid operations, and failing their abilities or powers, the Central Transmission Unit (i.e., Power Grid) will take over this role. The Electricity Grid Code referred to in the bill, as formulated today (Power Grid 2002), states that these entities will not trade power, but only facilitate power transactions. The Power Trading Corporation, though designed to trade power, is not set up as an ISO. Both the Bill and the Code indicate Regional as well as State Load Dispatch Centres. 48

This appears to be a poor design, as the synchronous grid should not operate with such granularity. The Electricity Bill 2001 has a strong focus on bulk (High Tension) consumers, who can get open access to generators (captive or IPPs). However, it doesn’t indicate how much surcharge the utilities can pose, for the losses they incur (loss of paying customer) (Mahalingam 2002). This tension, over paying customers that sustain the cross-subsidies of today, is one of the major issues facing the Indian power system. Table 12: Tenth Plan Power Sector Outlay (2002-07) Ministry/Department Outlay Centre Power 1,43,399 Coal 8,008 Atomic Energy 25,577 States & UTs 82,224 All-India 2,59,208 Note: The outlays of Ministry of Coal and Department of Atomic energy are for ‘Power programmes’ Source: Derived from Planning Commission, draft tenth plan, Vol 2, Annexure 3-A to 3-C

Table 13: Financing Pattern of Central Sector outlay in Tenth Plan (Rs. Crore at 2001-02 prices)

Ministry / Dept.

Atomic Energy Coal Power

Budgetary Support 9th. Plan Realisation

10th. Plan Projection

% Increase

Internal and Extrabudgetary resources

6771

21550

218.3

9th. Plan Realisat ion 1671

2233 14907

1050 25000

-53.0 67.7

14623 29785

Total Outlay

10th. Plan Projecti on 10820

% Increase

9th. Plan Realisatio n

10th.Plan Projection

% Increase

547.5

8442

32370

283.4

30541 118399

106.0 297.5

17058 44692

31591 143399

85.2 220.9

Note: 1.The outlay under Atomic Energy covers both power and R&D programmes. In the Tenth plan Rs. 25577 are for power 2. The budgetary support for coal includes Rs. 1257.4 cr. And Rs. 8007.6 cr. Under ‘Ninth Plan Realisation’ and ‘Tenth Plan Projections’ respectively for power. (Neyveli Lignite Corporation). Source: Planning Commission, Draft Tenth Plan, Vol 1, Annexure 3-B.

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Private Sector Participation in Generation The reform policy introduced in 1991 allowed private sector to set up companies to act as licensees, generating and distributing power, or simply as generators. Up to 100% foreign equity participation was permitted, with a maximum debt to equity ratio of 4:1. The return on foreign equity was protected in foreign currency and numbers of tax concessions were also made. In order to determine tariff for the purchase of power, a notification, which laid down the guidelines for a two part tariff, was issued. The main features of the notification were: 1. The tariff would constitute two parts- a fixed part comprising return on equity (RoE), interest on loan capital, depreciation, operations and maintenance costs (O&M); and a variable part comprising fuel costs. 2. A maximum of 16 per cent RoE was allowed to be included on the tariff (this was protected against fluctuations in the exchange rate) 3. Fixed cost would be recovered at a PLF of 68.5% (equivalent to 6000 hours of operations) in case of thermal plants, and at an availability factor of 90% in case of hydroelectric plants. The normative PLF for thermal plants was revised to 75 percent in February 1997. 4. As an incentive, a maximum of 0.7 per cent additional RoE could be given for every one per cent increase in PLF or availability.

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Clearance & Approvals In order to clear a thermal project, the CEA requires an approval from the state government and electricity board concerned, clearance of water availability, and fuel linkage approval from the petroleum and natural gas ministry or from the coal ministry. Projects also require environment clearance and chimney height clearance from the National Airport Authority of India. Fuel supply and Transportation: Fuel supply has become a contentious issue as the supply of coal, naphtha and natural gas is controlled by public sector units (PSUs). The PSUs are not willing to enter into agreements for assured supply, mainly due to the lack of experience with such contracts, particularly with regard to the evaluation and quantification of the associated risk and premium. Further the Indian Railways, the principal carrier of fuel, is unwilling to assure uninterrupted supply. The IPPs insist that the penalty for supply interruptions should cover the loss of revenue (Fixed cost component of tariff) attributable to the default in fuel supply; some of them suggest that the penalty could be on the basis of the additional cost incurred in procuring fuel from alternate sources. PSUs and Railways however contend that it should be related to the value of the fuel not supplied. In the absence of any satisfactory resolution to this problem, financial closure is getting delayed because the lending institutions, understandably, are reluctant to bank on risky fuel supply agreement (FSA).

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III. Growth of Power Sector Global Perspective Many countries have started reforms in the power sector before India embarked on reforms. Notable among them were UK, USA, and Latin American countries like Chile, Argentina, Peru, Columbia, EU Nations and Australia. Their reforms programs were based on country’s governmental structure, demographics, socio-economic and political environments and resource availability. But it was amply clear that those countries had undertaken restructuring electric utilities were for improving the efficiency, reducing tariff and to provide better quality of service to consumers, through competition and consumers would gain from efficiency gains in generation, transmission and distribution. Restructuring also led to the removal of certain problems like load shedding, blackouts, and high degree of T&D losses which includes theft of energy, etc. The private investment has become essential to pump in additional generation, improvement in transmission and distribution improvements.

International Scenario of Power Sector

1. United Kingdom UK was pioneer in unbundling government owned vertically integrated electric utility and privatizing the same. It also introduced competition in generation through power pool and a spot market. Initially there was resistance from opposition parties but it became popular with electorates. The small investors saw an opportunity to make investments and earn good returns. The British Model became the bench mark of reforms and it provided a platform for other countries to follow the same.

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Privatization of Power Industry The electricity industry was under public ownership from 1948 to 1990. The Central Electricity & Generating Board was in charge of generation and transmission. The Board was engaged in selling the bulk electricity to 12 area distribution boards. This monopoly resulted in excessive capital costs, over dependence on high-cost indigenous coal, low productivity growth, low return on assets and inefficient consumer redressal. The Electricity Act 1989 paved the way for privatization of electricity industry in UK. The industry was segregated in to four functions namely Generation, Supply, Transmission & Distribution. Open access was thus introduced. The basic underlying objective was to foster retail competition by allowing increasing number of consumers to shop around for the best service. The initiatives in this regard were taken as early as 1980s, which were comprised 1. Generation and Transmission was segregated and all the generating stations were made in to separate companies. 2. Two generation companies and regional distribution, which was owned by distributors, were floated on the stock market. 3. A centrally co-ordinated power pool, which acts as a spot market was created. 4. Generators compete to dispatch to the power pool as well as to enter in to bilateral contracts with distributors/retailers and end users. 5. Retail competition was allowed for large users. 6. All generators had the open access to the transmission network to ensure retail competition. All power utilities were unbundled into generation, transmission and distribution segments. Generation companies except nuclear generation companies and distribution companies were privatized; a central pool was created, which enables the companies to dispatch the power to the pool or 53

even to enter bilateral contracts with distribution companies as well as large end users. The principle of competition was introduced at every stage and open access was created for transmission network on payment of wheeling charges which also allowed retail competition. Labour productivity doubled in the first six years. There was a market shift in consumption from coal to natural gas. The prices of coal delivered to power fell by 20 percent in real term and unit costs fell by about 50 percent. Privatization resulted in a cost reduction of about 5 to 7.5 percent of prices or an extra 40 percent return on assets. The price of power fell almost by 20 percent in real terms and unit cost fell by about 50 per cent. Privatization resulted in a cost reduction of about 5 to 7.5 percent of prices or an extra 40 percent return on assets. The price of power fell by about 20 percent.

Chart 2: Load Duration Curve

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The Pool The most innovative reform was the pricing of power sold by the generation to the Regional Electricity Companies (REC), who are the distributors or bulk users. In UK, all generators sold power to a pool operated by the national grid company. The generators would bid to supply power in half hour slots during a day. The dispatch was done on the basis of merit order of these bids, as per the demand. The main reasons for establishing the pool were: 1. The advantage of minimal change from pre-privatization arrangements 2. The advantage of transparency bidding 3. The advantage of substantial market, a new supplier can enter 4. The belief that an efficient market would be characterized by a uniform price for all participants equal to marginal cost. In order to protect themselves against the potential variability of pool prices, generators and suppliers entered in to a series of short-term contracts which allowed both parties to manage the risks caused by uncertainty about pool prices. Initially pool prices fluctuated sharply and a review had shown that it was subject to severe manipulation and it came in for lot of criticism. It included lack of transparency regarding the price determination, lack of proper competition, lack of demand side participation and lack of flexibility to adapt to changing circumstances.

National Electricity Trading Arrangements (NETA) In order to overcome the above problems a New Electricity Trading Arrangement (NETA) was introduced to replace the pool system with forward future market and short term spot market and balancing mechanism. The forward contract market is where customers and distributors can enter into bilateral contracts for electricity directly with generators. The prices will be negotiated and the contracts will be “take or pay” contracts. The future 55

markets are legally binding arrangements between a buyer and a seller to deliver and take delivery on a specified future date a quantity of electricity at a price agreed today on the day of the contract. A short-term spot market where simple offers and bids for electricity, including demand side reductions can be traded. A balancing mechanism will be used by the National Grid Company (NGC) to balance actual supply and demand on the system as well as to solve transmission constraints. This market will open 3 to 5 hrs ahead of the moment of delivery and operate up to the moment of delivery. Through this mechanism, NGC will be able to contract for increases or decreases in generators’ output or decreases in customer demand. The British model demonstrates that unbundling is feasible and generation, transmission and distribution can be separated from one another. It shows that it is very important that competition needs to be introduced in power market by structural reform at the start of the reform process itself. The power sector reform can yield substantial productivity gains. The government and regulator must expect to face unanticipated challenges, during the transition period. The sequencing and the timing of the reforms are critical. The government’s full and sustained commitment is vital to the success of its reform programme, as the government must resist tendencies by some power entities to pre-reform structure. The UK experience has considerable relevance to the developing countries. The main development priorities of the power sector in developing countries are to meet rapidly increasing demand for power and to expand access to electricity. Power reform in developing countries tends to be driven by failure to meet these priorities.

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From UK experience it became clear that it is possible to introduce and foster competition that permits consumers to buy directly from producers with Transmission Company as just for fee, a carrier like road transport business.

2. United States of America (USA) In a federal country like USA the situation varies across states. The electricity industry in the US comprised about 200 vertically integrated privately owned utilities, over 4000 non-utility generators, about 3000 distribution utilities including local city controlled utilities and rural electric cooperatives. The existing legislative framework for regulating electric industries has Federal Energy Regulatory Commission (FERC) at the national level and separate regulatory commission at state level. While most regulatory functions are exercised at the state level, the federal agency is responsible for regulating mainly the wholesale trade across the states. In the US, the Federal Energy Regulatory Commission (FERC) is promoting an agenda for open access to transmission, and a number of states and utilities are considering restructuring the industry to set up power pools, separate generation from other functions and provide better customer service. Thirteen states in the US have already enacted electric industry restructuring legislation, five have issued regulatory orders, and all the rest are considering the issue.

The California Power Crisis 2000-2001 “Its problems are largely manmade.” —Newsweek Magazine, April 3, 2001, p. 23 The California power crisis is so sudden and serious that it is prompting policymakers in many countries as well as other U.S. states to look for lessons that can be applied to the reform of their own power sectors. Concerned policymakers around the world are asking: If things can go so badly wrong 57

with a reform that did not involve wholesale privatization of the electricity supply industry in such a rich and sophisticated economy, what are the implications for much less well-endowed countries embarking on the full menu of reform including privatization? When a power sector reform like California’s fails, political authorities are inevitably under strong pressure to “do something” to solve the crisis. In a special session of the California legislature called by the governor, legislators introduced more than 75 bills intended to solve one or more aspects of the crisis. Unfortunately, quick-fix “solutions” often lead to outcomes that can be inconsistent with the original reform objectives and can produce outcomes that are even worse than the conditions that triggered the reform. In 2001 the California and federal governments had proposed or undertaken actions which include the following: Price caps. The Federal Energy Regulatory Commission (FERC) imposed price caps that may deter the investment needed to overcome the current supply shortage. Forced sales. The U.S. Secretary of Energy issued several orders that required generators and natural gas suppliers to continue selling to noncreditworthy California buyers. Government energy trader. A new state law authorizes the state government to spend up to $10 billion on the state’s credit to purchase wholesale electricity that can be resold to the three large privately owned utilities. “Nationalization” of the grid. The State of California may become the new owner of the portion of the high-voltage transmission grid currently owned by the three large privately owned utilities.

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“Balkanization” of wholesale electricity trade. The state’s Assembly has passed a bill that would make it difficult to export electricity produced from new generating plants located in California to buyers outside the state. Many elements of the California reform package are peculiar to a complicated and unusual market design that was the outcome of a political compromise reached by various stakeholder groups. Many of these features will have no immediate, or even near-term, relevance for most developing countries. In developing countries, the California power crisis may be creating the impression that power reform is too risky. The power crisis in California does not justify this conclusion. For many developing countries, the status quo in the power sector is the riskiest alternative of all. The status quo often creates a drag on economic growth through inadequate and poor-quality power supply. In addition, limited government funds are frequently diverted to the power sector that would otherwise be available for schools, clinics and roads. Therefore, most countries simply have no alternative to a substantial and basic reform of the sector that almost always requires restructuring and privatization. But like all human endeavours, power sector reform can be done well or done poorly. The principal lesson of California is that good intentions are not enough. Any reform must pay close attention to starting points, the particular problems that need to be solved, and the appropriateness of the path selected for solving these problems. The paper is organized into three parts. It begins with an overview of the key features of the 1998 California power sector reform: how it differs from reforms elsewhere, the events and actions that have put it in a crisis mode, and the main lessons that can be learned from the crisis. Following the overview, the main text is divided into two parts. Part I discusses in depth the lessons learned, which concern mainly the establishment and regulation of a mandatory, wholesale power market based 59

on spot pricing. Since this is not a near-term option for many developing countries, the paper also describes other, more-limited forms of competition that may suit their situations. Although privatization was not an element of California’s reform, the state’s experience does indirectly provide important lessons for the privatization and regulation of distribution enterprises and new market entities in developing countries. Part II details the specific reforms initiated in California, reviews the factors that led to the crisis, and examines whether the crisis could have been avoided through better market design and management. The paper draws on numerous sources such as published articles, reports and websites, as well as the working experience of World Bank staff in numerous countries.

The Nature of the Reform

Key Features • The three privately owned utilities were “encouraged” to sell off their generating plants but without any vesting contracts to buy back the output of plants. • In return, the utilities were allowed to recover their “stranded costs” (i.e., anticipated above-market costs) associated with the two high-cost nuclear power plants and the state-mandated purchases of power from certain IPPs through a “competitive transition charge” on consumers’ electricity bills. • The state government mandated a 10- percent reduction in retail rates. Retail rates were frozen for four years or until stranded costs were recovered. Actual consumer bills went down little because the reduction in rates was largely offset\ by the competitive transition charge. 60

• Retail (residential, commercial and industrial) customers were given the right to choose alternative electricity suppliers. • A non-profit, Independent System Operator (Cal ISO) was created to operate the transmission facilities owned by the private utilities (about 75 percent of the state’s high-voltage grid). The Cal ISO also operated a bid-based real-time energy market as well as several other markets to acquire grid support services (i.e., ancillary services). • A separate Power Exchange (Cal PX) was created to operate a bidbased, centralized market for forward (day-ahead and day-of) power sales. The two largest private utilities were required to buy and sell all of their electricity through the Cal PX. • Both the Cal ISO and Cal PX were governed by large boards, each of which was made up of more than 30 stakeholder and non-stakeholder members. • The retail electricity rates of individual privately owned utilities continued to be regulated by the CPUC. Even though the Cal PX and Cal ISO were under the regulatory jurisdiction of FERC (the national electricity regulator), the CPUC and the state government had substantial de facto influence over their actions. The two regulatory entities, the CPUC and FERC, sometimes issued conflicting orders. • The coverage of the reform was incomplete. Municipal utilities were given the option of

not participating in these new arrangements. In

general, they chose not to participate.

61

How the California Reform Differs from Other Power Sector Reforms • Initially, the major private distribution companies were not allowed to buy outside of the spot markets. (No vesting or forward contracting was allowed.) Hence, they were totally exposed to the price volatility of the Cal PX spot markets. • Distribution companies and others who serve retail customers were not required to own or have under contract sufficient generation capacity to meet their peak demands. • No provision was made for pass-through of wholesale purchase power costs to retail rates until full recovery of stranded costs or March 2002 (whichever came first). • The complicated design involved multiple, sequential wholesale markets operated by two new separate entities (the Cal PX and the Cal ISO). In other U.S. regions, the ISO and PX are combined in a single entity.

The Reform Process The reform operated by “political consensus.” The final version of the reform

package

reflected

a

compromise

among

competing

stakeholders. It was incorporated in a bill that was passed unanimously by the California legislature. Criticisms of the final design by outside power sector reform experts were generally ignored by state and national political and regulatory authorities.

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The Crisis • The highly contentious sitting and permitting process for new generating plants blocked the installation of any major new generating plants for more than 10 years. California’s installed generating capacity declined by about 1,200 MW between 1997 and 2000. • Wholesale markets operated by the Cal PX and Cal ISO worked reasonably well for the first two years (1996–98) while the initial surplus of generating capacity disappeared. Less than 2 percent of residential customers exercised their option to pick new electricity suppliers because new suppliers could not offer substantial reductions in consumers’ electricity bills under the rate freeze and competitive transition charge during the reform transition period. • A shift in market fundamentals occurred: large increases in electricity demand in California and neighbouring states, reduced availability of hydropower in California and the Pacific Northwest, and big increases in the prices of gas and pollution permits to emit nitrogen oxides (NOx). • Wholesale spot prices skyrocketed starting in the spring of 2000. California utilities paid around $11 billion more for electricity in the summer of 2000 than in the summer of 1999. Similar wholesale price increases in neighbouring states had less impact because, unlike California, only 5 to 10 percent of their overall supplies are purchased on the spot market. • Mandated rolling blackouts throughout the state since December 2000 seriously disrupted the state economy (the sixth largest in the world). 63

Even more widespread blackouts are expected in the upcoming summer. • Some evidence indicates that the growing shortage of generating capacity, combined with certain features of the complex wholesale market design, may have allowed some generators to exercise market power. • Limited or no pass-through of wholesale costs to retail customers has forced the two largest private companies to incur around $12 billion in unfunded liabilities since April 2000. They are on the verge of bankruptcy. • The Cal PX ceased to operate its two markets on January 31, 2001.

The Lessons

Overall Design of the Power Market • A poorly designed power market will not operate properly, and inadequate attempts or delays in correcting market distortions will spill over into a serious financial crisis. • The California power reform crisis offers many valuable lessons on “what not to do” for reformers of power sectors, particularly for the establishment and regulation of a mandatory, wholesale power market based on spot pricing. • The California experience indirectly provides important lessons for the privatization and regulation of distribution enterprises and new market 64

entities in developing countries, even though privatization was not an element of California’s reform. • The California experience also provides a lesson about crisis management: there is no way out that is quick, painless or cheap. “Quick-fix” solutions to basic design flaws usually fail and may aggravate the problems. Any real solutions will impose heavy costs on stakeholders such as suppliers, consumers, shareholders, and legislators.

3. Latin American Countries Almost two decades after the beginning of the UK experiment in the power sector reforms and privatization, many other countries have either adopted or are adopting a model that promotes competition in the power market to achieve economic efficiency and higher quality services, as well as lower consumer prices for electricity.

A. Brazil Brazil started its power sector reform in the mid nineties implementing changes in the management, organization, ownership and decision-making of its electricity sector. Privatization was one of the initial steps of the process which aimed to attract private investments and create competition within the industry. As these changes have taken place it was observed that public interest activities related to energy efficiency and R&D undertaken in the past by state-owned utilities also changed.

Nature of Electricity Reforms in Brazil The restructuring process started in the country without a prior establishment of a clear regulatory framework and at the same time the tradition of 65

centralised planning ended. Centralised government planning previously required that ELETROBRÁS, the state national holding electrical utility, organised, planned, financed, built, and operated the entire electrical power system. The 2015 Power Sector Plan (ELETROBRÁS 1994) was the last edition of a periodically updated document that served in the past to focus ELETROBRÁS’ resources and those of its subsidiaries. Now, however, the Plan is only indicative of the course that overall system expansion may follow, not a plan for which ELETROBRÁS is directly responsible for the implementation. The new system is based on the premises that it should foster competition where possible (generation and commercialisation of electricity) and regulate where necessary (transmission and distribution – monopolies with open access). The restructuring process started with de-verticalisation and the privatisation of distributing utilities. By 2001 more than 80% of the electricity sold in the country is done by privatised distributing companies. This contrasts with the situation found in the generating side, which is still dominated by state owned companies and only 30% of generating capacity is done by private enterprises. The new system re-defined the role of the public sector which is no longer the main financial agent, planner, but now responsible for the indicative planning for generation and normative for transmission and regulator. Reforms included the creation of the National Energy Policy Council (NEPC) which is designed to be the most important body to determine overall energy policies that can shape the future development of the sector and its commitments towards sustainability. However, although created in 1997, NEPC only had its first meeting in year 2000, and has met only to decide on specific actions since then. It has not set out a national energy policy that should guide long term actions for the sector. NEPC is responsible for macroenergy policies, including division of federal/state responsibilities. The committee includes a wide range of ministries representatives and is chaired by the Minister of Mines and Energy. 66

In late December 1996 the Brazilian Congress passed a law creating the Agência Nacional de Energia Elétrica (ANEEL). Until then all utilities being privatized were regulated only by the terms of the contract at the time of the sale of assets by the public utility. This new agency has been entrusted with regulatory oversight of the restructured Brazilian electric industry. Initially ANEEL relied on the structure of the previous DNAEE, or National Department of Electric Energy, a now-extinct MME department, and started to function only in December 1997. ANEEL is responsible for setting up the regulatory regime necessary to provide the right signals to the market and other measures in accordance with national energy policies that should be promulgated by NEPC. ANEEL regulates the power sector, sets guidelines for tariffs and rate-making, approves tariffs, and has the authority to grant concessions to service providers. Such an authority resembles a licensing or authorization power to grant a private agent the right to use public resources to generate, transmit, or distribute power. ANEEL is also charged with establishing competition among the actors, as well as reliability and cost effectiveness of service, including to rural areas. ANEEL has decentralized its activities, transferring regulation oversight to some State Public Utility Commissions that are better positioned to monitor the performance of distribution utilities. Power sector reforms also included the creation of a National System Operator (ONS) and a wholesale electricity market (MAE). After six years of the first privatised utility Brazil faced a severe electricity shortage and had to implement a rationing plan during June /2001February/2002 (Table 1). This crisis resulted largely due to the absence of national energy planning and energy policy guidelines that should shape clear regulation which are needed for private investors to assess their risks and returns on investments. The end result was the lack of investments in 67

generation and transmission lines that have not come in the expected speed and amount.

Table 14: Electricity Consumption in Brazil Twh (1994 – 2002) SECTOR

1994

1995

1996

1997

1998

1999

2000

2001

2002

Residential

55.957

63.579

68.581

74.089

79.340

81.249

83.494

73.770

72.660

Industrial

116.759

111.632

117.128

121.717

121.979

123.550

131.195

122.629

127.69

Commercial

28.885

32.277

34.388

38.198

41.544

43.562

47.437

44.517

45.256

Other

34.026

35.598

37.234

39.276

41.659

42.739

44.621

42.882

44.924

236.627

243.096

257.331

273.280

284.522

291.110

306.747

283.798

290.529

Total

Source: Electrobas (2003)

Lessons learned It is very unlikely that initiatives in energy efficiency and R&D would have taken place without the regulators’ enforcement in 1998 and later with the implementation of Bill 9.991/00 by the National Congress. Power sector reforms in Brazil provided the opportunity to enhance support and in fact increase significantly the level of funding in these areas. However, provisions in legislation alone are not sufficient condition to ensure that resources are being used efficiently to maximize the public interest of energy-related services. Analysing the country’s experience since 1998, it was observer an important learning process within the regulator and also amongst the utilities. Some utilities are perceiving the strategic importance of pursuing activities in R&D, such as the technical improvement of their own staff, some small companies are appearing as results of some more successful projects and a better relationship between research centres and universities is being developed (ABRADEE, 2003). This is a significant change in the relationship with utilities and research establishments in the country. It also helped to promote interesting spill over effects inducing the creating of new businesses represented by small consulting firms and ESCOs. The experience with the 68

public benefit fund CTEnerg is more recent. However it is illustrative that it has invested much less than the amounts invested under the regulated utilities efficiency and R&D programmes. The federal government has limited annual spending in order to comply with macro-economic targets for public spending and CTEnerg has been affected by these types of interventions. The management of this fund is done by representatives from government, academia and private sector, and this has been a novelty in the administration of public funds in Brazil, and has contributed for a better screening of investment options, during the period 2001-2002. This model, however, needs yet to be consolidated and CTEnerg has to demonstrate a higher degree of consistency and predictability over time. Interesting enough, legislation gives conditions for a more stable operation, but indigenous institutions have not been able to implement these conditions. The provisions to ensure funding support for energy-efficiency and energy R&D had an important impact for the institutional learning both in the public sector and utilities.

B. Argentina Restructuring of electricity industry began in 1992, prior to which the electricity industry in Argentina suffered from lack of investment, resulting in low availability of generation capacity; widening gap between demand & supply; poor tariff policies; dependence on government for financial support; frequent power interruptions; non-paying customers; illegal connections; increase in technical and non-technical losses; overstaffing; a demotivated work force; inefficiency and poor consumer service. The electricity industry conditions were very much similar to the general conditions prevailing in India. By the time of reform the system had deteriorated badly and was characterised by considerable operational and financial problems. The cost of electricity was high (around $60 per MWh), there were large commercial 69

losses due to theft and non-payment and periodic threats of blackouts, aggravated in times of low rainfall by a large dependence on power from hydroelectric stations.

NATURE OF ELECTRICITY REFORM IN ARGENTINA The goal of the reform process was to have an electricity industry that was capable of ensuring sufficient energy to the economy at the best price which reflected the economic costs of maintaining and expanding the activity. It was also driven by the increasing inability of the government to service the public debt and the need to attract private investment into the sector. In January 1992, the electricity privatisation law was passed. The reform was based on the principle of open access to the wholesale capacity, energy pool for generating facility & least cost dispatch. A national regulatory body, ENRE (Ente Nacional Regulador de la Electricidad) and a national wholesale market for electricity (CAMMESA) were established. Transmission and dispatch were mandatorily separated from generation and distribution and no generator was allowed to control more than 10% of the system’s capacity. Three federal companies1, SEGBA, AYEE and HIDRONOR were restructured by separating their generation, transmission and distribution activities Companies to be privatised were sold through auction, using a twoenvelope process. This included a qualifying technical offer and a competitive financial offer. Usually, at least a bare majority (51%) was offered for sale, and sometimes much more. For example, 98% of a 448 MW hydroelectric plant was sold to a domestic aluminium company, retaining 2% for the employees2. In transmission and distribution, long-term concessions were awarded. The first of SEGBA’s generators was sold in April 1992, followed by two more in May and August. Two distribution companies were sold in September, followed shortly by the high-voltage transmission company. The 70

success of the privatisation depended to a great extent on the regulatory and commercial environment as determined by ENRE and CAMMESA. Demand and supply determine energy prices. The supply side of the wholesale market is composed of independent power producers, privatised generators, publicly owned generators, and imported electricity. The demand side of the market is made up of private and public distribution companies, large users (currently more than 100kWh annually) and foreign consumers. There are three main types of prices: contractual, seasonal and spot. Transmission and distribution prices (for supplies through distribution companies) are regulated. Like transmission, firms may enter distribution only by bidding for a concession. They also have regulated prices and a commitment to allow open access to third parties. The price caps are reset every five years; in the interim, the regulated company can avail of the benefits of cost reduction. Large users can however, choose to be supplied directly by the generators or buy directly in the spot market, instead of through the distribution company. The number of large users in the wholesale market has risen rapidly. As distribution companies must supply to large users at the same rate they charge other customers, this helps to keep prices under control. While all federal distribution assets have been privatised, many provincial distribution companies remain in the public sector.

Effect of reforms 1. Low prices & higher reliability- Following the reform process, electricity prices fell sharply. After a period of turbulence, they stabilised at around half the pre privatisation levels (See Figure 4). The extent of outages also reduced considerably (See Figure 5). In EDENOR’s distribution areas, outages fell from over 20 hours to around 5 hours a year. Generators were fitted with 71

power system stabilisers, which permitted minimal disconnection of generating capacity while addressing transmission faults. 2. Increased Efficiency- Electricity loss for non-technical reasons, such as faulty billing and theft came down and generation availability increased considerably. For example, the La Plata distribution company increased its customer base by over 20%. Similarly, the availability of Costanera, a generator near Buenos Aires went up from 30% to 75%. 3. Increased Investment- Substantial investments were also made in upgrading the assets bought from the government. EDENOR, for instance, made capital investments of $380 million over 1992 to 1995, and plans an additional $500 million until the year 2000. It is anticipated that the total investment in the electricity sector by 2000 will be around $ 7 billion.

Conclusion The Argentine experience demonstrates that it is possible to effect measurable changes in a state-owned electricity sector suffering from lack of funds and inefficient management, within a reasonably short time frame. A number of problems that plagued Argentina, such as high distribution losses, low generator availability are similar to what India faces today. The Argentine power system is much smaller, and has a better hydro thermal mix when compared to Indian power system as a whole, but it may prove profitable to examine the Argentine experience to see whether it would help with the design of reform in India.

Indian States’ Experiences The majority of states in India have started the reforms process, mostly in the last few years. Even before official reforms, Karnataka had the first semi-unbundled power sector in the country, with a separate PSU in charge of generation, 72

Karnataka Power Company Limited (KPC), established in 1970. However, there was still some capacity with the SEB, and true unbundling didn’t begin in India until 1995-96, with Orissa’s reforms. Even Orissa had a PSU for generating thermal capacity, but this was not considered an unbundled sector, with some capacity remaining with the Orissa SEB. We present below some details on the restructuring of various states, focusing on Orissa, Andhra Pradesh, Maharashtra and New Delhi. Orissa was not only a forerunner, but its reforms were under the aegis of the World Bank. Andhra Pradesh has also been ahead in reforms, and has received extensive World Bank funding for its reforms. Delhi, the capital, was unique in that its utility had extremely high losses (40+ %), despite virtually no agriculture. This very recently underwent full reforms with privatization of distribution, only the second in India after Orissa. There are indications that Delhi’s reforms incorporate lessons learned from the mistakes of Orissa.

Modes of Reform While Orissa’s reform done with privatization, most of the subsequent states, up until Delhi in 2002, reformed with corporatisation (unbundling) of the SEBs across segments. Even when different distribution companies were set up, these were on a geographic basis, 57 with no competition for retail customers. Given the nature of the industry, institutionally there are no structural barriers to competition in the generation sector. GENCOs already share the market with Central PSUs and IPPs (it is a different matter that the dispatch norms and tariff agreements don’t lead to real competition). India appears to be relying on the single buyer model for now (making the role of TRANSCO special – monopoly seller to DISTCOs, and monopsony buyer from the GENCOs). While there is recognition of the pros and cons of a single-buyer model, the government hopes this is a transitional solution, 73

leading to open access to the wires (Deepak Parekh Expert Committee on State Specific Reforms 2002). Instead of the transmission companies, privatizing the handful of DISCOMs per state appears to be the thrust of the government. However, a large number of options were considered by the government, as indicated in Figure 7.

Financing and Past Debt After the March 2001 Chief Minister’s conference, there was a consensus to find a solution to the outstanding SEB dues (to PSUs), then about 41 thousand crore Rupees (of which interest/surcharge was almost 16 thousand crore). Under the Chairmanship of Montek Singh Ahluwalia, former Finance Secretary, the Expert Group on Settlement of SEB Dues submitted its report in May 2001. The aim was to come up with a one-time settlement scheme to ensure timely payments in future. The report suggests reducing the surcharges by 50%, and securitizing the remaining dues through the issuance of bonds by the Reserve Bank of India (RBI). If the SEBs fails to pay for their fuel/power in the future, this would impact their central assistance and access to coal supplies. The report also recommended incentivizing states to undergo reforms (Ahluwalia 2001), including establishing State Electricity Regulatory Commissions, and metering distribution transformers. It is important to recognize, as indicated in the Report, that the main challenge is the ongoing (future) financial viability of the power sector, and clearing off the debts will not solve that. SEBs complains that their finances consist largely of loans, and conversion to equity would improve their finances significantly. However, it remains unclear how much such a one-time solution would cater to solvency improvement, instead of mere liquidity improvement, that is, unless, their debt be wiped off, and the equity is allowed to operate with no minimum returns requirement? In such a case, the State balance sheets would take a hit. Overall, states find it easier to access funds after undergoing reforms,

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especially corporatization. These entities can access state, central government, and even international (multi-lateral agency) funding. Reforms in Andhra Pradesh Andhra Pradesh has made phenomenal progress in the development of Power sector since Independence. Andhra Pradesh State Electricity Board (APSEB) established in April 1959 was responsible for overall growth of Power generation, transmission and distribution in the entire state like any other SEB. The state had 7,236 MW of installed generating capacity, third highest among all the states in the country only after Maharashtra and Gujarat in that order. It included 5,976 MW of state-owned generation 919 MW IPPs and 1,000 MW from NTPC. It has electrified most of the villages in the state. APSEB’s generation stations had been operating at high levels of PLF and other performance efficiencies and the power stations have been rated among the best performing power stations in the country. In spite of the overall impressive growth, the growth in installed capacity could not keep pace with the demand from various categories of customers and therefore shortages; both energy and peaking have been experienced in the system resulting in power cuts. Energy shortages increased from about 6.7 per cent in 1991-92 to about 22.1 per cent in 1996-97 and peak shortage had reached from almost 15.8 per cent in 1991-92 to 23.6 per cent in 1996-97, from a situation of helping neighbouring states in mid eighties. The investments in transmission and distribution system have also not kept pace with the demand for power. The transmission and distribution system was beset with problems of high T & D losses, poor voltages, interruptions and low reliability due to overload and shortages of power. Consequently, customer service has also deteriorated considerably.

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The overall financial position of APSEB deteriorated and the SEB started incurring losses, which resulted in greater dependence on the state government. The accumulated losses of APSEB as on Mar 31, 1998 were estimated to be Rs. 41 billion (excluding subsidy from the state government). The poor financial viability came in the way of APSEB’s ability to further develop the power sector. Since 1995, it has been governed by the techno-savvy Chief Minister, Chandrababu Naidu, a central figure in the reforms process. The state’s policies have been progressive, and it is considered a success in terms of IT, but its human development indices are generally below the national average. A closer look indicates that much of the success has been in the cities, and the benefits of plans have not trickled down to the villages. Naidu has been successful in pushing reforms, no matter how unpopular, such as reducing food subsidies. However, perhaps with an eye towards upcoming (2004) elections but also driven by his push towards rural empowerment, Naidu announced in August 2002 that the state should be power surplus, and that agricultural power supply would be guaranteed at 9 hours per day, a big improvement over then supply. But this lofty promise made them a political target, and power sector reform promises to be one of the largest election issues in the state. As mentioned before, protests against tariff hikes in 2000 turned violent, but the AP government still vowed to proceed with reforms. When considering the success of AP’s reforms, political will is possibly the most important factor, coupled with the efforts of management at the utilities. The key has been not only efforts at policy, but execution. In looking at the reforms, the first step was likely the 1995 high level committee, chaired by Hiten Bhaya, to suggest reforms to be introduced in the power sector (Reddy 2000). While focusing on unbundling APSEB and 76

operating on commercial lines, as well as tariff rationalization, the World Bank commented that the Hiten Bhaya Report didn’t go far enough with the reforms process. The regulatory commission should focus on all tariffs, and full unbundling, without holding companies, should be the way forward. The World Bank also advocated a minimum 50 ps/kWh for agriculture. While the AP government stated the WB role was only advisory, studying the reform paper showed nearly full correlation with such recommendations (Reddy 2000). Driving ahead with reforms, the government pushed the Andhra Pradesh Electricity Reforms Act of 1998 through with stunning speed. The Telugu Desam Party government introduced the Bill on April 27, 1998, which was passed within one day. Helping ensure its smooth passage, the entire opposition was suspended from the Assembly (Reddy 2000). Because of its reform programs, AP was the beneficiary of the major portion of World Bank funding in India, and it received 6,600 crore of loans towards total reforms, two-thirds of which were for the Andhra Pradesh Power Sector Restructuring Program. These loans were under the Adaptable Program Loan (APL). Such disbursements were despite sanctions imposed on India after its May 1998 nuclear tests. Implementation of Reforms The functions of APSEB were segregated into generation, transmission and distribution companies, each under a separate company. The existing generating stations and those under construction were also transferred to a state owned generation company, called APGENCO, which is also mandated to set up on its own or jointly with private sector new thermal or hydro or other power stations. A single buyer model was put in place under which APGENCO would sell power to APTRANSCO, which in turn would sell to the various distribution companies. Both companies have become effective from 1st. February, 1999. The assets, liabilities and personnel were allocated to these companies with effect from 31st. March 2000. The unbundling of the 77

sector was primarily aimed to increase operational efficiencies and to allow these entities to function independently and put them in decision taking mode. More than 90% of the employees were allotted to the company of their choice. The new power generation projects would be mainly developed by the Independent Power Producers (IPPs) selected through International Competitive Bidding (ICB) and joint venture companies of APGENCO with private parties, other states or central undertakings.

Power Transmission The power transmission network from 132KV and above including O&M of interstate tie lines in the state, have been entrusted to APTRANSCO. It is responsible for purchase of power from all purchasing sources under a competitive and transparent power purchase process and dispatch power on merit order basis, so as to avail the least cost power available in the grid. The pooled power is being supplied to the different distribution companies. It is also responsible for grid operations. The private sector may also be allowed in developing power transmission networks, in future, keeping in view the national policy.

Power Distribution Initially the distribution function was with APTRANCO, and subsequently the state was geographically divided to East, South, Central and South power distribution companies. The borders for the 4 DISTCOs were chosen not on operational rounds, but to ensure that no one company had an extreme mix of consumers

(too

many

agricultural

or

all

the

paying,

i.e.,

industrial/commercial, customers). All the distribution companies are working under separate licences granted by APERC. In order to involve the employees in the reform process, the government of Andhra Pradesh proposed to invite the employees to participate in the equity of new companies. The state 78

government and the new companies signed corporatization Agreements to specify the role, rights and obligations of the state government as owner and give managerial, operational and financial autonomy to the companies to perform. Regulations of the Power Sector The Government of Andhra Pradesh has established the Andhra Pradesh Electricity Regulatory Commission (APERC), which has started functioning from 3rd. April 1999. The objectives of the APERC are to regulate the power sector, promote transparency, efficiency and economy in the operation and management of the power utilities, encourage competition and help Andhra Pradesh to attract private investment for development while ensuring fair tariffs to the customers.

Restructuring and Private Participation The distribution companies buy bulk power through APTRANSCO initially and subsequently, these will be able to purchase directly from the generation companies with the APTRANSCO only wheeling such power. Andhra Pradesh has followed the Orissa model. It is expected that the progress would be rapid as compared to Orissa as the state had demonstrated strong political will to improve the infrastructure and to attract private investment in to various sectors of the economy.

Business Plan While approving the original plan, the state government has agreed to provide financial assistance to the sector during the transition period till the sector achieves a turn around and ceases to be a burden on state government finances. 79

Demand Side Management (DSM) The power sector reforms will also tackle issues such as energy efficiency and demand side management to improve efficiency in supply and end-use of electricity, introduction of tariff linked DSM; time-of-day tariffs for certain categories of customers to flatten load curve and to meet the peak demand, improvement of efficiency of agriculture pumps, installation of capacitors and installation of meters on all unmetered supplies and conservation of energy with incentives and disincentives. Awareness campaigns will be launched to promote energy conservation. All resources of energy will be encouraged and various options to bring in demand-side-management measures will be explored.

Funds Flow in Support of Reforms Since announcement of Government policy to take up the reforms and restructuring of the power sector and also various measures initiated by the state government in pursuit of reforms, both national and international funding agencies have come forward to support the reform programme and Andhra Pradesh has been the biggest beneficiary of funds. The details of some of the projects sanctioned / under consideration are: • The World Bank agreed to lend, up to $1000 million for transmission and distribution improvements and augmentation of system over a decade. This would be given as a series of loans under their Adaptable Program of Loans (APL). The first loan of $210 million is already being used. • Department for International Development (DFID) sanctioned $42.7 million as a grant to revamp the distribution system. DFID is

80

also providing $2.7 million as technical assistance grant to the power sector. • The Overseas Economic Cooperation Fund (OECF) now known as JBIC sanctioned funds to the extent of Rs. 390 crores for Srisailam Power evacuation scheme and Rs. 311 crores towards the Simhadri power evacuation scheme. • PFC is extending support to the tune of Rs. 275 crores out of which Rs. 113 crores towards counterpart funding for the projects funded by World Bank and OECF. PFC also sanctioned a loan of Rs. 240 crores for transmission and distribution schemes. • Rural electrification corporation (REC) sanctioned Rs. 720 crores for the period from 1998-2001 for APTRANSCO for rural electrification works, in addition to rescheduling outstanding loans. • Technical assistance extended through grants by DFID and CIDA for implementation of Reforms and restructuring program.

Regulatory Support to Reforms The APERC is considered independent, and has a retired Civil Servant as its Chairman, a tax official as its member and former APSEB officers. It has a strength of 60 staff members (high for SERCs in India), and has issued some unique pronouncements in terms of power. They have published a “cost to serve” model, whereby the different classes of consumers have different costs explicitly calculated on economic grounds. They have also issued an order to the utilities to meter all consumers within 3 years. The APERC tariff orders have been challenged in the courts, but the Tariff Order for 2000-01 was upheld in the Supreme Court in March 2002. Many more cases were ongoing 81

in the Supreme Court (6 cases) and the High Court (nearly 100 cases) in 2001 (Prayas 2001).

APERC Tariff order 2002-2003: an Analysis This is the third tariff order promulgated by APERC, and follows the model whereby tariffs are determined by the APERC, and utilities must follow the pricing models. An Annual Revenue Requirement (ARR) analysis leads to the costs that each utility would face, and any shortfall from the revenues must be borne by the State. APERC allowed explicit subsidy by the state, which had to be paid to the DISTCOs. APERC announced Bulk Supply Tariffs (BST) that the Transco would charge the DISTCOs (aka Discom). In arriving at its calculations, APERC invited petitions and presentations from various parties, not only the utilities and the State, but also consumers. Notable among the challenges to submitted information were the transmission losses claimed by APTRANSCO, and the amount of consumption by agriculture (submitted by the DISTCOs). As per APERC, “The tariff design was further rationalized to achieve the objectives set forth in the Reform Act of 1998. Attention was on i) rationalization of categories; ii) rationalization of tariffs and iii) incentives for incremental consumption by HT consumers.” The tariff order modified the slabs as well as the tariffs for many consumers, and introduced an optional metered tariff for agriculture. Any takers-up could find lower tariffs than the flat-rate tariff, assuming low to normal consumption. There were also incentives to consumer more electricity for bulk consumers (industry), with rebates given for higher usage.

Efficiency Improvement Initiatives in A.P Several initiatives have been taken to improve operational and financial performance of the companies and notable among them are

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Enactment of “Anti Pilferage Legislation” in July 2000 providing for very stiff penalty including mandatory imprisonment for a minimum period of 3 months and a maximum of 5 years in addition to a penalty varying from Rs. 5,000 to Rs. 50,000. The Act also provides for denying electricity supply for 2 years to the premises where the offense is committed and proved. Special Courts have been set up for speedy trial of these offences. The tempo of inspections is being maintained and all out efforts are being made to curb the menace of theft of energy in the state. Consumer Analysis Tool (CAT) facilitates organizing raids for detection of pilferage of energy. This has also helped in bringing down the T&D losses. The T&D losses have come down from 38 per cent in 1998-99 to 24.8 per cent in 2002-03 which was possible due to introduction of metering at all interface points coupled with enforcement of the Anti Theft Act. Andhra Pradesh has taken up full-fledged energy auditing of 114 towns and the T&D loss levels in these towns have been brought down to less than 10 per cent. The utilities have provided tamper-proof high accuracy meters for high value services and installed 21,000 energy meters on low voltage side of transformers exclusively feeding agricultural consumption in the state. A massive metering plan is being implemented in the state, 2.8 million energy meters are already installed. The programme envisaged fixing of HT & LT electronic meters on industrial services and providing one lakh LT 3 Phase electronic meters on High Value services and three lakhs single phase electronic meters for replacing defective meters. The utilities have also provided exclusive express feeders to high revenue yielding industrial services by bifurcating 702 existing mixed feeders in an effort to improve the reliability of supply to industrial consumers which would result in better revenue. 83

The introduction of electronic spot billing system in all the towns using a handheld computer has facilitated the issue of bills on the spot, which has facilitated the issue of bills on the spot, which has also reduced the number of complaints relating to the wrong meter reading, wrong billing etc. The Transformer Information Monitoring System (TIMS) has helped tracking failures and repair of distribution transformers and helped the inventory management of distribution transformers. The “Supervisory Control and Data Acquisition System” (SCADA) for operation and control of 106 sub-stations in greater Hyderabad has facilitated capturing data on real time basis and unmanned sub-stations.

Information Technology Initiatives Many IT initiatives have been taken up to improve the quality of information, maximize revenue, monitor operational performance and facilitate improved customer service. A WEB based MIS system is in operation for conducting detailed reviews at various levels. Similarly, a total consumer database has been established which is being used not only for consumer service but also for identifying cases of potential commercial losses. An information system plan which is a road map for all IT related initiatives has been prepared for the sector. These efforts have helped in bringing down T&D losses from 38 per cent to 24.8 per cent i.e. a ten per cent reduction within 03 years. The revenues have increased from Rs. 4,484 cr. To Rs. 7,238 cr. (2002-03) in the last 03 years period, especially against revenue demand of Rs. 6,434 cr. The percentage of collection of revenue has increased substantially. Realisation of cost per unit has increased from 57 per cent to 82.5 per cent. Percentage of transformer failures has come down from 28 per cent to 18 per cent. This has been possible due to introduction of technology to reduce human intervention. 84

CRISIL Rated Andhra Pradesh as the Best Utility in Implementing Reforms The power sector in Andhra Pradesh has been making steady progress in achieving its cherished objectives while adopting the reform path. There is, undoubtedly, a significant improvement in technical, financial and commercial operations of the companies. Significant improvements are also seen in metering, billing, revenue collection and reduction of losses especially through the control of theft energy by implementing stringent punitive measures. There has been marked improvement in consumer related services. Several states are evincing keen interest in the progress made by A.P power sector. The CRISIL and ICRA have undertaken the performance analysis of all the SEBs across the country to assess the commitment of the state governments for reforms, performance of SERC’s and utilities. The state governments were evaluated on their commitment on subsidy payments, outlook on tariff reforms and enabling legislation, and operational support extended to the utilities to tone up their functioning and implement the reform agenda. The SERCs were evaluated on their tariff philosophy, efficiency norms, implementation of tariff orders, while ensuring commercial operations and protection of interest of consumers, utilities, investor and lenders. The utilities were assessed on performance of generation and T&D related parameters. The financial performance was measured on cost-revenue analysis, level of receivables and liabilities. Andhra Pradesh stood first among the states in three of the four subparameters viz. payment of subsidy, and commitment for reforms, role of SERC and the performance of successor utilities to SEB. However it occupied third position after Karnataka and Maharashtra in respect of financial risk 85

analysis. It has however pointed out that further focus is needed to further improve operational and commercial efficiency as well as improve customer service. The utilities in A.P have planned several initiatives in operational, commercial and consumer service, to show better results in the near future. While there is no doubt about the existence of considerable scope for further improving the technical, financial and commercial parameter, the A.P experience demonstrated that improvement can be achieved by the utilities given the will and the support by the government and the SERC, even without privatization.

Future Course of Action While the impressive performance of the power sector since initiation of reforms is laudable, the government’s commitment for reforms, in spite of considerable resistance, criticism and even demonstration by some opposition political parties, is commendable. The state is however required to carry forward the reforms further to get the fullest benefits to all the stake holders.

I. Need to Increase Domestic and Agricultural Tariffs The government of Andhra Pradesh, however appears to be averse to increase the tariffs in general and domestic and agricultural tariffs in particular, keeping in view the opposition parties proposals to supply power for agriculture consumption free of cost and the ensuing general elections in 2004. However at the time of last general elections in Andhra Pradesh, the electoral manifesto of a major political party promised complete waiver of electricity arrears for the agriculturists and also supply free power, if elected. The farming community however did not bite this offer as is evident from the election results. This outcome of the result reflects that farmers don’t expect free power but wants quantitatively and qualitatively reliable power without breakdowns, low voltages, etc. at a reasonable tariff, which is possible 86

only by restructuring and reforming the power sector. While the farmer certainly needs relief during the periods of drought as it is during 200304, there should be gradual increase in tariffs to cover sizable portion of cost of supply. It is therefore imperative that there’s a need to build up consensus among the major national political parties on the need to reform the electricity sector especially in respect of agricultural tariffs. The state government should take the lead in building up such consensus in the overall national interest.

II. State Governments Continued Support for Reforms Needed It is often assumed that once the process of reforms and the associated legal framework and various institutions are established, the government has a limited role in the functioning of the electricity sector. Indeed it is not so. The government’s support subsequently also is indispensable to the successful completion of the reform process and the sustainability of the sector in areas such as tariff reforms, subsidy delivery, 100 per cent metering of the consumers and controlling theft of energy.

III. Support for Tariff Reforms With the introduction of regulatory regime, the task of rationalization of existing tariff structure, the issues pertaining to efficiency improvements, quality of supply and facilitating private investment have entrusted to the regulators. The bedrock of the new tariff fixation process is the involvement of the public through a transparent system of public hearing and other forms of public consultation. This is a good forum for sensitizing the general public about the problems being faced by the utility and take stock of the utility’s performance as a public utility, looking to the general interest of the public.

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It appears that the government owned utilities in Andhra Pradesh have not been able to use this forum to present a true picture of the costs and performance levels to improve their commercial viability. The tariff proposals received from the utilities do not seem to reflect the economic costs of the supply. The utilities have been optimistic in forecasting higher percentages of sales to subsidizing categories of industrial and commercial sectors than subsidized categories of agricultural and domestic consumers with a view to preventing fixation of realistic tariffs and making the regulator to enhance the tariffs, though have not been projected by the utilities themselves to ensure their financial viability. It also appears that the licensees in AP have not been generally demanding a 16 per cent rate of return in their revenue requirement. It has been the regulators initiatives to provide for the same, again to ensure long term viability of the utilities. As the government ensures full cost recovery to the licensee by providing subsidy transparently in the budget, the regulators role in the final tariff determination has become limited, which causes hindrance to the regulator to fix cost reflective retail tariffs by allowing the government to exercise control indirectly over the regulators role in determining viable and cost related tariff. There is need to taper off subsidies over a period and the amount spent on subsidies could be diverted to much neglect other sectors including social sectors.

IV. Agriculture Subsidy to Targeted Groups In spite of regular and timely payment, including advance payment of subsidy by the government during 2002-03, the licensees in AP are still incurring huge financial losses due to excess purchase of power, which goes to agriculture at a highly subsidized rate. In the current scheme of 88

operations, the licensees’ supplies to agriculture are dictated by the government rather than any financial or other guiding principle. It is necessary to make realistic estimates about agriculture consumption and encourage growing of less water intensive crops. The other major issue is whether the current form of subsidy administration is the most optimal one. The unrestricted supply to agriculture at nominal fixed costs has resulted in cultivation of highly water intensive crops in a surface irrigation deficit area, leading to indiscriminate installation of tube wells and high capacity pumps in order to grow crops like cotton. Besides the real gainers from such measures are the financially well off farmers. There is a need to ensure that it is the poor, marginal and below poverty line farmers who should get benefits from the subsidy scheme and not the rich farmers. It is therefore necessary for the government to ensure that the agriculture subsidy is extended only to deserving target groups. A fool-proof monitoring mechanism for subsidy mechanism has to be devised and monitored.

V. Support for Efficiency Improvements Andhra Pradesh is one of the few states that have allowed the strict implementation of the Anti Theft Act, which allows the licensees greater powers in detecting and controlling commercial losses effectively. Necessary supports for enforcement of anti-theft measures by the state government are required to be continued even after privatization. However, the unmetered supply of nearly 25 per cent power to the agriculture sector imposes restrictions on the effective use of the Act. The APERC has directed all licensees to complete agricultural by March 2003 and the licensees have fallen well short of such directives. The regulators role is limited to directing the licensees to address this problem through accurate metering of the interface 89

points, regularization of the unauthorized consumers, metering of all services, proper recovery of dues, etc. The commission is forced to go in for alternatives like distribution transformer level metering to estimate the quantum of agricultural consumption in the state which does not give accurate picture about T & D losses.

VI. Timely Payment of Dues by Government Agencies The central and state organizations, municipalities, local bodies, etc. are some of the biggest defaulters in paying their bills. The government should either ensure timely payment or the DISTCOs should be allowed to disconnect as being done for other consumers. The state Governments directive for prompt payment of dues failing which power supply would be disconnected will go a long way. VII. Need for Reduction of Subsidies While the revenue gaps faced by the licensees have been stabilized around Rs. 3,000 crores per year, they being Rs. 3,064 crore for 19992000, Rs. 2,872 crore for 2000-01 and Rs. 2,942 crores for 2001-02 supported by subsidies by the Government, any such support is also affected by other factors like additional support for debt repayment for the licensees, Government of Andhra Pradesh support for capital investment plans, electricity duty, water royalty, interstate power purchase, guarantee commission, interest of repayment of Government of Andhra Pradesh loans etc. The net input from Government for 200102 is reduced to Rs. 2,378 crores which is a positive signal. It is also noticed that the cross subsidy from other consumers to agricultural consumers continue to be over a Rs. 1,000 crores or even more. The Government of Andhra Pradesh still continues to pay substantial amount towards power subsidy, thereby not allowing the tariffs to be fixed on cost related basis which obviously deprives the other socio 90

economic and infrastructure sectors their rightful claims. While the cost of supply is steadily increasing year after year, the government prefers to extend subsidies to the various segments, instead of bridging the gap between cost of supply and average tariff.

VIII. Support for Privatization The current electricity sector reform programme has not yet reached its logical conclusion. The introduction of private entities and competition for market is still to be attempted. Regarding APERC’s efforts towards making the distribution domain investor-friendly, the APERC have recently enunciated the draft for the Long Term Tariff Principles, the first of its kind of document in India. These principles will help the investor in determining his revenue requirements over a period and result in tightening of efficiencies so as to ensure that the customers are benefited over the long run. These will be crucial in the privatization process in AP. The Government of Andhra Pradesh should go in for privatization in joint sector mode at least in one or two distribution companies, which would demonstrate to all the stake holders, especially to the consumers the benefits of privatization. It is necessary to fulfil certain prerequisites by the government before any private investor would be willing to take on the distribution business. All these measures are required to be undertaken expeditiously to take reform to its logical conclusion.

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Reforms in Delhi Delhi, the state that includes the capital, New Delhi, used to have its power supplied by the Delhi Vidyut Board (DVB). DVB, itself the reincarnation of the Delhi Electric Supply Undertaking (DESU), was in the extreme position of having very little generating assets, some 300 MW, relying on outside (largely central) generators for its power (peak loads are over 3,000 MW). Despite being an urban area, and hence, almost no agriculture, the theft and losses were very high, estimated at 45+%. While most other states underwent or are undergoing reforms in stages, Delhi underwent reforms with a bang, though the initial reforms came under the central government ERC Act of 1998, creating the Delhi ERC in 1999. The Delhi Electricity Reform Ordinance was promulgated in October 2000 and was replaced by the Delhi Electricity Reform Act, 2000. It’s worth noting that the Delhi ERC is understaffed, in fact lacking 2 Commissioners (it only has one Member, the Chairman). Subsequent reforms were undertaken in 2002, when it unbundled its utility (into 3 zones) and privatized them at once (June 27, 2002). Learning from the Orissa experience, the main metric for choosing companies was not based on valuation, but on performance improvement goals. The DISTCOs annual revenue requirements are calculated based on their expenditure, performance (targets), and return on equity (16%). They pay the Transco, a government company, a realistic lower amount, based on the collection. Over time (5 years), this amount would match up to the full costs. In the interim, the Transco will receive Rs, 3,250 crore as subsidy to cover its costs to generators vis-à-vis the lower amount of money the DISTCOs would be paying. One other feature is the retail tariffs are known to the DISTCOs in advance, and were fixed by the ERC. The Delhi ERC also announced the total losses in the 3 circles, averaging 50.7%! 92

Details of the process of choosing the companies are given below, based on the Distribution Policy Committee Report (Ministry of Power 2002) and discussions with Government of India and DISTCOs officials. • Valuation of assets: This will be based on “Business Valuation” Based on reasonable assumptions of retail tariffs, efficiency improvements, and expenses in the future, assets are valued such that the company can become viable in a fixed period of time. The liabilities are also considered this way, with some portion going to the successor companies, some left with a holding company or refinanced, and some covered through tariff increases. • Mitigating uncertainty: Based on the annual revenue requirement calculations and bulk supply tariff will be set such that the company can make the required returns, assuming a performance target is met. The difference in such a price and the cost to the TRANSCO will be covered by the Delhi Government. Such support will effectively lower the price for the DISTCOs, making them viable from day one. • Criteria for selection of successful investor: A 5 year period, 2002-07 is the operating period for which bidders give their performance improvement targets. • Incentives for achieving higher efficiency gains: The benefits of doing better than the targets will be equally shared between the consumer and the DISTCOs, and underperformance will be borne entirely by the DISTCOs.

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• Baseline data: The Bulk Supply Tariff Order has been released by the Regulatory Commission in response to the filing by DVB before bidding closed. • Treatment of receivables: Past dues will be transferred to the Holding Company. If these are recovered, 80% will go to the Holding Company, and 20% to the DISTCOs. The stated losses (subsidy requirement) for the 5 year period (covered by support to the TRANSCO) will be Rs. 3, 250 crore. These are reported to be in the form of a loan, under terms to be worked out subsequently. It would be important to consider various exit strategies, in case the TRANSCO is unable to repay the loan. In comparison, just before the reforms, from 2.4 million customers, and 19 billion kWh of sales, an annual revenue of 5,400 crore was required, with a gap of 1,100 crore rupees. The bidding processing revealed the issue of limited players, as initial interest was shown only by 6 parties. Only Tatas and BSES submitted final bids, and only BSES submitted bids for all the 3 zones. Tatas won the North West Delhi Distribution Company, while BSES took the South West and Central East Companies. The main risks they face are that they either fail to meet the loss reduction performance targets, or they fail to collect from consumers. They state the government has been quite supportive, including by passing an anti-theft law, making electricity theft a cognizable offense. It also gives them power to disconnect non-paying users, even government users. While the DISTCOs mention they worry about the accuracy of data, fearing Orissa-like effects, the reverse is true from the consumer and system perspective. Without accurate benchmarking, the DISTCOs might have an incentive to petition the ERC that the initial losses are actually higher than they truly are.

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BSES states that labour is a non-trivial issue, as the workforce was handed down as part of the privatization process. Nonetheless, they say the bigger cost is infrastructure upgrading, to improve operations, metering, and collection. Some of the recent ERC orders they must comply with are the installation of electronic (solid state) meters, and metering on all the distribution transformers. Structure of the Unbundled DVB The primary objective to unbundle the DVB was to create functionally independent generation, transmission or distribution entities to have focused attention on performance. This was also expected to result in a better benchmarking of the performance of each activity and lead to an easier identification of problem areas. The DVB has therefore been unbundled in to

GENCO

Owns the generating stations of DVB

TRANSCO Owns the transmission network of DVB and also acts as a bulk buyer from generating stations and the bulk supplier to the DISCOMS DISCOMS Separate distribution companies, which own the distribution, network and are responsible for retail supply of electricity to the consumers of Delhi. Taking in to consideration the size of the distribution area for a metropolis like Delhi and the load pattern, level of T & D losses, average billing losses and number of unauthorized connections, it was decided to divide DVB in to three DISCOMS. The other states which are in the process of unbundling the SEBs have also divided the SEB into two or more viable distribution companies. 95

The Reform Process Government of NCT of Delhi has ushered in a new era of privatization of distribution on 1st. July, 2002 by unbundling Delhi Vidyut Board. This was a major policy decision arrived after bringing out a white paper on power situation and the problems facing power supply in Delhi in 1999. After extensive consultations, the idea of reform including privatization of power sector in Delhi emerged as credible alternative to improve the dismal functioning of power sector in Delhi. The process of privatization of distribution business of electricity was completed in record period of three years.

Privatization of Distribution In order to facilitate privatization, the government of Delhi issued the policy direction in exercise of the powers conferred under section 12 of Delhi Electricity Reform Act, 2000 on 22.11.2001 further amended on 31/05/02 incorporating that: i.

The Aggregate Technical and Commercial Losses (AT&C losses) shall form the basis for determination of tariff and computation of incentives for better performance. The measure of overall efficiency of distribution business is based on AT&C losses which is the difference between units input and units realized.

ii.

The reduction in AT&C losses in next 5 years will be determined through competitive bidding.

iii.

51 per cent equity shares shall be offered at face value to the winning bidder.

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iv.

The retail tariffs for three distribution licensees shall be identical till the end of 2006-07.

v.

Till the end of 2006-07, tariffs shall be determined in such a way that the distribution licensees earn, at least 16 per cent return on the issued and paid up capital and free reserves.

vi.

The government of Delhi will make available to the TRANSCO, an amount of Rs. 2,600 crores (Subsequently increased to Rs. 3,450 Cr) as loan, to be repaid in 13 years with a moratorium of 3 years. The transmission company will use the loan to bridge the gap between its revenue requirements and the bulk supply price it may receive from the DISCOMS.

Financial Restructuring The financial restructuring was needed to ensure that the balance sheet of DVB’s successor entities carried liabilities which were serviceable and sustainable. • Analysis of Liabilities As the latest audited annual accounts of DVB were not available, which was one of the significant failures of DVB for years, the balance sheet of DVB for the year 1994-95 was considered as the base for determination of the existing liabilities of DVB and most of the information given by the DVB in the absence of audited figures, was obviously highly provisional and the conclusions drawn on the basis of such information were highly subjective and debatable. The increase or decrease in the various liabilities from 1994-95 till the time of privatization was, therefore, estimated based on the data furnished by DVB. 97

• Power and Fuel Purchase Liability DVB has not been able to pay for its power and fuel purchase dues from the Badarpur Power Station (BTPS) and central PSUs and all such dues of DVB, prior to its constitution in February 1997 were left with the Government. These dues could then be converted into long term bonds thereby reducing the upfront cash burden on the government. • Loans from Government The loans provided to DESU prior to the formation of DVB in 1997 and interests thereof were being considered as payable by the government for the purposes of this restructuring exercise. The loans were in perpetuity, in accordance with provisions of the electricity supply Act and only 50 per cent of the principal payment carried an effective interest rate of about 5.75 per cent to 6 per cent. In the financial restructuring exercise, the loans became repayable over a period of time, with a moratorium for a few years. The conversion of a part of the Government loans in to equity was advisable as this provided a reasonable debt equity ratio to the successor entities of DVB. • Funding of Initial Losses of DISCOMS In the initial years, the DISCOMS would in all likelihood suffer losses, inter alia, due to high T & D losses. The DVB was not the only SEB which was incurring losses and all the SEBs in view of their poor physical, financial and commercial operations are expected to incur losses in the initial years after reforms are initiated. Unless these losses 98

are funded by the Government, it will be difficult to attract private sector in the distribution business. The methods which could be used for funding losses are tariff increases, subsidy from the state government, rising of debt funds from the market, deferred payments due to TRANSCO and special debt liability in the opening balance sheet. Even after considering reasonable tariff increases, the DISCOMS are likely to incur losses as large increase in tariffs, immediately after reforms, would create strong public resentment, which needs to be avoided. It was also necessary to recognise, the payment of large amount of subsidy would be a significant burden on the finances of Government, which are none too satisfactory. The debt funds would have only helped the DISCOMs in wiping out cash losses. The deferred payment terms for payments due to TRANSCO has been used by Orissa in privatization of distribution. However, to prevent TRANSCO from defaulting on its own power purchase commitments to the generation companies, the government had to infuse debt funds into TRANSCO equal to the amount on which moratorium was being allowed to the DISCOMS. Although the above structure takes care of the cash losses, the losses in the profit and loss account are not affected by this structure. Under special debt liability in the opening balance sheet of the DISCOMS, debt funds were to be raised from the financial markets backed by Government guarantee to take care of cash losses. The losses in the profit and loss account were taken care of by creating a special debt liability in favour of Government in the opening balance sheet of the DISCOMS; this special debt liability shall be written off in the first three years. This appears to be a preferred option.

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• Unique Bidding Selection One unique criterion in the power sector reforms in Delhi when compared to Orissa was that of selection of the bidders for privatization was done on the basis of reduction of total Aggregate Technical and Commercial (AT&C) losses rather than valuation of the shares in the distribution company on the basis of assets of the distribution. The government had taken a conscious decision in this regard because this happens to be the primary variable for successful implementation of reforms and also sustaining this reform in the long run. Since the core issue was the commercial efficiency, instead of transmission and distribution losses only, the new concept of aggregate technical and commercial was introduced. The former is the energy supplied and the energy actually billed and this is subject to errors because of erroneous and false billing. In Delhi Power Sector Reforms, the concept of AT&C losses namely the difference of energy supplied and energy, for which payment has actually been recovered, was used. This figure will always be higher than the T & D losses but will be more accurate pointer to the malady which the privatization process intended to eradicate. It may be noted that Delhi approach of taking AT&C loss, as the base for the purpose of efficiency monitoring appears to be a step better than the usual practice of taking the T&D losses, as was the case in Orissa. • Bidding for AT&C Losses Reduction Another unique feature in the Power Sector Reforms in Delhi is that the loss reduction targets were established through competitive bidding. The bidders were required to bid on the basis of year wise reduction of AT&C losses over a period of 5 years and whichever 100

bid gave the highest net present value became the highest bidder. In order to encourage and motivate the bidders, it was also laid down that successful bidder can retain 50 per cent of the additional revenue recovered over and above the minimum target fixed by the government and the balance 50 per cent of any excess efficiency gain shall be passed on to the consumers. Since, the government holds the 49 per cent of the equity of the companies, effectively only about 25 per cent of the additional revenue will accrue to the private sector and 75 per cent to the government and consumer. In Delhi, efficiency improvement targets for five years have been set in advance during the bidding process, which also gives legitimacy to the targets and the private companies are fully aware of the improvements required to be carried by them well in advance. The Government of Delhi have given the regulatory policy directions whereby the regulator will set the tariffs for five years based on the efficiency improvements bid. In Orissa, the distribution companies did not know what the regulator would decide next year on efficiency improvements. The Delhi Government has given loan assistance to the TRANSCO to keep the bulk supply tariff at a reasonable level and this was basically done to avoid a tariff shock to the consumers. In Orissa, the entire burden was borne by the consumers. • Determination of Opening Loss Level In order to facilitate the bidders to compete effectively, the DERC after careful analysis of various factors like energy input, distribution and billing loss and collection efficiency determined 50.7 per cent for all DISCOMs as opening levels of AT&C loss, although there was variance among the DISCOMs. The Delhi privatization was structured to avoid the mistakes made in Orissa 101

reforms. It may be noted that Delhi approach of taking AT&C loss as the base for efficiency monitoring, appears to be a better step than the usual practice of taking the T&D losses which have not been scientifically assessed. The investors were made to bid on the loss reduction targets over the reopening losses determined by DERC for first five years and on the efficiency, in sharp contrast to Orissa, where the bidding was done on the value of the assets. During the regulatory proceedings, the Government clarified that prior to the bidding it shall stipulate the minimum loss reductions to be achieved each year for the next five years, so as to make the sector self sustaining within a period of five years. If the distribution company achieves the loss reduction as per their bid, they would be able to earn 16 per cent return on the issued and paid up capital and free reserves till the end of 2006-07 subject to recovery of all expenses as permitted by DERC. The incentive would be awarded only if the loss reduction is higher than the level proposed by the investor.

LESSONS FROM ORISSA EXPERIENCE It is obvious that some lessons are learnt from Orissa experience in privatization. It is clear from Delhi privatization process that there was a better recognition of the need for government support during the transition period in the Delhi privatization which was totally absent in Orissa reforms.

1. Holding Company The Delhi reforms have provided for creation of a Holding Company, which will retain all the liabilities of DVB and also hold 49 per cent share in the unbundled business, to facilitate the generation, transmission and distribution companies to start with a clean balance sheet, which is very essential to make reforms succeed. 102

2. Baseline Data on Losses The Orissa experience had highlighted the problem about lack of realistic baseline data about one of the crucial factors of T&D losses. In order to avoid any ambiguity about such data, Delhi adopted an alternative approach of using AT&C (Aggregate Technical and Commercial) losses, which is the difference between the unit inputs and units realized (billed and collected) in which it has also included the collection efficiency. The AT&C loss has formed the basis for determination of tariffs and also for fixation of incentives for better performance.

3. Balance Sheet Restructuring In Delhi, a business valuation approach was adopted for valuing the assets instead of revaluation of assets as in the case of Orissa to avoid problems created due to over valuation of assets in terms of tariffs, returns etc. The business value was arrived on the basis of future earning potential assuming reasonable tariff increases and efficiency improvements instead of on basis of depreciated replacement value. It was assumed that the electricity business will become self sustaining and will result in minimum tariff shock.

4. Bidding Process There was a major difference in the criteria for bidder selection even though Delhi also went through competitive bidding process. The bidder was selected in Orissa on the basis of highest offer for acquiring 51 per cent of the shares, the criteria for selection in Delhi was based on maximum reduction in AT&C losses over a five year 103

period and excess reduction, over the level mutually agreed, the licensees would retain 50 per cent of the revenue thud recovered, which would be shared between the joint venture partners and the remaining 50 per cent shall be passed on to the consumers.

5. Government Support The Government had withdrawn all subsidy support immediately after privatization in Orissa, resulting in serious impact on DISCOMs and there was also no clear data available about T&D losses in Orissa. In order to overcome these problems, the Government of Delhi issued a policy directive, containing the approach to loss reduction in five years, retail tariff policy including returns on investments, subsidy support etc. The loss reduction to be achieved over a five year timeframe was specified in initial document itself to induce the bidder to consider entry into business and AT&C losses reduction will be transparently decided on the basis of competitive bidding and 51 per cent equity shares shall be offered at face value. The AT&C loss will be the basis for determination of tariffs and for computation of incentives for better performance and the base level of AT&C losses will be decided by the commission. If actual AT&C loss reduction is less than the target for that year, the entire shortfall in revenue because of the same shall be borne by the distribution licensee. The tariffs till the end of 2006-07, subject to that all expenses shall be permitted by the DERC, be determined in such a way that the distribution licensees earn at least 16 per cent return on the issued and paid up capital and free reserves subject to approval of SERC. The retail tariffs for the three distribution licensees shall be identical till the end of 2006-07.

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The Government of NCT of Delhi will provide Rs. 3,450 crore as loan (Initially Rs. 2,600 crores) during the transition period of five years to the TRANSCO. The Government’s decision to provide a loan of Rs. 3,450 crores to TRANSCO for five years, which would help to keep down the tariffs and help the consumers, is an improvement over Orissa experiment. Similarly incentives provided for better performance in respect of AT&C, is also a step in the right direction. The target of reduction in Aggregate Technical and Commercial (AT&C) losses by 17.5 per cent in five years prima facie may appear to be very lenient. However, after taking in to consideration the present magnitude of losses and the failure of DVB to bring down the losses during the last several years and these companies quoting for even lesser target than minimum stipulation the Government of Delhi was left with no other option than to agree for 17.5 per cent reduction.

Single Buyer Model Another area of criticism has been the single buyer model adopted by Delhi, which makes mandatory for all the DISCOMs to buy power through TRANSCO and sell only through TRANSCO. It appears the present arrangement of TRANSCO selling power to these companies is only an interim arrangement and thereafter, the DISCOMs would have the flexibility to buy power from anyone. While in the long run, it is desirable to encourage competition among the buyers and sellers of power, presently this arrangement would help these two companies to concentrate on improvements in power distribution as both the companies will have their hands full in managing the power distribution. The two private companies would have to make special efforts to bring about improvements in customer services, metering, billing, collection of revenue and control on theft.

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The state Government should continue to support the private companies, till the operations are stabilized and by legislating anti-theft laws, which would go a long way in curbing T&D losses. The DISCOMs can anvil financial support under the Accelerated Power Development and Reforms Programme. The government has not yet enacted Anti Theft Act, which it is hoped would be done sooner than later.

Improvements will be slow but steady Keeping in mind the precarious state of the power sector in Delhi, both TATAs and BSES have formulated a multi-pronged strategy to battle tough times ahead by conducting energy audits, audits at the distribution transformer level, cutting down AT&C losses, enhancing reliability, improving collections and fostering employee efficiency. The private companies are having massive programmes to install new meters and replace the old meters in a time bound programme, as they attach considerable importance to these from commercial point of view. Both the companies have stepped up anti-theft drive. To enhance revenue stream, the billing and collection system have been streamlined. As on line computerized billing system has been put in place. To improve system reliability, the distribution system including HT and LT network are being augmented and strengthened repairs, replacements and life extensions of equipment is being done. Maintenance programmes are given prominence. Massive programme for installation/repair of capacitors is undertaken to reduce the reactive power so as to improve the voltage. The DISCOMs have also started outsourcing critical commercial activities like consumer survey route sequencing, meter reading, billing etc. Intensive training programme of employee has been undertaken. The results of all these initiatives have started showing in the increased operational efficiency, in reduction of AT&C losses, improvements in the revenue collections, decline in failure of transformers. While it is too 106

early to comment on the results of privatization, it is hoped that the overall power situation will be better than what it had been during DVB period. It needs to be realised that the problems of the power sector have been accumulated over a period of 50 years. There are no easy solutions and instant cure for Delhi’s growing power problems. The change of mindset, perception and attitudes of the employees, bureaucracy, public, consumers, elected representatives and the Government is an essential pre-requisite to make privatization of power distribution a success. The successes of DISCOMs are critical for the future application of the Delhi distribution model to other states.

FUTURE COURSE OF ACTION

a)

Need for Additional Generation Capacity

One of the major constraints faced in Delhi is its almost total dependence on the generation from central units for its power supply, as its demand is far more than the ramshackle power stations, within the capital, can cope with. DVB has an installed capacity of 694 MW but normal generation is about 350 MW. Delhi’s power generation capacity has not been augmented. The thermal plants are all of obsolete technology. Over-dependence on Northern grid has also its limitations, due to competing demands on the system. The power from all sources put together is always less than the demand at peak hours and the problems get compounded during summer and winter, Delhi is forced to buy power not only from Northern Grid but also from far flung areas. In contrast, the relatively uninterrupted power supply in Mumbai is due to TATA and BSES, who together have an installed capacity of 2,300 MW and which is further supplemented by MSEB. This generation capacity is further strengthened by 400 KV ring main sub-stations with islanding facilities, so that whenever there are system disturbances either in MSEB grid and/or western grid, Mumbai system isolates itself, as happened even on 1st of 107

August 2002 thereby providing bare minimum power supply, at least, to run the essential services like Railways, transport, health and water supply. The DVB was undoubtedly India’s largest urban power utility. The peak demand for power is already in the horizon of 5,500 MW and energy requirement will be over 20 billion units and peak demand is growing almost at 10 per cent a year. The per capita consumption of power is almost three times higher than the all India average. While demand is galloping, hardly any new generation capacity has been added in the recent times. Delhi heading towards a major catastrophe unless adequate dedicated generation capacity of about 1,500 MW to 2,000 MW to Delhi is created, not only by putting up projects in other states like Himachal Pradesh but also purchasing surplus power from eastern region on a long term contract basis. If there are environmental constraints in setting up plants in Delhi, the dedicated power projects could be set up in other states and the power could be wheeled on the existing network. Over-dependence on Northern Grid can lead to serious problems in the long run. Though this is a long term strategy, it is essential to take immediate effective steps through the private sector to augment its generation capacity. There are already some private sector proposals which should be finalised without further delay.

b)

Augmentation of Transmission

There is also a need to establish 400 KV ring mains by establishing a number of sub-stations and EHV transmission network and also to create islanding facilities and to increase power generation substantially, as the system is presently working on the threshold. Even a small snag, snowballs into a major crisis.

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The power crisis in Delhi is further compounded by the excessive dependence on Northern Grid, as the constituent states themselves have not created adequate generation capacity, leading to overdrawl beyond allocation and have not taken adequate steps to maintain required voltage profile and also to maintain grid discipline. This leaves no option to Delhi but to resort to unscheduled load-shedding resulting in public outcry. In times of power shortage in the region, Delhi also gets equally affected. In order to ensure adequate availability and reliable supply to meet the growing demand for power, it should be able to island itself in times of crisis in the Northern Region and maintain un-interrupted supply of power at least to its essential consumers such as Water Supply, Hospitals, and Railways, etc.

Unless

generation and transmission capacity is augmented substantially, Delhi will not realize completely the benefits of reforms in the sector and consumers will continue to face blackouts, brown outs, load-shedding and shortages.

Conclusion The Delhi privatization guarantees a 16 per cent return on equity, subject to the licensees achieving their committed loss reduction target. These targets were determined by a bidding process but, given the poor response, they were finally determined by negotiations. The main implication of Delhi privatization is that given the state of power sector, investors are unwilling to take on any risk above the bare minimum, and the regulator is unwilling to commit to any set of multi-year tariff principles. The government has provided for a loan support of Rs. 3,450 crores since retail tariffs are not expected to be adequate to enable the licensees to pay full cost of power and also the 16 per cent return. However, since the regulator has not committed to commit to the multi-year tariff principles, there is some

uncertainty about

the full extent of the government exposure. In addition, there may be disputes between the government and the licensee about the measurement of the true level of AT&C losses and the licensees’ achievement of committed 109

reductions. In fact the opening level of AT&C losses, as determined by the regulator, is itself based on certain assumptions and projections. Similarly the liabilities of the DVB were not based on up-to-dated audited reports and a conclusion on the basis of such information is highly subjective. It is quite likely that the budgeted amount of Rs. 3,450 crores as transition support may not be adequate and the matter needs to be closely monitored and additional provisions made whenever needed. Another apprehension about the reforms is that given the problems in the sector and the lack of reliable data, the contracts with private companies are likely to be severely incomplete and unenforceable which may result in serious legal problems. Perhaps the transition phase reforms needs to be preceded by a ‘pre transition’ no privatization phase during which the State Electricity

Boards

undertakes

fundamental

risk

mitigating

actions.

Meaningful privatization is possible only in case durable progress is made by undertaking close to 100 per cent metering, billing and collection, proper determination of assets and liabilities of the successor companies is done; disconnections of illegal connections and progressive reduction in subsidies / or cross subsides in tariffs. The Government of Delhi deserves all the credit for improving on the experience from Orissa reforms and showing the way to other reforming states.

The Electricity Act 2003 (Act No. 36 of 2003) The Electricity Act 2003 (except section 121) has come in to force with effect from 10th. June 2003 vide Notification No. SO.669 (E) dated 10th June 2003 issued by Ministry of Power, Govt. of India. The act aims to consolidate the laws relating to generation, transmission, distribution trading and use of electricity and generally for taking measures conducive to development of Electricity industry, promoting competition therein, protecting interest of 110

consumers and supply of electricity to all areas, rationalization of electricity tariff, ensuring transparent policies regarding subsidies, promotion of efficient and environment benign policies, constitution of central electricity authority, regulatory commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto. The Act 2003 has repealed the Indian Electricity Act. 1910, Electricity Supply Act 1948 and the Electricity Regulatory Commission Act 1998, but has saved certain provisions of the Indian Electricity Act and Electricity Supply Act as contained in Section 185 of the Electricity Act 2003. The Electricity Act 2003 provides that the provisions of the enactment specified in the schedule (which include OER Act 1995) which are not inconsistent with the provisions of the Electricity Act. 2003 shall apply to the states in which enactments are applicable.

Key Features of the Electricity Act 2003 1. Central government shall prepare National Electricity Policy and Tariff Policy in consultation with state govt.s and Central Electricity Authority (CEA). CEA shall prepare National Electricity Plan in accordance with the National Electricity Policy. 2. Generation of Electricity has been permitted without obtaining a license provided it complies with the technical standards for connectivity to GRID. Hydro generation shall need the approval of the state govt. concerned and clearance of CEA. 3. Captive generation freely permitted and the scope widened. A captive shall have the right to open access for carrying electricity from captive generating plant to the destination for its use subject to availability of

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transmission facility. Captive power plant has been removed from the ambit of license and other permissions. 4. Establishment of National Load Despatch Centre (NLDC) at the national level for optimum scheduling of despatch of electricity among regional load despatch centres. NLDC shall not engage in the business of trading in Electricity and shall be operated by a Govt. Company or any authority/corporation established under any central Act. 5. Regional Load Despatch Centre (RLDC) shall be operated by a government company or any authority/corporation established under central government act. The Central Transmission Utility (CTU) shall operate the RLDC till such time it is operated by a Govt. Company etc. 6. The State Load Despatch Centre (SLDC) shall ensure integration operation in the power sector in the state and shall be responsible for optimum scheduling of despatch of electricity within the state. The SLDC

shall

be

operated

by

a

Govt.

Company

or

any

authority/corporation established under any state act. Till such time it is operated by a govt. company etc. the State Transmission Utility (STU) will operate the SLDC. 7. Transmission and Distribution of electricity and trading in electricity shall require license from the appropriate commission. 8. Central transmission utility and state transmission utility at their respective levels shall be responsible for planned and coordinated development of transmission network. 9. The central transmission utility shall not engage in generation of electricity or trading in electricity. 112

10. Distribution License shall be free to undertake generation and generating company would be free to take up distribution license. 11. For Rural Areas, stand alone systems for generation and distribution of electricity shall be permitted without any license. 12. Appropriate Commission may grant license to two or more persons for distribution of electricity within the same area. 13. Trading of Power is recognised as a distinctive activity with Regulatory Commissions being authorized to fix ceilings and trading margins, if necessary. 14. Central transmission utility and state transmission utility shall provide the commission may specify non-discriminatory open access to its transmission system on payment of transmission charges and a surcharge as. The surcharge shall be utilised to meet the current level of cross subsidy and shall be progressively reduced and eliminated. 15. The state commission shall introduce open access in phases and subject to such conditions within one year. Such open access will be available on payment of transmission charges and a surcharge and the surcharge will be utilised to meet the current level of cross subsidy. 16. Transmission Licensee and distribution licensee have been permitted to engage in any business for optimum utilization of its assets. 17. Tariff determination principles under the repealed laws/enactments shall continue to apply for a period of one year or till the regulations are framed under the Electricity Act 2003 whichever is earlier.

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18. Generation Tariff shall be subject to determination by the appropriate commission. 19. Setting up of State Electricity Regulatory Commission is a mandatory requirement. 20. Where state government requires grant of any subsidy to any consumer or class of consumers, the amount to be compensated to the person affected by the grant of subsidy. The subsidized tariff shall be applicable on payment of the subsidy by the state government. 21. Metering of all electricity Supply have been made mandatory within two years or within such extended period as may be allowed by the commission to complete metering. 22. An Appellate Tribunal will be constituted to hear the appeals against decision of SERCs & CERC. 23. Provisions relating to theft of Electricity have been made more stringent. States will be required to set up Special courts to deal with theft of electricity and line materials for speedy trial of offences. 24. Distribution Licenses permitted to undertake distribution of Electricity in a specified area through franchisee where franchisee is not required to have a license. The distribution license shall be responsible for distribution of electricity in the said area of supply. 25. Distribution Licensees shall establish a forum for redressal of grievances of the consumers. Any consumer aggrieved by nonredressal of grievances may represent to an authority known as Ombudsman to be appointed by the state commission. 114

26. The act provides re-organisation of State Electricity Board with an objective of corporatising the generation, transmission, distribution and trading functions.

Implementation of Montek Singh Ahluwalia Report In pursuance of one of the resolutions passed in the Chief Ministers’ Conference presided over by the Hon’ble Prime Minister on 03.03.2001, the Government of India constituted an Expert Group under the Chairmanship of Shri Montek Singh Ahluwalia, Member (Energy), and Planning Commission to:

(a) Recommend measures for one time settlement of outstanding dues of SEBs to CPSUs.

(b)Suggest a strategy for capital restructuring of SEBs including the provision of structural adjustment of loans so as to enable them to tide over present financial crisis and make them operationally viable. The Expert Group has submitted its report to the Ministry of Power on Part (a) above in May 2001. As per the report, as on 28.02.2001, the SEBs owed about Rs. 41,473 Crore to various CPSUs and Railways. This amount consisted of Rs. 25,727 crore of principal payment and Rs. 15,746 Crore by way of surcharge / interest on delayed payments. The Group deliberated on whether the settlement should be attempted independently or as a part of the reform process. They however felt that although both are interlinked, it would be prohibitively difficult for the SEBs to reform if they have to carry the huge financial burden of outstanding dues. The Group therefore recommended that this financial liability should be taken over by their States and the CPSUs should also share this burden by waiving off part of their debt. 115

The main features of proposed scheme for one time Settlement are: • 50% of the surcharge/interest on delayed payments should be waived for the participating States. • Remaining 50% of the surcharge/interest and the full principal amount have to be securitised through bonds issued by State Governments. • The bonds should be issued through the RBI at a taxfree interest rate of 8.5% per annum with terms such that entire principal is repaid between 6th and 15th years and with lock-in restrictions allowing release of only 10% bonds each year in secondary market. • Timely payment of current dues and opening of LC equal to105% of average monthly billing for preceding 12 months. • SEBs should accept reform based performance milestones such as setting up of SERCs, issuance and implementation of tariff orders, energy audit at 11 kV feeders, metering of distribution feeders and improvement in revenue realisation. • Scheme to be effective only after half of the States with Annual Billing of over Rs.500 crores from CPSUs give their consent.

Incentives • If SEBs do not default on their current dues and adhere to performance milestones, CPSUs should pay them biannual cash incentives equal to 2% of value of bonds for first 4 years starting 01.04.2001

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• If SEBs open and maintain LCs by Dec 2001, CPSUs should pay them one time cash incentive equal to 2% of value of bonds.

Disincentives • Graded reduction in supply of power/ coal from CPSUs for defaulters on current payments. • Where defaults exceed 90 days from the date of billing, GOI to recover through adjustment against Central Plan Assistance and other devolutions from the Centre. • States withholding consent beyond 60 days of the scheme becoming effective to be denied discretionary allocation as well as any assistance under APDP. The high level Empowered Group consisting of Chief Ministers, Deputy Chairman, Planning Commission, Finance Minister and Power Minister, which has been constituted to monitor and guide the reform process, has approved the recommendations with the following modifications: (a) Waiver of surcharge recommended by the Expert Group shall be increased from 50 to 60%. (b) Incentives for a period of 4 years @ 4% of the face value of the bonds for achievement of performance milestones by the SEBs shall be increased to 6% in the first year and 5% in the second year.

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Single Buyer vs. Multi Buyer Model in Distribution The states such as Orissa (OPTCL), Andhra Pradesh (APTRANSCO), Haryana (HVPNL), Rajasthan and Uttar Pradesh (UPPCL), who have restructured the power industry, have adopted “Single Buyer Model”, wherein the state transmission companies are the monopoly purchases of Power and they sell power to distribution companies. The single buyer model has a number of disadvantages, particularly in situations with low collection efficiency and payment indiscipline. Since generation companies (GENCOs) must sell their power to the TRANSCO, the distribution companies can buy from the TRANSCO alone, and the consumer also likewise has to buy from the same DISCOM. As all the prices are determined on a ‘Cost Plus basis’ either through negotiation or by the regulator, the consumer, etc.

World Bank Models on Structural Reforms in Power Sector Ten distinct models of power structure reform can be found in the literature, but most countries believe that four generic models are adequate to represent the available structural options. These are shown in Figure 3. It should be noted that these models should not be interpreted as rigid presentations of reality but as a basis for conceptual analysis and discussion.

Model 1- This is an integrated monopoly with no competing generating or distribution companies in an area.

Customers buy from Monopoly

Company.

Model 2- Distribution is separated but generation, transmission remain integrated. Distribution has no choice of supplier from whom to buy power.

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This is still a full monopoly model but it may be considered as a step towards decentralization & eventual competition.

Model 3- In the purchasing agency model, competition to generate power exists but all sales must be made to the designated purchasing agency. This Agency then sells it to retailers or to its own customers, who have no choice of supplier.

Model 4- This involves central transmission with open access for retail sales. Competition exists in generation, with customers or retailers having a choice of supplier, possibly buying and selling through the power pool. The above models differ in a number of aspects. The degree of vertical integration depends on the extent to which generation, transmission, and distribution are managed together or separately. The relevant criterion for restructuring decisions is the relative cost making contracts between separate entities versus benefits of greater production efficiency through competition, taking into account that small systems are not amenable to it. The degree of concentration or fragmentation is defined by the number of enterprises conducting the same activity within the same geographic or administrative region. The size of the market would determine the advantages of horizontal un-bundling. Typically, in large or federally organized countries, such as India, China, or Brazil, a large number of local enterprises are operating. In a small country, such as Georgia or Lithuania, excessive fragmentation would add relatively large transaction costs. The countries that the World Bank serves have adopted various models of reform in their power sectors, each of which merits separate discussion and analysis. The general conclusions from the World Bank's experience in sector restructuring are as follows:

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o Generation is the first core power activity that can be separated and made competitive. Decentralizing the sector by introducing additional players such as IPPs is the first step toward making generation a competitive activity. o Successful implementation of structural reform requires both the hardware of technological advances in the power system and the software of workable contractual relationships. o Separate distribution enterprises are encountered in many developing countries and may indicate relatively easy transition to a more unbundled and competitive system.

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Table 15: Comparative statement of sops extended by different countries CHINA • 5-year tax holiday. • Half-rate tax for 5 more years. • Equity return restricted to 12.5%.

INDIA • 5-year tax holiday. • Reduced duty for capital equipment. • Equity return restricted to 16% (equity “sweeteners” keyed to plant load factor. • Purchaser obligations guaranteed for initial “fasttrack” projects.

PAKISTAN

PHILIPPINES

• No corporate tax; reduced dividend tax. • Sales-tax and customduty relief for capital equipment. • Government guarantee for fuel supply. • Ceiling bulk-purchase price specified.

• Sales tax and customs-duty relief for capital equipment. • Government guarantee of purchaser obligations. • Government guarantee for fuel supply.

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Electricity Tariff This chapter traces the changes in the legal provisions governing electricity power tariffs and discusses the processes and methodologies adopted over time for tariff setting till the formulation under Section 178 of the Electricity Act, 2003, which may be called the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004. The legal provisions for the regulation of tariffs of power utilities can be traced back to the Indian Electricity Act 1910 (IE Act). However in keeping with the perceptions of the times there was no attempt at being prescriptive by specifying either the principles or the methodology to be followed for tariff setting enjoining that tariffs must be non-discriminatory and allow a reasonable return to the licensee. The first attempt to closely regulate monopolistic power utilities by defining the basis on which tariffs could be charged was made in the Electricity Supply Act. 1948(E(S) Act). At the time there were two types of entities in the power sector: Licensees under the IE Act and state electricity boards (SEBs) created by the E(S) Act. Schedule VI of the E(S) Act prescribed the methodology to be followed for the determination of the tariffs of power utilities which were Licensees under the IE Act. This is a detailed cost plus methodology where the rate of return is fixed. Electricity Regulatory Commissions Act. 1998 (ERC Act) was the predecessor to the newly formed Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004. The Central Electricity Regulatory Commission hereby makes the following regulations, namely: 123

Short Title & Commencement 1. These regulations may be called the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004. These regulations shall come into force on 1.4.2004, and unless reviewed earlier or extended by the Commission, shall remain in force for a period of 5 years.

Scope & Extent of Application 1. Where tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government, the Commission shall adopt such tariff in accordance with the provisions of the Act. 2. These regulations shall apply in all other cases where tariff is to be determined by the Commission based on capital cost.

Norms of operation to be ceiling norms 1. For removal of doubts, it is clarified that the norms of operation specified under these regulations are the ceiling norms and this shall not preclude the generating company or the transmission licensee, as the case may be, and the beneficiaries from agreeing to improved norms of operation and in case the improved norms are agreed to, such improved norms shall be applicable for determination of tariff.

Tariff determination • Tariff in respect of a generating station under these regulations shall be determined stage-wise, unit-wise or for the whole generating station and tariff for the transmission system shall be determined line-wise, sub-station-wise and system-wise, as the case may be, and aggregated to regional tariff.

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• For the purpose of tariff, the capital cost of the project shall be broken up into stages and by distinct units forming part of the project. Where the stage-wise, unit-wise, line-wise or sub-station-wise break up of the capital cost of the project is not available and in case of on-going projects, the common facilities shall be apportioned on the basis of the installed capacity of the units and lines or sub-stations. In relation to multipurpose hydro electric projects, with irrigation, flood control and power components, the capital cost chargeable to the power component of the project only shall be considered for determination of tariff.

Explanation For the purpose of this chapter, 'project' includes a generating station and

the transmission system.

Application for determination of tariff • The generating company or the transmission licensee, as the case may be, may make an application for fixation of tariff in respect of the completed units of the generating station or the lines or sub-stations of the transmission system. • In case of the existing generating station or the existing transmission system, the generating company or the transmission licensee, as the case may be, shall make an application for determination of tariff as per Appendix I to these regulations. • In case of a generating station or the transmission system declared under commercial operation on or after 1.4.2004, an application for fixation of tariff shall be made in two stages, namely:

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1. A generating company or a transmission licensee may make an application as per Appendix I to these regulations, for determination of provisional tariff in advance of the anticipated date of completion of the project based on the

capital

expenditure actually incurred up to the date of making of the application or a date prior to making of the application, duly audited and certified by the statutory auditors, and the provisional tariff shall be charged from the date of commercial operation of the respective unit of the generating station or the line or sub-station of the transmission system; 2. A generating company or the transmission licensee shall make a fresh application as per Appendix I to these regulations, for determination of final tariff based on actual capital expenditure incurred up to the date of commercial operation of the generating station or the transmission system, duly audited and certified by the statutory auditors.

Core Business For the purpose of these regulations, core business means the regulated activities of generation or transmission of electricity and does not include

any

other

business

or

activity,

like

consultancy,

telecommunication, of the generating company or the transmission licensee.

Tax on Income • Tax on the income streams of the generating company or the transmission licensee, as the case may be, from its core business, shall be computed as an expense and shall be recovered from the beneficiaries.

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• Any under-recoveries or over-recoveries of tax on income shall be adjusted every year on the basis of income-tax assessment under the Income-Tax Act, 1961, as certified by the statutory auditors. 1. Provided that tax on any income stream other than the core business shall not constitute a pass through component in tariff and tax on such other income shall be payable by the generating company or transmission licensee, as the case may be. 2. Provided further that the generating station-wise profit before tax in the case of the generating company and the region-wise profit before tax in case of the transmission licensee as estimated for a year in advance shall constitute the basis for distribution of the corporate tax liability to all the generating stations and regions. 3. Provided further that the benefits of tax-holiday as applicable in accordance with the provisions of the Income-Tax Act, 1961 shall be passed on to the beneficiaries. 4. Provided further that in the absence of any other equitable basis the credit for carry forward losses and unabsorbed depreciation shall be given in the proportion as provided in the second proviso to this regulation. 5. Provided further that income-tax allocated to the thermal generating station shall be charged to the beneficiaries in the same proportion as annual fixed charges, the Income-tax allocated to the hydro generating station shall be charged to the beneficiaries in the same proportion as annual capacity charges

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and in case of interstate transmission, the sharing of income-tax shall be in the same proportion as annual transmission charges.

Tax Escrow Mechanism • The beneficiaries shall maintain an interest bearing tax escrow account in a scheduled bank, to which all amounts of interest shall be credited. • The tax liability shall be estimated two months before the commencement of each Year and intimated to the beneficiaries. The generating company or the transmission licensee shall endeavor to minimize its liability on account of taxes recoverable from the beneficiaries. • The generating company or the transmission licensee shall be authorised to withdraw the amounts for settling the income-tax liability on presentation to the escrow holder, a certificate from their statutory auditors that the amounts are immediately due and payable to the taxing authority. • The generating company or the transmission licensee shall pay into the tax escrow account any refund received from the taxing authority. • The refunds, if any, shall not be paid back to the beneficiaries and shall be adjusted in the escrow account. Any balance due or returnable shall be rolled over to the next year. • The escrow accounts shall be reflected in the books of accounts of the beneficiaries as their bank account. 128

Extra Rupee Liability • Extra rupee liability towards interest payment and loan repayment corresponding to the normative foreign debt or actual foreign debt, as the case may be, in the relevant year shall be permissible provided it directly arises out of Foreign Exchange Rate Variation and is not attributable to the generating company or the transmission licensee or its suppliers or contractors. Every generating company and the transmission licensee shall recover Foreign Exchange Rate Variation on a year to year basis as income or expense in the period in which it arises and Foreign Exchange Rate Variation shall be adjusted on a year to year basis.

Recovery of Income-tax and Foreign Exchange Rate Variation • Recovery of Income-tax and Foreign Exchange Rate Variation shall be done directly by the generating company or the transmission licensee, as the case may be, from the beneficiaries without making any application before the Commission. Provided that in case of any objections by the beneficiaries to the amounts claimed on account of income-tax or Foreign Exchange Rate Variation, the generating company or the transmission licensee, as the case may be, may make an appropriate application before the Commission for its decision.

Deviation from norms Tariff for sale of electricity by a generating company may also be determined in deviation of the norms specified in these regulations subject to the conditions that:

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• The overall per unit tariff of electricity over the entire life of the asset, calculated on the basis of the norms in deviation does not exceed the per unit tariff calculated on the basis of the norms specified in these regulations; and • Any such deviation shall come into effect only after approval by the Commission. In case of the existing generating stations, TPS-I and TPS-II (Stage I & II) of Neyveli Lignite Corporation Ltd, whose tariff was initially determined by following Net Fixed Assets approach based on mutual agreement between Neyveli Lignite Corporation Ltd and the beneficiaries, tariff shall continue to be determined by adopting Net Fixed Assets approach.

Power to Remove Difficulties If any difficulty arises in giving effect to these regulations, the Commission may, of its own motion or otherwise, by an order and after giving a reasonable opportunity to those likely to be affected by such order, make such provisions, not inconsistent with these regulations, as may appear to be necessary for removing the difficulty.

Power to Relax The Commission, for reasons to be recorded in writing, may vary any of the provisions of these regulations on its own motion or on an application made before it by an interested person.

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Determination of Tariff (under Electricity Act. 2003) 62. (i) The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for – (a) Supply of electricity by a generating company to a distribution licensee: Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity; (b) Transmission of electricity; (c) Wheeling of electricity; (d) Retail sale of electricity. Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity. ii. The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be specified in respect of generation, transmission and distribution for determination of tariff. iii. The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of

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any area, the nature of supply and the purpose for which the supply is required. iv. No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified. v. The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover. vi. If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

Determination of Tariff by Bidding Process 63. Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government.

Procedure for Tariff Order 64. (1) An application for determination of tariff under section 62 shall be made by a generating company or licensee in such manner and accompanied by such fee, as may be determined by regulations.

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(2) Every applicant shall publish the application, in such abridged form and manner, as may be specified by the Appropriate Commission. (3) The Appropriate Commission shall, within one hundred and twenty days from receipt of an application under sub-section (1) and after considering all suggestions and objections received from the public,Issue a tariff order accepting the application with such modifications or such conditions as may be specified in that order; Reject the application for reasons to be recorded in writing if such application is not in accordance with the provisions of this Act and the rules and regulations made there under or the provisions of any other law for the time being in force: Provided that an applicant shall be given a reasonable opportunity of being heard before rejecting his application. (4) The Appropriate Commission shall, within seven days of making the order, send a copy of the order to the Appropriate Government, the Authority, and the concerned licensees and to the person concerned. (5) Notwithstanding anything contained in Part X, the tariff for any inter-State supply, transmission or wheeling of electricity, as the case may be, involving the territories of two States may, upon application made to it by the parties intending to undertake such supply, transmission or wheeling, be determined under this section by the State Commission having jurisdiction in respect of the licensee who intends to distribute electricity and make payment therefore:

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(6) A tariff order shall, unless amended or revoked, shall continue to be in force for such period as may be specified in the tariff order.

Provision of Subsidy by State Government 65. If the State Government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commission under section 62, the State Government shall, notwithstanding any direction which may be given under section 108, pay, within in advance in the manner as may be specified, by the State Commission the amount to compensate the person affected by the grant of subsidy in the manner the State Commission may direct, as a condition for the license or any other person concerned to implement the subsidy provided for by the State Government: Provided that no such direction of the State Government shall be operative if the payment is not made in accordance with the provisions contained in this section and the tariff fixed by State Commission shall be applicable from the date of issue of orders by the Commission in this regard.

Development of Market 66. The Appropriate Commission shall endeavor to promote the development of a market (including trading) in power in such manner as may be specified and shall be guided by the National Electricity Policy referred to in section 3 in this regard.

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AVAILABILITY BASED TARIFF (ABT) ABT has been under discussion since 1994 when M/s ECC, an ADB consultant, first supported it. GOI constituted a National Task Force in February 1995. It had ten meetings till end 1998 where all the related issues were discussed. A draft notification was prepared for issue by government. With effect from May 15, 1999 the jurisdiction was vested in the CERC. Papers were sent to the Commission in June 1999 by the MoP. The proceedings were held in the Commission from July 26 to 28, 1999. The ABT order dated January 4, 2000 of the Commission departs significantly from the draft notification as also from the prevailing tariff design. Why ABT? 1. India plans to have an integrated National Grid. This will assist in meeting demand with the least cost supply. Five Regional grids already exist. Some linkages between Regions are also in place. 1. The five Regional grids work at vastly varying operational parameters today. Frequency level is one such operational parameter. The target frequency prescribed by the Indian Electricity Rules is 50 Hz 2. Integrated grid operations require the normalisation of frequency across all five Regions. The alternative is to insulate each Regional Grid by Back to Back HVDC links. This is an expensive option. Normalisation of frequency requires proactive load management by beneficiaries and despatch discipline by generators. 3. There is currently no formal system of financial incentives to promote grid discipline. 4. The ABT provides this mechanism. 2. Chronic surpluses in the East and shortages in the South, have resulted in sustained functioning of these grids at frequencies which are far beyond even 135

the normal band, liberally defined by the IEGC as frequency variation within 49.5 to 50.3 Hz 1. Continued functioning at non-standard frequency results in long-term damages to both generation and end use equipment. This is a “hidden cost” which is borne by the customer in the long term. 2. The ABT will induce corrections in the prevailing frequency to bring it within the permissible band. 3. Frequent fluctuations in frequency caused by short-term variations in the demand supply gap due to the tripping of load or outage of a generator or a transmission line impose substantial costs on generators and consumers. 1. The ABT will address this problem by inducing grid discipline. 4. Economic efficiency dictates that least cost power should be despatched in preference to more costly power (merit order despatch). This becomes difficult without a two part tariff for all stations. States tend to compare the total cost of central generators with the variable cost of their own stations, since for them the fixed costs of state level stations are sunk costs. These results in making central generation appear artificially more expensive than state level stations even though on variable cost basis the former may be cheaper. 1. The two-part tariff of the ABT by making the payment of fixed cost a fixed liability of the states converts it into a sunk cost thereby levelling the playing field between central generators and state level plants. 5. Currently beneficiaries are not liable for payment of the fixed cost associated with the share of capacity allocated to them. If a beneficiary decides not to draw any energy he can escape payment of the fixed charge, which then gets paid by the person drawing energy. This is unfair since it

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increases the cost of energy even for those beneficiaries who may be drawing energy within their entitlements. 1. The two-part tariff of the ABT assures that each beneficiary will be liable for payment of the fixed cost associated with its share of allocated generation capacity. 6. Currently generators have a perverse financial incentive to go on generating even when there may be no demand. This results in high frequency in the grid as is endemic in the East 1. The ABT will discourage such behaviour by pricing generation outside the schedule in relation to the prevailing frequency. What Is ABT? •

It is a performance-based tariff for the supply of electricity by generators owned and controlled by the central government.

•

It is also a new system of scheduling and despatch, which requires both generators and beneficiaries to commit to day-ahead schedules.

•

It is a system of rewards and penalties seeking to enforce day ahead pre-committed schedules, though variations are permitted if notified One and one half hours in advance.

•

The order emphasises prompt payment of dues. Non-payment of prescribed charges will be liable for appropriate action under sections 44 and 45 of the ERC Act.

It has three parts: - A fixed charge (FC) payable every month by each beneficiary to the generator for making capacity available for use. The FC is not the same for each beneficiary. It varies with the share of a beneficiary in a generators capacity. The FC, payable by each beneficiary, will also vary with the level of availability achieved by a generator. 137

- In the case of thermal stations like those of NLC, where the fixed charge has not already been defined separately by GOI notification, it will comprise interest on loan, depreciation, O&M expenses, ROE, Income Tax and Interest on working capital. - In the case of hydro stations it will be the residual cost after deducting the variable cost calculated as being 90% of the lowest variable cost of thermal stations in a region. - An energy charge (defined as per the prevailing operational cost norms) per Kwh of energy supplied as per a pre-committed schedule of supply drawn upon a daily basis. - A charge for Unscheduled Interchange (UI charge) for the supply and consumption of energy in variation from the pre-committed daily schedule. This charge varies inversely with the system frequency prevailing at the time of supply/consumption. Hence it reflects the marginal value of energy at the time of supply. How is ABT different from normal proceedings to determine generation tariff? 1. The ABT proceeding has not attempted to consider most of the cost drivers like ROE, Operational Costs, depreciation rate, composition of the Rate Base, capital structure etc. Proceedings to redefine these norms are being held separately. Hence the ABT proceedings have been concerned more with tariff design rather than definition of tariff norms or determination of tariff levels. 2. Its incidence is a function not only of the behaviour of a generator but also of the behaviour of a beneficiary. Disciplined beneficiaries and generators stand to gain. Undisciplined beneficiaries and generators stand to lose.

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Broad features of ABT design 1. It implements the long held view that electricity tariffs should be twopart comprising a fixed charge and a separate energy charge. 2. It increases the target availability level at which generators will be able to recover their fixed costs and ROE from 62.79% deemed PLF at present to 80% (85% after one year) for all thermal stations, 85% for Hydro in the first year and 77% (82% after one year) for NLC. 3. Misdeclaration of availability entails severe penalties. 4. It rationalises the relationship between availability level and recovery of fixed cost. The draft notification provided for recovery of (annual fixed costs minus ROE) at 30% availability and recovery of ROE on pro-rata basis between 30% and 70% availability. This order provides for payment of capacity charges between 0% and target availability (as indicated in item 2 above) on pro-rata basis. 5. The draft notification had provided for payment of capacity charges for prolonged outages. This order disallows such payments. 6. It delinks the earning of incentive from availability and links it instead to the actual achievement of generation. Hence incentives will be earned by generators only where there is a genuine demand for additional energy generation unlike the prevailing situation, or the proposed draft received from the GOI, under which it is earned purely because the generator is available. 7. Draft notification linked incentives to equity. This order preserves the status quo of one paise per Kwh per each 1% increase in PLF above target availability. 139

8. It increases the minimum performance criterion for the earning of an incentive from 68.5% deemed PLF at present to 80% (85% after one year) for all thermal stations, 85% for Hydro and 77% (82% after one year) for NLC. 9. It introduces severe financial penalties for grid indiscipline along with significant rewards for behaviour, which enforces grid discipline for both generators as well as beneficiaries. 10. The order permits market pricing for the trading of surplus energy by beneficiaries and generators. 11. The order urges the GOI to allocate the unallocated capacity a month in advance so that beneficiaries know their exact share in capacity in advance and can take steps to trade surplus power. 12. It will be implemented in stages from April 1, 2000 starting from the South. The new norm for incentive will however be applicable from this date for all central stations. In the case of NPC, GOI to decide applicability of the order.

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COMPARISON OF EXISTING AVAILABILITY BASED TARIFF Existing System Annual Fixed Charge (AFC) include : a) Interest on loan b)Depreciation c)O&M d)Return on Equity e) Income-Tax f) Interest on Working Capital of Recovered at 62.79% deemed PLF. 50% AFC at 0% PLF and full recovery at 68.49% deemed PLF.

TARIFF

SYSTEM

AND

Sl. Description No. of Item 1. Capacity / Fixed Charge

Draft ABT ABT Order Proposal Capacity charge as Fixed per existing system charges excluding ROE i.e. all other five items of the existing system. ROE treated separately

2.

Basis recovery

FC excluding ROE recovered at 30% availability on pro-rata basis between 0% and 30% availability. ROE recovered on pro-rata availability between 30% and 70%

3.

Incentives

Above 68.49% deemed PLF, incentives at 1 paise/KWh for each 1% increase in

Pro-rata recovery of capacity charge for i) NTPC stations: Between 0 to 80% availability in the first year and 0 to 85% availability in the second year ii) NLC Stations Between 0 to 77% availability in the first year and 0 to 82% availability in the second year iii) NHPC Stations Between 0 to 85% availability in the first year and availability in the second year to be announced by the commission separately. 1 paise/KWh/each Incentive percentage increase in beyond PLF of 80%/ 85% in target availability the first/ second year of 70% is as for NLC and 85% in the first year for follows:

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PLF.

4. 5. 6.

Sharing of Based on fixed cost actual energy drawls Recovery of Based on variable cost actual energy drawls No penalties Deviations for such from schedule – UI deviation charges

7.

Tariff Norms for GOI notification tariff determination

8.

Procedure for Not applicable payment of capacity charge if ABT is introduced in the middle of a financial year Prolonged Included in Outages item (2) above

9.

10.

Marketing of Not applicable surplus energy

70% to 85% - 0.4% of equity for each 1% increase in availability beyond 85%. Based on allocated capacity Based on Scheduled Energy Varying between 0 to 360 paise/Kwh for the frequency range of 50.5 Hz to 49 Hz GOI Tariff notification Not specified

Provided for payment of adjusted capacity charges Not specified

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NHPC.

Based on allocated capacity Based on Scheduled Energy Varying between 0 to 420 paise/Kwh for the frequency range of 50.5 Hz to 49 Hz

GOI Tariff notification till such time Commission finalises its views Specified

Does not provide for payment of capacity charges Encouraged and will not require commission’s approval

Capacity charge covered depreciation and interest on loan. Energy covered ROE, income tax, O&M and interest on working capital.

Capacity charge covered depreciation and interest on loan. Energy covered ROE, income tax, O&M and interest on working capital.

Till such commission notifies peak and offpeak energy rates for hydro-stations, primary energy charge would be taken as 90% of the lowest variable charge of the thermal power station in the concerned region. The balance of total charges would be recovered as capacity charges. per As per As per orders of the of As agreements commission to agreements

11.

Splitting up of capacity and energy charge for hydro stations.

12.

Payment dues generators

13.

Applicability

14.

PLF for Not applicable incentives during interim period

All central All central generating generating stations stations staggered region wise

Not specified

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i) ABT implementation is staggered region wise ii) Fixed charge recovery and basis for incentive payments revised from 1st April, 2000. iii) GOI to decide about ABT for automatic power stations. Till the introduction of ABT in other regions and after 1.4.2000, the actual PLF for incentive purposes for NTPC shall be 80% instead of deemed PLF of 68.49%. The PLF in the first year for incentive purposes for NHPC shall be 85%.

Open Access: Methods for Calculation of Cross-Subsidy Surcharge and Assessment of the Financial Impacts on Utilities

Introduction In order to promote competition in the electric power sector, the Electricity Act 2003 (E. Act) mandates open access to the transmission and distribution network for any supplier of electricity. With open access, upon approval by the Electricity Regulatory Commission (ERC), competing suppliers will be able to provide electricity to certain categories of consumers and thus bring competition into generation and supply of electricity. A major complication in the transition to competition is the loss of cross-subsidy revenues that were being provided by the exiting consumer to fund the subsidized (below cost provision of) supply to the majority of LT consumers. The EAct has attempted to compensate the utilities by allowing State Commissions to impose surcharges on those consumers leaving the licensee and receiving power from competing suppliers. However, the wording of the Act on these issues is not clear regarding the level of the surcharges and the method of their calculation. For this reason, the EAct is subject to multiple interpretations and there have been several suggestions for how these surcharges are to be calculated. Here we describe the recommendations made by various parties regarding the method of calculation and level of the surcharges. Then we discuss our concerns about these recommendations. Next, we assess the likely revenue loss for licensees due to open access and the extent to which the various recommended methods would compensate the utilities for the revenue loss.

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We’ve discussed the conflicting requirements for making open access economically attractive and protecting the financial health of utilities. We conclude with suggestions on other factors that need to be considered to make the transition to competition a little smoother.

Recommendations by Various Parties on Mechanisms to Calculate the Cross- Subsidy Surcharge

Electricity Act 2003 The EAct allows open access before cross-subsidies are eliminated through the payment of a surcharge but requires that the subsidies be progressively reduced in a manner determined by the State Commission. Clarifying the purpose of the surcharge, the Act states that the surcharge is to “meet the requirements of current level of cross subsidy within the area of supply of the distribution licensee.” While the Act is silent on the method to be used to calculate the cross-subsidy surcharge, it clearly states that the State Commission will determine the cross-subsidy surcharge and the manner in which it will be progressively reduced. However, the EAct requires that the State Commissions be guided by the National Electricity Policy, National Electricity Plan, and Tariff Policy which are to be notified by the Ministry of Power (MoP). Thus these policies will also have an influence on the calculation of the cross-subsidy surcharge to be decided by the State Commissions.

First Draft of Tariff policy paper by MoP MoP prepared a Preliminary Discussion Paper on Tariff Policy with the assistance of CRISIL, which mentions that, the “Commission would decide the surcharge such that the loss of cross-subsidy is shared between the consumer and the incumbent distribution licensee.” This statement is an 145

interpretation/ extension of the EAct, because the EAct does not mention any sharing of the cross-subsidy but simply states “…such surcharge shall be utilised to meet the requirements of current level of cross subsidy…”

Draft National Electricity Tariff Policy as recommended by the Task Force The Report of the Task Force on Power Sector Investments and Reforms dated February 2004 included a draft tariff policy in which it recommended that the cross-subsidy surcharge for open access be computed based on the Long Run Incremental Costs (LRIC). In its recommendations, the Task Force said that the cross subsidy surcharge should represent the difference between the actual tariffs and LRIC. The Report went on to say that the appropriate Commission should conduct the necessary studies to determine LRIC or have the studies carried out by the licensees. It suggested that in the interim the costs of the most expensive generating unit (based on both fixed and variable costs) be used as a proxy for LRIC. In October 2004, the Ministry of Power (MoP) recommended to the Planning Commission that it take note of these recommendations of the Task Force while formulating policy on the cross-subsidy surcharge.

Other Recommendations Sankar (2004) discusses two alternatives for determining the surcharge. He looks at the cross-subsidy as either: (1) the HT tariff minus the average cost of supply; or (2) the HT tariff minus the cost to serve the HT consumer class. Using the example of AP, he estimates the cross-subsidy surcharge to be Rs 1.65 per kWh and Rs. 2.05 per kWh based on the two methods respectively. He argues that simply using either of these approaches will result in a high cross subsidy surcharge that would make open access meaningless and stall reforms of the power sector. Mr. Sankar recommends that the National 146

Electricity Policy or the Tariff Policy should define the cross subsidy paid by a consumer class as the difference between the tariff for that consumer class and the average cost of supply. He further recommends that the surcharge be only a fraction, say 50 percent, of the present level of cross-subsidy. He considers it reasonable to fix the surcharge at a fraction of the cross-subsidy because according to him the consumer opting for open access is taking a greater risk than one that stays with the utility. Furthermore, he says that to make open access meaningful, the cost of supply from open access including the surcharge should be less than the grid tariff. As an alternative, Mr. Sankar suggests that the marginal cost of power purchase be used as the cost to serve in calculating the surcharge. A Consultation Paper prepared by NCAER for CERC titled Introducing Competition in Generation of Electricity, recommends that the surcharge be subject to a ceiling determined by the following equation:

Max. Surcharge = Tariff for departing consumer – Marginal cost of supply for the discom “As an alternative formulation” the paper recommends that the surcharge not be greater than 20 percent of the average price of power procured by the DISTCOs in the preceding financial year. In most cases, the alternate formulation would result in a much lower surcharge.

Concerns with Recommended Methods for Calculating the CrossSubsidy Surcharge

Issues with the Use of LRIC* The Task Force Report does not give a reason for recommending that the difference between the actual tariffs and LRIC (Long Run Incremental Cost) 147

be used for calculating the cross-subsidy surcharge. Clearly, the LRIC do not represent the current cost to serve the existing customer, but could be seen as a proxy for the costs that will be avoided by the utility. Cross-subsidy revenues are equal to the difference between the revenue generated by a customer and the cost to serve that customer. Cost to serve is based on an allocation of total costs to different customer categories. In contrast, LRIC are akin to marginal costs. By using LRIC as a proxy for cost to serve, one is allocating the costs of new additions to a single consumer category (HT consumers). But actually while calculating the cost to serve, the cost of new additions is merged with existing costs so that the cost of capacity additions are spread across all categories of consumers. Therefore, by using LRIC as a proxy for cost to serve, one is overstating the cost to serve if LRIC is greater than the average of the existing costs, and one is understating the cost to serve if LRIC is less than the average existing costs. Usually LRIC is higher than the existing costs so the cost to serve would be overstated resulting in a smaller surcharge. Furthermore, if HT load leaves the system much faster than the expected load growth, then capacity additions will not be required for some time but instead the utility may have to pay for existing fixed costs that cannot be avoided. In that case, the avoided costs will be zero, and instead, there will be stranded costs. Thus we see that for cases of rapid departure of HT load, the use of LRIC (based on capacity additions) will significantly overstate the avoided costs and understate the surcharge required*. *- Long Run Incremental Cost *- Another issue with the use of LRIC is that estimating LRIC can be difficult because these are forward looking costs which are based on forecasts. There can be great variations in the forecasts made by different parties and the regulatory agency must decide whose forecast is the most reliable. This is often not easy. 148

Issues with the Use of Marginal Unit Cost (MUC) We have several concerns with the use of MUC to calculate the surcharge. First, MUC do not represent avoidable costs. Generally, the fixed costs of the marginal unit are not avoidable. If the licensee’s load is reduced because of the departure of some customers, at best the licensee will avoid the highest variable cost of either its own plants or the plants from which it purchases power. In those cases where the marginal unit for a utility may be an unplanned purchase from a surplus area or the unallocated portion of a Central Generating Station (CGS), the utility may be able to avoid both the fixed and variable costs of the contract. The second reason why it is inappropriate to use MUC to calculate the surcharge is that this assumes that for any utility, there is a single generating unit that is on the margin at all times, and that is not so. The generating unit on the margin changes with the time of day and season. During peak periods, peaking units with very high variable costs are on the margin while during off-peak periods, baseload units with very low variable costs may be on the margin, etc.. Thus generally the most expensive unit would be the one that operates only at the times of the system peak (and hence would have a low PLF) and applying that cost to all the 8760 hours3 of the year would lead to a gross overstatement of the avoidable costs. The third problem with the use of MUC to calculate the surcharge is that the highest cost unit is not applicable to the entire decrement of load. The use of a single unit (the highest cost unit) to represent avoidable costs for all the load that would go out due to open access is likely to be incorrect. As an example, consider that 1000MW of industrial load is expected to leave the licensee and get electricity from alternative suppliers. If the capacity of the highest cost generating resource is only 200 MW, then clearly it would be incorrect to 149

assume that the costs per kWh of the 200 MW units would be applicable to the entire 1000 MW load block. The avoidable costs for the remaining 800 MW would be lower. Therefore, the size of the decrement of load for calculating the avoidable costs must match the expected decrement in load due to open access. The avoidable cost would then be the weighted average of the costs of the generating units that would no longer be required. These concerns with the use of MUC to calculate the surcharge are best illustrated by calculating the surcharge for different states by strictly following the recommendations for the use of MUC. For AP and Maharashtra, the total costs (fixed plus variable) of the marginal generating unit per kWh are higher than the tariff for HT industrial consumers. Therefore, if the recommendations for the use of MUC are strictly followed, we get a negative cross-subsidy surcharge. The main reason for this anomalous result is that the marginal unit operates for a very short time in the year and it is incorrect to apply its costs to a load decrement that covers most of the hours of the year. Issues with the Use of the Average Cost of Supply If the average cost of supply is used to calculate the surcharge, then the resulting revenues will not completely compensate the licensee for the loss of cross-subsidizing revenues. This can be seen from the following calculation:

Cross-subsidizing revenues provided by HT consumers = HT tariff - Cost to Serve HT consumers If the average cost of supply is used to calculate the surcharge, then

Surcharge using average cost of supply = HT tariff – Average Cost of Supply

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Therefore, the revenue deficit due to the use of average cost of supply is given by the following equation:

Cross-subsidizing revenue deficit = Average cost of supply – Costs to Serve HT Consumers How large would be this deficit due to the use of average cost of supply instead of cost to serve? We consider the case of AP, where the HT tariff is 4.11 Rs/kWh; the average cost of supply is 2.82Rs/kWh, and the cost to serve HT consumers is 2.61 Rs/kWh. Using the equations given above, we see that the revenue deficit would be Rs 0.21 per kWh. The total HT sales for Category I and II consumers for the year are projected to be 7297 MU, so if half the HT load opts for open access, then the revenue deficit will be Rs. 77 crores per year. If, for calculating the surcharge, the average cost of supply is reduced by 50% as suggested, then the loss will be Rs. 312 crores per year. HT Energy Audit: The Crucial Starting Point for Curbing Revenue Loss Introduction For the last two decades, the financial crisis besetting the Indian power sector has been an issue of great concern for the planners and experts. In 1990s, the discussion on this crisis was focused on the large subsidies for agricultural consumers and the rapid growth in agricultural power consumption. It is worth noting that this preoccupation with agricultural tariff and subsidy persisted in spite of efforts on the part of some researchers to point out another crucial causative factor. These researchers had been pointing out that excessive transmission and distribution (T&D) losses, hidden under the garb of agricultural consumption, had been a major cause for the poor financial health of utilities (Roy 1996, Reddy and Sumithra 1997, Dixit and Sant 1997). However, most experts and leaders of the sector continued with their

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preoccupation with the agricultural subsidy without serious investigation into this crucial factor. In the last few years, especially after establishment of the independent state electricity regulatory commissions (SERCs), many state utilities are revising their T&D loss estimates from the earlier lower figures of around 18-20% to anything in the range of 35% to 50%. With this, it is now being widely accepted that reduction in T&D losses to a reasonable level is essential for restoring financial viability of the utilities*. * A calculation for Maharashtra state utility indicates that financial loss due to excessive T&D loss (defined as that above 25%) is about Rs 2,500 crores p.a. And, this is more than the agricultural subsidy that is claimed to be\ Rs. 2,100 crores p.a. However, the belated acceptance of excessive T&D losses has resulted in considerable delay in action to reduce these losses, which is proving extremely costly. Nonetheless, it is a welcome sign that the issue of T&D losses is coming into limelight now and different approaches are being suggested as prescriptions to address the issue. This section highlights the large swings that have been occurring in the estimation of T&D losses in various states as well as the prevailing uncertainty in estimation of even transmission losses and HT-level losses. Based on experiences from the states such as Haryana, Maharashtra and Andhra Pradesh, the third section highlights unwillingness on the part of utilities to carry out effective metering even at the HT level. The fourth section points out that commercial loss even at the HT-level might be significant in terms of revenue lost per customer as well as of the total revenue loss. The fifth section discusses various advantages of focusing on HT-level energy audit for increase in utilities revenue. The sixth section argues that the approaches of “100% Metering” and “Total Energy Audit” 152

(including LT energy audit) though essential, would, at best, yield significant benefits only in the long term. The last section presents the conclusions of this analysis. 1. Swings in the Estimates of T& D Losses The first step in the efforts for reducing excessive T&D losses is to properly estimate T&D losses. The next and probably more important step in these efforts is to identify various links or geographical areas in the network that have excessive losses. It is possible that losses in some of these areas or links could be easier to curb as compared to losses in other links/areas. Identification of such links / areas makes it possible to focus initial efforts for reduction in T & D losses on these areas or links. The next two sub-sections demonstrate that, though SERCs and

Chart 5: T& D Loss determination between four states

Figure highlights changes in the estimated T&D losses in various states. The state utilities have attempted a more realistic estimation of T&D losses during the regulatory process. In states such as Maharashtra and Haryana, the upward revision of loss estimates has been much higher than the RC targeted loss reduction. The bar sequence for Karnataka has been changed as Karnataka utility did two substantial revisions in the loss estimate before the KERC—s first tariff order.

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Utilities are making efforts to identify such links / areas of high losses; there is still significant uncertainty and differences over the real level of total as well as Transmission and HT losses.

2. T&D Loss Estimation Analysis of regulatory orders by SERCs from different states indicate that, even two to three years after establishment of the SERCs and the reforms process, there is still ambiguity over the real level of T&D losses. Figure 1 shows changes in the estimate of T&D losses in the four states. State after state has revised the figures for T&D losses upward in the last few years. This has happened in some typical steps. First, as a prelude to the setting up of the SERCs, the state utilities typically increased the loss estimates from the historical low values to a more realistic level. Subsequently, SERCs ordered reduction in T&D losses, usually by around by 5-7 percentages point. As against this target of lowering T&D losses the utilities have come back to SERCs with further revised estimates of losses, which are typically 5 to 10 percentage points more than their earlier estimates. This resulted in SERCs (as in the case of Maharashtra & Haryana) approving higher loss levels in subsequent orders. The Maharashtra ERC revised approved loss levels from 27% to 36%, whereas the Haryana ERC revised approved loss levels from 25% to 41%*. *Though the MERC order does not explicitly state the approved loss level, it is back calculated based on the loss level projected by MSEB and additional revenue from commercial loss reduction as directed by MERC. For explaining these upward changes in the T&D loss estimates, the utilities cite some typical reasons such as (a) increased (and hence ’better—) sample of agricultural consumers used for estimation of their average hours of consumption and (b) changes in assumed usage level (i.e. load factor) of the 154

un-metered domestic or commercial consumers. Additionally, the utilities have argued that it is impossible to reduce T&D losses to the levels envisaged and desired by the SERCs in a period of four to five years. The state utility in Delhi (viz., Delhi Vidyut Board) has produced evidence of international experience in support of this argument. Some utilities have also argued that, in order to achieve the significant reduction in T&D losses, they will have to police the entire state to curb the rampart power theft. Unfortunately, none of the utilities in the country, whether private or public, has been able to reduce the T&D losses to the level mandated by the SERCs.

3. Estimation of Transmission and HT Losses Measurement or even estimation of T&D loss in the LT (low voltage / tension) system is a difficult task, as the LT network connects millions of small consumers spread across the country and even into remote and inaccessible areas. However, unlike the LT system, the transmission or hightension (HT, i.e., 11 kV and above) network connects only to a few thousand large consumers. Hence, it is much easier to monitor the HT network. Due to the large volume of electricity flows in the HT network, monitoring and protection systems are already in place in the HT network. For example, at least by design, HT sub-stations are provided with proper metering system to measure feeder-wise incoming and outgoing energy flows. As a result, one would expect that making correct measurement (or at least estimation) of losses in the HT system would be easier and less prone to large swings. Unfortunately, most Indian utilities fall short even on this count. Let us review the situation in this regard in the three- considered to be relatively better managed- states of Maharashtra, Karnataka and Andhra Pradesh.

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Maharashtra In its tariff proposal presented before the SERC in March 2000, Maharashtra State Electricity Board (or MSEB) claimed that losses in its Extra HT (EHT) network for the three previous years had been in the range of 3.8 % to 4.2% (MSEB 2000). These estimates were based on the ’load-flow studies— carried out by MSEB. As against this, MSEB, in its tariff proposal submitted in August 2001, claimed that average EHT losses for the preceding six months were 6.7% (starting with 8.4% and coming down to 4.8% in the last month). This implied an upward revision by 2.7 %! (MSEB 2001). This recent estimate seems to be based on the meter readings, but MSEB has not provided estimate of technical losses (i.e., results of load-flow study) for this period. Karnataka Karnataka Power Transmission Corporation Limited (KPTCL), the Karnataka utility, had estimated transmission losses for the three consecutive years (1999 to 2001) as 15.6%, 16.47% and 15.17%. Against this, the Karnataka Electricity Regulatory Commission (KERC) pointed out that the studies conducted by two consultants (viz. PRDC, Bangalore and MECON), indicated transmission losses (up to 33 kV) to be around 10% (KERC 2000). The estimates by the consultants were based on load-flow studies and on meter readings, wherever available. Thus, here again, there is a large difference of over 5 percent points in the estimation of just the transmission losses. Andhra Pradesh The case of Andhra Pradesh (AP) is more revealing. In the first tariff proposal before the Andhra Pradesh Electricity Regulatory Commission (APERC), the state utility had claimed the transmission losses to be 4.6%. But, in the second 156

tariff proposal, the utility claimed transmission (up to 132 kV level) loss level to be 8.7%! The utility explained this upward revision in transmission losses by saying that the earlier estimates had been based on load-flow studies, whereas the revised losses were based on actual meter readings. As per the utility—s claim, metered data in the period of the four months showed actual transmission losses at the level of 9.6%, and after making certain adjustments for ”metering accuracy and meter reading cycle time‘ etc. the utility estimated the annual loss level to be at 8.7%. During the process of the review of the ‘Revenue Requirement’ APERC asked the utility to carry out a load-flow study. Surprisingly, the utility was prompt in carrying out the load-flow study and came out with an estimate of technical transmission losses to be 8.7%! (APERC 2001). It is not a surprise, however, that there are serious lacunae in the calculations in the load-flow study submitted by the utility. To summarize, the above discussion indicates that even after a few years of regulatory process, accurate estimation of ETH or HT losses is proving to be a difficult task. To overcome this shortcoming, several SERCs have initiated detailed technical studies with the help of external consultants to clearly establish the technical losses at transmission / HT level. As discussed later, estimation of technical losses at the HT level (through load-flow studies) coupled with calculation of actual losses on the basis of energy audit would lead to identification of commercial losses.

3. Unwillingness of Utilities for Effective HT Metering Realizing the importance of proper energy audit for accurate estimation of T&D losses and reduction in the same, several SERCs have directed the utilities to undertake ”Total Energy Audit‘ and “100% Metering”. But, the emerging evidence clearly demonstrate that the utilities are unable, rather unwilling, to undertake “Energy Audit‘or”100% Metering’ even at the HT level.

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Maharashtra Maharashtra Electricity Regulatory Commission (or MERC), in its first tariff order dated 5th May 2000, directed MSEB to install the ’Time-of-Day— (or TOD) meters for all industrial HT consumers by September 2000 and for all the remaining HT consumers by December 2000. It also directed MSEB to furnish quarterly reports giving the number of these meters and data obtained from the same. But, even six months after the target date, MSEB was able to provide TOD meters only to half of the approximately 10,000 HT consumers. MSEB—s performance has been equally awful in dealing with the task of energy audit of its express feeders. Since 1994-95, MSEB has been claiming that it is carrying out regular energy audit of selected urban areas as well as of the Express Feeders (GoM, 1996). MSEB reiterated this claim in its tariff proposal submitted in March 2000. It repeated this claim again in the proposal submitted in August 2001. However, this time, MSEB could actually make available the data compiled from energy meters installed on about 220 ‘Express Feeders’ for the period of six months. Out of the total 1320 data points (i.e., 6 months multiplied by 220 feeders), nearly 45% of these data points indicate loss figures that are either less than -0.5% or greater than +5%! (Prayas 2001). This is striking because, usually, the technical losses on such type of feeders should lie in the range of 1% to 2%. This implies that about half of the data points are indicating either ineffective metering, commercial losses, or excessive technical losses. This is a clear indication of MSEB—s failure to carry out effective metering even for these 220 ’Express Feeders—. It is worthwhile to note that the energy supplied through these 220 ‘Express Feeders’ account for nearly 20% of MSEB’s yearly revenue (considering average HT industrial tariff of Rs 4.2/unit).

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Andhra Pradesh The case of AP is more serious. In its tariff order dated 27 May 2000, APERC directed the utility to install high-accuracy (i.e., the 0.2% accuracy class) meters at all interface points (where the ownership of power changes from one utility to other, i.e., from either generation to TRANSCO or from TRANSCO to DISCO) and file a compliance report within one month, i.e., by June 2000. Ten months later, in the subsequent tariff order dated 24th March 2001, APERC mentioned that the utility could implement this directive only for 3% of the total interface points. Moreover, this order also reported that the utility is demanding another full year to implement the directive! There is no other way to term this delay as ridiculous, when one realizes that, in order to comply with this directive, the utility had to install, in all, only 460 meters. Haryana The status of HT-level metering seems even more serious in the case of Haryana. Haryana Electricity Regulatory Commission (HERC), in its tariff order dated 26th November 1999, categorically mentioned that all interface metering (where the ownership of power changes) should be completed latest by 31st March 2000, i.e., within the period of four months. It went to the extent of mentioning that “All metering would be completed by 31 March 2000 for all purposes including transmission and bulk supply tariff application by the licensee. The Commission would not like to be presented again with the plea of nonmetering for any purposes whatsoever after 31 March 2000” (emphasis original). The utility failed to comply with this directive but went ahead and filed another tariff revision application. In its subsequent tariff order in December 2000, HERC said, The Commission reiterates that this work should be given high priority and no slippages beyond the targeted completion date of July 2001 will be allowed“(emphasis original) (p. 56, para 5.1.2.2). One would expect that the utility would have followed this simple directive at least by the 159

extended target date. But the scene repeated after few months. The subsequent tariff order by HERC dated 6th August 2001 (Annex 3) also mentioned that, till the date, the utility had failed to introduce interface meters as directed and has, in fact, requested waiver of this directive! In the case of Haryana, the total number of meters to be installed under this directive was about 300. This failure of utility forced the SERC to estimate transmission losses on the basis of data from other agencies such as regional electricity board and power grid. To summarize, it is serious that utilities are taking SERCs for granted by not implementing even such simple but crucial directives. Moreover, it goes without saying, that the suggested prescription of T&D loss reduction through ‘100% Metering’ approach would be a non-starter if the utilities are unwilling and / or unable to carry out metering and data-gathering tasks even at the small number of locations, despite the full-knowledge of the high-stakes involved in the energy flowing through these points.

4. Indication of Significant Commercial Losses at HT Level The inability, rather unwillingness, of the utilities to install proper metering even at the HT-level raises strong suspicion that all may not be well at the HT level. Further analyses indicate possibilities of substantial commercial losses even at the HT level.

Andhra Pradesh As mentioned earlier, the transmission losses in AP as per the metered data (for a period of four months) were 9.6% (APERC 2001). The utility applied some corrections and arrived at the estimate of the annual losses of 8.7% based on the meter data. The utility justified this loss-level as the technical losses using a load-flow study. This study found the peak power losses to be 9.66%. The utility then used an assumed figure of 90% for the ’Load Factor— and multiplied the peak power losses with the assumed Load Factor to arrive 160

at the estimate of technical losses as 8.7%. This calculation for technical losses is flawed because the ’Load Factor— (i.e., average load divided by peak load) for the utility was about 70% and not 90%. Using correct load factor indicates technical losses of 6.7% i.e. around 2% less than losses indicated by metered data. The APERC has recently engaged the CPRI (Central Power Research Institute) for estimation of technical transmission losses.

Maharashtra In case of MSEB, indication of the possibility of substantial commercial loss at the HT level emerges from the analysis of the energy audit data of the Express Feeders supplied by MSEB, which is mentioned earlier. Out of the 220 Express Feeders, nearly 40% of the feeders show consistently problematic readings. These include either no reading or the reading showing losses outside the range of (- 0.5%) to (+5 %) for four or more months out of the six-month period! (Prayas 2001). Such a large number of consistently problematic readings on a very small number of high-stake feeders also points to the possibility of substantial leakage at the HT level.

Madhya Pradesh The tariff proposal put up by Madhya Pradesh Electricity Board (for FY 2001-02) before the SERC clearly mentions that, as per the study carried out by M/s Descon Consultants, commercial losses attributed to the HT industries is estimated at 5.4% (of energy available for sale at the bus-bar). Unfortunately, no details about the methodology or sampling used in this study were available. Table 1 below is reproduced from the MPEB tariff application.

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Table 16: Estimated Break-up of T& D losses in M.P Energy Input (MU)

27,000

T&D Losses (as the percentage of Generation)

43.2%

Technical Losses

15.3%

Total Commercial Losses

27.9%

HT Industry

5.4%

LT Industry

6.5%

Household

13.0%

LT Commercial

3.0%

Total Commercial Losses

27.9%

Source: Consultants study as quoted in MPEB Tariff Application (2001 – 02)(MPEB – 2001) To summarize, the recent data coming out in the regulatory process demonstrate that it would not be improper to conclude that in most utilities, revenue loss due to commercial losses at the HT level would be significant.

5. HT Energy Audit: Key Staring Requirement The above two sections clearly demonstrate that: (i) the state utilities are unwilling to establish proper metering even at the HT level, and (ii) there is a strong evidence to indicate that all losses at HT-level may not be technical and may include substantial commercial losses. This needs to be viewed in combination with the facts that in most states, (i) HT consumption is in the range of 20% - 30% of total sales, and (ii) HT sales account for nearly 50% 60% of the total revenue. If we take into consideration all these facts it is clear that even a small commercial loss in the HT-section has significant impact on 162

revenue of the utilities. With the HT tariff being twice that of the LT tariff and the number of HT consumers being less than 0.1% of the LT consumers; it is obvious that the first point of attack has to be the HT sector. As such, the first priority in the efforts towards T&D loss reduction should be to establish an effective metering and audit regime at the HT level to curb revenue loss at this level. Efforts of reducing commercial losses at the HT level can take different forms; starting from proper vigilance and inspection by utility staff (and /or outside agency) to instituting a rigorous energy audit to identify losses in various feeders. But, depending simply on administrative measures such as vigilance squads has proved to be ineffective in the current utility setup. More direct measures, which could hold utility and its staff accountable, need to be adopted. Rigorous energy audit is one such measure. Such an audit should aim at establishing the energy balance right from the points of generation / power purchase to points where energy is transformed to LT level. In addition, the audit system should be capable of (i)

detecting malpractices on a routine and consistent basis;

(ii)

being implemented in a time bound manner; and

(iii)

evolving concrete and indisputable performance indicators for the utility staff

The energy balance can be depicted in the equation form as follows: Energy Loss (HT level) =Energy generated (net) (A) + Energy Purchased (B) - Energy Consumed by HT consumers (C) - Energy transformed to LT (i.e. 440 V) (D) In the above equation, A and B are metered points and these data are readily available with all utilities. Part D, i.e., energy transformed to LT side is difficult to measure and may involve sizable investment as well as number of metering points. For example, in the case of Maharashtra, accurate 163

measurement of Part D would imply metering of 180,000 distribution transformers (DT) on LT side. This implies an investment of around Rs 150 crore (about 1.5% of utility revenue) for metering. In addition to HT energy audit, this approach will allow us to zoom onto the DT level losses and, hence, would be far effective in localizing high theft points. But its implementation - in terms of installation of meters, proper maintenance, reading, and data analysis in a routine and consistent manner - could take substantial time. Hence, as an intermediate option, some approximations could be considered. These are discussed below. The first such approximation could be to restrict the audit only up to 33 kV level (i.e., instead of measuring energy transformed to 440 V, energy transformed to 11 kV or 22 kV should be considered). Since energy fed into all the 11 / 22 kV feeders is now measured or expected to be measured soon (as per the MoP’s August 2001 report), calculating such an energy balance up to 33 kV is simple. It only involves maintenance and reading of all meters on the 11 / 22 kV feeders (in the substations). In state such as Maharashtra, this reduces the meter reading points to around 5,500 outgoing feeders and existing meters of HT consumer. But this would cover over 20% of the total energy fed into the system and 25-30% of revenue. The 11/22 kV express feeders, i.e., feeders supplying to only HT consumers, could be readily brought into this audit, expanding the coverage a little more. In the subsequent phase, efforts could be made to include all 11 kV or 22 kV feeders supplying to at least one HT consumer. Tackling these mixed feeders, i.e., feeders supplying to HT consumers as well as having DTs (i.e. 11/22 kV to 440 V) could be somewhat tricky. Depending on the configuration of each such feeder, different options will have to be adopted. Some possible options would include supplying HT consumers through a separate feeder (as was being attempted in some states as part of the system improvement program) or installing check meters for a group of HT consumers. Installing meters on LT side of DTs could be considered, where the number of DTs on the feeder is 164

less. As a last resort, one could install a check meter for each HT consumer on such mixed feeders. Investment required for such additional metering need not be a deterrent for its implementation. For example, Maharashtra has around 10,000 HT consumers, which give revenue of around Rs. 6,000 crores p.a. Assuming additional metering at all of these 10,000 points (check meters for each consumer) at a cost of Rs. 50,000 per metering point, the one time investment would be Rs. 50 crores. This ONE TIME investment would be less than 0.5% of the utility’s yearly revenue (or 1% of HT revenue). Such check meters can help identify the problematic consumers / areas, where difference in check meter and consumer meter readings falls outside the range +/- 1% or either of the meter reading is unavailable. This can also become a concrete performance indicator for the staff. Depending on the state of the HT metering and capabilities of the utility, the manner and the speed of the action-plan may vary. However, there is no barrier to achieving the minimum target of ‘Energy Audit’ up to the 33 kV in a short time of say, one year. This audit should give an energy balance right from the generation (or power purchase) points up to the HT consumers. Difference in such audited loss figures and the estimated technical losses (based on the load-flow study) could be a concrete indicator of commercial losses. Such an approach involving tight and complete energy audit at the HT level is desirable for several reasons discussed below. Relative Ease of Implementation As discussed above, effective energy audit at the HT-level requires installation and reading of only a few thousand meters, unlike the audit of LT system.

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Low Investment and High Returns Since HT tariff is significantly higher than LT tariff, reduction in HT commercial losses would be much more valuable. Such high returns coupled with the relatively low-levels of investment and managerial inputs required to institute HT-level energy audit (compared to the LT energy audit or 100% metering approach), imply quicker and higher benefits. This is essential considering the current precarious financial situation of utilities. A ’back-ofthe-envelope— calculation for MSEB indicates that HT energy audit can pay back the investment (of around Rs. 50 Cr.) in just half a year, if theft of only 238 MU (= 0.5% of bus bar energy or about 2% of the HT consumption) is curbed. “A No-Regrets” Strategy Effective metering at the HT level is also essential for implementing ‘Total Energy Audit’ and theft (identification and) reduction through “100% Metering approach”. This is because at times meters indicating input energy to a division / zone are malfunctioning or readings are misreported, resulting in higher transmission /HT losses and lower losses at division / zone level. To address this issue it is essential to have equal emphasis on correct measurement of transmission and HT losses and reduction in the same. Such HT energy audit is also essential for reforms involving unbundling of utilities or even for implementing concepts such as profit centers in existing SEBs. Further, if utility is unable to effectively carry out even the HT energy audit – which requires much less managerial and administrative efforts (compared to ‘Total Energy Audit’ and ‘100% Metering’ approaches) - then the very expectation of T&D loss reduction to a reasonable level will need serious rethinking.

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6. The “100% Metering” Approach: A Long- term Solution The approaches of “100% Metering” and “Total Energy Audit” are essential for achieving several objectives such as: a. tariff regime based on the principle of “pay as per-use” b. better targeting of subsidy, c. identification of some of the 11/ 22 kV mixed feeders that have excessive technical or commercial loss, and, finally d. establishing accountability up to the level of linesmen of the utility. Hence, it is inescapable to carry out the “Total Energy Audit” as well as ‘100% Metering’. But, it needs to be considered that this requires not only large investments but also immense efforts involved in installation and regular reading of millions of meters (in each state) as well as in billing equally large number of consumers. In the case of millions of “single bulb houses” innovative approaches such as load limiters and efficient bulbs would be far more prudent than blanket metering in the medium term. The second consideration in making effective use of “100% Metering” relates to the billing systems of SEBs. Many utilities are yet to install the system of computerized billing and systematic numbering of each consumer (linking the consumer to a pole / DT or a feeder). Further, well-designed software to capture and analyse these data will have to be put in place and used by a large number of sub division level staff! Another aspect relates to integrity of the audit. Unless the billed energy is traced back to the supplied energy up to the point at which energy is fed into the system, the utility of the whole exercise could be greatly reduced. The 167

whole exercise can be rendered ineffective by tampering (or making dysfunctional or not reading) just a few key meters. These will certainly act as major hurdles in implementing and effective use of “100% Metering” towards the goal of complete LT level energy audit. Before we commit to ‘100% Metering’ as the sole answer, it is worth doing a reality check. Metering and billing performance of utilities is not very encouraging even in the case of categories of customers that already fall in the ‘100% metered’ bracket (e.g., domestic, commercial, and industrial). In Orissa, most of the LT consumption is not metered. In UP, consumption of 44% of metered consumers (that include domestic, commercial, and even small industrial consumers) is “assessed” and not measured. During the first tariff hearing of MSEB, it was revealed that about half of the bills issued to residential and commercial consumers were not based of metered consumption despite these consumers had been metered since the time of connection. Considering these factors, despite large investment and immense efforts, approaches of ‘100% Metering’ and “Total Energy Audit” are unlikely to yield significant results in most states within a time frame of three to five years. Hence, we cannot ignore the HT audit and it has to be treated as the starting point for proper identification of high loss area, for curbing theft and more importantly the revenue loss.

Conclusion The emphasis by SERCs and the Ministry of Power on reduction of excessive T&D losses is a welcome development. Considering that many power utilities are almost bankrupt, it is essential to give higher priority to measures that can lead to increased revenue within a short time with limited investments, and 168

with limited managerial efforts. This understanding coupled with the recent evidence of poor HT-level metering and possibilities of significant commercial losses at the HT level, necessitates that the approach of stringent HT-level energy audit be made the foremost priority. This crucial as well as urgent measure should not be put on the backburner in our zeal to ensure “100% Metering” and “Total Energy Audit” at the LT level. Many SERCs have directed utilities to undertake HT energy audit in successive tariff orders. Considering the importance and relative ease of HTlevel energy audit, the SERCs need to be far stricter in dealing with the failures of utilities in complying with their directives in this regard. This is essential for maintaining the sanctity of the directives by SERCs. For example, the SERCs should direct utilities to institute effective HT-level energy audit within a reasonable period and should reject any tariff proposal after that period, if it is not accompanied by proper results of the HT-level energy audit. Unless the SERCs adopt such unyielding stand on implementation of such crucial, urgent, and relatively ‘easy-to-implement’ measures, the entire regulatory process would soon be rendered ineffective. On the other hand, such unyielding stand on the part of SERCs would also create pressure on the utility’s top brass to make those responsible for HT energy audit more accountable. SERCs should also direct utilities to publish results of such energy audit (along with names of concerned officers) through newspapers as well as on the Internet so as to facilitate public scrutiny of utility’s performance. In order to facilitate HT energy audit and to overcome the financial difficulties associated with procurement of meters, the SERCs may choose to charge a special component in tariff, which should be devoted exclusively to meeting expenses relating to the HT-level energy audit. Consumers should be willing to share this small additional burden (of the order of 1 or 2 paise per unit) to ensure that utility is made accountable. Such an approach would also 169

help in ensuring more stringent public scrutiny of performance of utilities on this account. Simply carrying out stringent HT level energy audit and curbing HT theft would, by no means, be sufficient to make utilities financially viable. Reduction of high technical losses, LT level theft, and other efficiency improvement measures are also essential. But curbing HT theft with iron hand would, on one hand, give the utilities much needed cash and, on the other hand, would give a clear signal to corrupt utility staff and consumers that the party is over. Such a signal is also critical for the success of measures such as “Total Energy Audit” and “100% metering”.

170

Reforms and Restructuring Initiatives in Orissa’s Power Sector In 1994, the government of Orissa initiated power sector reforms and its restructuring. The reform programme resulted in the vertical unbundling of the state owned integrated utility, corporatisation of resultant entities and constitution of an autonomous regulatory commission for power sector regulation in the state. One of the key features of the reform programme was the privatization of distribution activity. To make the process successful and obtain more revenues, there was need for the distribution entities to change the existing culture and approach to management. The state government undertook a process of organizational strengthening to develop appropriate organizational structure, systems and business process suitable to the new environment. Encouraged by the Government of India, assisted by the World Bank, and supported with grants from the Government of U.K (DFID), Orissa took the initiatives and earned the reputation of being the first state to reform its electricity industry. The Orissa Electricity Reform Act, setting out the basic framework of the reform, enacted in 1995 came in to force from 1 April 1996. The principal objectives of the reform, as set out in the preamble to the Act and the policy papers of the Government of Orissa, were the following: a. Restructuring of the electricity industry for rationalization of generation, transmission, distribution and supply of electricity. b. Development of the industry in an efficient, economic and competitive manner. c. To provide for avenues for participation in the industry of private entrepreneurs, attract private investment and reduce the need for government funding of the electricity sector. 171

d. To improve the quality of the service to the consumer. e. To enhance operational efficiency and reduce losses. f. To provide for a transport mechanism for development and regulation of the industry, including tariff fixation and dispute settlement, through an independent statutory body, the Orissa Electricity Regulatory Commission (OERC). g. To contribute to the economic growth of the state by ensuring superior electricity supply, and h. To create opportunities for increasingly rewarding employment for technical personnel and provide a stable environment for career development in the electricity sector. Conceptualization of the reform and road map for its implementation had been drawn up after elaborate exercise in association with the World Bank and with active involvement of a large number of consultants including several foreign consulting firms of high international repute.

FIRST PHASE OF REFORM: All the major steps in the restructuring process have since been taken as envisaged under the reform scheme: • OSEB was restructured and corporatised in to Grid Corporation of Orissa (GRIDCO) and Orissa Hydro Power Corporation (OHPC) in April 1996. • The Orissa Electricity Regulatory Commission (OERC) was established in August 1996. 172

• Orissa Power Generation Corporation (OPGC) was privatized with divestment of 49% stake and transfer of management control to a private operator, AES in January 1999. • Four distribution companies (DISTCOs), incorporated as wholly owned subsidiaries of GRIDCO, were privatized with transfer of 51% stake to private operators: three of these, namely, NESCO, WESCO and SOUTHCO were acquired by BSES in April 1999 and the fourth, viz. CESCO by AES in September 1999. In brief we can summarize that power sector reform comprised of Restructuring OSEB, Privatization, Competition, Regulation and above all reforms in tariff structure. Since the existing legal provisions were not adequate to provide necessary managerial and financial autonomy to the power sector, it was necessary to draft the Orissa Electricity Reform Bill, 1995 with provision to establish an independent and transparent regulatory commission and thereby attract private investment in to the state power sector. The assets and personnel were also transferred to the newly created entities such as the GRIDCO and OHPC with effect from the first of April 1996 on provisional basis. The transfer became absolute with effect from 1st April 1997. GRIDCO disinvested 51% of its equity holding to private investors with strong financial standing and technical capabilities. 10% of the equity has been reserved for the employees of GRIDCO- which would entitle them to direct monetary and welfare benefits. GRIDCO retains 39% of the holdings in the DISTCOs.

173

Chart 6: Relationship between different party

Background of OSEB Established in 1961, OSEB was the main body responsible for power sector development in the state. OSEB was vested with the responsibility of public power supply in the entire state as well as for related state level regulation. OSEB obtained the required power for distribution either from its own generating stations or by purchasing from other generating utilities. By using its transmission and distribution network, it applied power to the end consumers. OSEB was owned by the Government of Orissa and was governed by the provisions of The Electricity (Supply) Act. 1948. The 1948 Act explicitly required the SEBs to operate and adjust their tariffs to achieve a minimum return after interest of 3 percent on net fixed assets in operation. According to the provisions of Electricity (Supply) Act, 1948, state governments were required to provide subsidies to help the SEBs meet their minimum return requirements by compensating for the low tariffs charged for residential and agricultural consumers. 174

Performance of OSEB The performance of OSEB in terms of Plant Load Factor (PLF) and Transmission & Distribution losses had been quite poor vis a vis other SEBs during the period 1991-94. During this period, Orissa also had a considerable power deficit which was estimated to be in excess of 10 percent, higher than the all-India average of 8 percent. The Transmission and Distribution losses though stated to be around 24 percent by OSEB were reported to be much higher. A clear indication of large transmission and distribution losses was made in the Annual Administration Report of the GRIDCO which listed such losses as high as 49.47%. In 1993-94, the ratio of customers served to the employees of OSEB was 29, whereas the all India average was around 80 (Comparison of performance of Electricity Boards and Electricity payments, Planning Commission, Government of India, 1994). The billing and collection of OSEB had been poor because a large portion of the billing was not done on the basis metre reading but on average consumption or on load factors, which resulted in lower collection revenues. Figures available for 1996-97 indicated that only 12.19% of the total bills were based on metre reading. Lack of appropriate controls and poor accounting of sales revenues had affected the revenue collection. Figures available for 1998 indicated that in some of the revenue divisions, the percentage of billings collected was as low as 17%. Unmetered supply to a large number of consumers and theft of power resulted in non-technical losses being as high as 20-25 per cent. (There are two types of power losses during transmission and distribution: technical and nontechnical losses. Technical loss is the energy lost in the wires and equipment in a distribution system for technical reasons like resistance. Non-technical loss or commercial loss occurs due to theft, non-metering or defective / tampered metering of consumers, and inefficient billing and revenue collection systems)

175

In spite of an annual average growth of about 19% in sales revenue, OSEB had not been able to earn the statutory rate of return of 3 percent on net fixed assets without subsidy from the Government of Orissa because of its very low level of tariffs. In spite of the sales revenue not being able to meet the operating costs, there was no tariff increase from 1990 to 1992.

Table 17: Achievement of OSEB during 35 years Sl. No . 1. 2.

3. 4. 5. 6. 7. 8. 9. 10.

11. 12. 13.

Area of Achievement

196162

1974-75

198485

1994-95 1995-96

Installed Capacity(MW) Transmission & Distribution Lines(KM) Total Energy Input(MU) Energy Sold (MU) % Loss of Energy Sold Energy Billed(MU) % Loss to Energy Billed Revenue Earned (Cr.) Consumers Served (no.s) Villages Electrified(No.s ) Assets in Use(Cr.) Employees (No.s) Per capita Consumption (Kwh/Yr.)

9.897

547.675

1134

1731.93

1731.93

2498.88

2839.6 7

33945.2 1

83414

116715

118286

120625

641.43

2335.07

4348

7851

9244.93

11130

556.44

1995.12

3566

6471.14

4560.36

6286.49

13.2

14.5

17.9

17.6

50.4

43.52

-

-

-

4536.33

4560.36

6286.49

-

-

-

42.22

50.4

43.52

2.23

23.31

116.09

725.11

912.14

1547

31013

234977

118

11525

71670 6 23762

123035 4 33131

127384 4 32088

160055 1 35190

4.91

133

498.3

1073.14

1022.85

-

4737

18224

33000

34450

34732

28309

31.8

73.3

137

248

292.5

352

176

19992000

Orissa Achievement in Distribution Sector Second Phase of Reform Privatization of Distribution Functions: In pursuant to the Orissa Electricity Reform (Transfer of Assets, liabilities, proceedings & personnel of GRIDCO to distribution companies) Rules, 1998, the government of Orissa transferred the distribution assets and properties along with personnel of GRIDCO to 4 distribution companies namely CESCO, NESCO, WESCO, and SOUTHCO continued to function as affiliates of GRIDCO up to 31.03.1999 and thereafter functioned under the distribution and retail supply license obtained from OERC.

Objectives of Privatization of Distribution Function:

A. Operational Improvements : (i)

Improve quality of service to consumers

(ii)

Improve operational efficiencies and reduce losses.

B. Financial Benefits : (i)

Attract private investment to the distribution business

(ii)

Reduce the need for government funding of the electricity sector

(iii)

Contribute to increased economic growth in Orissa.

C. Employee Considerations : (i)

Create opportunities for secure and increasingly rewarding employment for the qualified personnel

(ii)

Provide a stable environment for employees

D. Sale of all 4 Zones to promote competition 177

In keeping with the objectives of power sector reform and the commitments given to the World Bank by the state government, the distribution function was required to be privatized. After considerations of various options available for privatization, the corporation decided to adopt the best mode of Joint sector/ Joint venture route. The sequence agreed was that the four distribution zones which were functioning under the corporation will be converted into four distribution companies as its wholly owned subsidiary. The privatization process was accomplished in three stages e.g. Qualification of companies/consortia, RFP and Lodgement of bids and negotiation and completion. 51 companies/consortia initially participated in the ICB but 13 of them furnishing SOQs. 11 companies were pre-qualified by GRIDCO board, out of which 4 companies did not participate in the bidding process because of reasons e.g. Asian Economic Crisis, Pokhran-II blast and unviable and small businesses and regulatory risks. 4 more companies did not participate in the bidding process. Out of the remaining bidders, the following 03 bidders were found to be technically qualified like BSES, Singaporepower-Grasim and TEC-Viridian. BSES was selected for WESCO, NESCO and SOUTHCO and the management was handed over with effect from 01.04.99. As TECViridian failed to honour their offer, the earnest money guarantee of Rupees 5 crores was invoked. Dispute raised by TEC-Viridian is pending in arbitration. AES-Jyoti structure, the pre-qualified bidder was selected for CESCO through a process of negotiation and the management was handed over with effect from 01.09.99. Thus through a process of international competitive bidding, GRIDCO offered 51% stake to private sector investors keeping a share holding of 39% with it and 10% share for Employees Welfare Trust. It may be mentioned here that no asset sale has taken place. Assets have been assigned to respective companies. Only the business has been sold with a

178

premium although all the 4(Four) companies are loss making and bore a part of the loans and liabilities. The new structure of the electricity sector in Orissa is as follows: 1. There are independent generation sources like NTPC, OHPC, OPGC, IPPs and CPPs. 2. GRIDCO purchases power under PPAs from the independent generators and provides bulk supplies to privatized distribution companies at a bulk supply price. This means GRIDCO acts as a Transmission Company between the generators and the distribution companies. 3. Privatized Distribution Companies have come into existence viz. WESCO, NESCO, SOUTHCO and CESCO. These privatized distribution companies cater to the needs of customers.

RESTRUCTURING OF GRIDCO GRIDCO presently undertakes –

1. The Transmission and Bulk supply activities in the state of Orissa. 2. Sale of energy outside the state of Orissa. 3. The SLD (State Load Despatch) Functions. Under the provisions of the Electricity Act, 2003, trading in electricity has been recognised as a distinct activity which can only be undertaken with a license to be granted by the appropriate commission. Trading has been defined under the new act as purchase of electricity for resale thereof and, therefore, the bulk supply of the electricity becomes a licensed activity being 179

covered under trading. Transmission of electricity has also been recognised as an independent activity to be carried on under a license from the appropriate commission. GRIDCO in addition to its transmission functions as a State transmission Utility is also operating as SLDC (State Load Despatch Centre). Under the Electricity Act, 2003, the SLDC shall be operated by a govt. company or under any state act, as may be notified by the respective state government. Provided that until a Government Company or any authority or corporation is notified by the state government, GRIDCO being the State Transmission Utility (STU), shall operate as SLDC. In view of the aforesaid statutory requirement, it has become necessary to take steps for separating the Trading Functions of the GRIDCO from the Transmission and SLDC functions. The matter is now under consideration and the following course of action is being contemplated. 1. GRIDCO will continue to undertake bulk supply and trading functions and will transfer the transmission functions together with the SLDC and State Transmission Utility Functions to another new Company (Transferee Company). 2. A public limited company under the companies act, 1956 as a wholly owned undertaking of state government shall be incorporated for vesting and transfer or transmission/ STU and SLDC undertaking of GRIDCO along with its personnel. 3. There shall be a transfer of Transmission and SLDC functions of GRIDCO for vesting with the newly incorporated company. The 180

transmission and SLDC undertakings shall comprise all properties, rights, liabilities, etc., pertaining to Transmission/STU function and SLDC functions along with personnel and the transfer shall be affected through a Statutory Transfer Scheme to be notified by Govt. of Orissa u/s 39 read with section 131 of the Electricity Act, 2003. The said transfer Scheme shall be effective from 01.04.2004 so that the newly incorporated

(Transferee

Company)

starts

functioning

w.e.f

01.04.2004. 4. State Govt. is to issue a notification declaring the new company (Transferee Company) as the State Transmission utility (in super session of earlier of earlier notification declaring GRIDCO as STU), which may form a part of Transfer Scheme to be issued by the state government and the transfer scheme shall provide that the Transmission company as the State Transmission utility (STU) will also operate the State Load Despatch Centre until further orders of the state government. 5. The new company (Transferee Company) to be incorporated may be named as any one of the following subjects to the same being available from the Registrar of Companies, India: (A)

Power Transmission Corporation of India Ltd. (TRANSCO)

(B)

Orissa Power Transmission Corporation Ltd. (OPTCL)*

(C)

Power Grid Corporation of Orissa Ltd. (PGCOL)

6. GRIDCO shall obtain a license from CERC for interstate trading of power on or before 9th. June 2004. GRIDCO shall continue with the business of bulk supply/inter-state trading with its license obtained from OERC but shall apply to OERC for deletion of transmission function from license. 181

Chart 7: GRIDCO STRUCTURE

182

Sequence of Events of Reforms The blueprint and milestones for the reforms were drawn up via the World Bank’s Staff Appraisal Report (SAR), and the reform experiment was ready by 1995. The process was as follows: 1993 Chief Minister announces power reforms plans. 1994 Planning for reforms continues. 1995 Regulatory Reforms Bill passes in the state legislature. 1996 Orissa Electricity Reform Act took effect on April 1, 1996. OSEB was divided into the Orissa Hydro Power Corporation (OHPC) for all hydel capacity and GRIDCO. GRIDCO inherited the transmission and distribution infrastructure, as well as the liabilities of the SEB. The already existing Orissa Power Generation Corporation (for thermal power) continued, but future generation capacity was to come from IPPs. Orissa Electricity Regulatory Commission (OERC) was also established. No budgetary support was envisaged for any of the bodies, except the regulatory body. But, to help out the enterprises, their accumulated losses were to be written off, their assets revalued, and their liabilities readjusted. Based on the recommendations of various consultants, a depreciated replacement model was chosen to revalue the assets of OHPC and GRIDCO. The assets of GRIDCO increased from a book value of Rs. 1,183 Crore to Rs. 2,395.8crore. There were also various liabilities, including to NTPC, and these were converted to a term loan of Rs. 1,148.9crore, plus some significant short-term liabilities (Mahalingam 1997). The total capacity was 2,120 MW within these units. 183

1997 OERC issues first tariff orders. 1998 4 Distribution zones were established as separate corporations (still PSUs) out of GRIDCO. Even then, GRIDCO remained the single-buyer of power to sell to the 4 DISTCOs. 1999 The 4 DISTCOs were also privatized, with a release of 51% of the equity in each held by GRIDCO. 39% would remain with the state government, and 10% would be held by employees. The central zone went to AES Transpower, the US multinational, and the other zones went to BSES. Workforce allocation and severance were long, drawn out processes according to most reports. To facilitate the sale, GRIDCO accepts deferred payments, which affects it cash flow position significantly later on. Orissa Government divests 49% of its stake in OPGC, via competitive bidding. AES wins with a Rs. 6.03 billion bid, giving it operating control of 2x 210 MW thermal plants in Ib Valley. These plants were commissioned in 1994 and 1996, at an investment of Rs. 11.35 billion (Iyer 2000). Not the entire bid was towards assets; fresh capital was also invested (8%, equal to Rs. 1.03 billion). 2000 GRIDCO’s financials worsen, and debt levels of the companies rise. 2001 Government constitutes Kanungo Committee to examine the reforms process, AES withdraws from the central zone distribution. Government appoints an administrator for this zone. His appointment is stayed by the courts. BSES states it is not interested in taking up the central zone. 2002 The performance of 3 of the 4 zones worsens compared to the previous year (Southern, with BSES, is the exception). That reforms are not straightforward, nor can private operator easily succeed is illustrated by the attempt in September 1996 to hand over one section of distribution (the central zone, which included cities like Cuttack and 184

Bhubaneswar) to BSES for operation, under a management contract. After the first 6 month review found negative performance, the management contract was terminated in April 1997. In response, BSES stated it was not given enough time to effect change, disputed the baseline numbers, and said that it never really had control over the staff (Mahalingam 1997), a concern for any reform mechanism based on outsourcing. Also, AES came into distribution somewhat reluctantly (Mahalingam 1998). It was originally in the state as a power generator (IPP), with the 500 MW (250 x 2) Ib Valley Project. However, during the privatization process, BSES was the only eligible bidder for the 4 zones, after Tatas withdrew from the central zone (Prayas 2001). But, to ensure they didn’t get all the zones, AES was persuaded to take over the central zone.

BENEFITS OF REFORMS 1. TTPS (Talcher Thermal power Station) after taken over by NTPC is now operating at a PLF of 75.1% whereas from its inception it never operated beyond 30%. 2. OPGC being exclusively in charge of Thermal Generation has been consistently maintaining high PLF of 70 to 80% - a performance level comparable to NTPC. 3. Disinvestment of 49% of Government share has unlocked a substantial amount of funds which could be utilized for power development. 4. OHPC being exclusively in charge of Hydro Power Stations could give undivided attention and bring back the two units at Burla to operation after renovation.

185

5. Each year Government was to give a subsidy of Rs. 340 Crore. This has been stopped since 01.04.96. 6. OHPC & OPGC, which are exclusively looking after hydro and thermal generation of power respectively, are now profit making corporations of the state.

7. In a sharp turn around now Power Sector is not loss making (See table).

Table 18: Accounting P\L

OPGC OHPC GRIDCO Total

1996-97

1997-98

1998-99

104.6 69.85 -294.99 -120.55

66.15 77.79 -319.11 -175.17

112.8 55.21 -578.61 -410.6

19992000 124.39 50.38 13.73 188.5

2000-01

2002-03

109.88 -27.44 -86.44 -3.73

132.22 -3.89 22.14 150.47

Table 19: Cash P\L

OPGC OHPC GRIDCO TOTAL

1996-97

1997-98

1998-99

144.96 114.26 -162.03 97.18

147.31 122.06 -177.45 91.92

195.68 99.93 -428.7 -133.09

19992000 208.97 100.19 86.85 396.01

2000-01

2002-03

194.68 65.92 -4.91 255.69

215.91 92.69 112.44 421.04

Though the above mentioned outcomes are some positive aspects of the reforms but all was not well in the years that followed and some of the negative outcomes are discussed in the following paragraph. The reforms were supposed to improve the power position in Orissa, but peak shortages continue. The finances of the companies have worsened to some extent, and the losses continue to mount (financial as well as technical). GRIDCO failed to pay generators what it owes, citing failure of receiving payments from the DISTCOs. Had they received their money, the generators

186

(OHPC and OPGC) have a book profit of Rs. 768 crores between April 1, 1996 and March 31, 2001 (OERC 2002). The WB-SAR (Staff Appraisal Report) based report called for a number of milestones, details on which can be found in Prayas (2001). Most of these were based on structural changes, like setting up the distribution zones, having OERC issue tariff orders, etc. However, some of these had negative operational effects as well. The goal of 16% return for OHPC along with its valuation hiked the costs to GRIDCO significantly, by hundreds of percent. This is an indication that reforms process, as profitable companies come up along the power sector (generation, transmission, and distribution), this will raise the average cost of power compared to today’s loss-making utility. One casualty of the reforms process was rural electrification. Private companies were not interested in such loss-making operations. The agricultural demand for power went down from a low 6% in 1992-93 to a very low 3% in 1999-00 (Kanungo Committee 2001). But yet, the finances didn’t improve. This highlights the importance of mechanisms to ensure rural/underserved areas are catered to. Either specific targets must be set and met, or an outside entity should be entrusted with such a role. Rural cooperatives might be one solution for such consumers. The noted environmentalist Ashok Khosla points out that if communities treat electricity as a shared resource, they would manage it better, as they have done historically for things like a shared water supply (personal communication).

What Went Wrong The main problem with the operations of the sector was relating to cash flows. OERC limited the increase in tariffs (citing that not all costs could just be passed on to the consumers – e.g., for bad performance – unlike the prereform days). This created losses for the DISTCOs, who also had deferred 187

payment agreements with GRIDCO. GRIDCO, owned by the Govt. of Orissa, was caught between the increasingly expensive generators and non-paying DISTCOs, who were unable to improve performance as expected. While the exact numbers have varied over time, some details are as follows (Prayas 2001): GRIDCO was owed over 7.7 billion rupees by the 4 DISTCOs as of March 31, 2000. Of this, CESCO (the central zone operated and majorityowned by AES) owed Rs. 1.6 billion. But, GRIDCO owed OPGC, of which AES owned 49%, some Rs. 1.8 billion. AES shut down a power plant for a week in protest, and the crisis escalated with the Govt. threatening prison time for its officers (under the Essential Services Act). The compromise solution involved the government promising to pay its dues in 15 days. After the reforms, GRIDCO’s and DISTCOs finances went down because of a number of factors (Prayas 2001; OERC 2002): • The bulk of the liabilities went to GRIDCO, Rs. 16 billion vs. 6 billion for all the DISTCOMs. • Assets of GRIDCO were revalued upwards, to help match the increase in liabilities. This had operating implications, like the increase in depreciation costs. • OHPC’s tariffs were increased to meet the 16% returns. Overnight, the tariff went from Rs. 0.1 to Rs 0.49/kWh in 1996. Even central station’s power was expensive, and GRIDCO had to off take such power. • There were unrealistic T&D losses estimated during the unbundling process. This stresses the importance of accurate baseline information, and realistic performance targets. The forecast for T&D reduction from 39.5% in 1996-97 to 22.7% 2000-01 wasn’t achieved. Even the initial assessment of 39.5% for 1996- 97 was grossly incorrect. A later audit showed this to be 49.4%. • Tariff increases were lower than in the WB-SAR. 188

• There was no budgetary support via subsidies. • The growth of load, especially profitable load, did not materialize. The WBSAR called for 7,009 million kWh for railways plus industrial high tension (bulk) supply, while the actual sale in 2000-01 was 2,760 million kWh. This affected not only the cross-subsidy potential, but the T&D losses as well. • Poor collection rates from consumers. DISTCOs achieved only 75 and 76% collection in 1999-2000 and 2000-01, respectively. In addition to these issues, we find several other factors at play. Not enough was invested in this sector towards the reforms. Less than half the money just from World Bank was spent, making the total fraction utilized based on the billion dollar estimate even lower (Kanungo Committee 2001). Critics will point out that a significant fraction went to consultants, 306.422 crores (but the bulk of this came from DFID funds, and none came from consumers). There was also a cyclone that hit just after privatization, before proper insurance was in place, causing not only a financial loss, but a major operational challenge. The AES episode created a lot of controversy, with their reporting Government interference and lack of law and order, but the Kanungo Committee Report (2001) counters a lot of difficulties were caused by AES practices. They created a new management cadre, which caused a lot of resentment within CESCO, the Central DISTCOs. In addition, they came in to CESCO expecting to take up an additional 2% in OPGC, giving them 51%. When that didn’t materialize, that triggered their desire to sell their state in CESCO in 2001.

189

However, the biggest reasons for the poor performance appear to be the false assumptions and expectations of the players, and the limited support provided by the government, either for subsidies or to the companies who had liquidity issues in addition to solvency issues. Money coming in from outside sources was often diverted to state budget needs, and there remained significant institutional lethargy and morass in the sector. The government failed to pay its own dues for power, some Rs. 1.5 billion.

Some of the lessons from the Orissa experience, other than the obvious ones include (IDFC 2000): • Incomplete separation of transmission and distribution can cause problems. • Regulators should give a clear picture of their tariff philosophy, rate base, valuation methods, likely profile of prices and expected performance levels. • There should be a structured, time-bound financial support mechanism, with a fixed schedule for tapering off coupled with improvements in operating parameters and collection. • The single buyer model is necessarily not the best, and the Transco might be better as just a wires company. • Determining who gets priority claims over revenues is important. Do not escrow the revenues from the distribution zones for meeting TRANSCO needs, like was done in Orissa. • Don’t tinker with valuations, especially just before privatization. This can have a serious impact on tariffs, as Schedule VI of the Supply Act 1948 is based on assets (and newer methods allow for 16% returns on equity).

190

Transfer of Assets The restructuring was done in two steps through the instrumentality of transfer scheme framed under the Orissa Electricity Reform Act, 1995. Under the first transfer scheme (effective from April 1, 1996) the assets, liabilities, proceedings and personnel of erstwhile OSEB were transferred to OHPC (for hydel generation) and GRIDCO (Transmission & Distribution). The second transfer scheme (effective from November, 1998) further transferred the distribution related assets, liabilities, proceedings and personnel of GRIDCO to four wholly owned companies of GRIDCO.

Table 20: Details of Revaluation Details of Revaluation done in Transfer Scheme dated April 1, 1996 Book Value of T&D Asset Interest and expense capitalised Total Uplift in Value of Assets Total Depreciation Net Fixed Assets of GRIDCO as on April 1, 1996 Total Revaluation Uplift In Assets Further Adjustment Total Adjustment Subsidy due to OSEB Electricity charges receivable from Government Reduction in O&M stock Total (A) Fresh Equity to State Govt. Zero Coupon Bond to State Govt. Bonds issued to Pension Fund Total (B) Total (A+B)

191

Rs. in Crores 1103.2 97.5 1201.0 1120.0 2320.7 363.0 1957.7 1120.0 74.0 1194.0 301.2 39.2 50.6 391.0 253.0 400.0 150.0 803.0 1194.0

RESTRUCTURING EXERCISE INVOLVED CERTAIN MEASURES, WHICH CAST A HEAVY STRAIN ON THE FINANCES OF GRIDCO Under the transfer Scheme of April’96, the state government took over the Transmission and Distribution assets of OSEB (book value plus capitalized expenses and interest at 1200 Cr.) and reinvested them in GRIDCO after upvaluing by an additional Rs. 1194 cr. (additional 134%). Against this upvalued amount of 1194 Cr, the state Govt. adjusted subsidies and electricity charges payable to OSEB/GRIDCO totalling Rs.340 Cr. In addition GRIDCO issued Rs. 253 Cr. Worth of shares and Rs. 400 Cr. Worth zero coupon bonds to the state govt. This left GRIDCO with a serious cash shortage right from day one and compelled it to default it to generating companies and other suppliers. In addition Rs. 1146 Cr. of loan and liabilities were also assigned to GRIDCO. The upvaluation exercise was prompted by considerations including the need to have a capital base capable of absorbing substantial debt funds needed for the up gradation of the T&D system and the requirement of having a self financing ratio of 20% and an adequate debt-equity ratio as per World Bank conditions. It was also felt that the assets should be valued on the basis of their business potential and replacement value, not their book value. The revaluation exercise also enabled the cash strapped state govt. to “Adjust” dues totalling Rs. 340 Cr. Payable to OSEB/GRIDCO against the upvalued amount. The impact of revaluation on the distribution companies has been lower than that to GRIDCO as they were allocated only project specific liabilities totalling Rs. 630 Cr. for all four distribution companies put together, while GRIDCO retained in their books liabilities (including accumulated losses) totalling about Rs. 1950 Cr. While the assets were upvalued, there was no such upvaluation of the liabilities. Besides, as stated earlier, the distribution 192

companies were assigned only project related liabilities. The only component of asset upvaluation which has a bearing on tariff depreciation, which stood at Rs. 81.69 Cr. in FY96 on the eve of the upvaluation and was pegged at Rs. 128.02 Cr. for FY98 by OERC in their tariff order effective from April 1, 1997. The difference of Rs. 46.33 Cr. (Rs. 128.02 Cr. – Rs. 81.69 Cr.) in the depreciation (which also included depreciation of assets created during FY97) formed only 3.2% of GRIDCO’s total revenue requirements of Rs. 1451 Cr. allowed by OERC. Hence the impact of upvaluation on distribution tariff has been estimated to be only about 2.5%. Further, it must be emphasized that it is not the upvaluation exercise per-se that resulted in GRIDCO’s cash crunch; the cause is rather the “adjustment” of the totality of its receivables from the state government (about Rs. 340 Cr.) right from inception.

Table 21: Debt Equity Comparison Rs. In lakhs As

1.4.1996 1.4.1997 1.4.1998 1.4.1999 1.4.2000 1.4.2001 1.4.2002

1.4.2003

on Audited

Audited

Audited

Audited

Audited

Audited

Provisional

Provisional

Equity

32620

34369

38423

45795

48786

48817

49106

49298

Debt

122145

127488

146068

240252

255477

291736

354990

420793

Ratio*

3.74

3.71

3.80

5.25

5.24

5.98

7.23

8.54

Equity

32620

34369

38423

45795

48786

48817

49106

49298

37,057

60,235

89,967

75,937

1,06,505

1,04,693

78,809

89,152

159202

187723

236035

316188

361982

396429

433799

509945

4.88

5.46

6.14

6.90

7.42

8.12

8.83

10.34

Power Purchase Liability Power Bills Ratio*

*- Debt Equity Ratio.

193

Table 22: PROFIT / (LOSS) COMPARISON OVER THE YEARS Rs. in Lakhs

Profit/ (LOSS) After subsidy

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

Audited

Audited

Audited

Audited

Audited

R Audited

Audited

Audited

Audited

Audited

Provisional

Provisional

2577

2594

2998

2490

2694

E (29,499)

(31,912)

(57,862)

(1,373)

(8,524)

2,214

(67,622)

531

529

0

0

0

0

(32443)

(58391)

F Revenue subsidy Received

7627

11100

22603

16098

25762

O

1138

R Profit/ (LOSS) before subsidy

(5050)

(8506)

(19605)

(13608)

(23068)

M (30637)

1373

(8524)

2214

(67622)

Note: Till FY-1995-96 the performance is of erstwhile OSEB and subsequent years of GRIDCO. FY 1996-97 to 1998-99 includes performance of Transmission and distribution business and FY 1999-00 onwards include only Transmission business after privatization of distribution business. The huge loss in 2002-03 is due the unprecedented hydrology failure and consequent additional burden towards purchase of high cost EREB thermal power.

Table 23: DETAILS OF LOANS As on

Govt. Loans State govt. cash loan Central govt. Zero coupon Bonds IBRD Sub-Total Financial Institutions LIC REC PFC/ADB Sub-Total Bonds & others Pension Fund Bonds Public Bonds Power Bonds/loan syndication GoO Bonds to NTPC Others (ICICI, SPA etc.) Sub Total Total

Rs. In lakhs 1.4.1996 1.4.1997 1.4.1998 1.4.1999 1.4.2000 1.4.2001 1.4.2002 1.4.2

200

200

15371

16871

16871

16871

1687

1126

1126

1126

1126

1126

1126

1126

1126

40000

40000

40000

40000

40000

40000

40000

4000

41126

0 41326

3363 44688

8572 65069

14913 72910

38111 96108

30992 88989

3876 9676

14356 25018 13680 53055

14066 27070 19460 60596

14066 29559 21570 65195

14066 36767 26696 77529

14066 42877 30816 87759

14066 42784 31899 88749

14066 41099 30092 85257

1406 3691 4354 9452

15000

15000

15000

15000

15000

15000

15000

1500

10991

8564

6584

5202

4377

3854

3476

2403

-

-

10948

66756

66756

77637

46256

9755

-

-

-

-

-

-

110288

1102

1973

2002

3653

10696

8675

10388

5724

4260

27964 25566 36185 97654 94808 106879 180744 122145 127488 146068 240252 255477 291736 354990 The Loan outstanding figure given above does not include the overdue interest. The IBRD loan has been considered as 70% loan and 30% grants from FY 2001-02 onwards.

2295 4207

Table 24: STATEMENT OF POWER PURCHASE, SALE, T& D LOSS BILLING COLLECTION ETC

4560.36

% of Cost of T&D power Loss (Rs. Cr.) 50.67% 652.61

Amount Billed (Rs. Cr.) 908.27

9650.00

5088.94

47.26% 982.71

1145.95 963.26

10324.30

5439.51

47.31% 1199.83 1357.55 1111.89

81.90%

10630.59

5359.41

49.59% 1240.62 1374.64 1108.36

80.63%

9996.52

5603.24

43.95%

1230.30 1454.36 1097.85

75.49%

11197.40

10645.70 4.93%

1165.60 1411.63 1113.79

78.90%

11197.40

6252.16

44.16% 1165.60 1585.75 1268.00

79.96%

10863.67

6080.42

44.03%

1412.53 1652.78 1276.27

77.22%

12400.03

11758.43 5.17%

1399.72 1607.63 1108.13

68.93%

12400.03

6974.76

43.75% 1399.72 1793.00 1459.66

81.41%

10992.42

5773.21

47.48%

1519.13 1751.56 1300.12

74.23%

12435.14

11866.63 4.57%

1204.11 1719.32 1126.47

65.52%

12435.14

6645.21

46.56% 1204.11 1933.19 1461.22

75.59%

11363.18

6731.78

40.76%

1475.64 1968.58 1607.72

81.67%

11889.39

11410.54 4.03%

1624.60 1486.79 1225.30

82.41%

11889.39

6779.14

42.98% 1624.60 1979.73 1617.73

81.70%

YEAR

Energy Purchase( MU)

Energy Sale (MU)

1995-96 (T&D) 1996-97 (T&D) 1997-98 (T&D) 1998-99 (T&D) 1999-2000 (Distribution) 1999-2000 (Transmission) 1999-2000 (T&D) 2000-01 (Distribution) 2000-01 (Transmission) 2000-01 ( T&D) 2001-02 (Distribution) 2001-02 (Transmission) 2001-02 (T&D) 2002-03 (Distribution) 2002-03 (Transmission) 2002-03 (T&D)

9244.93

196

Amount Collection Collected as (Rs Cr.) % of Billing 821.53 90.45% 84.06%

Table 25: Sources & Application of Funds Sources of Funds Rupees in Million Equivalent US$ (Million) Internal Resources 9,816 222 Grant ODA grant towards State 2,260 63 govt. equity to GRIDCO ODA grant transferred to 1,265 34 GRIDCO as GoO grant Loans World bank 14,419 350 State Government 960 26 ADB 2,025 57 Other Sources 10,605 246 Total of Loans 28,008 678 Grand Total 41,348 997 Application of Funds Item Capital investment Interest during construction Reform Expenses Repair and maintenance expenditure from ODA grant Increase in maintenance inventory Total Investment

Rupees (Million) 35,370 2,060

US$ Million 840 49

2,754 400

74 12

765

22

41,348

997

Source: World Bank Staff Appraisal Report

197

Table 26: EXPENDITURE INCURRED ON CONSULTANCY SERVICES Sl. Project No.

A 1 2 3 4 5 6 7 8

B

Agency

Amount In million PS

Pre-reform KPMG led Consultancy consortium Reform Credit Switz Fast Boston (CSFB) PMU Merz McLilan Seaboard International ISP Price Waterhouse Coopers RIAP Price Waterhouse Coopers Training Price Waterhouse Centre Coopers BEINA Price Waterhouse Social Coopers Study RIAP Price Waterhouse Extension Coopers TRISP Price Waterhouse Package Coopers TOTAL

Total amount spent on consultancy

198

Rupees in Funding Crore@ Agency Rs. 65/PS 41.000

GoO

16.194

105.261

DFID Grant

7.605

49.433

DFID Grant

4.668

30.342

7.884

51.246

0.150

0.975

0.018

0.117

DFID Grant DFID Grant DFID Grant DFID Grant

0.600

3.900

3.715

24.148

40.834

265.421

306.421

DFID Grant DFID Grant DFID Grant

Kanungo Committee’s Findings and Recommendations Encouraged by the Government of India, assisted by the World Bank, and supported with grants from the government of U.K. (DFID), Orissa took the initiatives and became the first state to reform its electricity industry. The Orissa Electricity Reforms Act, setting out the basic frame work of the reform, enacted in 1995 came in to force from 1st. April 1996. The principal objectives of the reforms had been discussed earlier but out of so many only three (03) objectives were achieved namely: (a) Restructuring of the Electricity Industry for rationalization of generation, transmission, distribution and supply of electricity. (b) To provide avenues for participation in the industry of private entrepreneurs, attract private investment and reduce the need for government funding of the electricity sector. (c) To provide a transparent mechanism for development and regulation of the industry, including tariff fixation and dispute settlement, through an independent, statutory body; the Orissa Electricity Regulatory Commission. The other expectations were yet to be realised. The OERC has done pioneering work in our country in the establishment of a regulatory mechanism for the electricity industry. The reform Act, which has given the commission a wide mandate, requires it to act effectively and independently. The OERC’s working in the last few years, has not been free from problems. To avoid these, the following recommendations have been made.

199

1. To ensure that commission is fully functional at all times, the government must appoint commissioners promptly. Action for filling up vacancies should start early so that recommendations of the selection committee are available to government at least two weeks before the vacancy occurs. In the event an appointment or selection is stayed by court, prompt action should be taken to have it vacated by moving a higher court or a larger bench. Further nobody should be considered for appointment unless there’s a clear possibility of his/her serving for five years. To attract persons of ability, integrity, and standing, wide publicity should be given while inviting nominations for commissioners. 2. Budgetary allocation for the commission should be adequate. Ordinarily, the government should not apply any budgetary cuts as long as the amount proposed by the commission is within the limit of license fees received. Accounting regulation for the commission should be settled forthwith and budgeted outlays placed in a banking account at the disposal of the commission for incurring expenditure in accordance with the accounting regulation, without further reference to the government. 3. The commission should institute regular systems of monitoring to ensure that the prescribed standards of performance are actually adhered to in the industry. 4. The government and the commission should have purposeful interaction on a wide range of issues of monitoring, problem solving, planning and development of the state’s power sector. For exchange of information and discussion on administrative matters of mutual interest, the government should interact with commission’s secretary. There should also be system of meeting with the commissioners, at 200

least once a year, taken at an appropriately high level to discuss and settle matters involving important issues of policy. 5. The reforms were conceptualized under the guidance of the World Bank and the road map for implementation was set out in its SAR (Staff Appraisal Report). The assumption in the SAR of growth in the demand for power in the state was highly ambitious, in terms of totals and compositions. The demand for industrial power (EHT Supply), which subsidizes domestic demand (LT supply), was grossly under realized while domestic and commercial demand with high losses grew fast. T & D losses, which were excessively high and were targeted for substantial reduction, could not be brought down. Billing and collection efficiency under the privatized distribution companies were (DISTCOs) far from improving, actually worsened and theft of electricity continued unabated. 6. The reform scheme was further vitiated by sharp, upvaluation of assets at the time of transfer to utilities. This led to a steep increase in the cost of power. Unrealistic assumptions that GRIDCO would become profitearning from 1999/98 led to the abrupt withdrawal of subsidy by the state government from 1996/97. There has been considerable increase in the average tariff at a cumulative rate of 15.5% annually over the last nine years without any perceptible improvement in customer service. The cross subsidy has also been brought down, particularly in the post reform period, thereby casting a heavier burden on domestic consumers. 7. Unabated increase in tariffs without a perceptible increase in technocommercial losses or improvement in customer service has led to growing public discontent against the reforms. This situation has worsened because of spiralling increase in costs and deteriorating 201

health of the utilities. The DISTCOs & GRIDCO have been rendered utterly unviable as a result of their inability to reduce T&D losses, control rampant misuse, and theft of electricity and contain costs. DISTCOs are unable to pay salaries to their employees without defaulting on payment to GRIDCO towards the purchase of power. GRIDCO also is unable to recover costs and is incurring heavy debts to finance losses year after year. In this situation, the generating companies are also facing inadequate cash realisation. The situation has become so critical that the private sector partner in one of the DISTCOs, AES, has abandoned the management of CESCO, which is now being managed by a CEO appointed by regulatory authority. It is recommended that the CEO of CESCO should be for full time. 8. The key to the revival of the sector lies in improving the efficiency and bringing down the costs. By efficiency improvement not only can customer services be geared up but T&D losses, currently at an unacceptably high level, can also be brought down substantially. The reform scheme sought to address the problem of T&D losses through (a) capital investment to strengthen the T&D system so as to reduce technical losses, and (b) privatisation of distribution to bring in better management skills and practices for enforcement of accountability to reduce commercial loss. Neither of these two has succeeded so far. 9. Large capital investments have been made but not a single project has been completed despite considerable time overruns. The delays in most cases for want of forest clearance, land availability or right of way. Since none of the projects has been commissioned, no benefit has been realized from the investments worth more than 6000 million rupees out of funds borrowed from the World Bank carrying heavy debt-servicing liabilities. Efforts need to be intensified to complete and commission the ongoing works. No new work should be contracted until the 202

majority of the ongoing works is completed. With the commissioning of these works, there should be a significant improvement in system reliability and reduction of technical losses, which would benefit impact on cost reduction. 10. As far as massive commercial losses are concerned, the results achieved over the last five years are insignificant. The T&D losses, which were 46.94% in the 1995/96 as shown by the audit, are now 46.63% as reported by the utilities themselves. The loss is more staggering in the LT segment at 68%. The DISTCOs, in their projections, have proposed very little reduction. The rate of loss reduction that needs to be attempted and achieved in the next five years must not be less than an average of five percent which, in our view, is well within reach. Attainment of the goal would, however, call for determined, comprehensive and relentless effort. The following are some suggestion in this regard: (A)

A concerted drive to remove illegal connections (such as hooking) and effective measures to convert them in to regular connections followed up by systematic billing and collection of energy charges.

(B)

Should the DISTCOs wish police force escort for carrying out special drives to prevent unauthorized use of electricity, over and above the comfort of the chief secretary’s circular to DMs and SPs asking for prompt intervention in the event of violence by antisocial elements, the government should make available to the companies the requisite support on payment of costs.

(C)

Hundred percent consumers metering within a year and immediate metering at the low voltage terminals of the step-down transformers should be provided so that supplies in to HT & LT systems can be 203

quantified for purpose of proper energy accounting, which is practically missing. 11.

A major cause of sharp increase in the cost of power was steep upvaluation of assets at the time of transfer to GRIDCO. It called for substantially higher provision for the depreciation as well as return on capital. Neither these could be met because of short fall in revenue. In these circumstances it would be worth while in keeping the revaluation in abeyance till the system is brought to balance. In fact there’s a case setting aside the revaluation of OHPC, which is expected to be profitable in the years to come. In addition to this, state government may agree to allow a moratorium on debt servicing to the state except the amounts in respect of loans from the World Bank, which the state government would need to pay to the centre. After applying these correctives and also taking credit for T&D loss reduction at an average rate of five percent per year, the revenue gap at the existing retail tariff would show a decline but would still be substantial. The unavoidable revenue gaps would need to be financed from the sources other than debt. Since the state governments are themselves passing through severe financial stress, it may not be realistic to ask them to make a sacrifice over and above what has been suggested already. 12. An exercise has been carried out to estimate the annual shortfall on a cash flow basis without tariff hike but assuming that collection efficiency of the DISTCOs would progressively improve from the present level of 76% to reach 95% by the year 2005/06 instead of ending up with a collection efficiency of 84% proposed by them. With a tariff hike of 18% in 2005, the entire cash deficit would disappear and the year 2005/06 would witness both an operational profit as well as marginal cash surplus. The sector as a whole would turn around in 2005/06. The consumers could be called upon to pay higher tariffs at 204

that stage because by then the utilities are expected to have shown evidence of their concern for and efficiency in T & D loss reduction and improvement of customer service; not otherwise. 13. To bring the reforms back on the rails, the World Bank and the DFID who helped Orissa initially, and hopefully have retained their interest in the reform, should come forward with a suitable package to fill the revenue gap in the intervening years. Without this interim financing (estimated at 32400 million rupees), there seems hardly any prospect of the reform coming to fruition. The Government of India should not only persuade them to do so but also extend a helping hand in sharing the responsibility of interim financing of the revenue gap. 14. Once decision is taken on interim financing and its apportionment, the DISTCOs and GRIDCO may be pinned down to specific performance parameters by desegregating the proposed T&D loss reduction DISTCO-wise. 15. In the prevailing run down state of GRIDCO and DISTCOs, no durable rehabilitation is possible without interim financing of unavoidable losses. However it needs to be emphasized that no amount of support from outside would succeed unless the utilities conduct themselves with greater sense of responsibility. Privatization was seen as a means to improve the performance of DISTCOs. The private sector partners need to bear in mind their crucial role, which cannot be performed satisfactorily unless they face the task as a challenge and an opportunity and take the industry forward in the true spirit of partnership and for mutual benefit. 16. The private promoters of DISTCOs neither brought superior management skills nor did they arrange financial support even by way 205

of working capital for companies, which were in dire need of capital, working capital in particular. Instead of using the good offices of BSES to secure working capital in terms of clause 8.1 of the shareholders agreement for the three DISTCOs under their management, the DISTCOs have persistently defaulted in payment to GRIDCO towards purchase of power. The outstanding overdue of GRIDCO as on 30 September 2001 against these three DISTCOs is 6807.2 million rupees including bonds issued by them in lieu of cash payments. So far as the other distribution company CESCO is concerned, the situation is worse. AES, the private partner, never fulfilled its commitment to bring working capital. They were allowed to pile up unpaid power purchase bills amounting to 4030 million rupees by the time they walked away in August 2001. Now that the AES have abandoned CESCO, GRIDCO seems to be left with hardly any other option except exploring a legal remedy. As far as BSESmanaged DISTCOs are concerned, the attitude of deliberate default in payment to GRIDCO must end. The BSES should make all efforts to bring in working capital in terms of the shareholders agreement. 17. The system of escrow put in place to secure regular payments to GRIDCO towards power purchase has not worked. With the package of financial relief recommended by us along with enforcement of the provisions of the shareholders agreement, the escrow mechanism should be made to work and strictly enforced. (Escrow-In the event of non-payment by the SEB, IPP shall have recourse to L/C and revenues shall be accumulated in the escrow account. In case funds in escrow account are insufficient, IPP may invoke State Govt. guarantee) 18. There is an urgent need to develop trust and goodwill between the employees and the management. The vital role of the employees and their associations in building up the industry needs to be taken more 206

seriously. While firm action against known miscreants is necessary to enforce discipline and accountability this cannot be done without skillful handling of situations and willingness to mitigate genuine grievances. A specific matter in this connection relates to pensionary benefits. Employees apparently have found that the pension scheme preferred by them, and also adopted by the companies, has turned out to be disadvantageous, particularly for those who came over from the government in a higher age group. In a matter like this neither the present employers nor the government should take any rigid stand. The effort should be to find a solution, which may not even be difficult to reach. Likewise, there is an apprehension the liabilities of government/GRIDCO towards the Pension Trust may not have assessed correctly. This is a matter of actuarial calculation, which may affect the viability of the pension funds, so there should be no reluctance to take a fresh look at the estimates. 19. Orissa is richly endowed with natural resources, and now has the additional advantage of the surplus power. This combination needs to be exploited to accelerate industrialization of the state through vigorous marketing of power by offering more competitive rates. By selling surplus power to industries, even at tariffs lower than prescribed by the OERC, not only would the state benefit from industrialization, but the DISTCOs themselves would also stand to gain as long as they recovered costs at the margin. The tariffs fixed by the OERC should be treated as the ceiling in each category, and utilities should have the freedom to supply power at lower rates in exercise of their commercial judgement. 20. With restructuring and privatization, there’s a much greater need now for rigorous enforcement of safety norms in the electricity industry. However, care needs to be taken to see that there’s no mindless 207

expansion of the Electrical Inspectorate. Services of chartered engineers, under a strict system of empanelment and penalty in the event of misconduct, may be utilised for the purpose of supplementing human resources of a slim, well structured inspectorate. 21. The services of local consultants as well as highly rated consulting firms of international repute were used extensively in the preparation of blueprint of reform, and to assist the utilities in developing internal systems of operation management, financial control, technical services, contract management, project implementation, etc. The cost incurred so far is a staggering 3060 million rupees. However, judging by the fate of reforms and the state of the utilities it is clear that the utilities, for whose benefit the consultants were engaged, did not assimilate much of their advice. Instead of developing an inner strength with the assistance of consultants, they tended to be excessively dependent on them leading to a near-atrophy of organisational strength. We suggest that

this

practice,

which

weakens

organisation

rather

than

strengthening them and demotivates employees instead of improving their skill and confidence, should end as soon as possible. 22. Close attention should be given to strengthening the managerial competence of GRIDCO, which is not only financially sick but also organisationally very weak. The following recommendations are made in this connection. • The senior management of GRIDCO should be selected on the basis of merit and must be appointed for a fixed term of three to five years. • The SLDC (State Load Dispatch Centre) and its commercial counterpart, the energy billing centre, should be provided with the 208

necessary staff whose skills should be substantially honed and upgraded by regular training. • GRIDCO’s PMU (Project Management Unit) should take over the responsibility of all capital works irrespective of the source of funding. It should also monitor capital works executed by the distribution companies in addition to managing and monitoring. 23. The entire power sector needs top management of a high calibre just as it requires an efficient work force motivated to further the interest of the industry. The task before the management is daunting. Appointments to the boards of directors of all the utilities need to be reviewed to ensure that professionals including administrators with competence, vision and commitment may enrich the utilities at the top. The prevailing system of part time appointments to key positions in the sector, including the chief executive officer of the OHPC should end. The chief executive officers of the DISTCOs should be stationed at their respective head quarters. 24. The committee did not get the evidence of any innovative practice introduced in the management of the privatized DISTCOs. However, in some of the DISTCO areas, an experiment is in progress to involve village communities in streamlining power supply in rural areas. While the results seem to be encouraging, the exercise currently being conducted by consultants can succeed in the long run and over large areas only if the programme is implemented by DISTCO official themselves. 25. It is recognised that regulatory commission need to lay down norms for tariff determination, which would enable the utilities to have a clear idea of the range in which tariffs may move over a reasonable period. A multi-year tariff regime is therefore, being advocated by experts. 209

The OERC has also laid down norms in certain areas though much more needs to be done. But no purposeful result can be achieved in the matter of multi-year tariffs unless there is a reasonable financial balance. Serious efforts are required to provide financial balance to the sector before multi-year tariffs can become a reality. 26. Another idea often advocated by experts is multi-buyer model of power trading. Here again attainment of financial balance is an essential pre-requisite to provide a basis for competition through various models of multi-buyers system as distinct from the singlebuyer model adopted by Orissa as well as other states who have embarked on reform. In the prevailing situation of near bankruptcy of GRIDCO and disarray in the functioning of DISTCOs, the sector should be spared any further trauma. Meanwhile, GRIDCO needs to strengthen itself to develop ability and skill to handle the power trading function which calls for, among other things, prompt exercise of commercial judgement. Urgent attention should be paid to develop this within the organisation. It would be of advantage to develop within GRIDCO a well functioning trading unit which may eventually be turned in to an independent trading organisation as a step towards bringing in a competitive regime that would provide the consumer the opportunity to choose the source of this power supply. 27. Rural electrification seems to have unintentionally become the worst casualty of the reform process. With the restructuring of OSEB, and privatization of DISTCOs, the rural electrification wing of OSEB was disbanded and it was left to the DISTCOs to carry on with whatever schemes were in the pipeline. Since the activity is commercially not attractive, the DISTCOs cannot be expected to be very enthusiastic about rural electrification. The interest of DISTCOs has further slackened because even the modest rural electrification work done by 210

them has not been paid for in spite of the fact that an amount of Rs. 23 Crore of capital subsidy due was certified by OERC several months ago. No fresh scheme of rural electrification seems to have been posed for funding support of agencies like REC, nor any scheme drawn up for the purpose. Another regrettable feature is the utter lack of concern for productive use of electricity for rural development through agriculture pumping. In terms of agricultural demand for power among states, Orissa is practically at the bottom. What is worse is that agricultural demand for power in the state has gone down from a meagre 6% in 1992-93 to a dismal 3% in 1999-00, compared with national average of 30%. No single department of the state government is entrusted with the administrative responsibility to plan, promote and monitor growth and press for rural electrification for development of irrigation pumping which is vital rural development. Under a high priority national plan, all villages are required to be electrified by March 2007. For a state like Orissa, with a 40% of the population from weaker sections of scheduled castes and scheduled tribes living in remote areas, the leeway to be made is large. Kutir Jyoti program needs to be pursued with vigour. It must however be ensured that the benefits of subsidised electricity supply under this program flow to the targeted beneficiaries

the goal is unlikely to be reached unless

determined efforts are made and an effective machinery is put in place for planning, execution and monitoring of rural electrification projects. The vacuum caused by abolition of the rural electrification wing of the OSEB needs to be filled up and an alternative system created. The following recommendations are made in this connection: a) A Rural Engineering Planning Organisation (REPO) should be set up under the Government to provide focus and direction to this vital programme, to prepare

211

specific schemes, pose them to funding agencies and over-see utilization of the funds procured. b) REPO should have under it four Rural Electrification Planning Units (REPU), each corresponding to a DISTCO with which it would need to work in close coordination. These units would draw up, detailed schemes of rural electrification. c) Prioritisation of villages for electrification should be done by REPUs in consultation with the collector of the concerned district. d) Execution of the works would be the responsibility of the concerned DISTCOs. e) REPUs would need to monitor the execution and report completion of schemes and the expenditures incurred thereon to the Collector of the district and the State REPO. f) On the basis of the Collectors’ certificates of satisfactory completion, the state Government should promptly settle subsidy payments admissible to DISTCOs. g) Government would need to provide DISTCOs with capital subsidy; revenue requirements would, in normal course, be considered by OERC as a part of tariff exercise. 28. Our recommendation would help rehabilitate the utilities, bring stability and promote growth of the power sector only if these are implemented as a package and implementation is managed and monitored closely. The reform adopted by Orissa may have been flawed, but mid-course corrections could have been managed rather than its success taken for granted. The committee’s recommendations 212

towards putting back the reform on rails would succeed only if the need for reform management is recognised and a system is put in place by the government for regular monitoring, co-ordination and midcourse correction. It is interesting to know that of all the major parameters of reform laid down in the SAR; one of the few that proved realistic was tariff. Retail tariff has been fairly close to the SAR assumption in the first two years and substantially higher since 199899. Thus, consumers have not failed to provide support; they have made ample sacrifice in search of better quality of service which has eluded them so far. 29. Power sector would succeed if the utilities bring in efficiency, cut costs, reduce losses and ensure greater consumer satisfaction. It would also require strong enforcement to ensure that consumers of electricity pay for its use. All sections of the society, particularly those, who are in a position to influence public opinion, have the responsibility to provide the requisite support. Revival of the power sector would depend to a large extent on how fast a consensus is built in this vital area. 30. The state’s power sector is now on the brink of the crisis. It is high time all agencies namely, the state government, the central government, the world bank and the DFID, got together and took a holistic view on what can be done by each to rescue the reform. If the electricity reform fails in Orissa, it would have its inevitable adverse impact on reform all over the country. What have taken place in the electricity industry of Orissa is only restructuring, privatization and establishment of a Regulatory Mechanism. The real reform, which brings in its wake benefits to consumers, strength to the industry and growth for the economy has yet to come.

213

Turnaround of GRIDCO / OPTCL - A Case Study All the major steps in the restructuring process have since been taken as envisaged under the reform scheme: • OSEB was restructured and corporatised in to Grid Corporation of Orissa (GRIDCO) and Orissa Hydro Power Corporation (OHPC) in April 1996. • The Orissa Electricity Regulatory Commission (OERC) was established in August 1996. • Orissa Power Generation Corporation (OPGC) was privatized with divestment of 49% stake and transfer of management control to a private operator, AES in January 1999. • Four distribution companies (DISTCOs), incorporated as wholly owned subsidiaries of GRIDCO, were privatized with transfer of 51% stake to private operators: three of these, namely, NESCO, WESCO and SOUTHCO were acquired by BSES in April 1999 and the fourth, viz. CESCO by AES in September 1999. GRIDCO disinvested 51% of its equity holding to private investors with strong financial standing & technical capabilities. 10% of the equity has been reserved for the employees of GRIDCO- that would entitle them to direct monetary and welfare benefits. GRIDCO retains 39% of the holdings in the DISTCOs.

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Transfer of Assets The restructuring was done in two steps through the instrumentality of transfer scheme framed under the Orissa Electricity Reform Act, 1995. Under the first transfer scheme (effective from April 1, 1996) the assets, liabilities, proceedings and personnel of erstwhile OSEB were transferred to OHPC (for hydel generation) and GRIDCO (Transmission and Distribution). The second transfer scheme (effective from November, 1998) further transferred the distribution related assets, liabilities, proceedings and personnel of GRIDCO to four wholly owned companies of GRIDCO.

RESTRUCTURING EXERCISE INVOLVED CERTAIN MEASURES, WHICH CAST A HEAVY STRAIN ON THE FINANCES OF GRIDCO Under the Transfer Scheme of April’96, the state government took over the Transmission and Distribution assets of OSEB (book value plus capitalized expenses and interest at 1200 Cr.) and reinvested them in GRIDCO after upvaluing by an additional Rs. 1194 cr. (additional 134%). Against this upvalued amount of 1194 Cr, the state Govt. adjusted subsidies and electricity charges payable to OSEB/GRIDCO totalling Rs.340 Cr. In addition GRIDCO issued Rs. 253 Cr. Worth of shares and Rs. 400 Cr. Worth zero-coupon bonds to the state govt. This left GRIDCO with a serious cash shortage right from day one and compelled it to default it to generating companies and other suppliers. In addition Rs. 1146 Cr. of loan and liabilities were also assigned to GRIDCO. The upvaluation exercise was prompted by considerations including the need to have a capital base capable of absorbing substantial debt funds needed for the up gradation of the T&D system and the requirement of having a self financing ratio of 20% and an adequate debt-equity ratio as per World Bank conditions. It was also felt that the assets should be valued on the basis of 215

their business potential and replacement value, not their book value. The revaluation exercise also enabled the cash strapped state govt. to “Adjust” dues totalling Rs. 340 Cr. Payable to OSEB/GRIDCO against the upvalued amount.

Table 27: Revaluation of Assets Details of Revaluation done in Transfer Scheme dated April 1, 1996

Rs. in Crores

Book Value of T&D Asset Interest and expense capitalised Total Uplift in Value of Assets Total Depreciation Net Fixed Assets of GRIDCO as on April 1, 1996 Total Revaluation Uplift In Assets Further Adjustment Total Adjustment Subsidy due to OSEB Electricity charges receivable from Government Reduction in O&M stock Total (A) Fresh Equity to State Govt. Zero Coupon Bond to State Govt. Bonds issued to Pension Fund Total (B) Total (A+B) Source-Price Water House Coopers

216

1103.2 97.5 1201.0 1120.0 2320.7 363.0 1957.7 1120.0 74.0 1194.0 301.2 39.2 50.6 391.0 253.0 400.0 150.0 803.0 1194.0

The impact of revaluation on the distribution companies has been lower than that to GRIDCO as they were allocated only project specific liabilities totalling Rs. 630 Cr. for all four distribution companies put together, while GRIDCO retained in their books liabilities (including accumulated losses) totalling about Rs. 1950 Cr. While the assets were upvalued, there was no such upvaluation of the liabilities. Besides, as stated earlier, the distribution companies were assigned only project related liabilities. The only component of asset upvaluation which has a bearing on tariff depreciation, which stood at Rs. 81.69 Cr. in FY96 on the eve of the upvaluation and was pegged at Rs. 128.02 Cr. for FY98 by OERC in their tariff order effective from April 1, 1997. The difference of Rs. 46.33 Cr. (Rs. 128.02 Cr. – Rs. 81.69 Cr.) in the depreciation (which also included depreciation of assets created during FY97) formed only 3.2% of GRIDCO’s total revenue requirements of Rs. 1451 Cr. allowed by OERC. Hence the impact of upvaluation on distribution tariff has been estimated to be only about 2.5%. Further, it must be emphasized that it is not the upvaluation exercise per-se that resulted in GRIDCO’s cash crunch; the cause is rather the “adjustment” of the totality of its receivables from the state government (about Rs. 340 Cr.) right from inception.

Privatization of Distribution Functions: In pursuant to the Orissa Electricity Reform (Transfer of Assets, liabilities, proceedings & personnel of GRIDCO to distribution companies) Rules, 1998, the government of Orissa transferred the distribution assets and properties along with personnel of GRIDCO to 4 distribution companies namely CESCO, NESCO, WESCO, and SOUTHCO continued to function as affiliates of GRIDCO up to 31.03.1999 and thereafter functioned under the distribution & retail supply license obtained from OERC.

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Objectives of Privatization of Distribution Function: A. Operational Improvements: (i)

Improve quality of service to consumers

(ii)

Improve operational efficiencies & reduce losses.

B. Financial Benefits: (iii)

Attract private investment in to the distribution business

(iv)

Reduce the need for government funding of the electricity sector

(v)

Contribute to increased economic growth in Orissa.

C. Employee Considerations: (vi)

Create opportunities for secure & increasingly rewarding employment for the qualified personnel

(vii)

Provide a stable environment for employees

D. Sale of all 4 Zones to promote competition In keeping with the objectives of power sector reform and the commitments given to the World Bank by the state government, the distribution function was required to be privatized. After considerations of various options available for privatization, the corporation decided to adopt the best mode of Joint sector/ Joint venture route. The sequence agreed was that the four distribution zones which were functioning under the corporation will be converted in to four distribution companies as its wholly owned subsidiary. In spite of these pragmatic reform programmes, GRIDCO’s financials worsened in the year 2000 and debt level of the company rose to the all time high. Then state government did intervene and constituted a high power committee lead by Mr. Sobhan Kanungo (I.A.S), to examine the fault lines and asked the committee to suggest the measures to put the GRIDCO back on track. After adhering to committee norms, improvements in all sectors are

218

visible now with increase in earnings and total turn around, with the GRIDCO posted a net profit in FY 2004-05. The highlights of the results as follows: 1. GRIDCO started trading of its surplus power with the utilities/SEBs through the Power Trading Corporation of India Ltd. (PTC) by entering into an Agreement signed on 03.07.2003. The trading was started with effect from 05.07.2003 initially for an average of 100 MW @ Rs.2.60/unit for the evening peak @ Rs.2.00/unit for the off-peak (18 hours) a day. The average rate was Rs.2.15/ unit Further, GRIDCO has also entered into an agreement with NTPC Vidyut Vyapar Nigam Ltd. (NVVNL), a wholly owned subsidiary of NTPC on 24.09.2003 for an average of 100 MW trading. Trading of power with NVVNL was started with effect from 01.10.2003. During November, 2004 the peak export is 557 MW, off-peak export is 427 MW

and the average export is 460MW.

Peak Trading

550 MW

Off peak Trading

430 MW

Average Trading

460 MW

2. T & D losses, which were excessively high and were targeted for substantial reduction, could be brought down gradually. Billing and collection efficiency under the privatized distribution companies (DISTCOs) started improving, theft cases of electricity started falling and due to the introduction of one time settlement of theft and irregular connection cases, many new customers were created over the years and receivable collection started increasing. Steps taken in this regard to reduce T&D losses are through (a) capital investment to strengthen

the T&D system so as to reduce technical 219

losses, and (b) privatisation of distribution to bring in better management skills and practices for enforcement of accountability to reduce commercial loss (D) Hundred percent consumers metering within a year and immediate metering at the low voltage terminals of the step-down transformers were provided so that supplies in to HT & LT systems can be quantified for purpose of proper energy accounting. Year % of T&D Loss Collection as % of Billing

19992000 44.16%

2000-01

2001-02

2003-04

2004-05

46.56%

200203 42.98%

43.75%

40.14%

38.93%

79.96%

81.41%

75.59%

81.70%

83.25%

88.68%

3. An exercise was carried out to estimate the annual shortfall on a cash flow basis without tariff hike but assuming that collection efficiency of the DISTCOs would progressively improve from the present level of 76%(2001-02) to reach 95% by the year 2005/06 instead of ending up with a collection efficiency of 84% proposed by them. Already 200405 witnessed a collection efficiency of 90%. With a tariff hike of 18% in 2005, the entire cash deficit would disappear and the year 2005/06 would witness both an operational profit as well as marginal cash surplus. The sector as a whole would turn around in 2005/06, which includes the distribution companies also. The consumers could be called upon to pay higher tariffs at that stage because by then the utilities are expected to have shown evidence of their concern for and efficiency in T & D loss reduction and improvement of customer service; not otherwise.

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4. To bring the reforms back on the rails, the World Bank and the DFID who helped Orissa initially came forward with a suitable package to fill the revenue gap in the intervening years. Without this interim financing (estimated at 32400 million rupees), this gradual turnaround in GRIDCO’s fiscals were unlikely and hardly there was any prospect of the reform coming to fruition. 5. The system of escrow put in place to secure regular payments to GRIDCO towards power purchase has not worked initially. With the package of financial relief recommended along with enforcement of the provisions of the shareholders agreement, the escrow mechanism has started working and has been strictly enforced. 6. The services of local consultants as well as highly rated consulting firms of international repute were used extensively in the preparation of blueprint of reform, and to assist the utilities in developing internal systems of operation management, financial control, technical services, contract management, project implementation, etc. The cost incurred so far is a staggering 3060 million rupees. Judging by the fate of reforms and the state of the utilities it is clear that the utilities, for whose benefit the consultants were engaged, did not assimilate much of their advice or it did not reach to the bottom line managers. These services of the consultants, which weakened the organisation rather strengthening them, were stopped and government appointed efficient bureaucrat in-charge of GRIDCO, which made turnaround a reality and it has been decided to keep the tenure of CMD, GRIDCO fixed for 03 years, prior to which they should not be disturbed on normal course. Chief executive officers of the DISTCOs are now stationed at their respective head quarters.

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7. To ensure that commission (OERC) is fully functional at all times, the government started appointing commissioners promptly because OERC has done pioneering work in our country in the establishment of a regulatory mechanism for the electricity industry. Commission started instituting regular systems of monitoring to ensure that the prescribed standards of performance are actually adhered to in the industry. 8. The government and the commission started interacting on a wide range of issues of monitoring, problem solving, planning and development of the state’s power sector. For exchange of information and discussion on administrative matters of mutual interest, the government evolved a mechanism to interact with commission’s secretary.

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Comparison of Financial Performance – Orissa Vis-à-vis Andhra Pradesh Table 28: Financial Result Analysis of Andhra Pradesh Particulars

2003 – 04

2004 - 05

1. Total Income

2468.37

2416.40

2. Total Expenditure

2481.77

2422.47

3. Profit / (Loss) before Tax

13.40

6.07

4. Provision for Income Tax

----------

0.45

5. Profit / (Loss) after Tax

(13.40)

(6.52)

6. Net prior period credits / (Charges)

19.38

9.13

7. SURPLUS / (DEFICIT)

5.98

2.61

• • • • • •

% increase in Profit : 129.01% % increase in Income : 2.15% % increase in Revenue : 5.84% % increase in Sales : 11.98% % reduction in Distribution Loss : 1.21% % reduction in distribution Transformer Failure: 0.82%

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Table 29: Financial Result Analysis of Orissa

Particulars

2002 – 03

2003 - 04

1. Total Income

1686.33

2809.74

2. Total Expenditure

1865.43

1921.62

3. Profit / (Loss) before Tax

(179.70)

888.12

4. Provision for Income Tax

------------------

------------------

5. Profit / (Loss) after Taxation, contingency & Resv.

(59.80)

41.11

• • • • •

% increase in Profit : 231.18% % increase in Income : 66.61% % increase in Sales : 31.11% % reduction in Distribution Loss : 3.24% % reduction in distribution Transformer Failure: 1.17%

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SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR REFORMS: A MICRO LEVEL ANALYSIS V.1

Introduction

5.1

Aggregative analysis as presented in the previous chapters gives a

macro perspective of the different aspects of power sector reform in Orissa and its impact. However, the analysis of aggregated data may not serve to bring out the subtle nuances of reform and its impact at the user level, the spatial variations and ground-level perceptions. Accordingly, the present chapter proposes to develop a general micro level perspective about the effect of reform on different user categories on the basis of various impact parameters. The data collected from the users is both factual and perceptionbased. 5.2

These disaggregated data are collected from different sources and from

different districts of the state of Orissa. The sources are: a) households, b) commercial and small industrial establishments, c) principal

informants

including

key

power

sector

functionaries, high-level officials of the Government of Orissa and user group representatives and d) the Focus Group Discussions (FGDs) in the selected sites. The instruments 1 of data collection consist of a structured questionnaire for households, FGD dairies, an open ended checklist for commercial and small industrial users, a list of issues in connection with the power sector for being discussed with the principal informants and also informal discussions. After pilot testing of the instruments and rigorous training of the investigators for administering them, the actual field investigation was conducted over a period of 4-5 weeks in the months of November – December in 2003. The senior

225

members of the study team conducted some of the FGDs and principal informant interviews themselves in two installments. V.2

Micro Level Data Sources: Sampling Framework

5.3

The study on Socio-economic Impact of Power Sector Reform was

conducted in eight selected districts of Orissa, with 2 districts sampled from each of the 4 geographical zones (North, South, East and West) of the State. Figure-5.1 gives the design of the sampling frame. A total of 2112 households from 32 selected villages (falling in 16 sample blocks) and 8 selected urban centres were surveyed to elicit users’ perceptions on different aspects of power sector reform.

226

Design of the Sampling Frame for Collection of Primary Data

O

Eastern Zone

Khurda (HD)

Khurda

(HD)

Nandapur Bajapur

(LE) (HE)

Chilika

(LD)

Chhutaraipur Nairi

(LE) (HE)

Bhubaneshwar (Town / City)

Nayagarh (LD)

Ranapur

(HD)

Sanagarh Gopalpur

(LE) (HE)

Gania

(LD)

Patanda Kishor Prasad

(LE) (HE)

R Nayagarh

I S S

Western Zone

Sambalpur (HD)

Angul (LD)

A

(Town / City) (HD)

Mahul Chappal P Pathhar

(LE) (HE)

Maneshwar

(LD)

Balaranga Bargoan

(LE) (HE)

Sambalpur

(Town / City)

Sambalpur

Banarpal

(HD)

Salgadia Santuri

(LE) (HE)

Athamallick

(LD)

Lunahandi Kundanali

(LE) (HE)

Angul

Southern Zone

T

(Town / City)

Angul

Digapahandi

(HD)

Rajpur Padmanavapur

(LE) (HE)

Ganjam

(LD)

Lunghuri Damodarpur

(LE) (HE)

Berhampur

(Town / City)

Berhampur

Bissam Cuttack (HD)

Badagatiguda Chatikana

(LE) (HE)

(LD)

Dangasorda Chandrapure

(LE) (HE)

Rayagada (LD)

Chandrapur

A T Northern Zone

Bhadark (HD)

E

Nayagarh

Bamra

Ganjam (HD)

S

Bhubaneshwar

Rayagada

(Town / City)

Chandabali

(HD)

Somapur Baligan

(LE) (HE)

Banta

(LD)

Malitira Purusandha

(LE) (HE)

Bhadark

Keonjhar (LD)

(Town / City)

Bhadark

Ghasipura

(HD)

Machhala Deogaon

(LE) (HE)

Joda

(LD)

Khandara Lalahari Basti

(LE) (HE)

Keonjhar

(Town / City)

Note : LD = Less Developed Block & LE = Less Electrified Village : HD = Highly Developed Block & HE = Highly Electrified Village

227

Rayagada

Keonjhar

V.3

Analysis of Household Data

5.4

This section analyzes the information gathered from responding

households* using electricity on different aspects of power sector reform that are closely linked to the stated objectives of: increasing access to electricity, improving the quality of power supply, enhancing billing and collection efficiency in the distribution of power, and generating a system for better supplier-consumer interface that includes quality customer care. We have discussed the household level data in respect of all the indicators for the pre reform and reform periods and for rural/urban areas. The study conducted by Xavier Institute of management (1996) is supposed to be used as the benchmark (baseline) in order to have a comparative perspective of pre and post reform periods. But for all the indicators used in the present study, we are not able to use Xavier institute’s study due to the following reasons: (i) the sample size for the domestic consumers of the Xavier study was 288 while in the present study it is 2112; (ii) the analysis of rural and urban area separately as well as by social groups was not made in respect of all the indicators in the Xavier study. Therefore, wherever possible, we have used the Xavier’s study as benchmark, otherwise, we have used CMDR’s field survey data for the pre reform period. Profile of Sample Households 5.5

Of the 2112 sample households, rural households constitute 52 %

(1107) and the rest are situated in urban areas. A little more than half (52 %) of the total sample households belong to the socially less privileged categories (Scheduled Castes, Scheduled Tribes, Other Backward Castes), hereinafter to be referred to as the ‘Less privileged class’. While more than 70 % of the *

On an average, the extent of non-response on different aspects ranges between 2 and 20 % of the total sample size.

228

rural households belong to less privileged castes, about 67 % of the urban households belong to the privileged category. The sex ratio (number of females per 1000 males) in rural areas is 826 while the same is 859 in urban areas. The sex ratio among upper caste is in favour of females in both rural and urban areas. Expectedly, the urban literacy rate comes out much higher than the rural literacy rate, particularly for education at the secondary level and beyond 2. Thus, while for the rural sample the literacy rate at secondary level and beyond is estimated to be about 47% of the total number of persons in the sample, the same is close to 60% for all persons in the urban sample. Across the different caste groups it is found that the less privileged categories are always behind the privileged category as one move towards higher and higher levels of education. Irrespective of the social category, female literacy rate at all levels of education is always behind the corresponding male literacy rate. Access to Electricity 5.6

“Kutir Jyoti” Scheme: The government of Orissa has a special scheme

named ‘Kutir Jyoti’ that is intended to improve the access to and use of electricity among the rural SC, ST and OBC households living below poverty line (BPL). The survey data relating to the sample households shows a significant number of forward caste households (about 14%) coming under this scheme (Chart-5.1). This gives an impression that, like any other scheme for the rural poor, the benefits of this scheme are also enjoyed by the privileged category. About 29 % SC and 39 % ST households are covered under ‘Kutir Jyoti’ scheme. The relatively low targeting of the scheme among the sample households may also be due to the high illiteracy rate of the SC and ST population and their ignorance of the schemes meant for their welfare.

2

The focus on secondary level of education and beyond it is based on the assumption that awareness about power sector reform is likely to be more crystallized at this level.

229

Chart 5.1: Composition of Kutir Jyoti Households

OBC 19%

Forward Caste 14%

SC 29% ST 38%

5.7

Access to Electricity by Sample Households: From Table-5.1 it is

found that 85 % of the total sample households got their connection before the reform in the power sector. There is no difference between the average connected load of the households between pre reform and reform period. The average distance from the nearest electric pole to domestic connection was 20 meters (distance) in the pre reform period while the same comes out as 28 meters during the reform period. The amount spent in getting connection is found to be nearly double in the reform period than that during pre reform period. As per the rules, the domestic consumers are expected to get connection within 30 days of their application. During the pre reform period (XIMB,1996) only 29 % of the total domestic consumers got connection within 30 days while during the reform period (CMDR study) it is reported that the average number of days to get connection is 21 days which seems to be an achievement of the reform process.

230

Table 5.1: Indicators of Access to Electricity by Sample Households Prereform Reform period period Information on Percentage of sample households that 85.0 15.0 received connection Connected Load (in kwh) 1.4 1.4 Distance from the pole (in meters) 19.9 27.6 Amount spent in connection (in Rs) 854.7 1521.9 Time taken for getting connection in 21 days (CMDR study) XAVIER study: % of HH got 29 connection in <30 days Metering of Electricity Use 5.8

Metered Connections: The reform aims at achieving 100 percent

metering of the use of electricity. In the sample taken up for study, about 17 % of rural households and 2 % of urban households revealed that they did not have meters in the pre reform period (Table 5.2). During the reform period about 10 percent of the households did not have meters (CMDR study, 2003) while 19 percent households did not have meters during the pre reform period (Xavier study, 1996). On the whole, the reform objective of 100% meter connections to the households is yet to be achieved.

5.9

Functioning of meters: About 25 % meters were not in working

condition in the pre reform period, while the same declines to 3 % for the reform period (Table 5.2). It thus seems that significant achievement in respect of repairing and replacing the non-working meters has been observed. This possibly reflects a greater emphasis of the DISCOMs not only installation of meters but making them effectively functional.

231

5.10

Frequency of Meter Reading: The irregularity in meter reading has

declined from 26 % (Xavier study) in the pre reform period to about 8 % (CMDR study) in the reform period. There is a significant improvement in the frequency of meter reading (every 2 months) in rural areas during the reform period (as reported by 74% of sample households in reform period compared to 48 % in the pre reform period). Similarly, for the urban areas the monthly reading of meter is reported to be more frequent during the reform period by 66% of urban households, compared to 44 % in the pre reform period (Table 5.2).

5.11

Complaints about Meters: More than 80 % of the rural households and

more than 90 % in urban areas did not lodge any complaint in case of non working of the meters in the pre reform period. In comparison, during the reform period this increased to 98 % and 96 %, respectively, of households in rural and urban areas.

It is significant to note that the proportion of

households going for lodging any complaint in case of defective meters declined sharply (from 18 percent to 2 percent) during the reform period, particularly in rural areas (Table 5.2). It is possible that there is less cause for complaint as far as the working of meters is concerned in the reform period and this is definitely an indicator of improving system efficiency in energy accounting by the DISCOMs. There is an alternative viewpoint on this aspect of metering and it is based on the widely reported dissatisfaction about the customer care services of the DISCOMs. Thus, if the public perception is that complaints lodged by them are less likely to receive timely and satisfactory attention, there would be a clear disinclination to access the existing grievance redressal system. However, the latter viewpoint seems unlikely considering that the next two indicators relating to customer care (for meter related problems) give a positive impression of the reform impact.

232

5.12

Time taken for Repairing of Meters: As per the norm, in case of non-

working of meters, the concerned DISTCOM is required to attend to it within a maximum period of 22 days from the day of complaint lodged by the consumer household. For the sample households it is found that the number of days taken in correcting/repairing the meter has been reduced on an average from 29 days in the pre reform period to 17 days in the reform period in rural areas while the corresponding decline in urban areas has been from 25 to 15 days. It seems that reform has been successful in this respect, irrespective of whether the consumer is from rural or urban area (Table 5.2). This again is an indicator of greater responsiveness of the DISCOMs in attending to consumer complaints as far as the grievance relates to the functioning of meters. 5.13 Payment for Repairing the Meters:

As per rules, if the officially supplied meter goes out of order due

to some inherent defect, it will be replaced/repaired without any charge from the consumers. But if the consumer damages the same, a penalty has to be paid by the consumer. It is observed that in the pre reform period the payment made by the consumers, on an average, towards repairing/replacing the meter was higher when compared to the amount of payment made during reform period (Table 5.2). This is possibly an indirect corroboration of the idea that perhaps during the pre reform period more meters were damaged by the households (either by tampering or any other way) for which they had to pay very high price towards repairing/replacing the meters. During the reform period the payment made by the households has significantly reduced. It is likely that the vigilance system instituted by the DISCOMs in the reform period has been largely effective in reducing the incidence of tampering/damage of the meters by domestic consumers in both rural and urban areas.

233

Table 5.2: Metering of Households in Rural and Urban areas

Indicators related to metering

Rural Pre-Reform Reform

Urban Total Pre-Reform Reform Pre-Reform Reform

1. Meter Connection CMDR Study (2003) Metered 83 84.2 97.6 Un metered 17 15.8 2.4 Total 100 100 100 Xavier Study (un metered households - 1996) NA 2. Working of Meters CMDR Study Working 87.2 95.3 96.1 Not Working 12.8 4.7 3.9 Total 100 100 100 NA NA Xavier Study (meters not working) 3. Frequency in Meter Reading CMDR Study (2003) Irregular 18.6 13.5 6.6 Monthly 30.3 9.5 44.3 Every 2 months 47.9 74.3 48.9 More than 2 months 3.2 2.7 0.2 Total 100 100 100 Xavier Study (Irregular Meter Reading)- 1996 NA NA 4. Complaint lodged by consumers in case of meter not working CMDR Study (2003) Lodged 17.7 2.4 5.1 Not lodged 82.3 97.6 94.9 Total 100 100 100 Xavier Study (1996) Not available 5. Time taken for repairing the meter (in days) 29 17 25 6. Payment made by the consumers to repair the meter (in Rs.) 63.77 9.15 85.68

97.9 2.1 100

9.5 19

97.7 2.3 100

3.2 25

4.5 66.2 29.3 100

7.7

26

4.3 95.6 100

15 18.64

Figures in % of Responding Households

234

Uses of Electricity 5.14

Type of Use: The domestic consumers use electricity largely for the

purposes of lighting, cooking, washing, entertainment, refrigeration, education, health and hygiene, etc. For the sample households it is observed that during the reform period there has been a definite shift in the pattern of use of electricity in case of both rural and urban area consumer households. While the traditional use of electrical appliances for lighting and cooking purposes appears to have declined (possibly due to greater economy of use and better availability of alternative sources of energy, such as LPG), there is relatively greater reporting of the application of electricity for nonconventional purposes like domestic chores, education, entertainment, health and hygiene among both rural and urban area consumers, and more so in the case of the latter (Table5.3). Table 5.3: Uses of Electricity by Households in Rural and Urban Areas Figures in % of total sample households Rural Urban Pre Type of Use Pre Reform Reform Reform Reform Period Period Period Period Lighting 39.97 32.54 28.99 17.36 Cooking 13.09 6.1 10.88 5.76 Washing Cloth 0.46 0.56 3.37 6.76 Entertainment 16.32 20.04 16.67 15.61 *Other domestic chores 28.35 35.21 30.8 39.34 **Any other use 1.81 5.55 9.29 15.17 Total 100 100 100 100 * Electrical Appliances, e.g: Grinder, Iron, Fan, Refrigerator etc. **Education, Health & Hygiene, Income Generating activities

5.15 Economy in Use: It is assumed that reform would induce economy in the use of electricity through the rationalization of electricity tariffs. From the field survey data it is found that more than 90 % (not shown in the table) of the sample households (rural and urban) have reported practicing economy in the use of electricity at their home in both pre reform and reform periods. It is found that the women members of the household are in general more conscious about the economy in use of electricity. Compared to about 60 % 235

women in the rural areas and 70 % women in the urban areas that are found in the pre reform period to be more conscious about economy measures in the use of electricity, these percentages has increased significantly in the reform period as more than 70 % women in rural and 80 - 90 % women in urban areas are found to be practicing economy measures (Table 5.4). This gender aspect about the consumers’ response to the power sector reform needs to be noted as this brings out the crucial role that women can play in matters of socio economic importance to the family and the economy as a whole.

Table 5.4: Economy in use of electricity by members of the household Figures in % of total sample households Rural Urban Members of the Household Women Men Old People Children Every one Total

Pre Reform Period 62.72 27.65 1.75 3.61 4.27 100

Reform Period 70.55 22.78 1.67 0.56 4.44 100

Pre Reform Period 73.31 20.75 1.82 1.09 3.03 100

Reform Period 89.78 7.3 0.73 0.73 1.46 100

5.16 Reasons for economy in use: The information gathered from the households reveals that when asked to prioritize the reasons for practicing economy measures in the use of electricity, 70 to more than 80 % of the sample households give minimization of the electricity bill as the most important factor. This evidence of a price impact is in accordance with the expectation from reform. Energy saving gets the second priority among the reasons stated by the households (Table 5.5). Chart 5.2 and 5.3 provide a clearer picture of the reasons for the economy in use of electricity.

236

Table 5.5: Reasons for Economy in Use by Households in reform period and Figures in % of responding households Reasons To minimize the bill Installation of china meters Energy saving

Rural 76.7 1.7 21.7

Urban 86.9 0.7 12.4

Reasons for Economy in use of Electricity Chart 5.2

Chart 5.2 A

Rural

Urban

22

1

2

12

77

87

To minimize the bill

Installatio n o f China meters

Energy saving

To minimize the bill

237

Installation of China meters

Energy saving

Electricity Tariff 5.17 Change in Cost/Tariff of Electricity: The overwhelming majority of household consumers in rural as well as urban areas perceives that price of power has increased in the reform period. This is to be expected considering the frequent hikes in tariff carried out in the reform period. What is interesting, however, is that about 11 % rural and 4 % urban households perceive a decrease in the price of power in the reform period (Table-5.6). It is likely that these households are referring to the real price of electricity, which after adjusting for the inflation rate during the period, is likely to have come out as lower for the reform period in the perceptions of some of the consumers. This is a possibility that also came out strongly in some of the discussions with key informants from different user groups as well as from the OERC functionaries.

Table 5.6: Perceived changes in electricity tariff in reform period Perceived Change in Electricity Tariff

Rural

Urban

Increased

88.5

95.9

Decreased

11.5

4.1

Total

100.0

100.0

Figures in % of responding households 5.18 Collusion: An attempt has been made on the basis of the reported information to relate the extent of use of electricity by a household with the amount of payment for the same. It is assumed that the number of power points in the households is a more accurate indicator of actual/potential consumption of electricity than the units billed, since there is a chance that tampering of meters by the consuming household contaminates the latter figure. The expectation is that 238

households with 15 ampere points would be at the high end of domestic users and accordingly would be paying on an average higher electricity charges. It is rather interesting to notice that the rural households using 15 ampere points reported on an average lesser amounts of electricity charges than the households using 5 ampere points (not shown in Table). While it is possible that the high end users in the rural domestic segment are more economical in their actual use of electricity, nevertheless the possibility of collusion, either in meter reading or in billing, cannot be entirely ruled out. Box-5.1 gives the case of one of the sample villages where such collusive activity still exists despite reform.

Box 5.1: Collusion: Who will stop? In one of the sample villages it was found during the household survey that the meters of most of the houses are stopped for 3/4th of the month and it is operated only towards that part of the month when the meter reader is expected to visit. On enquiry it was found that the lineman of the erstwhile OSEB used to help the villagers to do the tampering by taking some monetary or non-monetary benefits (example: free rental house for the line man in exchange for providing free electricity to the owner). Over time, most of the households have learnt to do the tampering by themselves. The meter reader takes down the deflated reading as the correct reading and the households clear the grossly underestimated dues in time.

Billing/Payment for the use of electricity 5.19

Frequency of Billing: Though there has been significant improvement

in the billing procedure in the reform period, still 2 to 5 % of the rural sample households reported about no billing (Table-5.7). There is a significant shift in the billing system from bi-monthly in the pre reform period to monthly in the reform period in urban areas. The billing system in rural areas has largely remained bi monthly in both pre reform and reform periods, but more so in the latter period.

239

Table 5.7: Billing frequency as reported by the households Figures in % of responding households Rural Pre-reform Reform Billing Frequency (Xavier (CMDR Study) Study) No Billing 2.86 5.1 Monthly 16.4 14.1 Bimonthly 40.0 72.4 More than Bimonthly 40.7 8.4 Total 100.0 100

5.20

Urban Pre-reform Reform (Xavier (CMDR Study) Study) Nil 2.3 26.4 68.5 46.6 24.1 27.0 100.0

5.1 100

Total Pre-reform Reform (Xavier (CMDR Study) Study) 1.4 1.3 21.5 43.4 43.4 45.1 33.7 100.0

Regularity in Billing: One of the basic objectives of reform is to reduce

the irregularity in the billing. There is a significant achievement of the reform process in this respect as the irregularity has declined from 50 per cent in the pre reform period to 11 per cent during the reform period (Table 5.8). Across rural and urban areas it was found that the irregularity in billing had declined significantly in urban areas while it remained more or less constant in rural areas over the years.

Table 5.8: Irregularity in Billing (% of households) Reform Research Studies Region Pre-reform Rural 18.2 17.0 CMDR Study Urban 21.3 9.7 (2003) Total 11.2 Xavier Study Total 50.3 (1996)

240

10.2 100.0

5.21

Billing efficiency and consumer perceptions: In order to determine

the efficiency in the reform period billing system, the perceptions of the people on 5 indicators were collected: correctness in billing, clarity in billing, ease of payment, timely complaint redressal and satisfactory solution of the complaint. Table-5.9 gives the extent of incidence of the perceptions among the households according to 3 possibilities: ‘improved’, ‘deteriorated’ and ‘no change’. The perceptions of people are found to be the most favourable regarding the payment procedure of the bill. Nearly 74 % rural and 88 % urban households feel that there has been greater ease of payment in the reform period. Correctness and clarity in billing comes next in the ranking and get equal rank in both rural and urban areas, with the backing of a little more than half of the sample households in both areas. However, almost 2/3rd (72 %) of the sample households in rural areas reported that they do not get satisfactory solution to their complaints. In comparison, about 44 percent of the urban households reported their satisfaction from the solution to their complaint. It is worth noting that only a small minority (about 12%) of urban consumers feel that there has been deterioration with regards to getting a satisfactory solution to their billing complaints. What comes out as certain is that customer care and grievance redressal by the DISCOMs in case of complaints related to billing are perceived to be the least satisfactory by the majority of households in rural areas. This may be contrasted with the earlier discussion of people’s largely favourable perceptions about the DISCOMs’ handling of metering-related complaints. It appears that the reform period system for customer care and grievance redressal is yet to be developed properly for the different areas of interface between the consumers and suppliers, particularly in the rural areas.

241

Table 5.9: Billing efficiency in rural and urban areas Figures in % of responding households Indicators of billing No Improved Rank Deteriorated Rank Rank efficiency change Rural Correctness Clarity Ease in payment Timely Complaint Satisfactory solution Urban Correctness Clarity Ease in payment Timely Complaint Satisfactory solution

5.22

51.87 51.43 73.75 27.97 12.79

2 3 1 4 5

17.4 16.52 5.16 25.55 71.64

3 4 5 2 1

30.73 32.05 21.09 46.47 15.57

4 3 5 2 1

66.55 66.26 87.67 49.59 43.97

2 3 1 4 5

14.83 14.84 3.84 10.84 11.76

2 1 5 4 3

18.92 18.61 8.49 39.57 44.27

3 4 5 2 1

Non-payment of bills and disconnection of electricity: Under the new

system it is expected that if there were no payment of the bills, the electricity connection would be withdrawn. From the field survey it is found that there is not much difference between rural and urban areas in respect of disconnection of power due to non-payment of bills. About 9 % of the rural households and 7 % of the households in urban areas reported that their connection was withdrawn due to non-payment of bills. It seems that the households have become conscious about the payment of bills in the reform period. Problems in the Supply of Power 5.23

Power supply and consumers’ perceptions:

The problems related

to power supply may be classified as technical and non-technical. The technical problems are mainly power failures, voltage fluctuation, scheduled and unscheduled power cuts. The non-technical problems are mainly related to metering, billing, theft of power, etc. A comparative assessment of rural and urban consumers’ perceptions indicates that the overall situation of power supply in urban areas is better than in rural areas during the 242

reform period. More than 80 % to about 90 % of the urban households feel favorably about the power supply scenario in the reform period, while a similar sentiment finds expression from 55 % to slightly more than 60 % of the rural consumers (Table 5.10). Table 5.10: Consumer perceptions on power supply in the reform period Figures in % of responding households Rural Urban Problems of power supply I D NC I D NC Power Failure 59 17 24 82 8 10 Voltage Fluctuation 55 11 34 83 7 11 Un-notified Power cut 61 14 25 90 4 6 Frequent power cut 56 17 27 88 5 7 I=Improved, D=deteriorated, NC= No change

5.23

Power Failure: Power failure is different from power cut. Power failure occurs due to the problems that are beyond the control of the supply authorities, e.g. natural calamities (cyclone, flood etc.), over loading from excess consumption of electricity, theft of electricity, etc. During the reform period, as judged from the sample households reporting its incidence, power failure of greater hourly duration appears to have declined in both rural and urban areas (Table-5.11). This improvement is more marked in case of the urban areas sampled. Significantly, about 45% of the urban consumers say that they do not suffer from power failure at all as against 5% in the pre-reform period (Xavier Study). Only 13 % consumers in rural areas do not suffer from power failure during reform period while the same was zero percent (Xavier Study) during pre-reform period. Though the power supply situation has improved during the reform period to a great extent, the incidence of improvement is found to be higher in urban areas than in the rural areas.

243

Table 5.11: Duration of Power Failure in pre-reform and reform periods (Figures in % of sample households reporting for different durations of power failure) Rural Urban Duration of power failure Pre Reform Reform Pre Reform Period period Period Reform period CMDR Study, 2003 < 1 hour 18.3 30.4 36.1 35.5 1 - 3 hours 35.4 26.5 32.5 10.5 > 3 hours 46.3 30.5 16.2 9.2 No Power Failure 12.6 44.8 Xavier Study, 1996 No Power Failure 0 5

5.25 Power theft, breakdown of transformers, etc: The major contributing factors for power failure, as gathered from the consumers themselves, are frequent theft of power, overloading and poor maintenance of transformers, falling of trees, etc in rural areas and over loading, theft in urban areas, besides frequent natural calamities common to the state. Despite the serious steps taken by the DISCOMs to control the misuse (theft) of power, still the practice appears to continue on a significant scale in both rural and urban areas of the State (Box 5.2). The field survey conducted by CMDR generated a lot of anecdotal evidence about incidents relating to theft of conductors, the practice of hooking and breakdown of distribution transformers during both the pre-reform and reform periods. By and large, the respondents were of the opinion that there has been a significant decline in the number of incidents involving theft/misuse of power. This general perception gathered from the field survey matches with the trends observed in the data obtained from secondary sources. Table-5.11a presents the data relating to the number of hooking cases detected, length of conductor stolen, number of transformers burnt, etc. as provided by the DISCOMs to the OERC.

244

Table-5.11a: Performance of DISTCOMs in checking theft/misuse of power in Orissa during the reform period Performance Indicators 2000-01 2001-02 2002-03 2003-04 Number of transformers burnt 6341 6741 4936 4501 Cost involved (Rs. Crores) 17.85 18.95 13.96 4.75 Length of conductor stolen (Km) 1659.29 1760.26 968.05 423.61 Cost involved (Rs. Crores) 4.071 4.351 1.406 0.563 Number of hooks detected 83484 68192 309324 126383 Number of hooks repeated out of hooks detected 0 0 21701 156 Number of connections regularised 29345 75097 109479 54090 Number of disconnections made 77277 86572 216860 406702 Source: OERC's Review of Performance of DISTCOMs based on data submitted by the companies to the Commission

Box 5.2: THEFT OF POWER IN THE CAPITAL! About 40-50 unauthorized temporarily constructed houses in the premises of an apex institution in the capital city of Orissa are found to have taken electrical connection through ‘hooking’ from the main lines of electricity provided to the staff quarters. Since the last 10 to 15 years, these households have been using power not only for lighting purposes but also for TV, cooking heaters, electrical grinders and other appliances, etc. Some of them have temporary shops in which they use electricity. The authorities of the Institution have attempted several times to disconnect the illegal connections of the employees but failed. Whenever the authority has taken any initiative towards disconnection, these people have resorted to threatening the authority and other bullying tactic. Consequently, the practice of theft continues and its effect is felt by the consumers residing in the staff quarters who suffer from poor quality of power supply due to over loading. The financial burden of the institution also increases. There is a main meter for the institution for the payment of electricity cost and the illegal users are using the electricity (free of cost) at the cost of the institution. The theft of power is still continuing almost everywhere which has been stated by various key informants i.e. Sarapanch (Nayagarh), Sarapanch (Khurda), Councillor (Bhadrak Municipality), Field Officer (Gramyabank, Khurda), Executive officer(Keonjhar,NESCO), Advocate (Bar Association,Nayagarh), OIC Town Police

5.26 Power cut: Power cut is made deliberately by the authorities when there is a shortage of supplies or need for repair and maintenance of transformers, etc. As perceived by the sample households, there appears to have occurred a marked decline in the duration of power cuts during summer as well as rest of the year in the reform period for both rural 245

and urban areas. This has been a significant achievement of reform and is commonly acknowledged. For the reform period, the most common duration of power cut during summer as well as rest of the year is 1 to 3 hours daily in rural areas and less than 1 hour in urban areas (Table-5.12). Table 5.12: Duration of power cut during pre reform and reform periods (Figures in % of sample households reporting for different durations of power cut) < 1 Hour 1-3 Hour > 3 Hour Not at all Total Pre Pre Pre Pre Season Pre Reform Reform Reform Reform Reform Reform Reform Reform Reform Reform Period Period Period Period Period Period Period Period Period Period Summer Rural 29.2 27.1 39.1 37.3 28.2 21.1 3.5 14.4 100 100 Urban 42.9 39.1 34.0 27.6 18.0 8.2 5.1 25.0 100 100 Total 32.2 35.7 37.1 33.2 23.6 14.2 7.1 16.9 100 100 Rest of the Year Rural 16.0 24.4 51.5 39.6 25.4 18.9 7.1 17.1 100 100 Urban 38.3 35.7 33.9 20.3 16.8 8.0 11.0 36 100 100 Total 25.4 32.5 44.2 29.1 20.5 14.2 9.9 24.2 100 100

5.27 The most common duration of power cut is summarized in Table-5.12a which provides the perception of consumers in the pre reform (Xavier study) and reform scenario (CMDR study). The duration of power cut was on an average 1 – 3 hours per day in the pre reform period throughout the year, while it has improved significantly in the urban areas in the reform period. Table 5.12a: Most common duration (hours per day) of power cuts during summer as well as rest of year Rural Urban Research studies

5.28

CMDR Study (2003)

1 - 3 hours

Less than 1 hour

Xavier Study (1996)

1 - 3 hours

1 - 3 hours

Alternative sources of power: It is interesting to observe that rural

consumers are increasingly using emergency light during power failures and power cuts, though the lantern continues to be the source of lighting for majority of the rural households (Table-5.13). This again is perhaps indicative 246

of a trend that speaks of growing consumer preferences for better quality of lighting and therefore betters quality of life, even in the rural areas of Orissa. Table 5.13: Alternative sources of lighting used by consumers during Power Cut/ Power Failure (Figures in % of responding households) Rural Urban Total Pre Pre Pre Alternative sources Reform Reform Reform Reform Reform Reform Period Period Period Period Period Period Emergency Light 4.0 12.2 34.6 39.5 19.3 23.8 Lantern 65.9 49.8 30.2 29.7 48.0 41.3 Gas Light 3.1 1.1 10.7 9.7 6.9 4.7 Any other (candle, battery etc) 27 36.8 24.5 21 25.8 30.2 Total 100 100 100 100 100 100

5.29 Voltage Problem: According to the consumer perceptions gathered from the field survey, the voltage situation in urban areas comes out much better compared to the position in rural areas during the reform period. Compared to the 73% of households from the urban sample that report receiving adequate power supply with normal voltage, it is found that only about half (50.41%) of the rural households report of receiving normal voltage. The corresponding percentages of responses were 30% and 34% for rural and urban areas respectively (XIMB, 1996). Even then, the fact that about 36 % of the rural households have reported that they suffer from very low voltage should serve as a cause for concern. In comparison, slightly more than 10 % of the urban consumers have reported about the low voltage problem. Table 5.14: Consumer perceptions on voltage quality in reform period

Indicators of voltage quality Low High Fluctuating Normal Total

% of households reporting problems related to voltage quality CMDR Study (2003) Xavier Study (1996) Rural Urban Rural Urban 35.7 12.3 51 42 2.5 1.5 <1 <1 11.4 13.1 15 - 20 20 - 30 50.4 72.7 30 34 100.0 100.0 Figures in % of responding households

247

5.30 Difficulties caused on account of Voltage Problem: Comparatively a greater proportion (51.4%) of urban consumers than those in rural areas (37.1%) reported the absence of any type of voltage-related difficulties in the reform period (Table 5.15). While looking at the various types of difficulties reported by the consumers on account of voltage fluctuation, the pattern comes out to be similar in both rural and urban areas, with the majority complaint being linked to low voltage in the evening time. The damage to electrical appliances due to high voltage problem declined significantly from 23 percent in the prereform period to 6 percent during the reform period both in rural and urban areas. This of course is a healthy sign of the reform process.

Table 5.15: Difficulties reported due to voltage problem in the reform period Figures in % of responding households Type of difficulty reported by the household Rural Urban Total CMDR Study (2003) Tube lights not working in the evening 42.2 32.0 33.2 Electrical appliances not working at night 11.9 9.1 10.9 Damage to electrical appliances 6.9 5.2 5.9 Accidents caused by high voltage 1.9 2.3 2.1 No problem 37.1 51.4 47.9 Total 100 100 100 Xavier Study (1996) Damage caused to electrical appliances NA NA 22.9

5.31 Management of voltage problem: It seems that the non-use of electrical equipment in times of voltage fluctuation is the most common strategy among the rural and urban consumers. However, during the reform period the use of stabilizer has been reduced to a large extent and the proportion of consumers not using any type of protective measure has increased, particularly in rural areas. This gives a

clear

impression

that

there

has

occurred

significant

improvement in the voltage profile during the reform period (Table 5.16). 248

Table 5.16: Protective measures by households in case of voltage problem Figures in % of responding households Rural Urban Total Pre Reform Reform Items Pre Pre Period Period Reform Reform Reform Reform (Xavier (CMDR Period Period Period Period Study) Study) Use of Stabilizer 42.2 12.9 27.6 18.6 24 16.0 Use of Capacitor 1.4 1.3 1.6 2.9 NA 1.9 Use of alternative sources of energy 3.4 5.5 6.0 2.4 1 4.3 Non-use of equipment 48.2 48.2 46.6 55.4 19 51.1 No protective measure 4.8 32.0 18.1 20.6 56 26.7 Total 100.0 100.0 100.0 100.0 100.0 100.0

5.32 Electrical accidents: Information about electrical accidents during the reform period is obtained from the OERC, which has been continuously monitoring the performance of DISCOMs. Table-5.16a gives the data about electrical accidents, both fatal and non-fatal, throughout the state. It is a matter of concern that there is a significantly higher incidence of fatal electrical accidents to humans in 2003-04 as compared to the previous year. Table-5.16a: Incidence of Electrical Accidents in Orissa during 2002-03 & 2003-04 CESCO NESCO SOUTHCO WESCO ALL ORISSA Electrical accidents 02-03 03-04 02-03 03-04 02-03 03-04 02-03 03-04 02-03 03-04 Fatal NonFatal

Human

12

29

7

5

18

18

11

12

48

64

Animal

10

11

4

6

12

15

14

13

40

45

Human

6

18

1

2

16

13

10

13

33

46

0

3

1

1

0

1

22

5

Animal 21 Source: OERC, Bhubaneswar

249

V.4

Socio economic Impact of Power Sector Reform: Impact on

Education Direct impacts 5.33

Study hour duration: The supply of electricity nowadays affects to a

great extent the education of children. If the supply of electricity is interrupted frequently, particularly during the study hours of children (early morning and evening) and during examination days, it tends to have a significantly adverse impact on the education of children. This may be considered as a direct impact of power sector reform on education. So far as the effect of power supply on the duration of children’s study hours is concerned, the majority perception points to an improvement in the current situation over the pre reform period situation. The perceived improvement appears to be quite independent of the social status of the sample households and is relatively more widespread in urban areas than in rural areas. Table 5.17 provides this information. At the same time, it needs to be kept in mind that a significant proportion (25 to 36 %) of households feels that there is still no perceptible change in the situation relating to the quality of power supply during study hours as compared to the earlier pre reform years. 5.34

Access to information and e-education: The supply of power to an

area brings with it the potential to increase consumers’ access to e-education and e-information. This helps in particular the children to increase their educational standard to great extent. The overwhelming majority of rural households sampled perceive no change in the situation relating to access to computer and Internet in the reform period (Table-5.17). On the other hand, a significant % of urban households, particularly from the privileged category, do feel that there has been improved access to eeducation in the reform period.

250

Indirect Impacts 5.35

Educational performance of children: In a general way, the standard

of educational performance of children is likely to be closely linked with the duration of study hour. If the study hour is affected on account of poor power supply, the performance level is likely to deteriorate. The power sector reform in this case affects education indirectly. A majority of sample households (over 60 % in rural areas and about 50 % in urban areas) failed to perceive any type of impact on the educational performance of their children resulting from the changed power supply situation in the reform period. However, the urban bias of the reform impact appears again in the form of a relatively greater percentage of urban households opining that compared to the pre-reform period the reform-period educational performance of children has improved. 5.36

Attendance of evening classes (Girl/female children): Generally

students attend the evening classes (either tutorial or coaching, dance, music, etc) because the regular schooling hours is during the daytime. In a situation of regular and frequent interruptions in power supply during evening hours, parents would naturally hesitate to send their children to such classes. It is found that irrespective of the social category, majority of the parents in urban areas (more than 50% to 76 %) do perceive the current situation conducive for allowing their daughters to attend evening classes. This feeling is found to be much less spread in rural areas. Also a significant proportion of less privileged caste households particularly in rural areas does not feel any change in the attendance of evening classes by girl children during the reform process. However, it should be kept in mind that there might be limited opportunities for children in rural Orissa to avail themselves of facilities offered by evening classes.

251

Table-5.17: Consumer perceptions about reform’s impact on education of children Figures in % of responding households Rural Urban Less Impact Indicators Privileged Privileged Less Privileged Privileged I D NC I D NC I D NC I D NC Duration of Study Hours (early 47 18 36 47 17 36 58 13 28 58 17 25 morning & evening hours) Access to information and eeducation (TV, 10 0 90 4 0 96 45 5 50 32 8 60 Computer & Internet) Educational performance of 28 9 63 26 14 60 37 13 49 35 15 50 children Conduciveness of situation for girls to 35 16 49 26 23 52 76 1 23 51 3 46 attend evening classes Note: (i) I = Improved; D = Deteriorated; NC = No Change (ii) Figures may not add up horizontally to 100 for different social categories because of rounding up

V.5

Socio Economic Impact of Power Sector Reform: Impact on

Health Direct impact 5.37

Diagnostic tests:

Electricity has a crucial role to play in the

provisioning of health care services. The machines/equipment used for different types of diagnostic tests and operations depend largely on continuous and uninterrupted power supply, which is a basic objective of power sector reform. More than 50 % households in rural and more than 80 % in urban areas are reported to have perceived that there is an improvement in the situation relating to the timely conduct of diagnostic tests of different types in the reform period (Table 5.18). 5.38

Health care of children and sick: Not only different diagnostic tests

but the health care of children and sick persons in the households are also 252

affected by the quality of power supply. (For instance, the sick persons, old persons and persons with hypertension etc require continuous fans and AC during summer, which require un-interrupted power supply.) It is found that about 50 to 57 % of households in the total sample perceive that there has been improvement in the health care status in households due to improvement in power supply in the reform period. At the same time, more than 40 % of the households do not feel any change in the situation. Across social categories, it is observed that a relatively larger percentage of privileged group households give a favorable opinion about the impact of reform. Indirect Impact 5.39

Health status of women: Women in general, and working women and

rural women in particular, get very little time to take care of their own health. The use of electrical appliances in domestic chores is expected to reduce drudgery and improve the health status of women along with the overall quality of life enjoyed by them. Since the use of such appliances is linked to the quality of power supply, the issue of the impact of reform in the power sector again becomes relevant. Barring the urban households belonging to the privileged category, the majority perception in all other categories is that there has been no change in the health status of female members in the household during the reform period. Nevertheless, it is encouraging to note that close to one-third of sample households cutting across social categories as well as the rural-urban division provides the perception that points to a likely positive impact of reform on health status of women.

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Table-5.18: Consumer perceptions about reform’s impact on health services and health care in households (Figures in % of responding households) Rural Urban Less Privileged Privileged Less Privileged Impact Indicators Privileged N N N I D I D I D I D NC C C C Timely conduct of 53 8 39 50 7 43 87 1 12 71 2 27 diagnostic tests Health care of children and sick in 53 4 43 49 4 46 57 2 41 51 4 45 households Health status of women members in 34 19 47 32 13 54 42 20 38 37 17 46 households Note: (i) I = Improved; D = Deteriorated; NC = No Change

V.6

Socio Economic Impact of Power Sector Reform: Impact on

Women Direct impact 5.40

Time saved from domestic work: About 45 % (less privileged) to 50 %

(privileged) of the households in rural and 52 % (less privileged) to 63 % (privileged) households in urban areas are reported to have perceived that their time used for domestic work has reduced during the reform period as compared to the pre reform period (Table 5.19). It appears that the reduced drudgery of work burden for women in the reform period has a larger incidence among urban households and those belonging to the privileged social category. 5.41

Leisure time: About 55 to 67 % households in rural and 66 to 69 %

households in urban areas have reported that their leisure time has increased during the reform period as compared to 10 years back. The availability of leisure time appears to be more among women belonging to the privileged category households in urban areas than that in rural areas and women in less privileged households.

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Indirect impact 5.42

Productive utilization of extra time: It is observed that 90 % to 93 % of rural households and 66 % to 73 % urban households are not able to productively utilize the extra time gained on account of reduced work burden on the domestic front. It is possible that there may be a dearth of opportunities for women to use their time gained for productive activities, particularly in the rural areas (Table 5.19).

Table-5.19: Consumer perceptions about reform’s impact on women (Figures in % of responding households) Rural Urban Less Privileged Privileged Less Privileged Impact Indicators Privileged N N N I D I D I D I D NC C C C Time spent for 20 50 30 24 45 31 16 63 21 18 52 30 domestic work Leisure time 57 12 31 55 13 32 69 15 16 66 16 18 Time used for skill 9 1 90 6 1 93 32 2 66 26 1 73 building Time used for 11 1 88 10 1 89 16 4 80 15 4 81 income generation Safety and security 20 17 63 18 23 59 32 33 35 35 28 37 of women Note: (i) I = Improved; D = Deteriorated; NC = No Change (ii) Figures may not add up horizontally to 100 for different social categories because of rounding up

5.43 Safety and Security: More than 50 % (59 to 63 %) of households in rural areas and 35-40 % households in urban areas reported that there is no change in so far as the security of women is concerned during reform period. In fact, among the urban households sampled, the opinion about insecurity of women is almost equally divided as to whether there has been improvement, deterioration or no change in the situation in the reform period.

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V.7

Impact of power sector reform on livelihood

5.44

Employment:

Improved power supply in the reform period is

supposed to generate rural employment in the cottage, tiny and small-scale industries, such as flour mills, rice mills, textile units, appliqué and other craft centres, tailoring units, etc that are located in villages and their vicinity. In both rural and urban areas, households belonging to the privileged category generate a majority (> 50 %) opinion that there has been increased employment of male workers in the cottage and small-scale industry sector during the reform period (Table-5.20). The same opinion comes from the perceptions of a significant percentage of the sample households belonging to the less privileged category in both rural and urban areas. Table 5.20: Employment in cottage, tiny and small scale industries Less Privileged Privileged I D NC I D NC Rural Male Female Total

45.8 23.4 35.0

5.6 7.3 6.5

48.6 69.3 58.5

52.3 33.2 43.4

5.5 8.0 5.1

42.2 58.7 51.5

Urban Male Female Total

49.8 43.3 44.2

2.1 5.5 4.2

48.0 51.2 51.6

60.4 54.2 56.5

2.1 4.4 3.2

37.5 41.4 40.3

I=Increased, D-Decreased, NC-No Change

V.8.

Impact of Power Sector Reform on Consumption Pattern of the

households 5.45

In view of the hike in tariff, it is expected that there may be a change in

the consumption pattern of the household and due to this change, there is possibility of foregoing some of the family expenditures The majority of the perceptions in respect of this aspect indicates that there is an increase in the household spending on consumption but no expenditure is postponed due to the hiked rate of tariff of electricity (Table 5.21). This provides a clear idea

256

that in view of the improved power supply the consumers are willing to pay for electricity uses without distorting their consumption pattern.

V.9

Impact of Power Sector Reform on Agriculture

5.46

Agricultural productivity: The majority of rural households surveyed

(nearly 85 %) perceived no change in the productivity of agriculture during the reform period as compared to its pre reform position. Considering the very low consumption of electricity in agriculture in Orissa, it is almost a foregone conclusion that there is very limited scope for power sector reform to make its impact significantly felt on the productivity level.

5.47

Cold storage facility: Has the better power supply scenario in the

reform period induced addition to cold storage facility for agricultural produce? The rural households surveyed almost near unanimous in their opinion that there has been no change in the availability of cold storage facility in the reform period. However, a small minority of 17 % of the privileged urban households felt that there has been a reform-period improvement in the storage situation in urban areas.

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Summary statement of the perceptions of HHs on impact indicators 5.48 The perception of households (HHs) on impact indicators discussed above are summarized in Table 5.21in amore descriptive way. Table 5.21 Summary statement of the perceptions of HHs on impact indicators Majority Perception Rural Urban Less Less Privileged Privileged Privileged Privileged Category Category Category Category

Impact Indicators

Impact on Education Power Supply during Study Hours Access to Information and E-education Average Per Performance Level of Children Attendance of evening classes by girls Impact on Health Timely Conduct of Diagnostic Tests Health care of sick and children Health status of Women Impact on Women Time saving by women from Domestic work Leisure time available to women Skill-building and income generating activities Safety and Security of women Impact on Consumption Pattern Family Consumption expenditure Foregone or postponement of family expenditure Impact on agriculture Impact on productivity of agriculture Impact on storage Impact on Employment Employment in cottage, tiny and small scale industries Male Employment Female Employment Total Impact on Income Generation Participation of family members in income generating activities Male Employment Female Employment I = Improved, NC = No Change, D=Deteriorated

258

I NC

I NC

I I

I NC

NC NC

NC NC

I I

I I

I I I

I I NC

I I I

I I I

I I NC NC

I I NC NC

I I NC NC

I I NC NC

I

I

I

I

NC

NC

NC

NC

NC NC

NC NC

-

-

I NC NC

NC NC NC

I I I

I NC NC

I I

I I

NC I

I I

V.10 Consumers’ Willingness to Pay at a Hiked Rate 5.49

Willingness to Pay: The present tariff rate seems to put financial

burden on the consumers to such an extent that about 73 % rural and 51 % urban households of the total sample are not willing to pay any extra rate for electricity over and above the present tariff. However, it is interesting to note that with a rise in the level of education consumer’s willingness to pay increases. It seems higher level of education and urbanization enhance the willingness of the consumers to pay more towards electricity charges if they are assured of better and regular supply of electricity. This can be seen from Table 5.22.

Table 5.22: Consumer’s Willingness to Pay for Electricity at a Hiked Rate of Tariff by Levels of Education Levels of Education % of Households revealing willingness to pay Nothing 5 % more 10 % more Rural Illiterate 86.97 8.76 4.27 Below Matriculation 73.91 19.04 7.05 Above Matriculation 58.95 24.53 16.52 Total 73.28 16.98 9.74 Urban Illiterate 62.83 28.26 8.91 Below Matriculation 51.62 31.48 16.90 Above Matriculation 33.94 27.90 38.16 Total 51.46 26.78 21.76

V.11 Analysis of data from Commercial & Industrial (small-scale) consumers 5.50

Sample profile: The survey of commercial and industrial units for the

present impact assessment study covered a total number of 212 units belonging to the small-scale segment of the commercial and industrial category of electricity consumers in Orissa. The number of units sampled in a survey area was largely determined by the presence of such units in that 259

particular area and the variety. Selection of the sample units was largely purposive with a view to capture as much as possible the different types of commercial and industrial activities present in a location. For the 8 districts sampled, with the exception of the Khurda district, each district has about 20 to 30 sample units belonging to the commercial and small-scale industrial consumer categories. The size of the sample (62) for Khurda district is relatively large because the State capital with a large number of commercial enterprises falls in this district. Table-5.23 gives the district wise distribution of the sample units along with their metering status. Table 5.23: District wise status of Metering of sample units belonging to commercial and industrial category Districts Keonjhar Bhadrak Sambalpur Angul Khurda Nayagarh Raydgada Ganjam Total

Units with No. of No. of Total Working Meters metered Unmetered sample as % of Total units units units Metered Units 18 25 21 18 60 19 20 22 203

100 100 100 100 100 100 100 100 100

9 2 3 2 2 1 0 0 19

27 27 24 20 62 20 20 22 222

5.51 Supply of electricity: There appears to be significant regional variation in the power supply position as far as its adequate availability to the productive units under consideration is concerned. Almost one third of the sample units seem to have problems with the adequate availability of electricity for their productive purposes (Table-5.24). The percentage of units reporting inadequate supply of electricity is as high as 71% for Keonjhar district.

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Table 5.24: District wise status of Supply of Electricity to commercial and industrial users

Districts

Keonjhar Bhadrak Sambalpur Angul Khurda Nayagarh Raydgada Ganjam

Units reporting Units reporting adequate inadequate supply of supply of electricity (% electricity (% to Total Units to total) total) 24 29.2 70.8 27 55.6 44.4 21 61.9 38.1 20 85.0 15.0 61 91.8 8.2 20 75.0 25.0 20 65.0 35.0 19 68.4 31.6 212 70.3 29.7

5.52 Impact of reform on productivity/efficiency/profitability: So far as the impact of reform on the productivity, efficiency and profitability of the commercial and industrial consumers is concerned, most of the sample units reported that the promised benefit of power sector reform relating to adequate supply of quality power is yet to reach them in a significant way. They complain that power problems like irregularity in power supply and poor quality of voltage still exist and continue to affect adversely the functioning of the units. The problem is particularly severe during summer time. District wise, the units located in the northern region (Keonjhar and Bhadrak) come out as the worst sufferers of continuing power sector problems. At the same time, however, there appears to be a growing realization among the sampled units that the situation may be turning for the better.

It is significant and a cause for concern that in contrast to the generally favourable perception of household consumers regarding the reformperiod power supply situation and also in contradiction with the improved power supply scenario brought out by macro performance 261

indicators, there is a general feeling of discontent among the commercial and industrial category of users about the adequate availability of quality power, particularly among units located in the relatively backward districts of the State. 5.53

Alternative sources of power and associated cost:

Table-5.24

presents the other-than-electricity sources of power used by different categories (connected load wise) of commercial and industrial units and the average cost per month associated with such use. In the case of diesel generators, larger units are seen to have a relatively lesser need to use them as compared to the units with small loads, since the average hours of use of such generators per month decline as one moves from units with small loads to the more power-intensive units. This appears to be a case of the regressive impact of power sector reform on commercial and industrial users. The average monthly cost on this source of power is higher for larger units, but one cannot rule out the possibility that when estimated relative to their respective turnovers, the financial burden on the smaller units would be disproportionately higher. Taking all units using diesel generators together, the average monthly cost comes to Rs.5614, which is a significant amount. For units using gas as the alternative power source, the average monthly cost is considerably lower (Rs.745).

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Table 5.24 a: Alternative Sources of Power / Stand by Facilities and the associated cost for commercial and industrial users of different capacity size (KW terms)

Type of Alternatives No.of Units Diesel Avg Cost (Rs. Per Generator month) Avg Hrs per Month No.of Units Avg Cost (Rs. Per Gas month) Avg Hrs per Month No.of Units Avg Cost (Rs. Per Solar month) Avg Hrs per Month No.of Units Avg Cost (Rs. Per Others month) Avg Hrs per Month No.of Units Avg Cost (Rs. Per Total month) Avg Hrs per Month

Capacity wise User Category >1 KW TO >5 KW TO Above <=1 KW Total <=5 KW <=10 KW 10 KW 7 9 7 17 40 3078 61 28

2650 55 18

8597 31 3

6789 39 0

5614 45 49

369 38.2 0

1290 41.7 0

733 72.7 0

0 0 2

745 42.3 2

0 0 25

0 0 14

0 0 3

335 7.5 2

335 7.5 44

757 40.0 100

2005 46.3 59

1133 8.7 28

500 7.0 34

1141 37.1 222

867 42.2

1773 45.6

5060 37.8

5421 31.2

2268 40.9

5.54 Customer care and grievance redressal: With the exception of the units coming under CESCO, the majority of the consumer units served by the other 3 DISCOMs complain of poor customer care and un-satisfactory solution to grievances. Again, the units coming under NESCO turn out to be the worst sufferers. Most of the complaints of the industrial units relate to the improper functioning of meters and the incorrect reading of meters.

263

CONCLUSION SUMMARY In the first two chapters of my thesis, I have discussed the theoretical framework of reforms and its necessity for timely adoption. The main aim of this thesis is to bring out an ideal framework for all those state utilities aspiring to unbundle their vertically integrated utility. The earlier Electricity Act. 1909 failed to deliver the results in terms of their financial viability. Power sector investment has always been dependent on budgetary support and external borrowings. Electricity Act. 2003 was enacted with a view to deregularizing the vertically integrated utilities, opening the field of generation and distribution to private players and introduction of power trading system. To achieve a robust GDP growth of 8 per cent per annum, the growth rate of power sector is prescribed to grow over 10 per cent per annum. Initiatives were taken in the chief minister’s conference on Common Minimum National Action Plan for Power (CMNPP) convened by Prime Minister in 1996 which ushered in the comprehensive reforms program for power sector including reforms in distribution sector. The results were visible in the Ninth Plan (1997 – 02) with an addition of 19,015 MW from the preceding plan period. The reform policy also allowed private sector to set up companies with 100% foreign participation and with a maximum 4:1 debt equity ratio. The return on foreign equity was protected in foreign currency and a number of tax concessions were extended to woo the investors. I have analyzed the growth of power sector in detail. The way the power sector has performed in the past several years across several plan periods has been supplemented with necessary tables and graphs. In spite of many rewarding initiatives the participation from the private players has been considerably low as compared to public sector participation. One of the reasons may be attributed to the lack of comprehensive fuel supply agreement 264

(FSA). The IPPs insist that the penalty for supply interruptions should cover the loss of revenue (Fixed cost component of tariff) attributable to the default in fuel supply. Penalty could be on the basis of the additional cost incurred in procuring fuel from alternate sources but railways contend that it should be on the value of the fuel not on supplied. In the subsequent chapter, I have discussed the success of global players in power sector reforms which includes nations falling in European Union, USA and Latin American countries and few other successful reform programs which acted as the precursor to India’s reforms initiatives. During my course of research the California power crisis happened and I’ve discussed it at length. In India, Orissa became the pioneer state to adopt the reform program way back in 1996 which had set a mile stone in the field of power generation and distribution. Other states like Andhra Pradesh and Delhi soon started the calibrated reforms initiatives after examining the fault line in the Orissa model of power sector reforms. During my analysis I found to conclude that the reform processes which were extremely successful abroad is not viable because of several underlying reasons like: High AT&C losses, concentric area development, ability to pay, willingness to pay and above all the excessive political interference from the successive state governments. Power has always been subsidised by several state governments but government fails to make the payment to the state run SEBs. Chapter IV deals with the enactment of a new Electricity Act. 2003 and implementation of Montek Singh Ahluwalia Report recommended the ways and means for one time settlement of outstanding dues of SEBs to CPSUs. The World Bank’s model on structural reforms in power sector has been discussed in detail. It is the prerogative of the different state governments to adopt the most suitable one as per their viability and need. This chapter also traces the changes in the legal provisions governing electricity power tariffs and discusses the processes and methodologies adopted over time for tariff setting till the formulation under Section 178 of the Electricity Act, 2003, 265

which may be called the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004. A broad comparison has been made over the existing tariff structure vis-a-vis availability based tariff (ABT). An in-depth analysis has been made to find out the mechanism of calculation of cross-subsidy put forth by different agencies working in this area. The financial crisis besetting the Indian power sector has always been an issue of great concern for the planners and experts but evolving an audit i.e. Energy audit mechanism was never introduced to the system because it may lead to some path breaking findings such as excessive estimation of T&D losses, High Transmission (11KV & above) losses, unwillingness of utilities for effective metering, indication of significant commercial losses in HT level, etc. Chapter V deals with the appraisal of Orissa’s reforms experience and its failure to become a financially profitable organization as against predicted by consultants who drew up this pragmatic reform model against a staggering Rs.306.422 crores as consultancy fees from Britain's Department for International Development (DFID). Consultants includes KPMG – Pre-reform Consultancy, Credit Suisse First Boston – privatization consultancy, Merz McLellan & Seaboard International – Project management consultancy, Price Waterhouse Coopers – other consultancy, has raised many unanswered questions on the efficacy and practicability of their consultancy. A detailed study has been made after examining its fault lines, and suggestions have been placed to improve its performance. During the course of my research, GRIDCO witnessed its turnaround in the A.Y 2003 – 04 and predictions are strong that complete turnaround after writing off previous losses will be possible in the year 2008 – 09. A complete case study has been prepared in this regard and it has received appreciation from several quarters after its publication in the Journal of Power Professionals “HORIZON”, Oct – Dec, 2005 Vol. 7 No.1. An attempt has been made to compare the financial performance of Orissa with Andhra Pradesh, though AP started its reforms 266

process much later than the state of Orissa. Orissa has become a model state among its counterparts as far as power sector reform is concerned and its successful turnaround under Mr. Suresh Chandra Mahapatra, IAS the then CMD of GRIDCO has again reaffirmed the faith in a person with dedication towards duty and transparent functioning. In the concluding chapter “Socio economic impact assessment of power sector reforms – An impact analysis” an attempt has been made to develop a general micro level perspective about the effect of reform on different user categories on the basis of various impact parameters. The data collected from the users is both factual and perception-based. The instrument of data collection consists of a structured questionnaire for households, Focus Group Discussion dairies, an open ended checklist for commercial and small industrial users, a list of issues in connection with the power sector for being discussed with the principal informants and also informal discussions. The study on Socio economic Impact of Power Sector Reform was conducted in eight selected districts of Orissa, with 2 districts sampled from each of the 4 geographical zones (North, South, East and West) of the State. The summary of findings has been quite convincing which leaves scope for further study. One cannot generalize from this specific focused research. There are only tentative formulations and proposals for further investigation. These areas of potential research have been illustrated after careful consideration. In the course of my research there have been many changes in the regulatory aspect and it has been done with a singular objective of facilitating the reforms process. I’ve a strong belief that with the growth of power, India will become resurgent India and the coming decade will be the decade for growth of “Power” in India.

267

FINDINGS 1. The central government started spending more money on power in comparison to previous years and a substantial hike in central outlay in ninth plan can be seen. 2. Actual capacity addition fell seriously short of target in both Eighth and Ninth Plan. 3. Private sector participation in capacity addition was worse among these three. In eighth plan actual capacity addition almost 50% of the target set but in ninth plan it was even less than 30% of the target set. 4. Capacity addition of hydro power in state sector was steadily increasing and phenomenal rise can be observed in ninth plan. 5. Actual capacity addition fell seriously short of target both in Eighth and Ninth Plan periods. 6. Establishment of Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commission (SERC) in each state in time bound manner. 7. Rationalization of retail tariff, under which no sector shall pay less than 50 per cent of the average cost of supply and tariffs for agriculture should not be less than fifty paise per unit and should be increased to 50 per cent of the average cost in not more than three years. 8. Finalization of National Energy Policy. 9. Gradual private participation in distribution has already taken place, initially in one or two viable geographical areas were covered both urban and rural areas and extends to other parts of state gradually. 10. Restructuring & corporatisation of SEBs and make them function on commercial basis. 11. Improvement in plant load factor (PLF). 12. Compulsory metering of all sub-stations and all major feeders, all new connections and all connections including agricultural connections has metered by the year 2002 as per the proposal. 13. Compulsory energy audit for all consumers. 268

14. Evolvement of a national policy on hydro power development 15. Encouragement for co-generation and captive generation. The above findings were possible because of the success of international experience in distribution reforms, namely UK, USA, and Latin American countries like Chile, Argentina, Peru, Columbia, EU Nations and Australia. Their reform programs were based on country’s governmental structure, demographics, socio-economic and political environments and resource availability. But it was amply clear those countries undertaken restructuring the electric utilities was for: • Improving the efficiency, • Reducing tariff • To provide better quality of service to consumers, through competition and consumers would gain from efficiency gains in generation, transmission and distribution. Restructuring also led to the removal of certain problems like load shedding, blackouts, and high degree of T&D losses, which includes theft of energy, etc. Basing on these experiences and taking world bank model for structural reforms on power sector India appears to be relying on the single buyer model for now (making the role of TRANSCO special – monopoly seller to DISTCOs, and monopsony buyer from the GENCOs). While there is recognition of the pros and cons of a single-buyer model, the government hopes this is a transitional solution, leading to open access to the wires (Deepak Parekh Expert Committee on State Specific Reforms 2002). Instead of the transmission companies, privatizing the handful of DISCOMs per state appears to be the thrust of the government as of now. The states kicked off their reform process notably among them were Andhra Pradesh, Delhi & Orissa.

269

In Andhra Pradesh the unbundling of the sector was primarily aimed to increase operational efficiencies and to allow these entities to function independently and put them in decision taking mode. More than 90% of the employees were allotted to the company of their choice. The new power generation projects would be mainly developed by the Independent Power Producers (IPPs) selected through International Competitive Bidding (ICB) and joint venture companies of APGENCO with private parties, other states or central undertakings. The achievements of Andhra Pradesh reforms because of the fact that Andhra Pradesh has taken up full-fledged energy auditing of 114 towns and the T&D loss levels in these towns have been brought down to less than 10 per cent. CRISIL Rated Andhra Pradesh as the Best Utility in Implementing Reform program in a calibrated way. In Delhi the main metric for choosing companies was not based on valuation, but on performance improvement goals. The DISTCOs annual revenue requirements are calculated based on their expenditure, performance (targets), and return on equity (16%). The process of choosing the companies were • Valuation of assets • Mitigating uncertainty • Criteria for selection of successful investor • Incentives for achieving higher efficiency gains • Baseline data • Treatment of receivables It is clear from Delhi privatization process that there was a better recognition of the need for government support during the transition period in the Delhi privatization which was totally absent in Orissa reforms. Encouraged by the Government of India, assisted by the World Bank, and supported with grants from the Government of U.K (DFID), Orissa took the initiatives and earned the reputation of being the first state to reform its 270

electricity industry. Though the purpose of the reform was pious but because of the under mentioned reasons, it failed to make any impact operationally and financially as well, namely • Incomplete separation of transmission and distribution caused problems. • Regulators should have given a clear picture of their tariff philosophy, rate base, valuation methods, likely profile of prices and expected performance levels. • There should have been a structured, time-bound financial support mechanism, with a fixed schedule for tapering off coupled with improvements in operating parameters and collection. • The single buyer model is necessarily not the best, and the Transco might be better as just a wires company. • Determining who gets priority claims over revenues is important. Do not escrow the revenues from the distribution zones for meeting TRANSCO needs, like was done in Orissa. • Tinkering with the valuations, especially just before privatization has caused heavy damage. This can have a serious impact on tariffs, as Schedule VI of the Supply Act 1948 is based on assets (and newer methods allow for 16% returns on equity). However, the main reason for the poor performance appear to be the false assumptions and expectations of the players, and the limited support provided by the government, either for subsidies or to the companies who had liquidity

271

issues in addition to solvency issues. After examining the fault lines carefully few steps were taken to improve the financials of new utility. It includes:• GRIDCO started trading of its surplus power with the utilities/SEBs through the Power Trading Corporation of India Ltd. (PTC) by entering into an Agreement signed on 03.07.2003. • Billing and collection efficiency under the privatized distribution companies (DISCOMs) started improving. • To bring the reforms back on the rails, the World Bank and the DFID who helped Orissa initially came forward with a suitable package to fill the revenue gap in the intervening years. • These services of the consultants, which weakened the organisation rather strengthening them, were stopped and government appointed efficient, dynamic bureaucrat in-charge of GRIDCO / OPTCL, which made turnaround a reality & it has been decided to keep the tenure of CMD fixed for 03 years. • To ensure that commission (OERC) is fully functional at all times, the government started appointing commissioners promptly because OERC has done pioneering work in our country in the establishment of a regulatory mechanism for the electricity industry. • The government and the commission started interacting on a wide range of issues of monitoring, problem solving, planning and development of the state’s power sector.

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SUMMARY OF THE MAIN FINDINGS OF SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR REFORMS 1.

Use of electricity: During the reform period there appears to

have occurred a significant change in the pattern of use of electricity since, compared to the pre-reform period, more households particularly in the urban areas report its application in non-conventional uses like domestic chores other than cooking, education, health and hygiene, entertainment, etc in addition to the extensive use of modern electrical appliances. More than 80 % of the households have reported about the economy in the use of electricity at their homes and more than 70 % women in the rural and 80 –90 % women in urban areas are found to be practicing economy measures in the use of electricity. It is possible that on account of the economy in use, the average monthly expenditure on electricity by households in both rural and urban areas is less in reform period than in pre reform period despite the fact that there has been a significant rise in electricity tariff in the reform period. 2.

The inclusion of forward caste

Access and metering:

consumers among the sample households in the ‘Kutir Jyoti’ scheme points to relatively poor targeting. Though the objective of 100 % metering of user households is yet to be achieved in rural areas, there is significant achievement in repairing and replacing of non-working meters in the rural areas in the reform period. Evidence of improved system efficiency in the reform period is contained in the less time taken for households to get connections, significant decline in the irregularity in meter reading, less time taken for repairing of meters and the reduced incidence of tampering/damage of meters. The finding that there is a sharp increase in the proportion of households’ not lodging metering-related complaints during the reform period, particularly in rural areas, is more likely explained in terms of 273

improved system efficiency in energy accounting by the DISCOMs at the domestic users end. 3. Billing efficiency: Irregularity in billing has been eliminated significantly; still it needs to be brought down to a tolerable level, particularly in the rural areas. There is an overall increase in billing efficiency, specifically in terms of more correct billing, better clarity in billing and greater ease in payment procedure during the reform period as compared to the pre-reform period. However, in terms of customer care, the system set up by the DISCOMs is yet to provide satisfaction to the majority of consumers in the rural areas. The overall improvement in the efficiency in billing system seems to be relatively more pronounced in urban areas than in rural areas. 4.

Supply of power: According to the information gathered

from consumers, the overall power supply situation in urban areas appears to have improved significantly during the reform period. The rural consumers suffer from longer duration (more than 3 hours) of power failure on an average while urban consumers suffer from power failure for less than one hour.

There is a marked decline in the

frequency of power cuts during summer as well as the rest of the year during the reform period. The most common duration of power cut during summer is 1 to 3 hours daily while it is less than 1 hour duration during rest of the year in both rural and urban areas in the reform period. Despite the various steps undertaken in the reform period to control the misuse (theft) of power, still the practice appears to continue quite extensively in both rural and urban areas, possibly in collusion with the field functionaries of the DISCOMs.

274

5.

Voltage quality:

Slightly more than half (50.41%) of the

households in rural areas while more than 2/3 rd (72.74%) households in urban areas have reported that they get adequate power supply with normal voltage. In rural areas about 36 % of the households have reported that they suffer from very low voltage. The damage to electrical appliances and accidents due to voltage problem seems to be negligible in both rural and urban areas, which of course seems to be a healthy sign of the reform process. During the reform period the use of stabilizers has been reduced to a large extent and the proportion of consumers not using any protective measure for voltage problem has increased which gives a clear impression that there has been a lot of improvement in the quality of voltage during the reform period. 6.

Impact on education:

It appears that on account of the

improvement in power supply the duration of the study hours has increased in both rural and urban areas, but in a more pronounced manner in the latter areas. There is significant improvement in the access to computer and internet in the urban areas in the reform period. No perceptible change is observed in the educational performance of children in rural and urban households. Due to less frequent power cuts in the evenings there seems to be greater confidence among the urban parents, irrespective of their social status, to allow their daughters to attend evening classes. 7.

Impact on health: More than 50 % rural more than 80 % urban

households reported that there is an improvement in the timely conduct of diagnostic tests of different types in the reform period. Largely it is found that the privileged urban area households are in a relatively favourable position to avail of the benefits of improved health care services due to better quality power supply in the reform period. There appears to be a significantly perceptible positive impact of reform on the 275

health care of the sick, old persons and children in the sample households. A significant proportion of households perceived that the health status of women has improved in the reform period on account of reduced drudgery. 8.

Impact on women: The women members of urban households

are found to save more time than their rural counterparts by the greater use of electrical appliances in domestic chores. By and large, the leisure time gained by the women members of rural and urban households has not been productively utilized possibly due to the lack of opportunities for women. About one-third of urban households and a quarter of households in rural areas have reported that the insecurity of women has increased during the reform period. 9.

Impact on agriculture, employment and consumption

pattern: There is no perceptible impact of power sector reform either directly on agricultural productivity or indirectly in terms of the provisioning of storage services for agricultural produce, as reported by the overwhelming majority of rural households. In both rural and urban areas, households belonging to the privileged category generate a majority (> 50 %) opinion that there has been increased employment of male workers in the cottage and small-scale industry sector during the reform period. Majority of the households expressed that their consumption expenditure is not distorted due to increased cost of electricity. 10.

Awareness about reform: About 76 % of the rural consumers

and 95 % of the urban consumers are aware of the reform measures. Regarding the sources of information about the reform it is found that largely news papers (as stated by 56 % consumers) in urban area and radio (as mentioned by 46 % consumers) in rural areas have played important role in creating awareness about reform measures among the consumers. 276

11.

Willingness to pay: The present tariff rate seems to put

financial burden on the consumers to such an extent that about 73 % in rural and 51 % in urban area consumers are not willing to pay any extra rate for electricity over and above the present tariff. However, it would be interesting to note that higher level of education and urbanization enhance the willingness of the consumers to pay more towards electricity charges if they are assured of better and regular supply of electricity.

SUGGESTIONS 1. The poor performance of the existing power generation facility is to be dealt, hence forthwith. The national average has almost reached 75% plant load factor (PLF). Gradually it should be increased to 85% PLF and continuous benchmarking should be done in this regard and this type of exercise needs to be continued. 2. There are a large number of states where a considerable amount of work needs to be done to set up rural electricity infrastructure and government intervention in a big way might be necessary. 3. Orissa was the first state which started the exercises of reforming its power sector in early nineties. It is therefore very essential to draw upon the experiences of this initiative. 4. Distribution is the cutting edge of the power industry and it needs to be set right. Unless the electricity market allows itself to be put under competitive pressure, performance improvement to the desired level might be difficult to achieve.

277

5. To meet the resource requirements of expansion, we have to devise the policies and programmes and revive this sector in a manner that it attracts investments and also generate surplus to fund growth. 6. The political willingness is required from the government to further its development. The political bosses must desist themselves from announcing populist policies relating to power. Any subsidy or free power extended to any sections of population will have severe pressure on the ailing state finances and ultimately the growth will be hindered. There is a need for continued political support for reforms. 7. The private power producers must be encouraged to operate in their area of preference. The option of producing power from Atomic energy must be pursued with great vigor.

278

SCOPE FOR FURTHER RESEARCH

1. Single Buyer vs. Multi Buyer Model in Distribution The state owned Single Buyer is often reluctant to take unpopular action against delinquent distributor, who either overdraws power or most importantly does not honour the payment schedule for the power purchased by it. It affects the commercial viability of the transmission and distribution company, which may not pay enough attention to disconnect power supply of the defaulting consumers across the board vitiating the very purpose for encouraging competition and privatization. The single buyer model retains the role of the government in the power sector instead of distancing it. So the research on Multi Buyer Model would be an ideal one at this juncture. 2. Scope of Foreign Direct Investment in Power Sector There has been an insignificant inflow of FDI in power sector. The time when power sector growth was required, then corresponding liberalized policies were announced, yet the response is not so encouraging. The different areas where it has failed to attract the FDI must be analyzed and a comprehensive roadmap needs to be prepared to woo the investors. So a comprehensive research needs to be carried out to suggest the ways and means to encourage the participation of private players in the power sector by the way of FDI.

279

THE SCHEDULE ENACTMENTS (See sub-Section (3) of Section 185)

1.

The Orissa Electricity Reform Act, 1995 (Orissa Act no. 2 of 1996)

2.

The Haryana Electricity Reform Act, 1997 (Haryana Act no. 10 of 1998)

3.

The Andhra Pradesh Electricity Reform Act, 1998 (Andhra Pradesh Act no. 30 of 1998)

4.

The Uttar Pradesh Electricity Reform Act, 1999 (Uttar Pradesh Act no. 24 of 1999)

5.

The Karnataka Electricity Reform Act, 1999 (Karnataka Act no. 25 of 1999)

6.

The Rajasthan Electricity Reform Act, 1999 (Rajasthan Act no. 23 of 1999)

7.

The Delhi Electricity Reforms Act, 2000 (Delhi Act No.2 of 2001)

8.

The Madhya Pradesh Vidyut Sudhar Adhiniyam, 2000 (Madhya Pradesh Act No. 4 of 2001)

280

ABBREVIATIONS ABT – Availability Based Tariff AP – Annual Plan (or the state of Andhra Pradesh) ARR – Annual Revenue Requirement APDP - Accelerated Power Development Programme BBMB - Bhakra Beas Management Board BHEL – Bharat Heavy Electricals Limited BJP – Bharatiya Janata Party (Ruling party in the present Indian Government – in a coalition) CCEA - Cabinet Committee on Economic Affairs CEA - Central Electricity Authority CPP - Captive Power Plant CPRI - Central Power Research Institute CPSU - Central Public Sector Undertaking CWC - Central Water Commission CCGT – Combined cycle gas turbine CERC – Central Electricity Regulatory Commission CM – Chief Minister CRORE (or cr.) – 10,000,000 (4.8 crore rupees ≈ 1 million US$ today) DISCOM / DISTCO – Distribution Company DPR - Detailed Project Report DSM - Demand Side Management DVB - Delhi Vidyut Board DFID – Department for International Development (UK) DPC – Dabhol Power Company EPRI – Electric Power Research Institute (US) EHV – Extra High Voltage EIA – Environment Impact Assessment ERC – Electricity Regulatory Commission (Includes variants like CERC, SERC, OERC, etc.) 281

FDI – Foreign Direct Investment GOI – Government of India HVDC – High Voltage Direct Current ICICI – Industrial Credit and Investment Corporation of India IDBI – Industrial Development Bank of India IGCC – Integrated Gasification Combined Cycle IREDA – Indian Renewable Energy Development Agency IIM – Indian Institute of Management IAS – Indian Administrative Services IPP – Independent Power Producer KWh – Kilowatt –hour LC – Letter of Credit LT – Low Tension MIS – Management of Information Systems MoU – Memorandum of Understanding MW – Megawatt MNES – Ministry for Non-conventional Energy Sources MoEF – Ministry of Environment and Forests MU – Million Units NTPC – National Thermal Power Corporation NHPC – National Hydroelectric Power Corporation Ltd. NIC – National Informatics Centre NPC – National Productivity Council NPTI – National Power Training Institute NREB – Northern Region Electricity Board NRLDC – Northern Region Load Despatch Centre PIB – Public Investment Board PMGY – Prime Minister Gramodaya Yojna PSEB – Punjab State Electricity Board PLF – Plant Load Factor PPA – Power Purchase Agreement 282

Ps/kWh – Paise per kilowatt-hour (100 paise = 1 Rupee) PSU – Public Sector Unit RE – Revised Estimate RLDC – Regional Load Dispatch Center RoE – Return on Equity RoR – Rate of Return R&M – Renovation and Modernisation RBI – Reserve Bank of India REB – Regional Electricity Board REC – Rural Electrification Corporation Ltd. RIDF – Rural Infrastructure Development Fund SEB – State Electricity Board SERC – State Electricity Regulatory Commission SBI Caps – State Bank of India Capitals Ltd. SEZ – Special Economic Zone TERI – Tata Energy Research Institute T&D – Transmission & Distribution TIFAC – Technology Information Forecasting and Assessment Council UPPCL - Uttar Pradesh Power Corporation Ltd. WB-SAR – World Bank - Staff Appraisal Report WAN – Wide Area Network WAPCOS – Water and Power Consultants

283

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