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Is the reform in the power sector adequate?, Shri R V Shahi, Former Secretary, Ministry of Power

Couple of weeks back, at the request of the premier Business Daily, the Economic Times, I had sent my comments on the above subject. Since, there was a restriction that the comments may be limited to 350 words, even though I could cover the most important issues, I could not do justice to the subject. All the relevant aspects needed to be properly elaborated and articulated, but that could not be done because of the limited size of the write up. Therefore, in today's weekly write up, I propose to discuss the subject in detail.

Towards the end of Tenth Plan, it was quite clear that business-as-usual approach in the power sector would not do. The reform in power sector was initiated almost simultaneously with the economic reform launched in 1991. However, the entire reform Agenda throughout the 90's was generation centric. The cutting edge of the power industry, which really is Distribution, received lesser priority in terms of reform actions. It was felt that highly attractive return to develop power generation projects, payment security mechanism in the form of Government guarantees would be able to motivate and inspire the investors. Apparently, the initial euphoric response did lead everyone to believe that the hypothesis was right. Unfortunately, this was short-lived. In the later half of the 90's the issue started becoming clearer. Sustainability of huge capital investments in generation projects cannot be secured through guarantees. The sustainability has to be created through matching commercial health of the distribution business which generates revenue for the entire value chain. Thus the failed initiative, which was generation centric, led to better recognition and realization that it is the Distribution which needs to be fixed. Reform initiative has to be re-oriented towards Distribution. These beliefs got further firmed up with the collapse of Enron promoted, Dhabol power project in Maharashtra, which in many ways symbolized the success of Private Power Policy of 1991. In fact, by the end of 90's power sector had been virtually abandoned by private developers and more strongly by the lenders and financiers, almost all of whom had burnt their fingers in a number of private projects.

The Tenth Plan (2002-07) saw major power sector reform agenda in action:

  1. These initiatives were planned in the back drop of the Tripartite Agreement among State Governments, Central Government and RBI. This Agreement had been worked out to address the issue of over Rs. 41,000 crores of dues on the State Electricity Boards, which had to pay to various central power generating companies, coal companies and railways. The most important initiative, which has now emerged as the umbrella under which various initiatives were launched, was the Electricity Act 2003.

  2. Accelerated Power Development Reform Programme was restructured to focus on major electricity distribution areas viz. towns, cities and industrial estates, where potential for effecting significant loss reduction was comparatively much higher. This incentive oriented Scheme ran through the entire Tenth Plan. Based on the experience of working with this Scheme, several changes were suggested, which became the basis for further restructuring of this Scheme to be operated in the Eleventh Plan.

  3. Memorandum of Agreements were signed between the Government of India and the State Utilities/State Governments, laying down specific actions and targeted outcomes for reforming electricity distribution sector at the State level. These Agreements emerged as the most important framework highlighting the priority of the Central Government on reforming distribution and obliging these State Governments and utilities to perform and achieve pre-determined outcomes. States reluctant to sign these Agreements were clearly conveyed that benefits under APDRP Scheme would not be available to them.

  4. Other initiatives of the Tenth Plan included 50,000 MW hydroelectric initiative launched in 2003, 100,000 MW Thermal initiative launched in 2004, National Electricity Policy 2005, Guidelines on Competitive Bidding 2005, National Tariff Policy 2006, Rajeev Gandhi Grameen Vidyutikaran Yojana 2005, Ultra Mega Project Scheme 2006, Merchant Plant Scheme 2006, National Action Plan on Energy Conservation 2003.

All these have had significant impact in raising the levels of confidence of power sector developers and financiers. This was adequately demonstrated by the overwhelming response towards the Ultra Mega Project Scheme, followed by a large number of public and private sector projects, of capacity more than 110,000 MW, now already under construction.

Re-orienting the thrust of power sector reform to distribution during the Tenth Plan through specific Schemes and Policies as also through various reviews conducted at different levels did receive appropriate response from a large number of States. Meetings between the Union Power Minister and the State Chief Minister/State Power Minister on one to one basis, invariably centered around specific areas of deficiencies in distribution (Theft control, Tariff rationalization, Franchising, Modernizing distribution etc.). These created desired impact in most cases. The distribution sector, which had increased the annual losses from about Rs. 3,000 crores in 1991 to over Rs. 30,000 crores in 2000-2001, started gaining confidence that these losses could not only be arrested but could be reduced. In fact, in the year 2005-06, as per the study by PFC, the overall reduction in annual loss was of the order of Rs. 5,000 crores. The distribution utilities became so weak financially that they were unable to meet their payment obligations towards generating companies, transmission companies, coal companies, railways and, in fact, to almost any agency from which they received goods and services. In the year 2001-02, on an overall basis, the central generating companies were able to receive hardly 75% of their bills from the State Utilities. Awareness followed by actions on distribution reforms did lead to reasonably good outcome, though not to the extent one would have expected. But, the fact remains that from the year 2003-04, by and large all State Utilities have been able to pay year after year 100% of the bills to power generating and transmission companies. Reforms in distribution should have meant creation of surplus to be ploughed back for augmenting and modernizing distribution and also helping State level generation companies to expand. That has not happened, but, payment obligations are by and large being met.

In the last few years, distribution reform actions are again sliding to the back burner. Excepting a few States most others have again become complacent on this most important and vital issue which is at the centre of the financial sustainability of the expansion the power sector. It is apprehended that massive expansions that are happening in the power sector, if distribution is again not brought back to the centre stage, sustainability, in terms of meeting the payment obligations may be doubtful.

What needs to be done?

  1. We need to bring back distribution in the centre of power sector reform. The MoA's signed with the States must be brought into action. We need to update the targets, align them to the revised APDRP Scheme. Implementation needs to be monitored meticulously. Even independent agencies could be assigned these tasks, so that regular feedback is available for immediate correctives.

  2. States, even after seven years of Electricity Act, refusing to re-organise Electricity Boards may be made ineligible to a number of benefits under various Central Schemes. It must be reiterated to them that a high level Expert Team had established beyond doubt that re-organisation is at the core of sector reform, that it enables pinpointed accountability and that States which have done it with seriousness and commitments have derived good benefits.

  3. Theft control measures must be implemented by States with commitment. It appears that, these actions did receive a good degree of momentum a few years back, but again it needs to be revitalized. Even now, the average loss in the country is about 35%. Committed actions have demonstrated that many States have succeeded to bring them down to less than 20%, particularly in towns and cities.

  4. One of the consensus which was reached during 2004-05 was that distribution business in those towns where loss is more than 25% should be Franchised. We need to bring this Agenda into action again and monitor its implementation. With the success of Franchisee arrangement in a few towns, this initiative can be advanced with even better and stronger articulation. Similar initiative in villages is a condition of grant funding, Rural Electrification Programme. It needs to be insisted upon for its appropriate implementation. Those who do not go along may be denied the benefit of grant funding.

  5. As per Tariff Policy (2006), cross-subsidy was to be progressively reduced, so that it could be brought within + 20% of average tariff by January, 2011. In large number of States, a road map for meeting the above requirement and implementation of the road map has not happened. Management of cross-subsidy in the manner prescribed in the Tariff Policy is a very powerful aspect of distribution sector reform.

  6. Open Access on distribution is key to competition. In the last few years it has been seen that in many States several impediments and hurdles are created to defeat this initiative to succeed. States which do not facilitate Open Access on distribution may be denied a number of benefits under various Schemes of the Ministry of Power.

  7. Free Power is the antithesis of distribution reform. We persuaded the State Governments of Madhya Pradesh, Tamil Nadu and Punjab during the year 2002-03 and in the beginning of 2003-04, the Ministry of Power succeeded in eliminating, from the power map of India, the practice of Free Power. Though, as per Electricity Act (2003) utilities which are forced Free Power are to be compensated by the State Governments. Though, this is being done also, yet, it is doubtful whether they are being fully compensated. Through studies it has been established that Free Power not only affects the commercial working of electricity distribution companies, but it also creates highly adverse impact on water table. Here again States not falling in line may be made to lose specific benefits under Central Schemes.

Expansion of power sector, at the rate of 9 to 10%, is essential for supporting the double digit economic growth in coming years. It is possible to achieve this. Recent experience shows that it can be made to happen. But on a sustained basis, achieving this would require that distribution sector is kept commercially viable. It is reported that annual losses have again risen to above Rs. 40,000 crores. Success of power sector will greatly depend on how effectively we set right distribution.