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Distribution Reforms lead to turn around of electricity sector in a number of states, Shri R V Shahi, Former Secretary, Ministry of Power

As we all know, power sector reforms were initiated in early 90's from the generation end of the industry. Several policy initiatives were put in place, a number of schemes were incentivised, Government supports by way of even guarantees for payments to service the investments were provided. All these were aimed at attracting private sector investments. Yet, during the entire period of 90's and even covering the early years of 21st Century, as against interests shown for developing more than 60,000 MW of capacity, not more than 6,000 MW (hardly 10%) could materialize from the private sector route. After ten years of trials and tribulations, rather belatedly, it was realized that power sector reforms should have been started from the distribution end of the industry rather than from the generation front. It is the distribution segment which has to support, through realization of revenues, the capital investments made in the entire supply chain - investment in Fuel Sector, Power Generation Projects, Transmission Systems, Distribution Infrastructure and in arranging sale of power. Burdens of all these investments have to be finally mitigated by the distribution business. Unfortunately, almost in the entire country, Electricity Distribution sector, which was controlled to the extent of more than 95% by the State owned Electricity Boards, over a period of several decades but most prominently during 80's and 90's, demonstrated even deteriorating technical and commercial performance. In fact, most of the professionals and others engaged in the sector as also those interested in the sector started believing towards the end of 90's that the distribution segment of the Indian electricity sector has emerged as the bottomless pit in which any amount of electricity can be poured in without really being assured that the power will be appropriately accounted for, billed and paid for by the customers. Discoveries of weaknesses of all types in every aspect of distribution business led to the realization that unless the orientation of power sector reform is realigned to distribution, none of other initiatives would work and bring about any visible change and result.

Attention of Government and other policy planners got focused to reforming distribution - technically, commercially and financially. It was recognized that major structural changes would be necessary. A number of States had already started introducing legislative reforms envisaging reorganization of Electricity Boards and subjecting the commercial functioning of the electricity industry through regulatory interventions. Electricity Act 2003 further reinforced the need and rationale of such structural reorganization. Most of the large States responded to the need of reorganizing their State Electricity Boards. Obviously, reorganization as such, though a necessary condition, is not sufficient to derive the full benefit of reform and restructuring. Many States reorganized but fell far short of properly manning the top functionaries' posts and empowering the respective Boards of these reorganized companies. Many of the States took lot of time to entrust the management of these companies to competent professionals, many of them are still in the process while a few of them have not even reorganized. Those States which restructured their Boards and allowed them to function with required operational autonomy and flexibility and provided, in these companies, suitable Board and top management level functionaries, have derive good benefits. They are worth emulating. Sometime back, I examined in detail, in a couple of articles, the outcomes of reorganization of Delhi Electricity Board and Gujarat Electricity Board, and had kept pending further analysis of a few other States which have demonstrated significantly better performance as compared to many other States. In this paper I would like to cover the States of Andhra Pradesh, Maharashtra and West Bengal and simultaneously would also attempt to update the outcomes in respect of Delhi and Gujarat, which were covered in an earlier article. Orissa had organized much earlier and several papers have been written about this.

Before I present the performance parameters and a comparative assessment of the Electricity Sector of these six States it may be important to describe in brief some of the common salient features of the initiatives taken by all these States. These would be of direct relevance to other States for adopting them or for their adaptation suiting to the specific needs and peculiarities of different States:

  • An unambiguous belief that reorganization of integrated State Electricity Boards into Generation, Transmission and Distribution Utilities will lead to a more pinpointed and focused accountability of the respective entities and that the large unwieldy integrated structure has the deficiency of diffused and confused responsibility, has proved to be the guiding principle of reorganization. Growing realization and acceptance of this principle is leading to committed actions by the Governments.

  • While Andhra Pradesh, after Orissa, was one of the first few States which reorganized, Maharashtra and West Bengal have had the experience now only of last two years or so on the reorganized pattern. Gujarat, though came later than Andhra Pradesh, does have an experience of working with reorganized structure for the last four years.

  • In all these exercises it is important to convey that thrust of reform of distribution cannot be tariff rationalization alone - though it is perhaps one of the most important requirements - equally important would be issues like quality of power supply, care for customer conveniences, quick response for providing new connections to the likely customers, arranging, in advance, adequate power so that supply disruptions are minimized, and constantly updating, augmenting and modernizing the distribution infrastructure to cope with increasing pattern of demands. States which have given due importance to all these aspects in a balanced manner have not only succeeded in winning the loyalty and appreciation of their customers but have also benefited immensely on their commercial performance.

  • While talking of commercial performance we need to recall that during the entire 90's, without exception, by and large all Electricity Boards kept accumulating and increasing their losses, so much so that the total annual loss of all Electricity Boards put together which was about Rs. 3,000 crores during 1990-91 rose to a staggering figure, within a period of ten years, to about Rs. 30,000 crores by 2000-01. It appeared that turn around of any Electricity Board was not only difficult and challenging but virtually impossible. Incidentally, this was the sole reason for private sector investors being totally indifferent, notwithstanding best of the power policies and most attractive returns provided therein.

  • Respect to regulatory decisions and commitment for implementation by the concerned stakeholders, be they the power companies, the State Governments or other agencies, is the most important requirement of the reform process. If we look at the States under discussion, depending on the extent of implementation in this regard they have been able to derive the benefits.

  • As regards the physical and financial performance, right in the beginning of the 10th Plan when Accelerated Power Development and Reform Programme (APDRP) was introduced by the Ministry of Power, Government of India, to improve distribution systems in towns and cities, the whole concept of determining distribution loss in the system was redefined. A new formulation with the nomenclature "Aggregate Technical and Commercial (AT&C) loss" was brought in. This concept not only covers the loss in the system but also captures the bill collection inefficiency. The financial performance of the distribution business is directly dependant upon this factor. The experiences in different towns and cities indicated that losses were in the range of 20% (outstanding performers) to over 80% (poor performers). The choice of towns and cities to be covered under APDRP was primarily based on the ground reality that much of the electricity transacted by the distribution companies is concentrated in these towns, cities and industrial estates, and that if we succeeded in creating breakthrough in these areas of distribution, commercial revival of the utilities would be easier and faster. This is the approach which guided the formulation of APDRP.

  • Electricity Act 2003 provided for specific stringent measures to control theft of electricity. Even prior to the Act, States like Andhra Pradesh and West Bengal initiated their own steps for control of theft of electricity. In fact, West Bengal issued an Ordinance, which subsequently was converted into legislation, providing for very harsh punishments for those consumers and also for the conniving employees, indulging in theft. It may be relevant to mention that even though strong measures were provided in the Electricity Act, towards the end of year 2006 it became clear that the Act needed to provide for even more extensive and stringent punishments so that this menace of electricity sector was effectively controlled and eliminated. Accordingly, a comprehensive set of amendments to the Act were formulated, which were later passed by the Parliament. All these States which have been able to achieve remarkable results have, to a great extent, taken important and effective measures including setting up of special police stations and Special Courts to handle the cases of electricity theft.

  • Controlling the technical and commercial losses and rationalizing the tariff structure led to better consumer awareness which in turn created expectations among the consumers for uninterrupted power supply. Obviously this would be possible only if the State Utilities and also the Private Utilities arrange their generation business properly and take appropriate advanced action in time so that availability of power leading to reliable power supply is ensured. Reorganisation therefore has not only helped in taking care of the distribution business by the concerned distribution companies in a more responsive and responsible manner, but has also led to greater sense of responsibility among the reorganized generation companies.

Based on the above general approach on various issues there would definitely be difference in priorities and thrusts in varying degrees in different States. It may be relevant to analyse the initiatives and outcomes achieved in last few years which led to the turn around in these States. While Orissa was the first State to have restructured its power industry way back in 1995-96, out of others we will analyse in brief Delhi, Andhra Pradesh, Gujarat, Maharashtra and West Bengal. All of these have achieved turn around.

  • Orissa, ever since the State reorganized the power industry, never had to subsidise the sector. This is one State which has surplus power. It is able to trade that power with other State Utilities and further strengthened its finances. Distribution companies, which had several problems in the initial stage, have come a long way. The only minus point in case of Orissa is highly deficient approach on the rural electrification. Since the reform and restructuring initiative of Orissa has been extensively discussed and analysed in separate papers, this not being detailed here.

  • All the distribution companies in Delhi have brought down substantially, beyond the targeted levels, the Aggregate Technical and Commercial (AT&C) losses. In two of the Weekly Articles, I have discussed the initiatives and outcomes in relation to the North Delhi Power Ltd. (Tata Group) and about the two other distribution companies controlled by Reliance Energy. There are a number of areas where further improvements are necessary. It is also the common assessment that perhaps the improvements could have been faster. However, we must evaluate the electricity reform initiative of the Government of Delhi visualizing the situation in absence of such an action. We saw during the period 1995 to 2000 the losses of Delhi Vidyut Board increasing from less than Rs. 400 crores a year to more than Rs. 1200 crores a year. We also had the experience of the poor reliability and quality of power supply then. It is not the case that there are no issues now on reliability of supply, but definitely demonstrable changes over last five years have been experienced by most of the customers due to improved power supply and better response to consumer complaints. Had the restructuring and reform initiative not taken place and the trend of ever increasing losses continued, the annual loss figure by now would have crossed Rs. 2,500 crores and accordingly the financial burden on the Government Budget would have gone on increasing.

  • APDRP brought about outstanding achievements in towns and cities of Andhra Pradesh. This State was one of the first few States which took up the revamp of City Distribution Systems right from the year 2002-03. They could achieve loss reduction to the level of less than 15% in most of the towns, in a period of three to four years, and in a large number of towns, in fact, the AT&C loss achieved was less than 10%. In the year 2000-01 the AT&C loss for Andhra as a whole was of the order of about 33% which came down to about 17% during 2006-07 and further to about 15.4% in the year 2007-08. No other State, for the State as a whole, has been able to achieve this type of a result in distribution loss reduction.

In the year 2000-01 the deficit in the power sector was of the order of Rs. 1,310 crores. From the year 2002-03 it started reducing substantially and reached a level of a little more than Rs. 100 crores in the year 2002-03. In the year 2004-05, the sector turned around with a surplus of Rs. 57 crores which increased to Rs. 168 crores in the year 2007-08.

As a result of physical performance as above in terms of distribution loss reduction and improved collection efficiency, the dependence of the power sector on State Government continuously reduced. In the year 2000-01, the support required from the Government was of the order of Rs. 2,936 crores which reduced to Rs. 1,047 crores (i.e. annual reduction of the order of about Rs. 1900 crores) in the year 2007-08. This includes the subsidy given by the State on account of free power which is of the order of about Rs. 500 crores.

The important steps taken by the power sector and the Government of Andhra Pradesh, in last six to seven years, include the following:

  • Capacity addition of 5,042 MW.

  • 143 nos. of EHT sub-stations, 1430 nos. 33 KV sub-stations and over 4 lakh Distribution Transformers were installed.

  • Over 11,000 Ckt kilometers of EHT lines were added.

  • About 89 lakh new connections were added.

  • Introduction of Citizens' Charter 2002.

  • 336 Customer Centres, 2712 Collection Centres (compared to 4390 in 2002), 1120 - Ekiosks in rural and 250 in urban area.

  • Adherence to Standard Performance Norms.

  • Consumer Analysis Tool (CAT) to track Bill irregularities.

  • Transformer Information Management System (TIMS) to better maintain Distribution Transformers.

  • Remote Meter Reading (RMR).

  • Theft control measures - Arrests, Special Police Stations, Special Courts, and Conviction etc.

The story of reform in the power sector of Andhra Pradesh would really have been highly satisfying and worth emulating but for the decision of the Government of Andhra Pradesh to provide free power to agriculture. This makes the story not only disturbing but also the State cannot claim to be ranked at the top in the power sector reform.

  • Maharashtra was rather slow in reorganizing the State Electricity Board and this decision could be taken only in the middle of 2005. There have been positive outcomes even in this short period. These could have been much better and more significant had Maharashtra reorganised atleast right in the beginning of the 10th Plan (2002-03). Some of the remarkable achievements of last two years of reorganized Maharashtra Electricity Board are as follows :

The Aggregate Technical and Commercial (AT&C) loss which was almost 35% in 2005-06 has decreased to about 24% (i.e. about reduction of absolute 10% points) in 2007-08.

The average monthly revenue collection has increased from Rs. 1100 crores (2005-06) to Rs. 1600 crores (2007-08).

The distribution transformer failure rate has decreased from about 20% to about 13%. Though this is still very high, reduction in failure rate is remarkable.

The Generation Company has also started focusing on new capacity additions and has initiated expansion programmes of the existing power plants and has also taken up new power projects.

The Maharashtra State Electricity Distribution Company which had a deficit of about Rs. 134 crores even during 2006-07, has turned around to a surplus of Rs. 82 crores in the year 2007-08.

Some of the important steps that MSEDC has taken are as follows:

  • Dedicated police stations with 15 police outposts to handle electricity theft cases.

  • Raids conducted led to about 60,000 in 2006-07 and about 92,000 of theft cases which were detected; about 1800 accused were arrested.

  • Conviction orders were passed in a large number of cases.

  • Photometering of Electricity Bills; Tampered Meters photographed and action against theft taken.

  • Monthly Energy Accounting at Division/Feeder/DTC level has helped in identifying specific problem areas for corrective action.

  • Scheme to regularize unauthorized drawal of power - more than 1.27 lakh cases connected.

  • Appraisal system for every level of officer identifies targets for AT&C loss reduction and actual achievement. This has brought about consciousness, at all levels, about this issue.

  • About 500 employees involved in electricity theft cases have been departmentally punished including 25 suspensions in 2007-08 alone.

  • The most important and historic initiative in Maharashtra has been the introduction of "Distribution Franchisee" in Bhiwandi in January 2007. Bhiwandi (about 500 MW Load) had been one of the most challenging areas with very high AT&C loss (of the order of more than 60%). In last over one year, the positive result is already visible. AT&C loss has come down to about 25%.

  • Encouraged by Bhiwandi Franchisee initiative, Maharashtra is considering franchising six more towns (Nagpur, Aurangabad, Kalwa, Ulhasnagar, Jalgaon, and Dhule) where AT&C losses are comparatively very high.

MSEDC is targeting the distribution loss reduction to 15% by the year 2011-12, collection efficiency to be improved to 100%, all old meters beyond ten years of service are being replaced, Geographical Information System including Geographical Mapping are being introduced in major cities and they are targeting a No Load Shedding situation by 2011-12.

While reorganization of Maharashtra Electricity Board has proved useful, it would be better if they have more than one Distribution Company. Competition among distribution companies on performance will improve quality of service as also efficiency of operations.

  • Gujarat had been discussed in one of the earlier Articles in detail. In this paper, I would only like to update some of the performance parameters :

The Aggregate Technical and Commercial loss which was 36.3% in the year 2002-03 reduced to 26.5% in the year 2005-06, has further reduced to 23.68% in the year 2006-07.

The loss of Rs. 1,932 crores in the year 2003-04 reduced to Rs. 927 crores in the year 2004-05. Its turn around to a profit of Rs. 202 crores in 2005-06 has somewhat declined but even in the year 2007-08 the profit is Rs. 168 crores.

  • West Bengal provides a very good reform story. As already mentioned earlier, the State took early steps, even before reorganization, on theft control by notifying a very powerful Ordinance on the subject.

So far as the reorganization of the State electricity sector is concerned, the Government had already set up a power generating company earlier called West Bengal Power Development Corporation. During the entire period of 10th Plan this company focused on capacity addition with remarkably good results. The State does not have to face power shortage situation. In fact, quite often it has surplus power to sell to other States.

Reorganisation of the State Electricity Board into transmission and distribution was decided in 2006-07, with separate transmission company and one distribution company.

During the period 2001-02 to 2007-08 the revenue has increased from Rs. 2,438 crores to Rs. 6,030 crores.

The operating surplus (EBDIT) which was (-) Rs. 232 crores in the year 2002-03 has continuously improved and it was (+) Rs. 905 crores in the year 2006-07.

The aggregate technical and commercial loss which was as high as 43.43% in the year 2003-04 has come down to 28.53% in the year 2007-08.

Some of the specific steps that have been taken by the state power sector and the Government include the following:

  • Introduction of High Voltage Distribution System (HVDS) in agricultural sector (About 6,000 number of connections).

  • Feeder Bifurcation for agriculture and domestic loads.

  • Replacing Conventional Meters by Static Meters.

  • 100% Feeder Metering upto 6 KV, alongwith energy audit.

  • Distribution Transformer metering completed in six circles and 10 Towns. Further work in progress.

  • Several I.T. initiatives include - Revenue Management System (RMS), Energy Management System (EMS), Corporate Administration and Monitoring System (CAMS).

  • Remote Meter Reading; Spot Billing System.

  • On line Cash Collection System, Pre paid Metering.

  • Zonal Data Warehouse and Call Centres.

  • Geological Information System (GIS) etc.

I recall, in the year 2003-04, from the Ministry of Power we started a Scheme of Rating of Electricity Sector of all States by CRISIL and ICRA. This initiative led to discovery of strengths and weaknesses and an anxiety to change and improve. We also introduced an Annual Event to discuss Best Practices in every aspect of Distribution together with Exhibition. These led to not only dissemination of Performance Benchmarks but a determination to reform, to act and to improve. The cases of six States have been briefly discussed. There are many others where changes have started happening. It has now been widely recognized and accepted that "Distribution" holds the key. It would make or mar the sector. Therefore, each State is trying its best. And that is the silverlining.