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Evaluating Power Sector Reforms, Shri R V Shahi, Former Secretary, Ministry Of Power

Evaluating Power Sector Reforms
[R V Shahi's Weekly Column for Infraline, September 17, 2007]

India Energy Forum organized, as a part of its 10th India Power Forum, a conference on power sector with the theme "Power Sector-Driver of Growth" on 11th September, 2007. I had occasion to chair the plenary session on "Evaluating Power Sector Reforms". It was a very distinguished group of panelists namely, Shri V.S. Ailawadi, Former Chairman of Haryana State Regulatory Commission, Shri Ashok Khurana, Additional Secretary in the Ministry of Power, Shri R. Krishnamurthy, Member Central Regulatory Electricity Commission, Shri Sunil Verma, Member Central Electricity Authority and Shri R.R. Rao, Managing Director ICRA Management Consulting Services. After the remarks and observations by the panelists, detailed deliberations took place on various issues. Two comprehensive presentations were made - one by Mr. Ailawadi and another by Mr. R. R. Rao of ICRA Consulting Services.

The gist of observations made by the Chairman of the session, the Co-Chairman and other panelists are summarized below:

  1. The strongest aspect of the reform process in last many years is the historic legislative initiative of the Government, viz. Electricity Act 2003. Following this initiative a chain of policy instruments such as National Electricity Policy, Tariff Policy, Rural Electrification Policy, Policies on Captive Power Plants, Merchant Power Plants and Ultra Mega Projects, have been put in place.

  2. Throughout the 10th Five Year Plan (April 2002), the course of reform, including the priority of reform, and direction of change was re-aligned toward setting right the distribution segment of the power industry.

  3. The Accelerated Power Development Reform Programme (APDRP), which was implemented throughout the five year period, with a very large financial commitment from the Government of India both for the investment component to tone up, strengthen and modernize the distribution system as also for incentivizing commercial revival of electricity utilities through very strong component of monetary incentive, was a major policy instrument aimed at distribution sector reform.

  4. Concurrent with the APDRP, which was focused to improve distribution in towns and cities, Rajiv Gandhi Gramin Vidyutikaran Yojana was vigorously implemented made a significant difference and contribution toward creation of a sound Rural Electricity Distribution Backbone.

  5. Rating of State Electricity utilities and of State Government initiatives and regulatory interventions, was another powerful instrument to bring into focus the areas of weaknesses as also to motivate outstanding performers among the reforming states.

  6. These and other measures did not remain unrewarded. We need to recall that in the fact that while in the beginning of the 10th Five Year Plan, even the major public sector power companies had liquidity crunch, were unable to fund their growth programmes, needed substantial financial support from the Government for their expansion, and above all, power sector, had been practically abandoned by private sector companies. Towards the end of the 10th Five Year Plan the scenario was not only significantly different but there was visible quantitative and qualitative change. Most of the power sector companies have adequate funds because in the last five years, payments by state electricity utilities are practically 100%. Private sector organizations have not only come back but their overwhelming response toward Ultra Mega Project initiative as also toward similar tenders floated by various state utilities, entailing more than 100,000 crores of investment, is a clear vindication of coming back of the private sector in a meaningful way in large numbers.

  7. These are obviously the positive and bright side of the reforms in the sector. It needs to be underscored that the sector which experienced all types of problems over several decades, accumulated not only bad habits and practices but also huge financial losses, can obviously not turn around in a five year time frame. What is, however, important is that the direction of change is right, that the initial outcome, though slow, is positive and there is keenness coupled with uneasiness to bring about change. There are many areas which need to be set right. Some of the important aspects of the darker side of the change and reform which were highlighted during discussions, include the following :

  • Paying consumers still have a feeling, and rightly so, that they are not being provided the services that they deserve - in terms of reliability of power supply, response toward complaints for supply, billing, new connections etc.

  • In most states rampant theft of electricity continues without getting arrested or reversed. This inevitably places larger burden not only on the financial health of the distribution utilities but also on the tariff.

  • Investment in distribution, though in recent years has received better attention, continues to be inadequate.

  • Incidence of free power supply to select group of consumers in certain states have further compounded the problem.

  • The net result of all the above is a very unfortunate conclusion in many quarters that electricity reform means increase in tariff, less regard to quality of service to consumers and continued mismatch in demand and supply resulting in load sheddings.

There is another perception about electricity reform in respect of reorganization of the electricity industry. Many believe, though not correctly, that power reform necessarily means privatization. As a matter of fact, when discussions about the Electricity Bill were being held in the Parliament in April -May 2003, many Hon'ble Members of the Parliament expressed apprehension that the Act is about privatization. Fortunately on clarifications and on further discussions the correct objective which aims at benefiting consumers, as the focal point, was ultimately understood properly. Similarly, reorganization of State Electricity Boards into generation, transmission and distribution companies is also, quite often, misunderstood as if it was for the sole purpose of privatization.

The Ministry of Power gave an assignment to the Indian Institute of Public Administration (IIPA) in 2005-06 to carry out a comprehensive study the impact of re-organisation of State Electricity Boards. The terms of reference included that the study should cover the states where re-organisation had taken place a few years ago, states where reorganization had happened recently and states which had not re-organized their Electricity Boards. IIPA took the services of about a dozen eminent experts who had hands on experience of the power sector and had long standing background of handling the affairs at very senior positions. Twelve states were identified so that a distinctly comparable and contrasting pictures emerge in order to arrive at reasonable and reliable conclusions. The issue was whether reorganization of the electricity boards would lead to more efficient operations of the sector. The Report was submitted in December 2006.

Shri Ailawadi, Former Chairman of Haryana State Regulatory Commission , who happened to be one of the members on the above study team of the IIPA, presented a detailed account of the findings and conclusions of this study:

  1. In majority of the state electricity Boards which have been restructured into generation, transmission and distribution entities, there are noticeable improvements in varying degrees after restructuring.

  2. Wherever restructured companies have been adequately staffed at the top levels in the Boards and Senior Positions and have been allowed to function with proper delegation of authority, in most cases, the results have been positive, particularly in those cases where they have had the opportunity to improve for about 3 to 4 years post restructuring.

  3. In cases where the Boards were restructured a few years back but, these changes in effect have been only theoretical, in as much as they were not provided suitable autonomy nor were they staffed at Board and senior levels, the results obviously, as could be expected, have not been satisfying.

  4. In cases where Boards were restructured only recently, obviously we will have to wait for the outcome of the change.

Major Conclusions of IIPA Study

  • Need for sustained political commitment for initiating and managing the reform process in the state.

  • State Governments should issue Detailed Policy Statements spelling out the future policy and programme.

  • Planning the strategy for proper management of the change process.

  • Evolution and implementation of transparent H.R. policies.

  • Regulatory mechanism to be made more autonomous and effective.

  • Continued support of Central Government in implementation of Accelerated Power Development & Reform Programme (APDRP) and of Rajiv Gandhi Gramin Vidyutikaran Yojana.

  • Professional management cadre in restructured utilities and autonomy to the Boards of these companies.

  • Greater use of media for creating informed public awareness on likely gains of reforms and on the factors which stand in the way of reform.

  • The State Governments should establish medium term Financial Restructuring Plans over a defined period, with transition period support.

  • The Financial Restructuring Plans should identify milestones with reference to financial support.

  • Financial Restructuring Plans should be publicized and should be regularly monitored.

  • Financial Restructuring Plans should be included in the State Government budget and should get reviewed for implementation by Planning Commission.

Source: IIPA Study Report

The lessons which could be drawn from the reorganization exercises could be outlined as below :

  1. Re-organisation definitely brings an important element of accountability. Those entrusted with generation or transmission or distribution start looking at their respective portfolios with a focused attention and well defined objectives aimed at deliverables. In a large vertically integrated monolithic Electricity Boards accountability is diffused and therefore results are hard to achieve.

  2. Though restructuring is a necessary requirement for bringing about improvement, it is not a sufficient condition to secure results. To fill-up the gaps what would be essential is to have the right professionals in key positions in these reorganized entities, their selection should be on the basis of objective criteria, they should be given a definite tenure of appointment, there should be delegated authority commensurate with accountability. These prerequisites are necessary for the success. In some states this has happened, though not to the required level, yet in these states there have been good results. It would therefore be wrong to conclude that results of re-organization have not been satisfactory without analysing whether the prerequisites were put in place or not.

A few extracts from the Report of IIPA. Study may be relevant to convey what this study has established and seeks to emphasise :

"The broad conclusion is that, despite some shortcomings, the overall impact of restructuring has been positive and in the right direction."

"One of the major gains of the process of restructuring is the improved performance of the utilities. The losses which were on the increase until 2001-02, started diminishing after that, and came down from Rs. 29,252 crores in 2001-02 to Rs. 21,998 crores in 2004-05. The losses may have been of the order of Rs. 38,000 crores if allowed to continue in a "business as usual" mode........"

"The process is highly sensitive to several factors; and calls for unstinted political commitment and support, public sensitization on issues involved, highly placed champions for the reform, excellent consultancy support, cooperation of the employees and an efficient Financial Restructuring Plan which would free the newly-formed utilities from the burden of past liabilities."

Regulatory institutions and their decisions are, by and large, getting accepted. Appellate Tribunal and their working has further strengthened the regulatory process, distanced from Government, in deciding issues such as tariff. Multi year Tariff by Commissions, a process which needs to be speeded up, will further introduce regulatory clarity and certainty.

Decisions on free power in some states could have been avoided. There could have been other methods to help and assist those who needed such subsidies. Yet, it is remarkable and, to some extent, it is a success of reform process that in each of these states, as per the provisions of the Electricity Act, states were made to pay, as a condition, in advance, to the utilities the subsidy the State Government decided. This is a major and significant departure from the past non-commercial approach practices.

Open access on transmission has progressed satisfactorily, has helped in promoting power trading and therefore some element of competition. Its pace, however, needs to be stepped up. Open access in distribution has not made much head way. Even though there is resistance from the state distribution utilities, this is one provision which needs to invoked if we have to bring about major change and a competitive environment in the electricity sector.

Privatisation of Distribution has presented a mixed experience. Any amount of argument that post privatization transition of 5 to 7 years could be needed before significantly visible positive change can be experienced is not cutting ice with consumers and public at large. Once privatized, they expect results sooner than later. This initiative therefore will have to be pursued very cautiously. Unless we are able to create a few success stories, this may not go very well with our people, at least for the present. We can't reject this model. However, we need to implement this with full preparations and giving due regard to all nuisances of managing a major change process. Simultaneously reorganized Electricity Boards as companies must be made to improve.

Except for a few states, most states have failed to check the rampant theft of electricity. West Bengal and Andhra Pradesh could be taken as good examples where systematically planned theft control measures and ruthless actions have led to remarkable results. Unless theft of electricity was projected as a social evil and crime, and those guilty given solitary punishments, this deep rooted practice would be very difficult to effectively tackle.

The conclusion of this session was that power sector reform will be incomplete, even with lot of positive outcomes and results, unless distribution sector is reformed. And, distribution sector cannot be reformed unless electricity theft is eliminated. Therefore, there are three actions that are needed: (a) Reduce theft, (b) further reduce theft, and (c) eliminate theft. And, this will be possible only when distribution reform is pursued with full political will and commitment. Another conclusion was that more and more of competition will need to be introduced in larger interest of consumers.

Copyright : R.V. SHAHI