Turn Around Of Gridco

Turnaround of GRIDCO*- A Case Study For any nation to achieve significant industrial and economic growth, power sector is very important. The poor development of power sector can have far-reaching consequences on the economic growth of any nation, as every company/industry requires energy to produce goods. Electricity is the primary source of energy and the development of electricity sector is important for improving productivity and hence economic growth. Developing countries needs energy particularly electric power for social & 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. For the Indian economy to achieve the economic growth rates commensurate with developed nations, infrastructure holds the key. With the liberalization of the Indian economy in the 1990s, it was expected that infrastructure development would assume center stage along with the deregulation of the financial markets. However, the infrastructure development was not a priority item on the reforms agenda during the earlier stages and it is only a recent phenomena that infrastructure development is being stressed upon, especially in the development of roads, ports etc. Being one of the biggest sectors in infrastructure, power has not been given adequate attention in India. With the power situation becoming grimmer in the recent days, the Indian government is now focusing on reviving the power sector. 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 & external borrowings. 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 & distribution of electricity in the country. The state electricity boards (SEBs) were allowed to start their 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) was formed in 1975. Earlier being entrusted with generation of power from coal & 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 & to develop the interconnected grid system across the country. 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 plants today incorporate Flue Gas Desulphurization (FGD) technology. (*-Grid Corporation of Orissa)

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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. 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 remains integrated. Distribution has no choice of supplier from whom to buy power. 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 & selling through the power pool. Reforms and Restructuring Initiatives in Orissa’s Power Sector In 1994, the government of Orissa initiated power sector reforms & it’s 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 & 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. The performance of OSEB (Established in 1961, OSEB was the main body responsible for power sector development) 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 & 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 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. 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 2

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. 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.

·

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.

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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 & welfare benefits. GRIDCO retains 39% of the holdings in the DISTCOs. 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. 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 totaling 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 3

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.

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)

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 Source-Price Water House Coopers

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 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. 4

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 & 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 & reduce losses. B. Financial Benefits: (i) Attract private investment in 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 & increasingly rewarding employment for the qualified personnel (ii) 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 & debt level of the company rose to the all time high. Then state government did intervened & 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 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 peal export is 557 MW, off-peak export is 427 MW and the average export is 460MW. 5

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 & due to the introduction of one time settlement of theft & irregular connection cases, many new customers were created over the years & 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 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

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

% of T&D Loss Collection as % of Billing

44.16%

43.75%

46.56%

42.98%

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 2004-05 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. 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.

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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 & government appointed efficient bureaucrat in-charge of GRIDCO, which made turnaround a reality & 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. 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. Question: 1. Apart from World Bank which other funding agency helped monetarily to Govt. of Orissa by lending loan for restructuring of OSEB? A. IBRD B. IMF C. DFID D. NONE 2. When the Orissa Electricity Reform Act. Came in to force? A. 1995 B. 1997 C. 1996 D. 1994 3. What were the total dues to OSEB by the Orissa Govt. at the time restructuring? A. 340.4 cr. B. 39.2 cr. C. 301cr. D. NONE 4. Who headed the committee formed to suggest the revamp plan of GRIDCO? A. K C Pant B. M .S Alhuwalia C. S Kanungo D. S Prabhu 5. In order to achieve a healthy growth rate of GDP around 8 percent, what should be the growth of power in India? A. >10% B. >12% C. >15% D. >20%

Contributed By, Prof. A P Dash, Sr. Faculty, PMI Sarbesh Mishra, Faculty, University of Delhi. .

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