POWER SECTOR REFORMS
By A K Basu, Secretary, Ministry of Power

Introduction

The Indian Power Sector has made significant strides in the past fifty years by increasing its installed capacity from 1,300 MWs at the time of independence to about 99560 MWs as on 30th September 2000. The size and expansion of the transmission and distribution network has also increased substantially. There has also been progressive inter-connection of power systems at the State level to start with and then at the regional level. The entry of Central Public Sector Undertakings into power generation and transmission have helped further consolidation of the power system in the country. A National Power Grid, which has been approved in principle by the Government, is already on the horizon. The growth achieved almost entirely through investments in the public sector have indeed been impressive. However, despite this impressive growth we continue to face power shortages. In the Eighth Plan period, we could achieve only a little above half the generation capacity addition target we had set for ourselves. In the Ninth Plan period also the final position may not turn out to be much better. The poor financial health of the State Electricity Boards as also inadequate investment in the Power Sector are largely responsible for this inability to meet targets.

Financial Performance of SEBs.
* Most of the State Electricity Boards are cash strapped. They are not even able to earn a minimum Rate of Return (ROR) of 3% on their net fixed assets in service after providing for depreciation and interest charges in accordance with Section 59 of the Electricity (Supply) Act, 1948.
* One of the reasons for this dismal performance is that a substantial portion of cost remains uncovered on account of lower average tariff. While the cost of supply of electricity has shown an increasing trend, the tariff has not been commensurate with this, thus, widening the gap between the average cost of supply and realisation.
* The cumulative outstanding due from SEBs to the Central Power Sector Undertakings (CPSUs) as on 31st October,2000 stands at a collosal Rs.26858.07 crores and have been progressively increasing. These heavy overdues are a source of serious concern since they threaten to drag the so-far healthy Central Power Sector Organisations into sickness as well.

Commercial performance
Revenue arrears receivable by SEBs stood at Rs. 17235 crore during 1997-98 representing 33.8% of the sales revenue. State and local Government offices are prominent among the defaulters.

Need for reforms
Given the financial health of the SEB’s, we shall very soon reach a stage of no return if we don’t take immediate corrective measures. Our per capita power consumption stands at only 338 unit (against over 800 units in China and over 13000 in the US) which is one of the lowest in the world. The foreseeable fall out of our inaction can be discussed as under :-

Poor prospect of capacity addition (Increasing Demand-supply gap)

With the existing state of affairs, the State sector may at best add another 4,000 MW and the private sector another 10,000 MW by 2012. The Central sector is likely to add 40,000 MW during this period. If the outstanding dues of SEBs continue to mount as estimated, even this capacity addition by the Central sector would be difficult. Our requirement as per the 16th Electric Power Survey (EPS) is about 1,00,000 MW. Thus, there will be a gap of nearly 46,000 MW as per the requirement. As a consequence, the energy shortage will widen from the present 6% to 18% and peak shortage from 11% to 24%. This will adversely affect the economy as a whole and put a brake on the rate of economic growth.

Financial closure of new power projects difficult due to payment uncertainty.

It is estimated that Rs.1,000,000 crore would be required during the Xth and XIth Plan periods for power generation and matching transmission and distribution purposes. The generating companies are unable to make these investments because their plans are getting affected due to the inability of the SEBs to pay them back. It is a vicious circle. The SEBs cannot raise revenue as they have poor system of selling electricity and collecting revenue. Financial institutions and foreign investors are not coming forward to finance private sector power projects because of their assessment that such projects would not be in a position to recover investments due to poor financial health of SEB’s.

Dues of CPSU’s will lead to their sickness.
The CPSU’s are getting increasingly constrained from making new investments as their balance sheets are getting adversely affected due to poor recoveries from the SEBs. Government, both Central and State, cannot provide budgetary support to their corporations owing to their own financial constraints.

Rural Electrification -
Declining trend
About 81,600 villages in the country are yet to be electrified. There is a steep decline in the number of villages electrified since the Seventh Plan as in their perilous State of finances, SEBs find rural electrification as a non-viable proposition. Current trend indicates that Bihar will take 702 years, West Bengal 71 years, UP 26 years and Orissa 19 years to complete village electrification.

Dependence on Diesel
Non-availability and lack of proper supply of electricity leads to increased dependence on diesel for running pump-sets, generators etc. This in turn adversely affects the economy.
Poor quality of power and service
Supply of power is highly erratic. Blackouts are on the increase. Customer service is very poor. All this affects economic growth and the quality of life of the people.
The deteriorating situation, if not stemmed adequately and immediately, will make the Indian economy and industry highly uncompetitive.

Objective of and GOI initiatives towards reforms
The objective of reforms in Power Sector is to bring in commercial viability in the power supply industry so as to ensure power supply on demand to all consumers at reasonable prices. The focus of reform initiative of the Government of India has been to

• meet demand - supply Gap
• supply Quality Power
• supply power at affordable cost
• have a financially viable sector
• remove tariff distortions
• improve operational efficiencies - improve PLF - control losses, leakages, theft
• give choice to the consumers
• introduce competition
• access new sources of finance

The Government of India have taken a pro-active role in unleashing and accelerating the process of reform in the power sector in the country.

In the Chief Ministers Conference held on 3.12.1996, a Common Minimum National Action Plan for Power (CMNPP) was adopted which inter-alia stipulated setting up of independent State Electricity Regulatory Commission (SERC) for rationalisation of tariff by each State / UT, privatisation of distribution system gradually, providing maximum possible autonomy to the SEBs and to restructure and corporatise them for running on commercial lines. The conference also resolved that cross subsidisation between categories of consumers may be allowed by SERCs. No sector shall, however, pay less than 50% of the average cost of supply (cost of generation plus transmission and distribution). Tariffs for agricultural sector will not be less than fifty paise per Kwh to be brought to 50% of the average cost in not more than three years.

The Chief Ministers/Power Ministers Conference held on 18.12.1998, after taking into account the significant changes that have taken place in the power sector after adoption of the CMNPP, decided that a new initiative needs to be taken to move the power sector into the next phase of reforms. With this end in view, a plan of action was adopted for implementation, which inter-alia included constitution of State Electricity Regulatory Commissions (SERCs) before 31.3.1999, announcement of a power sector reform policy and initiate steps for drawing up of a reform bill in a time bound manner, corporatisation and commercialisation of generation, transmission and distribution for operating them on commercial principles and to undertake distribution reforms by increasing entry of private investors, wherever feasible.
The Chief Ministers/Power Ministers’ conference held in New Delhi in February 2000 is another important milestone towards reforming the power sector. The conference decided that the key elements of the reforms strategy would be:

• Energy Audit at all levels.
• Time-bound programme of 100% metering of all consumers by December 2001.
• Reduction and finally,elimination of power theft within a specified time frame.
• Strengthening/upgradation of sub-transmission and distribution system by taking sub-station as an unit on a priority basis.

It was decided that if the above was not unattainable in the existing set up, corporatisation / cooperatisation / privatisation of distribution would have to be undertaken.

The Electricity Regulatory Commissions Act, 1998 has been enacted with the objective of rationalisation of tariff, transparent policies regarding subsidies, promotion of efficient and environment friendly policies. The Central Electricity Regulatory Commission (CERC) was constituted in July 1998. The functions of the CERC are to promote competition, efficiency and economy in the power sector besides determining tariff for generating stations owned and controlled by Central Government, other inter-state generation projects and inter-state transmission. Since then 12 States/UTs (West Bengal, Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Maharashtra, Madhya Pradesh, Karnataka, Gujarat, Delhi, Andhra Pradesh, Arunachal Pradesh) have constituted/notified constitution of their State ERCs. Orissa and Haryana are the two States who have constituted SERC prior to the ERC Act, 1998.

STATUS OF REFORMS IN THE STATES
The States of Orissa, Haryana, Andhra Pradesh, Uttar Pradesh, Karnataka, Rajasthan and Delhi have enacted their State Electricity Reforms Acts which provide inter alia for unbundling/corporatisation of SEBs, setting up of SERCs, etc. Madhya Pradesh Reform Bill has been passed in the State Assembly. Government of India has approved Gujarat Reform Bill for introduction in the State Assembly.

As many as fourteen states (Orissa, Haryana, Andhra Pradesh, Uttar Pradesh, Karnataka, West Bengal, Tamil Nadu, Punjab, Delhi, Gujarat, Madhya Pradesh, Arunachal Pradesh, Maharashtra and Rajasthan) have either constituted or notified the constitution of SERC. The Electricity Regulatory Commissions of Orissa, Andhra Pradesh, Maharashtra, Uttar Pradesh and Gujarat have issued tariff orders.

The SEBs of Orissa, Haryana, Andhra Pradesh, Karnataka, Uttar Pradesh and Rajasthan have been unbundled/corporatised. Delhi Vidyut Board will be unbundled in the near future.

The reform process in Orissa has progressed significantly with privatisation of distribution in the state. The four subsidiary companies of GRIDCO have been disinvested in favour of the private companies. BSES Ltd. has taken over the three distribution zones (WESCO, NORTHCO and SOUTHCO) and the US based AES Ltd. has taken over the Central Zone. The Power Generation Corporation (OPGC) has also been disinvested to the extent of 49%.

The private distribution companies have reported of reduction of T&D losses, decrease in gap between revenue and expenditure, increase in collection and good progress towards metering of all consumers.

GOI support to State Governments for reforms
The Ministry of Power has signed a Memorandum of Agreement (MOA) with the Government of Karnataka on 12.2.2000 with the Government of Uttar Pradesh on 25.2.2000 and the Government of Madhya Pradesh on 16.5.2000 charting out the programmes and agreements for power sector reforms in these three States.

MOA with Government of Karnataka
The MOA with the Government of Karnataka envisages unbundling of transmission and distribution and privatisation of distribution by December, 2001, 100% electrification of villages, energy audit at all levels, full support to the regulatory commission etc. In reciprocation, the Government of India has committed support, among other things, for reduction in T&D losses, strengthening and improving the transmission network and enabling supply of additional power to Karnataka, Rural Electrification Programme, Structural Adjustment, new generating capacity and allocation of additional power from Central Generating Stations.

MOA with Government of UP
In the MOU signed with the Government of Uttar Pradesh, the areas in which the actions are to be taken in a time bound manner are: segregation of transmission and distribution functions within UPPCL, energy audit, metering for all consumers, distinct distribution profit centres with separate commercial accounts, commercial viability in distribution failing which privatisation and support to the State Electricity Regulatory Commission. The Government of India has agreed to support the State Government in various ways, some of which are : renovation and modernisation of thermal and hydro Power stations and undertaking transmission works, reform related studies, metering of all consumers. Required financial assistance would be provided through PFC. In addition, there would be joint venture hydro projects between NHPC and UPJVNL, acceleration of rural electrification through REC and additional allocation of power directly to the distribution centres from new central sector generating stations.

MOA with Government of Madhya Pradesh
In the MOA with the Government of Madhya Pradesh, the areas in which the actions are to be taken in a time bound fashion are: reorganisation of MPEB, 100% electrification of villages and hamlets, metering of all suppliers by 31.12.2001. It has been dicided in the MOA that all classes of consumers should be made to pay atleast 75% of the cost of supply of electricity subject of decision of SERC regarding subvention by the State Government. The Government of India has agreed to allocate an additional 100 MW from Central Generating Station for the state. Powergrid and MPEB will work in enclose cooperation for strengthening of transmission network in the state and as a recognition of reform, Powergrid shall also invest in inter-state transmission lines. In addition, GOI shall fully assist the State Government in raising funds for structural adjustment, and NHPC shall be having a joint venture with the State Government for completing the ongoing hydro power projects.

Draft Electricity Bill 2000
The Ministry of Power has been contemplating a new legislation, which would replace the three existing electricity laws namely, The Indian Electricity Act, 1910, The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Act, 1998. One of the primary aims of the proposed legislation is to obviate the need for each State to legislate individually.

The Draft Bill suggests inter-alia, corporatisation of the State Electricity Boards and their restructuring into separate entities that would provide for accountability based on profit centres, whether public or private. The State Electricity Boards were created by Central legislation, viz., the Electricity (Supply) Act, 1948 and therefore a Central legislation for transformation of this section by doing away with the statutory requirement of State Electricity Board and providing the legal framework for functioning on commercial lines with independent regulation is necessary.

It is also necessary to make it compulsory for the States to have a Regulatory Commission either individually or jointly. Further, the Draft Bill provides for several new features like trading, spot market, open access etc., keeping in view the future of power sector.