the reform process and regulatory commissions in the ... · prayas-focus event on power sector...

Prayas-Focus Event on Power Sector Reforms

1

The Reform Process and Regulatory Commissionsin the Electricity Sector:

Developments in Different States of India

A Compilation of Selected Papers and Presentationsmade during the

‘Event on the Power Sector Reforms’organized by

Prayas and Focus on the Global South

[December 2000, Mumbai, India]


2

The Reform Process and Regulatory Commissionsin the Electricity Sector:

Developments in Different States of India

Contents

Introduction

Part I: Papers on State Reform Processes

Maharashtra Prayas Energy Group

Andhra Pradesh Dr. M. Thimma Reddy

Orissa Ms. Sudha Mahalingam

Harayana Dr. Surinder Kumar

Kerala Mr. Abey George, Mr. K. Ramachandran

Uttar Pradesh Dr. Rahul Pandey

Phillipines Ms. Jenina Joy Chavez

Part II: Presentations during Consultation and Panel Discussion

Prof. A. K. N. Reddy Former President, International Energy Initiative

Dr. Madhav Godbole Former Home Secretary, Government of India andChairman, Energy Review Committee (GoM)

Mr. P. Subramaniam Chairman, Maharashtra Electricity RegulatoryCommission

Mr. Venkat Chary Member, Maharashtra Electricity RegulatoryCommission

Mr.Sanjeev Ahluvalia Former Secretary, Central Electricity RegulatoryCommission


3

Introduction

The Indian power sector has been in the limelight since the reforms and restructuring of this sector beganin earnest in the latter half of 1990s. The reforms in the sector have gradually become the issue ofacrimonious debate in the academic, policy, and political circles. After the strike by employees of theUttar Pradesh State Electricity Board (UPSEB) in March 2000 and stalling of sector reforms (mainlyprivatization) in Haryana, the theatre of action shifted to the southern part of the country. In AndhraPradesh, electricity tariff hike and, hence, power sector reforms have become major issues even in themainstream electoral politics resulting in widespread political turmoil and even loss of life. InMaharashtra, after the five-day long strike in July 2000, trade unions of the employees of MaharashtraState Electricity Board (MSEB) were successful in eliciting a promise that the state government wouldnot privatize the state electricity board (SEB) and would consult the unions before unbundling.

The ongoing reforms involve fundamental legal, governance and ownership changes in the sector, withlong-term and, at time, irreversible implications. The reforms have engendered the independentregulatory commissions, which constitute a new institutional structure. This new institution is evolvedwith a view to ensure that the privatized power sector utilities do not take undue advantage of themonopoly over the sector and to ensure that the sector is able to meet the stated goal of supplying goodquality electricity at reasonable tariff. The regulatory commissions have been established in many states.In several states, the regulatory process has picked up speed with the commissions issuing tariff orders,releasing discussion papers, and deliberating on the other important issues such as capacity addition andstandards of consumer service.

This situation requires intense and urgent efforts on the part of the public-interest organizations to takeup challenges thrown up by the reform process in general and the regulatory processes in particular.Many individuals and organizations working for protection of public interest have been striving to takeup these challenges and are engaged in analysis, political as well as legal actions, and regulatoryinterventions. However, these individuals and organizations do suffer from paucity of information,analytical as well as legal skills, and human as well as financial resources. Hence, in response to theincreased pace of the reform and regulatory processes, it is necessary that these individuals andorganizations should come together, share experiences, and learn from each other. It must, however, beremembered that there is considerable diversity in the functioning of the state regulatory commissionsand even in the techno-economic, political, institutional, and historical contexts in different states.

Against this background, Prayas, in collaboration with Focus on Global South organized an event inorder to initiate a process of dialogue and, sharing of experiences among the individuals andorganizations working or planning to work for protection of public interest in the context of power sectorreforms and regulatory process. The event took place during 6th to 9th December 2000 at Mumbai.

Prayas (Energy Group), based in Pune, has been working in the electricity sector on activities includingresearch, information dissemination, policy activism, and regulatory intervention. Established in 1995,Focus on the Global South, based in Thailand is dedicated to regional and global policy analysis, micro-macro issues linking and advocacy. The India program of Focus (established in 1996) has beenundertaking studies, capacity building activities and facilitating dialogues amongst people’sorganizations, trade unions, and grassroots groups on specific issues falling under the realm ofliberalization, privatization and globalization.

The focus of deliberations during the four-day event was on reforms/restructuring processes in the statepower sectors with a special emphasis on the regulatory processes in the states. The main objectiveunderlying the event was to provide an opportunity to the participants to share experiences and to learnfrom each other on strategic as well as substantive issues.

The four-day event was divided in the five major components. The first component of the event was the‘Training Seminar’ lasting for about one and half days. In the ‘Training Seminar,’ along with thehistorical review of the Indian electricity sector, basic topics on techno-economic, legal, and institutionalaspects of the reform and regulatory processes were covered. The second component of the program,


4

lasting for another day and the half, was entirely devoted to the invited presentations on updates andanalysis of the state-level processes. The third component of the event that took place on evening of thethird day was devoted to strategizing and planning for future activities.

The fourth component involved consultation on the topic “Sharing of Concerns and Expectationsbetween Regulators and Civil Society Institutions”. This was attended by Dr. Madhav Godbole (formerHome Secretary, Government of India), Mr. Venkat Chary (Member, Maharashtra Electricity RegulatoryCommission), Mr. Phillipose Matthai (Chairman, Karnataka Electricity Regulatory Commission), andMr. Sanjeev Ahluvalia (then Secretary, Central Electricity Regulatory Commission). The consultationwas chaired by Prof. AKN Reddy (former President, International Energy Initiative). The last componentwas the panel discussion on the topic “Electricity Sector: What Difference the Regulators can make?”which was open to public. The panelist included Prof. Reddy, Mr. Matthai, Mr. Ahluvalia and Mr. PSubrahmanyam (Chairman, Maharashtra Electricity Regulatory Commission). Dr. Godbole chaired thediscussion.

The invited presentations on the analysis of reform process in each state were the mainstay of the event,which sparked off intense discussions. In all, twelve presentations were made on the basis of analysis ofreform process in eleven states. In addition, an analytical note was circulated to participants on thereform process in Punjab. Further Ms. Jenina Joy Chavez-Malaluan of Focus on Global South presenteda similar case-study on the electricity sector reforms in Philippines.

In order to facilitate the comparison among the states and the process of drawing conclusions, thespeakers were requested to follow a common pre-decided framework in their presentations. Thesepresentations covered the broad contours of the reform/regulatory processes in the state, actions ofgovernments and regulators, responses of other players and the lessons the public interest organizationscould learn.

This volume is a compilation of selected papers presented during the event. The first part of the volumecontains papers discussing the reform process in six states namely Orissa, Andhra Pradesh, Harayana,Uttar Pradesh, Kerala, and Maharashtra. In the case of Kerala, excerpts from two presentations arepresented in this volume. It also contains a paper on electricity sector reforms in Philippines. Part II ofthe compilation contains presentations, remarks, and observations by some of the regulators and panelistswho attended the last two sessions. It was felt that these observations would provide deeper insights inthe subject under deliberations. The annexures contain the other details of the event including the list ofparticipants.

We wish to take this opportunity to thank all the participants in the four-day event including theregulators, panelists and chairmen of the sessions on the last day. We are especially thankful to thoseparticipants who patiently cooperated with us in revising their papers. We also wish to sincerelyapologize for the delay in coming out with compilations. We are sure that, despite this delay, thiscompilation would be useful to researchers, activists, media-persons, academics, and members of public.

Sincerely yours,

Minar Pimple Subodh Wagle(for Focus on Global South) (for Prayas Energy Group)


5

Electricity Reforms in Maharashtra: An Analytical Overview

Prayas Energy Group

1. History of Power Sector in Maharashtra

1.1. A mix of ownership structures and retail competition since four decades

Maharashtra State Electricity Board (MSEB) was established in 1961. It soon acquired(after expiry of licenses) many small private power companies in the state. Since then,MSEB has monopoly over the generation, transmission, and distribution of electricityin the state except the Mumbai metropolitan region. Mumbai is served by three utilities,viz., Bombay Electricity Supply and Transport (BEST), Bombay Suburban ElectricitySupply (BSES) Ltd., and Tata Electric Companies Ltd. (TEC). BEST is MumbaiMunicipal Corporation’s undertaking and has a license to distribute power to a part ofthe city of Mumbai. BSES is a public limited company in which Reliance group has ashareholding of around 30% while financial institutions such as LIC, UTI, and GeneralInsurance Corporation hold around 37% equity. BSES distributes power to suburbanarea of Mumbai and also owns and operates a 500 MW coal thermal power plant. TECis a TATA group company supplying power to BEST and BSES from its 1774 MWpower plants. TEC also purchases power from MSEB to supplement its own generationfor meeting Mumbai's demand. Apart from this, TEC's license also allows it to sellpower directly to consumers in the areas licensed to BEST and BSES, provided thedemand is above 1 MW. Before BSES's plant at Dahanu came online in 1995, TEC'scapacity was being fully utilized. TEC has only recently started actively seekingconsumers from service areas of BEST and BSES. “Mula Pravara Electric Co-operativeSociety” is the only co-operative electricity distribution utility in the state. “MulaPravara” serves nearly 200 villages in Ahmadnagar district. Thus, it can be seen thatMaharashtra has a mix of different patterns of utility ownership and retail competitionin the Mumbai area since four decades. Table 1 lists some salient features of these fiveutilities to indicate the relative scale of operation.

Table 1: Salient Features of Power Utilities in Maharashtra

S r . No.

Parameter MSEB TEC BSES BEST M u l a -Pravara

1. Installed GenerationCapacity (MW)

9,096 # 1,774 500 Nil Nil

2. No. of consumers 1.3 Cr. 300 lakh 20.6 lakh 8.4 lakh 1.3 lakh3. Sales (MU) 42,000 9,000 5,415 3,000 4803. Annual revenue (Cr.) 14,500 ~ 2500 2,158 1,400 454. Service area (sq. km.) 3,08,000 438 384 78 1,880

Notes:1. Cr.=crores=10 million & lakh = 100,0001.2. Numbers given above are approximate.2.3. TEC sales includes sales to BSES and BEST


6

3.4. # Apart from this MSEB, also has a share of around 1800 MW from central sectorgeneration such as NTPC and Nuclear Power Corporation. Additionally, DabholPower Company has commissioned Phase I of 728 MW and Phase II of 1444 MW.

1.2 Remarkable growth in physical infrastructure

Since its creation in 1961, MSEB has made remarkable progress in terms of expandingthe physical infrastructure. In terms of installed capacity and revenue, it is the largestelectricity board in the country. MSEB achieved 100% village electrification (~ 40,000villages) in 19891 and serves nearly 22 lakh agricultural consumers. In domestic,commercial, and industrial categories of consumers, around 65% consumption is fromurban areas. Commensurate with the national-level power policies and like many otherstates, this growth in physical infrastructure was facilitated by four major policychoices, which are briefly described below.

i.) Self-reliance and import substitution: In order to build national capability and toavoid dependence on imported equipment and fuel, emphasis was given ondevelopment of coal-thermal and hydro power stations.

ii.) Budgetary Support: The power sector is a highly capital-intensive sector,requiring huge investment with very long repayment horizons of around 10-15 years.To address such needs of the power sector, both central and state governmentsallocated significant portions of the plan expenditure for development of the powersector. Fox example, in 1980-81 annual plan, nearly 34% of the plan outlay wasearmarked for power sector. The governments provided this capital to the SEBs onconcessional interest rate with long repayment period2.

iii.) Centralized supply and grid expansion: Power sector relied almost exclusively onexpansion of centralized grid system for village electrification and on large centralizedgeneration schemes such as Chandrapur (2340 MW), Koradi (1110 MW), and Koyna(1920 MW).

iv.) Cross-subsidy: Realizing that many poor households and farmers cannot afford topay full cost of electricity and remaining in line with the mainstream political thinkingat that time, the government adopted a policy of cross-subsidy. This involved chargingindustrial and commercial consumers more than the cost of supply and chargingdomestic and agricultural consumers lower than the cost of supply. Figure 1 shows thetariff of three major categories as well as the average cost of supply, i.e., total revenue(amounts billed) divided by total sales.

1 Similar to the other states, MSEB also declares a village "electrified" even if it manages tosupply power to just one household or one street light in the village. Some of these villages areconsidered electrified even if there are few solar PV based streetlights. As a result, even thoughMaharashtra has achieved 100% village electrification, actual household electrification is justabout one-third.2 Since 1991, budgetary support is also becoming as expensive as commercial loans with highinterest rates.


7

Figure 1: MSEB's Cost of Supply and Tariff

Note: Sudden increase in the average cost of supply in 2000 is on account of morerealistic estimation of T & D losses (of 31% instead of ~18%), resulting in reduction inunits sold as well as due to substantial increase in power purchase cost due topurchase of power from Dabhol Power Company (DPC). Reduction in cost in 2001 isdue to Maharashtra Electricity Regulatory Commission’s (MERC’s) directive ofreducing (and hence disallowing) T & D losses by 5%. Data upto 2000 is from MSEB'sFinancial Reports, while data for FY 2001 is based on MERC’s order dated May 5,2000.

1.3 Crisis of governance leading to performance and financial crisis

Though MSEB was successful in expanding physical infrastructure and access toelectricity, this success was not free from blemishes. Like many other SEB's, MSEBalso adopted a policy of flat rate tariff (based on connected load and not on actualconsumption) to agricultural consumers in the late 1970s. In the initial period, the flatrate tariff was nearly equal to the average cost of supply, considering average hours ofoperation of the agricultural pumps. But, over the years, the flat rate tariff failed to keepup with both increasing cost of supply as well as increasing hours of operation of theagricultural pumps. This resulted in agricultural consumption being highly cross-subsidized as shown in figure 1. This necessitated substantially high industrial tariff.Another major drawback of this policy was that it allowed an easy route for MSEB tohide excessive T & D losses and caused increasing lack of accountability. Sinceagricultural consumption was unmetered, it had to be estimated, without adequate basedata, in order to estimate the T & D losses. Over a period of time, like many other

0

50

100

150

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000

Year (FY)

Pai

se /

un

it

Cost DOM HT Ind. IPS


8

SEB's, MSEB also started overestimating the agricultural consumption to show"reasonable" figures for T & D losses. Figure 2 shows how, in spite of substantialgrowth in T & D network and rural electrification, MSEB managed to show nearlysame percentage of T & D losses, year after year, while showing rapid increase inagricultural consumption.

Figure 2: Increasing Un-metered Energy and Inflated Agricultural Consumption

This route of hiding excessive T & D losses helped many quarters. MSEB officialscould, on one hand, absolve their responsibility of preventing theft and excessive T &D losses and, on the other hand, could brag about growing agricultural consumption asa symbol of its "social commitment", politicians could patronize constituencies byclaiming highly subsidized agricultural tariff and growing agricultural consumption,agricultural consumers also benefited from this policy as they had become used to apre-defined power tariff not linked to consumption. As a result of this "arrangement ofconvenience" for a array of influential actors, increase in theft of power and technical(T & D) losses was ignored and continued to be camouflaged under the agriculturalconsumption. As indicated by the last year’s data in Figure 2, the real agriculturalconsumption was far lower than claimed3. Speaking in the gross terms, these excessiveT & D losses and theft of power amounted to nearly Rs. 2500 Cr. This loss waspartially funded by higher tariff to industrial and commercial consumers and partly byway of government subsidy to MSEB.

Though excessive T & D losses and theft of power form the most significant parts ofoverall inefficiency in MSEB, they are not the only ones. There are several other areaswhere MSEB's performance could be improved. For example, during the first tariffrevision case before MERC, MSEB claimed that, though the availability of its thermalpower plants was about 85%, it could not generate full power due to poor quality of 3 As explained in section on regulatory process the real level of T & D loses and agriculturalconsumption was exposed during the first tariff revision process for the year 1999-2000.

Composition of Un-metered Energy

0%

10%

20%

30%

40%

50%

1975 1980 1985 1990 1995 2000

% o

f Ene

rgy

Ava

ilabl

e

T&D loss Agri. Unmetered Share


9

coal and claimed that the loss of generation capacity on this account was about 670MW. Similarly, nearly 500 MW (out of 920 MW) of MSEB's gas station at Uran couldnot be effectively utilized due to unavailability of gas. MSEB's performance in terms ofbilling and metering is equally dismal. During the tariff revision process, it wasrevealed that even for consumers from domestic, commercial, and industrial categories(which have been metered), around 50% bills issued are not based on the actualconsumption due to reasons such as faulty meters and average billing or minimumconsumption bills. The other areas where MSEB's performance needs to be improvedsubstantially are quality of electricity supplied and service to consumers. However, inthe absence of adequate studies and proper data, these aspects cannot be elaborated.Table 2 shows MSEB's performance for the last decade.

Table 2: MSEB's Sales and Revenue

Year < - - - - - Sales (MU) - - - - - - - - --- > < - Revenue (Rs. Cr.)- >Domestic Total TotalHT

I n d u -stry

Agric-ulture

Sale ofPower

Government.Subs--idy

R a t e ofReturn%

1990 2594 9050 5950 26973 2249 272 25871991 2839 9706 6404 27958 2923 0 2995 2.61992 3148 9746 8177 30472 3336 199 3626 3.01993 3549 10083 7839 30962 4343 0 4484 5.21994 3772 10771 8703 34562 5244 0.01 5464 4.81995 3962 11671 11453 37763 6151 0.03 6444 4.71996 4424 12776 13332 41619 7115 630 8016 4.51997 4897 12856 13867 42698 8573 258 9074 4.51998 5341 12635 15382 43894 9242 305 9829 4.51999 5915 12622 15968 46327 10121 355 10891 4.52000 6454 12756 10293 41981 10625 2084 13215 4.5Note: Rate of return is the return on net fixed assets in use.

2. Status of Independent Power Producers (IPPs) in Maharashtra

2.1 Reliance’s Patalganga Project

In the mid 1990s, MSEB signed Power Purchase Agreements (PPAs) with three majorindependent (private) power producers (or IPPs). In 1990, MSEB had invitedcompetitive bids for two power stations, viz., Khaperkheda Coal-Thermal (420 MW)and Nagothane Gas-Thermal (820 MW). After several changes in the locations andcapacity of the plants and deliberations by committees, MSEB finally signed a PPAwith Reliance Patalganga Power Ltd. in 1996 for a power station at Patalganga withcapacity of 447 MW. Though the process of inviting bids was initiated before theGovernment of India (GoI) opened up the power generation sector for privateinvestments, tariff of this project is on the lines of GoI tariff guidelines announced in1991. The project will use natural gas (to be diverted from MSEB's share of natural gasfrom Bombay High) and naphtha as fuels. Subsequently, the PPA was amended in


10

February 2000. This was done after the establishment of MERC, but without MERC'sprior approval. The Government of Maharashtra (GoM) approved allocation of “escrowcover” for the project in early 2001. Prayas filed a petition before MERC, raising thisissue and requesting MERC to declare this amendment in the agreement as null andvoid. Mr. Prakash Hogade of Janata Dal (Secular) had also filed a petition regardingthis issue apart from the other issues such as load shedding. In response to this petition,MERC directed that MSEB need to take a prior approval for any PPA or foramendments to the same and declared that the said agreement was of "doubtful legalvalidity". As a result of this order by MERC (dated 17th May 2001), ReliancePatalganga Power and MSEB will have to approach MERC and get its approval for thePPA amendments. As per the techno-economic clearance (dated 22nd January 1998)from Central Electricity Authority (CEA), the approved capital cost of the project is US$ 320 million plus Rs. 246 Cr.. Apart from a small controversy regarding diverting ofMSEB's share of gas for this project, there is no major controversy or litigationsurrounding this project as yet, mainly due to relatively (compared to Enron project)small size of the project and very initial stage of development.

2.2 Bhadrawati Project

MSEB signed with M/S Central India Power Company (an IPP promoted by the Ispatgroup) a MoU in 1993 and a PPA in 1998. This is a coal-based project with a capacityof 1082 MW and located near Bhadrawati in Chandrapur district. This is one of theeight power projects that were granted the ‘fast-track’ status as well as the counter-guarantees’ by the central government. Though the project secured CEA's techno-economic clearance in 1994 (with a capital cost of Rs. 5187 Cr.), it has not movedmuch beyond the planning stage. This project is marred by several controversies mainlyrelating to fuel supply and cost. The project will use coal mined from a nearby captivemine to be owned and operated by a sister company. There were several allegations andcourt cases on the issue of coal cost. Similarly, it was suggested that the proposedproject would pose threat to national security as the proposed captive mine was close toone ordnance depot. Last year, Electricite de France (EDF) withdrew from the projectdue to delays and due to the unresolved issues relating to coal supply, cost, and theescrow cover. After the report of Energy Review Committee (Godbole Committee),considering the changed demand-supply situation as well as learning from the Enronepisode, the GoM has decided to keep the project on hold. Also, due to several changesand delays in finalizing various contracts, it is expected that the PPA will have to beamended, which would require approval of MERC.

2.3 Enron's DPC project

The power project of Dabhol Power Company promoted by Enron Corporation is oneof the most controversial IPP projects in the country. In response to GoI's decision toopen power generation for foreign private companies and following a visit by a high-level GoI delegation to Houston, USA, Enron Corporation decided to set up a powerproject based on imported LNG of capacity of around 2000 MW. In 1993, it signed aPPA with MSEB. As per the PPA, the project was to come up in two phases, the firstphase was of 695 MW and second phase was of 1255 MW. As envisaged in the PPAsigned in 1993, the first phase would run on liquid fuel (either distillate or naphtha) and


11

the second phase (to be run on imported LNG) was optional, i.e., was not binding onMSEB and a Go / No-Go decision could be taken in future without any liability. Sincethe beginning, the project has been shrouded in many controversies on aspects such aslack of competitive bidding, high capital cost and tariff, and larger than neededcapacity. In 1995, the state government led by two part coalition of BJP and Shiv-Sena,which had opposed the project as one of the main election plank, came to power in thestate assembly. Immediately after forming the government, it appointed a committeeunder the chairmanship of then Deputy Chief Minister Mr. Gopinath Mundhe to reviewthe project and, based on recommendations of the committee, cancelled the project thathad purportedly attained financial closure in February 1995. In response to GoM'sdecision to repudiate the contract, Enron filed an arbitration claim in London followingthe provisions in the PPA. The state government also filed a suit in the Bombay HighCourt and alleged that the PPA was null and void on account of alleged corruptioninvolved. But, subsequently the Sena-BJP government did a somersault and appointedan "expert committee" to renegotiate the project. The terms of reference of thecommittee required it to negotiate both the phases of the project. The committeeworked with lightning speed and submitted its report within just 11 days, few daysahead of its term. Based on the report of the committee, the project was revived,making both phases as well as purchase of large quantity of LNG (take-or-pay contractequivalent to 90% PLF of the 2184 MW plant) binding on MSEB and stategovernment. The revised PPA was signed in 1996, which was again amended in 1998.The project being one of the eight ‘fast-track’ projects enjoys counter-guarantee fromthe central government (for Phase I) as well as the guarantee from the state governmentand “escrow cover”. The first phase of the project started production in May 1999 andopened eyes of the politicians and MSEB alike when bills started coming in. The costof Dabhol power is around Rs. 5 / kWh, with intermittent peak tariff of as much as Rs.7.80 / kWh in July 2000 due to the limited off-take by MSEB and high naphtha prices.

By this time, it had become clear that neither MSEB nor even the Maharashtra Statecould afford the Enron project. MSEB earns around Rs. 12,000 Cr. from its consumersAs against this, when Phase 2 of the project was scheduled to be commissioned in early2002, annual payments to DPC from MSEB would shoot to over Rs. 6,500 Cr., makingit simply impossible for MSEB to bear the burden. In this event, it was evident thateven the GoM, which has guaranteed the payments to DPC, would also not be able tobear such a large burden, year after year, due to the more precarious financial situationof the state.

This stark financial reality, on one hand, and the aggressive stand taken by someconstituents of the ruling coalition, viz., Democratic Front, the state governmentdecided to appoint a review committee under the chairmanship of Dr. MadhavGodbole. The committee submitted its report in April 2000. The report is highly criticalof the manner in which the project was negotiated and approved in 1993 as well as in1995. The committee also concluded that the project was not desirable for the state ofMaharashtra right from initial design in 1993. The committee concluded that the DPCproject would be unsustainable even if MSEB were to function in an efficient manner.The committee recommended several structural changes in the project such as:separating LNG facility and harbor from the project, drastic reduction in theprofitability of the promoters as well as in the interest rates of the loans extended by


12

financial institutions supporting the project so as to reduce the tariff and make theproject viable.

The report of the committee revealed that, apart from the losses due to fundamentalfactors such as the need for project and reasonability of capital cost, MSEB could havesaved Rs. 930 Cr. per year only by negotiating in a better manner, the provisionsrelated to sharing of harbor and regasification costs, O & M costs, and heat rate. Thecommittee also pointed out several lacuna and shortcomings in the decision-makingprocess that led to the present state of affairs and observed that "This failure ofgovernance has been broad, across different governments at different points of time, atboth the state and the central level and across different agencies associated withexamining the project, and at both the administrative and political levels".

Two members of the committee, viz., Dr. Godbole and Dr. E.A.S. Sarma, alsorecommended institution of a judicial commission of inquiry to investigate the issueand to make those responsible for such "governance failure" accountable.Subsequently, the GOM has asked the same committee to conduct negotiations with theDPC on the lines of its own recommendations. Several rounds of negotiations betweenthe committee and DPC took place but the issue could not be resolved. The committeehas submitted its report on these negotiations to the state government, which is yet tobe made public. As per press reports, the committee has concluded that the DPC tariffshould not be more than Rs. 2.40 /unit. Considering that the tariff as per current PPAworks out to around Rs. 3.6 / unit, effectively the committee has concluded that areduction of around Rs. 2000 Cr./ yr. in payments to DPC is required and feasible. Atthe time of writing of this report, the Government of Maharashtra has announced that itwill institute such a Commission of Inquiry.

Alongside these developments, the MSEB also adopted aggressive legal stand towriggle out of this unsustainable liability. MSEB realized that the DPC plant wasunable to supply full power within three hours of start-up as promised in the projectreport submitted to CEA as well as in the PPA. MSEB, as per the provisions of thePPA, charged DPC a penalty of nearly Rs. 400 Cr. for one such instance. As expected,DPC rejected this claim and chose to invoke the international arbitration process as perthe provisions in the PPA. MSEB responded to this by filing a petition before theMERC claiming that MERC has the exclusive jurisdiction on resolving disputesbetween utilities following endorsement of the Electricity Regulatory Commission'sAct 1998 in October 2000 by GoM, which delegated powers of dispute resolution toMERC. In the meanwhile, MSEB also rescinded PPA by citing the issue ofmisdeclaration of plant's capabilities and has stopped purchasing power from DPC.DPC has obviously not accepted this claim. On MSEB's petition, MERC gave aninterim order and stopped DPC from proceeding further in the international arbitrationcase filed by DPC. DPC refused to accept MERC's jurisdiction on "dispute resolution"and filed an appeal in the Bombay High Court. The Bombay High Court ordered thatthe MERC should first hear the matter and decide on its jurisdiction. DPC appealed onthis order of the high court in the Supreme Court. The Supreme Court then directed theBombay High Court to decide on the issue of MERC's jurisdiction. During the hearingin the Supreme Court, apart from other legal issues, DPC also alleged that one memberof the MERC, viz., Mr. Jayant Deo had been biased against DPC. In support of these


13

allegations, DPC quoted extensively from Mr. Deo's writings on DPC project in 1995-96 in his capacity as the Research Director of a consumer organization, ‘MumbaiGrahak Panchayat’. As things stand at the time of writing this report, the case ispending before the Bombay High Court on the issue of MERC's jurisdiction to arbitrateand resolve dispute between MSEB and DPC.

The Enron episode has highlighted the ruinous financial impact on MSEB because ofthe wrong contracts with IPPs. The Godbole committee also pointed out similar flawsin the design of other two IPPs in the state, viz., Reliance and Bhadrawati. As a resultof these developments, MSEB has decided not to pursue these projects at this stage.Also, both Reliance and Bhadrawati projects will have to approach MERC for seekingits approval for their PPAs before they can attain financial closure, which is a key pre-condition and a milestone for any IPP to start construction. It is expected that crucialissues such as need for power, the least-cost nature of these projects, and tariff of powerfrom the same will be debated in a transparent manner during the proceedings beforethe MERC.

Apart from these major IPPs, GoM / MSEB had initiated the process of contractingwith seven small IPPs (liquid fuel based) through competitive bidding in the mid1990's. Though promoters were selected, due to several constraints relating to fuelsupply and escrow agreements, the PPAs have not been signed and these projects arealso shelved in the current situation.

3. The Regulatory Process

In 1995-96, the financial situation of MSEB worsened and the government was forcedto provide a subsidy of Rs. 630 Cr. so as to enable MSEB to achieve the mandated rateof return of 4.5% of net fixed assets. Also the World Bank, which was providing a loanto MSEB under its “Second Maharashtra Power Project” threatened and later actuallypulled out of the project and declined to disburse the remaining amount. This was donein response to failure of MSEB and GoM to adhere to certain loan covenants such asachievement of a minimum of 4.5% return on net fixed assets, reduction in receivablesto the level of 2.5 months, and increasing agricultural tariff. These developmentsprompted the GoM to appoint an expert committee under the Chairmanship of Shri.V.G. Rajadhyaksha. Apart from several recommendations to improve the functioningof the MSEB, the committee also suggested an establishment of the state regulatorycommission. Like many other recommendations of the committee, thisrecommendation was also not followed by the government.

In September 1998, MSEB effected substantial tariff hike mainly for industrial andcommercial consumers. Some industrial associations filed a petition in the MumbaiHigh Court against this tariff increase. By the time this petition came up for hearing,the GoI had enacted the Electricity Regulatory Commissions Act 1998. This Actprovided for establishment of state regulatory commissions and articulated proceduresfor selection of the regulatory commissioners as well as functions and authorities of thecommissions. The decision of whether to establish the regulatory commission was leftto the discretion of the respective state governments. During the hearing on the petitionfiled by the industry associations, the High Court directed the GoM to establish the


14

Maharashtra Electricity Regulatory Commission, however, the MERC was constitutedin August 1999. MERC is a three-member body consisting of two retired seniorgovernment officers (from the Indian Administrative Service or IAS) and one privatesector consultant.

3.1 First Tariff Revision Process before the MERC

Soon after MERC was established, MSEB filed a tariff revision application before it inNovember 1999 (Case 1 of 1999) based on the revenue requirement for the financialyear 1999-2000. In response to this, MERC issued a public notice inviting commentsand made available copies of MSEB's tariff proposal (at the price of Rs. 200/-) in theoffices of all Executive Engineers of MSEB across the state. The proposal submitted byMSEB was sketchy and lacked adequate data and information. In response, Prayas fileda separate petition before the MERC (Case 2 of 99) demanding that MERC shoulddirect MSEB to make available to public substantial quantity of more data andinformation on matters such as details of fuel cost, power purchase cost, and estimationof T &D loss and agricultural consumption. This petition also demonstrated that how,in the absence of this data, it was not possible for public or the MERC to justify andevaluate reasonableness of costs claimed by MSEB to the tune of Rs. 1900 Cr. Thiswas much more than the tariff increase of Rs. 1219 Cr. demanded by MSEB. Afterhearing the petition, MERC directed MSEB to make all data requested by Prayas to bemade public. MERC also directed MSEB to reply individually to each objectionreceived on the proposal. MERC held public hearings at the headquarters of all the sixrevenue divisions in the state. During the hearing, in addition to those who had filedaffidavits, other interested persons were also allowed to comment on the proposal afteradministering proper oath. After the public hearings were over, the Commissiondecided to hold "technical sessions" on MSEB's proposal. Citing MERC's conduct ofbusiness regulations, which stipulated that all proceedings before the commissionwould be public, Prayas requested the commission to allow consumer groups toparticipate in such sessions. The MERC accepted this suggestion and invited consumergroups to participate in these sessions. During the technical sessions, the proposal andadditional data submitted by MSEB, was scrutinized in detail. In this process, severalinconsistencies and shortcomings in the proposal were exposed and MSEB was forcedto modify the proposal as well as affidavits several times. At the end of this process, itbecame clear that the revenue shortfall claimed by MSEB (based on existing tariff) wasfar less than reality and in order to bridge the revenue gap far higher tariff increasewould be required. Apart from this, the original proposal had undergone substantialchanges on many other accounts, such as T & D losses, agricultural consumption, andsales to industrial consumers. Table 3 summarizes these changes.

Also, by this time, the financial year 1999-2000 was nearly over, as technical sessionsextended upto February 2000. Considering these aspects, the commission directedMSEB to submit revised proposal based on revenue requirement for the year 2000-01.The commission also directed the MSEB to take note of findings during the technicalsessions, which had indicated far higher T & D losses. Using the analysis of dataobtained from MSEB in Case 2 of 99 and its own previous work on agriculturalconsumption, during the technical sessions, Prayas was able to conclusively prove thatT & D loss figure of about 18 % as claimed by MSEB in its original proposal was


15

highly understated and that the real T & D losses would be in the range of 28 to 33%.On suggestion from Prayas, MERC also directed MSEB to send revised proposal to allthose who had commented on the earlier proposal, i.e., to over 100 groups andindividuals. The rationale was that this was the same case and the need for revisedproposal had arisen mainly due to inconsistencies and shortcomings in the MSEB'soriginal proposal. MSEB submitted its revised tariff proposal for the FY 2000-01 andadmitted that T & D losses were 27%. In the new proposal, MSEB estimated that, atexisting tariff, the revenue shortfall would be Rs. 2018 Cr. and proposed an equivalenttariff increase. Considering that the process had extended over a long time, thecommission decided to hold public hearing only at Bombay. The commission finallycame out with the tariff order on 5th May 2000.

Table 3: Changes in the MSEB's Tariff Proposal During Technical Sessions

Item October 99 10th Feb2000

16th Feb2000

28th Feb 2000

Total revenue requirement 13,859 13,592 13,011 12,995Revenue at present tariff 12,640 12,486 10,912 11,206Revenue gap at present tariff 1,219 1,106 2,099 1,789Revenue at proposed tariff 13,859 13,592 11,972 12,344

Revenue gap at proposedtariff

0 0 1,039 651

Connected load of Agri.pumps (LT Unmetered) HP

9,175,803 7,291,464 8,619,475 8,464,420

Connected load of Agri.pumps (HT Unmetered) HP

579,088 326,950 307,647 522,788

Number of power looms 373,718 631,108 631,108 631,108Assumed hours of operationof flat rate looms

2,598 3,650 3,650 3,650

Net power generation byMSEB plants

~ 42000 43,297 40,793 42,073

Power purchase MU 19,469 19,470 18,470 17,610HT industrial consumption 15,333 15,191 12,436 12,920

Notes:HT industrial consumption = HTP I + HTP II + HTP BP + HTP X (mines)

This order concluded that the T&D losses of MSEB (including theft) were 31%. Theorder gave a tariff hike amounting to revenue increase of about Rs 600 Cr. against thedemanded increase of Rs 2018 Cr.. It asked MSEB to generate additional revenue ofRs. 600 Cr. through reduction in T&D losses by 5%. It also asked MSEB to reduceexpenses by Rs. 256 Cr. for power purchase, and Rs. 69 Cr. for power generation.

There were many positive features in the order. The order asked MSEB to strictlyfollow “merit order dispatch” 4. It ordered that all the new connections would have to 4 Merit order dispatch implies generating power from lowest variable cost plants first and to useplants with highest variable cost minimal (after all low variable cost generation is exhausted).


16

be metered and asked MSEB to evolve a master plan for metering in order to completemetering of all consumers within the next three years. MERC has plans to reviewperformance of MSEB on the key operational parameters, like metering plan. This wasa welcome step. The order also directed MSEB to introduce Time of the Day (TOD)tariff for industrial consumers giving incentive for load shift to off-peak period, it alsoincluded incentive for power factor improvement. The order gave a very stiff tariff hiketo agricultural consumers (60% immediately, followed by another 200% for the largeagricultural consumers, considering metered tariff and compulsory metering). TheCommission also expressed its intent to remove cross-subsidy within five years.

After the tariff order by MERC, MSEB as well as some consumers (mainlyagricultural) groups filed review petitions before the MERC. MSEB's main points forreview petition were plea for not to disallow transit loss of coal (around Rs. 150 Cr.),nearly halve the targets for T & D loss reduction, increase in thermal PLF andreduction in thermal heat rate. The main pleas from consumers were to reduce tariff,especially of large irrigation pumps owned by co-operative lift irrigation schemes.After similar process including public hearings, the commission virtually rejected allthese review applications and maintained earlier decisions.

3.2 Other major cases before the MERC

Apart from the tariff revision case, MERC has addressed several other major issues /cases. Table 4 shows the nature of cases filed before the MERC and petitioners.

Table 4: Petitions before the MERC

Party No. of Cases Name ofthe Party

Details

Utility 8Tariff 4 MSEB 1998, 00-01 *, FOCA *, Mula

CoopDispute 2 Tata-BSES, MSEB-DPC *PPAs 2 MSEB-Cogen PPAs *Govt 1 About SubsidyIndustry 12Own Tariff 7 Bulk discount, billing demandNTPC directSupply

4 Steel export industry

Supply conditions 1 With AGPNGOs 6Transparency 2 Prayas MSEB data, PPA documentsPPA invalidity 1 Prayas Reliance PPA being voidGovernment role 1 MGP Restraining governmentSupply conditions 1 AGP Challenging MSEB comm. CircularsMSEB efficiency 1 Individual Challenging MSEB plant dispatchPolitical Party 1PPA invalidity 1 JD (s) Reliance PPA being voidNote: Review petitions not included


17

Soon after the tariff order, the GoM announced concession in tariff for agricultural andpower-loom consumers without assuring adequate compensation to MSEB for this lossof revenue. After consumer groups raised this issue in the Commission AdvisoryCommittee, the GoM approached MERC with a request to allow reduction in tariff andfiled an affidavit to provide MSEB around Rs. 800 Cr. to compensate the revenue loss.MERC agreed with this proposition and directed GoM to release the said amountbefore October 2001, i.e., before finalization of MSEB's accounts for FY 2000-01.

As mentioned in Section 2 above, the MERC ruled positively on the petition filed byPrayas as well as Shri. Hogade and declared PPA amendment between Reliance andMSEB of "doubtful legal validity".

Shri. Paranjape, former Director, Kalpakkam Atomic Power Station filed a case beforethe MERC alleging that the MSEB violated MERC's tariff order dated May 5, 2000which directed MSEB to purchase power from Enron strictly on the principle of "meritorder dispatch". Several hearings were held on this petition with the final hearing beingheld in April 2001. MERC has not issued its final order in this case as yet.

MERC has, after duly inviting public comments and conducting public hearing,approved MSEB's application for fuel and other costs adjustments (FOCA) formula.The other major cases pending before the MERC are dispute between TEC and BSESregarding stand-by charges, a tariff revision application by Mula-Pravara Co-operativeSociety, and MSEB's application for resolution of dispute between MSEB and DPC.Recently, MSEB approached MERC for approval of PPAs for several bagasse-basedco-generation plants. MSEB and project promoters claimed that they be allowed a tariffof Rs. 2.25 / unit (1995 level) with annual escalation of 5% as per GoM policy. MERCopined that GoM cannot give a "policy directive" specifying tariff, as the ERC Act1998 specifies that tariff determination is the exclusive domain of ERCs, and decidedto look into cost components of these projects. These cases are still in initial stage oftechnical validation and preliminary hearing. MERC plans to hold public hearingsbefore approval of the PPAs.

In October 2000, Prayas had filed a petition before the MERC with a view to enhancetransparency in the sector. Prayas requested MERC to obtain copies of severaldocuments (such as clearances and project construction, operation and maintenance andfinancing agreements of IPPs ) and to make the same available to consumers and otherpublic. As a result of this petition, MSEB has made several documents public withhitherto "confidential" information. This includes information / documents such ascomputer model of DPC's tariff calculation, evaluation report of the competitivebidding process through which Patalganga project was awarded to Reliance. But, due toDPC's claimed confidentiality, MSEB refused to make public the agreements related toproject construction and project financing. Prayas filed second petition objecting to thisnon-compliance. The final hearing on this petition was held on 18th July 2001. MERCgave its order on 31st July 2001 and, notwithstanding MSEB's claims of confidentiality(arising out of its contractual obligation under the PPA), directed MSEB to makeavailable all documents demanded by Prayas.


18

3.3 Salient observations about the regulatory process in Maharashtra

In many other states, the regulatory commissions were created, as part of the overallreform package, usually under active coaxing from the World Bank (WB) or AsianDevelopment Bank (ADB). As against this, in Maharashtra, MERC was established inresponse to peoples’ initiative and without any external pressure related to the overallreform. In less than two years of its existence, MERC, through its regulatory process,has been instrumental in substantially improving the transparency and publicparticipation in the decision-making and regulation functions in the sector. This couldbe attributed to three major factors, viz., MERC's positive approach, absence ofexternal pressures, and strong public intervention. For example, in the last two years,access for public to data and information has substantially increased and severaldocuments and information are now easily accessible to public. This included data suchas detailed monthly bills from DPC, PPAs and related clearances and contracts of IPPs,MSEB's metering and billing performance, hourly demand, load shedding and plant-wise generation. In line with its ‘Conduct of Business Regulations’, MERC has ensuredthat all proceedings before it are "actually" public and all notices of MERC are sent toits registered consumer groups. This has allowed consumer groups and general publicto witness all proceedings before the commission.

Apart from these process-related gains, in terms of substantive issues, the regulatoryprocess has also proved useful. Maharashtra is perhaps the only state, where an attemptis being made to estimate real T & D losses, without pressures from the WB or ADB.The Reliance PPA amendment case and the directive to GoM for timely disbursementof subsidy to MSEB has also demonstrated that such regulatory process can helprestrain both private and government sectors, provided there is strong publicintervention.

Though these are the positive aspects of regulatory process in Maharashtra, within thepresent legal and institutional framework, several more things need to be done toensure sustained effectiveness of the regulatory process for protecting and promotingthe "public interest". In the Electricity Regulatory Commission's Act 1998, powers ofstate electricity regulatory commissions (SERCs) are spit in two sub-sections, 22.1 and22.2. Powers under section 22.1 are not discretionary and but governments have choiceof delegating powers under section 22.2 to the SERCs. GoM has still not delegated fullpowers under section 22.2 to MERC. As a result, the MERC still has no authority toapprove investments of utilities or licensing. Apart from this, another factor affectingefficacy of the MERC is the lack of adequate financial and human (technical and legal)resources. Till now, MERC has very few technical staff and no legal staff at all. Suchlack of crucial resources is likely to hamper MERC's ability to take proper decisions ina time-bound manner and affect the in-depth scrutiny of various techno-economic aswell as legal aspects. Though MERC's conduct of business regulations stipulate that allrecords of the commission are public, a proper public information system is yet toevolve. In order to operationalise various transparency and public participation relatedprinciples articulated in the law and regulations, it is essential to institute proper"information disclosure systems" which would facilitate easy access to regulatoryinformation. For example, if the MERC institutes a system of monthly newsletter,listing all proceedings before the MERC in that month (along with a summary of each


19

hearing and list of documents / records available to the commission), then it would befar easier for public to access commission's records and participate in the process. Aweekly email newsgroup version of this newsletter can further shorten the time lag andimprove benefits.

Compared to other states, the public awareness in Maharashtra about the regulatoryprocess is much better. However, considering the complexity and scale of regulatoryprocess, it is essential to have sustained efforts for enhancing public awareness andcapabilities of the civil society groups to effectively participate in the process.

In terms of substantive issues, there are some major challenges before the regulatoryprocess. MERC, in its first tariff order in May 2000, declared its intention to remove allcross-subsidy within five years. How agricultural economy can cope with this change isa big question as for the last two decades, large infrastructure as well as cropping andirrigation practices have been developed on the assumption of continued supply ofcheap, unmetered electricity. In the absence of comprehensive approach aimed atpumping efficiency improvements and at gradual changes in cropping and irrigationpatterns and practices, it is likely that agricultural economy will suffer badly. Asanother outcome of attempts of rapid reduction in cross-subsidy, GoM might be forcedto bear the subsidy burden, resulting in just transferring burden of cross-subsidy fromelectricity consumers to taxpayers. Large T & D losses and the Enron imbroglio areother major issues that need to be resolved with out affecting public interest in theMaharashtra's power sector.

4. The Reform Process

As mentioned in Section 3, the GoM appointed a committee under the Chairmanship ofShri. V.G. Rajadhyaksha in 1995-96. Dr. Madhav Godbole, Pradip Shah (CRISIL), andShri. M.G. Varade (Ex. Director, MSEB) were other members of the committee. One ofthe major recommendations of this committee was to privatize distribution. Based onthis recommendation, the GoM initiated measures to privatize power distribution insome urban industrial areas adjacent to Mumbai. These actions and recommendationsof the Rajadhyaksha Committee resulted in strong protests from trade unions of MSEBemployees. The unions opposed any move towards privatization and demanded thatMSEB should be allowed to function with adequate autonomy. They also demanded a"code of conduct" to avoid government interference in MSEB's functioning. But theseprotests failed to change GoM's thinking in any significant way. It announced decisionto privatize distribution in the New Bombay area (predominantly urban, industrialarea). The ‘Infrastructure Leasing and Financial Services’ (IL & FS) was appointed forthe study of various aspects related to the formation of a joint venture companybetween MSEB, CIDCO (a nodal urban infrastructure authority for the region, ownedby GoM) and a private company. The GoM also assured MSEB unions, in the process,that it would consult unions before any final decision. IL & FS submitted its report inMarch 1999 and it was circulated to MSEB unions for their comments. However, in themeanwhile, elections for the Legislative Assembly in Maharashtra were held in 1999and a new coalition of Congress, Nationalist Congress and some other smaller partiescame to power. Apparently, this change in government and opposition from the MSEB


20

unions resulted in putting this proposal on the back-burner and not much progress wasmade in this regards.

The second impetus for reform came in the mid-2000. During this period, the ChiefMinister (CM) and some of his cabinet colleagues went to US. During this visit, theyalso met the President and other officials of the World Bank. Immediately afterreturning from the US, the CM announced plans for power sector restructuring on theline of the Orissa Model, i.e., unbundling and privatization. GoM appointed‘Administrative Staff College of India’ (ASCI) to prepare a draft of reform Act, knownas Maharashtra Electricity Reform Bill 2000. This bill is very similar to reform Act ofAndhra Pradesh and Orissa. GoM’s decision to adopt the WB model of power sectorreforms resulted in strong protests. Over a dozen unions of MSEB went on indefinitestrike from July 25, 2000 with only one demand of canceling privatization. The strikereceived wide support from MSEB’s workers and engineers alike and over 95%workforce joined the strike. Though in terms of workers unity the strike was successful,striking workers were at the receiving end of the public wrath due to the large-scaledisruption in electricity supply and the resultant inconvenience to general public. Apartfrom MSEB unions, many organizations such as Prayas, and Akhil Bharatiya GrahakPanchayat also opposed government’s approach to power sector privatization. Afterfour days of strike, a compromise was struck between unions and government. Thecompromise agreement is peculiar. It is a Marathi agreement, reading that thegovernment would withdraw the proposed bill and new bill will be introduced afterapproval of unions, but in bracketed English it says “after consultation” with unions !The events during the strike revealed how MSEB and its workers have little credibilityin the public eye. One of the major shortcomings in the process was the failure ofunions to create public awareness about dangers of privatization and to demonstratetheir commitment to improve MSEB’s performance and consumer service. The revisedversion of the Bill (not materially different from the first version) was tabled in theAssembly in November 2000. But due to growing internal realization that untilcrushing liability of Enron is taken care of, reforms cannot move ahead as well as dueto the growing opposition to Enron project (which needed immediate remedial action),the government did not press for passing of the bill. Instead, the government announcedits decision to appoint an expert committee to review Enron Project.

After much delay and skirmishes over the Chairmanship of the Committee, theCommittee was finally appointed in February 2001 under the Chairmanship of Dr.Madhav Godbole. Other members of the committee were Dr. E.A.S. Sarma (formerHome Secretary, GoI), Mr. Deepak Parekh (Chairman, Infrastructure Development andFinance Corporation), Dr. R.K. Pachauri (Director, Tata Energy Research Institute),Mr. V. M. Lal (Energy Secretary, GoM) and Dr. Kirit Parikh (Professor Emirates,Indira Gandhi Institute of Development Research). After a controversy over Dr. KiritParikh's involvement in the earlier committee to renegotiate Enron project, he chose notto participate in the functioning of the committee citing his prior commitments. Apartfrom reviewing Enron and other IPPs in Maharashtra, the Terms of Reference of thecommittee also required the committee to make recommendations for reforming powersector in Maharashtra. This Part II of the committee’s report was submitted to thegovernment on July 11, 2001 and was made public subsequently. The committee hasrecommended unbundling and privatization of generation and distribution. As per the


21

report, separate companies should be created for thermal and hydro generation plantsand nearly a dozen companies (equivalent to present zones of MSEB) should be createdfor distribution. The committee has outlined a time-line of five years for privatizationof distribution and seven years for that of thermal generation. It has furtherrecommended surcharge of one paise / unit for funding expenditure of the RegulatoryCommission. Because, currently, the issue of DPC is attracting full attention of policymakers as well as general public, there has been little debate or action on the report ofthis committee as yet.

5. Conclusion

Due to several reasons, developments of power sector in Maharashtra till now are muchdifferent than many other reforming states. Ruinous financial impacts as well as strongpublic opinion against the Enron project have forced MSEB / GoM to look for ways ofavoiding this crushing liability. Only legal and techno-economic innovations as well asstrong political will would succeed in relieving people of Maharashtra and other statestoo (as there are efforts to sell Enron power to other states) from the unwarranted andhigh-cost Enron power. The Enron experience has also resulted in rethinking aboutother IPPs in the state. Though a couple of attempts were made by the GoM in the lasttwo to three years, the privatization and unbundling have remained on paper. This wasdue to several factors such as, the large and unbearable burden of Enron PPA, strongopposition by unions and some public groups, and relatively better financial situation ofMSEB (in the pre-Enron period). The regulatory process in the state is also muchdifferent when compared to other states. Due to strong public intervention and sectoralexigencies, the MERC had to handle several important cases such as amendments toPPA, subsidy by government, tariff revision and merit order dispatch. The regulatoryprocess in the state has resulted in substantial improvement in the transparency andpublic participation but, at the same time, several further actions (e.g., operationalisingtransparency and civil society capability building) are needed to ensure that the processbecomes sustainable and effective in protecting and promoting “public interest” in thelong term. One of the major fallout of the Enron controversy has been lack of concertedefforts to improve the performance of MSEB. Fortunately, after appointment of thecurrent Chairman of MSEB, since November 2000, several steps have been initiated toimprove MSEB’s performance (such as design and implementation of proper energyaudit, management information systems, and strong drive for recovery of arrears andtheft reduction). These measures have started yielding some results in terms ofreduction in arrears and better estimation of theft and identification of high theft areas.Of course, the success of these efforts depend on co-operation of MSEB’s workers andengineers and strong public pressure to ensure that the top management of MSEB isgiven free hand to deal sternly with erring staff and consumers alike and is madeaccountable for performance of MSEB.

Documents and Web-sites Referred

MSEB's annual Administrative and Financial Reports

Report of the Energy Review Committee (Godbole Committee) - 2001


22

Report of the Rajadhyaksha Committee - 1996

MERC's tariff order dated May 5, 2000

MSEB's tariff proposal before MERC in November 1999 and March 2000

www.mercindia.com

www.msebindia.com

www.bses.com

www.bestundertaking.com

www.tata.com

_________0_________


23

Development in the Power Sector in Andhra Pradesh

M. Thimma Reddy,Convener, Peoples’ Monitoring Group on Electricity Regulation (PMGER)

Introduction

In a span of four decades since its inception in 1959 APSEB increased power generationcapacity by 36 times, power handled by 59 times, service connections by 40 times, andrevenue by 747 times. During this period APSEB achieved 100 per cent electrification oftowns and villages. 65 per cent of the hamlets, 85 percent of the backward classes coloniesand 92 per cent of the Scheduled Castes’ colonies are electrified.

Table 1: Power Position in Andhra Pradesh

Item 1959 1999Generation Capacity 200MW 7330MWPeak Demand 146MW 6480MWService Connections 2.7 lakhs (i.e., hundred thousands) 1.1 croreAgriculture Connections 18,000 18.85 lakhsPower supplied 686MU 40,574MUAnnual Revenue Rs. 6.6 crore Rs. 4932 crore

Source: Power Development in AP – 1998-99.

Financial Position of Andhra Pradesh State Electricity Board (APSEB)

Losses incurred by APSEB are shown as one of the main reasons for restructuring thepower sector in Andhra Pradesh. But these losses have surfaced only recently. Both thestate government and the World Bank concede this fact. In 1994-95 APSEB earned profitsof Rs.87.25 crores. But during the very next year, i.e., 1995 - 96 losses stood atRs.1244.68 crores. These losses climbed to Rs.1533.04 crores in 1996 - 97. One maywonder how losses of such magnitude surfaced so suddenly. According to the white paperpublished by the state government of AP on power sector in the past also the boardincurred losses but they were compensated by additional mobilisation of resources by thestate government. Additional resources worth Rs. 130.25 crores were mobilised in 1992 -93, and Rs. 275.25 crores were mobilised in 1993 - 94. In 1994 -95 the state governmenthas written off its equity of Rs. 944.11 crores in APSEB. After that, according to thegovernment, there is no other way of compensating losses incurred by the APSEB.

During the same period revenues of APSEB were moving up. Revenues increased fromRs. 1935.5 crores in 1992 -93 to Rs. 3007.87 crores in 1996 - 97. The revenues of theboard are not enough to cover the mounting costs. Fuel purchase, payments towardselectricity purchased from other electricity boards and interest payments are importantcomponents of the costs incurred by the APSEB. Because of rise in prices of petroleumproducts in recent times and difficulties encountered in production and transport of coalled to fuel cost escalation. In order to balance supply and demand of power in the state


24

APSEB resorted to purchase of power from other boards. The cost on this count increasedfrom Rs. 591.66 crores in 1992 - 93 to Rs. 888.18 crores in 1996 - 97. Besides this,purchase price paid by the board is also above the national average. While the nationalaverage purchase price stood at 110.01 paise (i.e. one hundredth of a Rupee) per unit ofpower, APSEB paid 114.12 paise. On the debt front, in 1992 -93 APSEB paid Rs. 330.36crore towards interest payments, it increased to 1106.93 crores in 1996 - 97. This showsthat one third of the Board’s income is going to meet interest payments. At the end ofMarch 1996 the outstanding loans stood at Rs.4851.02 crores. Added to this, theincreasing burden of interest payments formed 20.31 per cent of the expenditure of theBoard. It increased to 32.23 per cent in 1996 -97.

Table 2: Financial Position of APSEB (Rs. Crores)

1992-93 1993-94 1994-95 1995-96 1996-97Provi’nal Estimate

1. Total Income 1935.50 2303.15 3220.44 2407.28 3007.862. Expenditure on Fuel 484.66 608.75 719.09 1000.94 1306.443. Expenditure on purchaseof power

591.46 742.75 940.29 954.68 888.18

4. Total expenditure 1542.69 1914.14 2597.39 2991.79 3433.975. Operational Income (1-4) 392.81 389.01 623.05 -584.51 -426.116. Interest Payments 313.36 302.02 535.80 660.17 1106.937. Net surplus / Deficit (5-7) 79.45 86.99 87.25 -1244.68 -1533.04

Source : Finances of APSEB. APSEB, June - 1996

Table 3: Distribution of Electricity (in MU)

Category 1 9 8 0 -81

1 9 9 0 -91

1 9 9 5 -96

1 9 9 6 -97

1 9 9 7 -98

1 9 9 8 -99

P o w e r Distributed

6915 20233 29457 32092 36358 38721

Industry Total 3363 7042 7798 8207 8595 8655% 8.63 34.80 26.47 25.57 23.64 22.35

Agriculture Total 915 6285 11399 7835 9336 9866% 13.23 31.06 38.70 24.41 25.67 25.48

Domestic Total 546 2079 3276 3801 4535 5090% 7.90 10.28 11.12 11.84 12.47 13.15

T&D Losses Total 1523 3978 5551 10281 12020 12312% 22.03 19.67 18.85 32.04 33.06 31.80

Source: Power Development in Andhra Pradesh - 1998-99.

APSEB and Agriculture Sector

Whenever the issue of losses crop up the government and APSEB officials point theiraccusing finger at the agriculture sector. They argue that because of the subsidies given tothe agriculture sector the Board has landed in losses. While the agriculture sector isconsuming more power than any other sector, it provides least proportion of revenues. The


25

losses are mounting as power is being diverted from industrial sector to agriculture sector.In 1985 -86 while agriculture sector consumed 28.8 per cent of power distributed,industrial sector consumed 54.8 per cent. In 1994 -95 while power consumed by theagriculture sector increased to 47.8 per cent, that of the industrial sector declined to 29.1per cent. Subsidies to the agriculture sector cost Rs. 162.3 crores in 1985 -86. Thisincrease to Rs. 1626.8 crores in 1995 - 96. But the question is how far these figures arereliable. Power supplied to the agriculture sector is not metered. All the power supplied,after deducting the power consumed by industrial and household sectors is shown as beingconsumed by agriculture sector. But this includes losses in transmission and distribution,and also power theft. If these losses are taken in to account then the proportion of powerconsumed by the agriculture sector will be low, lower than 47.8 per cent. M. HariprasadRao estimated that the government overestimated the number of pump sets by 25 per cent,working hours (1620 hours) in an year by 33 per cent and power consumption by one 5HPmotor (4.55 units) by 20 per cent. Because of all these power consumed by the agriculturesector was shown to be two times more than its actual consumption (The Hindu,September, 5, 1997).

This overestimation of the agricultural consumption continued with the recent tariffhike exercise. According to the ‘Tariff Proposals for Retail Power Supply’ (pageNo.17) “ for the purpose of developing the ERC/ARR projections, APTRANSCO hasadopted an estimate of agricultural consumption of 1200 hours This calculation isbased on supply of power for six hours daily for 200 days in an year. But in actualexperience it never crossed five hours. APTRANSCO has taken 9,815 MU asagricultural consumption for the year 2000-01. Actually this would not be more than6600 MU. This means that more than 3200MU of power is wrongly attributed toagriculture. This fact is also conceded by APTRANSCO when it submitted beforeAPERC that its “sample was not representative and it is likely that the extrapolatedconsumption derived from such sample metering is on the higher side”(p.16).

According to the official white paper released in 1999, while cost per unit of power atLT end was about 201.84 paise in 1997-98 the electricity board received only 16.12paise from agriculture while supplying 9336MU of power; and as a result of it incurreda loss of Rs. 1,733.88 crore. But if we take 5398 MU as the actual consumption in theagricultural sector per unit income from this sector will be 28 paise and loss incurredwill be Rs 938.40 crore. Industrial and commercial consumers are cross subsidisingagricultural and domestic consumption. While the average cost of power supply is Rs.2.29 per unit the industrial consumers are paying about Rs 3.19 per unit andcommercial consumers are paying Rs 3.69 per unit. As a result of this additionalincome accruing to the board is about Rs 907.8 crore (Rs 778.02 crore from industryand Rs 129.79 crore from commercial). This amounts to Rs 31.4 crore effective subsidyprovided by the state government/APSEB. Even if we add subsidy of about Rs 163.25crore provided to domestic consumers the total subsidy will not cross Rs 200 crore.This show that subsidies to agriculture in particular are not the main cause of financialproblems because the losses on this account are more than compensated by surplusfrom the industrial and commercial consumers.

Transmission and Distribution (T&D) Losses: Fudged Figures


26

While subsidy to agriculture is treated as villain, the T&D losses are escaping theattention it should have received. In fact effective addressing of this problem will solvethe problems of the power sector. A substantial proportion of T&D losses were shownas being consumed by the agriculture sector on the pretext that it being non-meteredsector it is difficult to measure its consumption properly. So after assuming a notionalquantity of T&D losses the remaining quantity is attributed to agriculture. From1982while T&D losses steadily declined as if showing improved efficiency in T&D,agricultural consumption was shown to be increasing, symbolising unbridledconsumption in the wake of heavily subsidised power supply. But truth was otherwise.There were technical limitations to such an increase in agriculture sector powerconsumption, which include limited hours of supply, poor quality of supply anddeclining water table. At the same time commercial losses signifying theft of powerwas spreading alarmingly. But from 1996-97 the year in which power sector reforms inAP began to take a firm shape T&D losses were shown to be suddenly increasing, to 32percent from 18.85 percent of the previous year. With the initiation of AP Power SectorRestructuring Programme extensive investments began to be made in transmission anddistribution. Since the onset of reforms in 1995 more than Rs. 2000 crore were spent onimproving transmission and distribution systems. Even then T&D losses instead ofdeclining are increasing. According to the Power Development in Andhra Pradesh1998-99 published by APSEB T&D losses during 1998-99 stood at 31.8%. In a writtenreply in Lok Sabha (i.e., the Parliament) on 17th April 2000 the minister for state forpower stated that T&D losses in AP are 31.76%. But for the same year according to theARR submitted by the APTRANSCO these losses were shown as 38.10%. This showsthat the figures are fudged to their convenience. Substantial proportions of these lossesare because of commercial losses/thefts. These could be and should be stopped withoutmuch investment. The Document released by the APERC “Issues in Tariff Philosophy”in October 1999 for public discussion has specifically mentioned, “APTRANSCO hasalready initiated programmes to alleviate these problems. Energy audit was conductedin October 1996 to assess a realistic level of non-metered agricultural consumption.Almost 7 lakhs of defective meters were replaced in 1997-98. Meter terminal coverswere sealed for majority of services. Investigation of energy theft has been intensifiedin the last two years, and bill collections at the LT level has increased to 91.8% in thelast year. All these measures have contributed to reduction of T&D losses and anincrease in revenue of APTRANSCO to a small extent” (page No.4). This means thatreducing these losses is within reach, provided will to achieve it is there.

Evolution of Reforms

It can be said that the reform process in AP started with the constitution of a high levelcommittee under the chairmanship of Hiten Bhaya to suggest reforms to be introduced inthe power sector. This committee was constituted in January 1995 and submitted its reportin June 1995. The important proposals made by the Hiten Bhaya committee include,fixing of tariff structure to cover production costs, to separate generation, transmission anddistribution activities and keep them in the hands of different companies, to keep thesecompanies as subsidiaries of APSEB, to run them on commercial lines, to privatise powerdistribution companies gradually, to retain the Board only as a holding company in chargeof long-term sector planning, supervision and co-ordination of the subsidiaries, monitoringof reform implementation and provision of policy advice to be with the government,


27

setting up a regulatory commission to fix tariff structure, keeping licensing powers withthe state government.

The World Bank team which subsequently assessed the sector pointed out that though themeasures proposed by the Hiten Bhaya committee are in the right direction, they are notcomprehensive and need to be further developed. According to them some shortcomingsof the Hiten Bhaya committee are:

1. The proposal that ABSEB continue as a holding company for the new companieswould continue to expose APSEB and consequently its subsidiaries to politicalpressure, and the power sector would not be insulated from short-term politicalexpediencies. This would undermine the main objective of the reform programme.

2. The committee defines the role of the regulatory commission narrowly: to deal withretail tariffs. The responsibilities of the commission should be broadened to includeregulation of the bulk supply tariffs, distribution tariffs, and connection charges. Inaddition, the regulator should also grant licenses to all transmission and distributioncompanies and enforce them.

3. The committee recognised the need for new legislation only for the establishment ofthe regulating system. Unbundling APSEB and creating separate companies are majorchanges that could be achieved only through new legislation dealing also with transferof assets, staff and interests.

4. The committee’s recommendation that all power generating assets be transferred to asingle company that will also procure power from independent producers. This modelwould limit competition, reduce expected efficiency gains, and make the regulatorregime too complex to administer.

The only way out of the present predicaments in the power sector in the opinion of theWorld Bank team is to implement all encompassing reforms. Some important componentsof the reform proposed by the World Bank are:

1. Define a structure for the sector consistent with privatisation of distribution andprivate sector development in generation.

2. Corporatise the power utilities and ensure that they operate without governments’interference.

3. Create an independent and transparent regulatory system for the sector with broadrange of responsibilities including granting licenses and enforcing them.

4. Enact comprehensive reform legislation to establish the new regulatory frameworkand implement the restructuring measures.

5. Increase the tariff rate to agriculture to at least 50 paise/kWh in the near term.Continue to adjust tariffs to cover costs and reduce cross subsidies.


28

The government of Andhra Pradesh released its power sector policy statement on June 14,1997. According to it the aims of the state government are:

1. Providing operational, managerial and functional autonomy to APSEB/ othersuccessor utilities to enable it/them to operate along commercial lines.

2. Besides separating policy regulatory functions from the management functions of theAPSEB, ensure the establishment of a regulatory framework that would ensure costoptimisation with securing operational efficiencies in generation, transmission anddistribution of energy, collection of related revenues.

3. Ensuring that while Government may continue to direct and determine the overallpolicy framework for the power sector as a whole, it withdraws from regulatoryfunctions.

4. Promoting increasing participation of the private sector in power industry.5. Supporting progressive privatisation of distribution network under conditions and

phasing that are sustainable.6. Removing dependence of electricity utilities on Government budgetary assistance for

achieving prescribed statutory financial returns.

To achieve the above aims the government strategy to restructure power sector as follows:

1. In Andhra Pradesh considerable generation capacity is being established in the privatesector.

2. Under the reform while the transmission will be handled by the APSEB, which itselfwill be converted into a corporate body under the Indian Companies Act, 1956.

3. For purposes of distribution the State shall be separated into distinct distribution areas,each of which would be administered by a separate distribution company which wouldbe sustainable, both technically and financially, on an autonomous basis. In the firstinstance, all such distribution companies would function as wholly owned subsidiariesof the APSEB. Based on further technical studies, steps would be taken to graduallyprivatise distribution.

4. Even prior to initiating the structural reform of the APSEB, an autonomous regulatorycommission should be established to ensure fair play and equity between the separateentities that interact in the generation, transmission and distribution entities andconsumers. Such commission should be set up under an appropriate statute, whichwill assure the independence of the Commission, as also the non-interference in thefunctioning of the commission, by the State Government.

The policy statement delineates the role and functioning of the proposed ElectricityRegulatory Commission. The activities of the commission among other things, constitutepromoting efficiency and economy in generation, transmission and distribution ofelectricity by establishing appropriate norms, undertaking licensing of companiesproviding services in all the areas of the power sector, duly prescribing performancestandards. It also advises the state Government. Introduction of tariff structure that willprogressively reduce cross subsidisation and to see that no sector shall pay less than fiftyper cent of cost of supply of electricity within three years of setting up of the commission


29

is also the duty of the regulatory commission. If the State government decides to deviatefrom this tariff, the financial implications of such deviation were to be explicitly providedby the State Government in the State budget.

A comparison of reforms undertake by the AP state government in power sector andreform proposed by the World Bank shows the influence of the World Bank on AP stategovernment’s policy formulation. The activities undertaken by the state government areonly carbon copy of the measures proposed by the World Bank. Though the stategovernment claims that it is not doing anything beyond hearing the advice of the WorldBank, this policy paper shows that it is following the measures proposed by the Bank inletter and spirit.

The enactment of the Andhra Pradesh Electricity Reforms Act of 1998 is a watershed inthe power sector reforms in AP, The speed at which this Act to restructure APSEB waspassed in the AP Legislative Assembly stunned many an observer. The Telugu Desamgovernment introduced the Bill on April 27, 1998 and the same sailed through all themotions in one day and it was passed on April 28, 1998. In order to facilitate smoothpassage of the bill the entire opposition was suspended from the Assembly. Out side theAssembly the agitation called by the Boards’ employees was suppressed ruthlessly.

The contents of the Bill also highlight the influence of the World Bank on APgovernment’s policy making. This passage of the bill along with other measures taken bythe AP government impressed the World Bank so much that sanctions in the wake ofnuclear explosions have not come in the way of sanctioning new loan worth Rs. 2200crores to the AP government under Andhra Pradesh Economic Restructuring Project andRs 4400 crore loan for the Andhra Pradesh Power Sector Restructuring Programme.

The A P Power Sector Restructuring Programme (APPSRP) is being implementedparallel to the structural and fiscal reform programme: AP Economic RestructuringProject (APERP). Both the Bank and the Government of Andhra Pradesh (GoAP)considered the reform in the power sector as the single most important aspect ofstructural and fiscal reform in the state. This reform programme, covering a 10-yearperiod, aims at establishment of a new legal, regulatory and institutional framework,functional un-bundling of the system, corporatisation of sector entities, privatisation ofthe distribution business, tariff reforms to achieve reliable, high quality and costeffective electricity supply, higher customer satisfaction.

Consequent to the enactment of the reform Act the AP Electricity Regulatory Commissionwas set up. Initially APSEB was bifurcated into power Generation Corporation(APGENCO) and Transmission Corporation (APTRANSCO). As a next step powerdistribution was separated from APTRANSCO and four distribution companies(DISCOM) were set up. For the present all these companies are under the governmentownership. These will be privatised gradually.

Salient Features of the Reform Model


30

The ultimate objective of the reforms is for the government to withdraw from powersector as an operator and regulator of utilities and to have commercially operated,largely privately owned utilities functioning in a competitive and appropriatelyregulated power market. The reforms aim at removing dependence of electricityutilities on Government budgetary assistance, and ensuring that while Government maycontinue to direct and determine the overall policy framework for the power sector as awhole, it withdraws from regulatory functions.

Under the new dispensation, unlike the pre-reform days, power generation,transmission and distribution will be separated. In each segment there will be multipleoperators. This is meant to bring in competition in to the sector.

Another important feature of the reform model is the regulatory mechanism.Establishment of a regulatory framework is meant to insulate the power sector fromexternal influences, to reduce the interference of the state government, minimise thepoliticisation of key sector decisions (for example on tariffs). The new Reforms Actenjoins the Regulatory Commission “to promote competitiveness and progressivelyinvolve the participation of private sector”.

Under the new dispensation electricity is treated as a commodity, but not as adevelopment input. This is reflected in the tariff policy that this reform model brings in.Bringing in power tariff that equals cost to serve and remove cross subsidies is theessence of it. The new model looks down upon the subsidies as the main culprit indistorting the rational functioning of the economy. It expects the agriculture sector topay for the electricity services full cost of supply as the industry can no longer bearhigher tariffs. As an initial step it intends to increase the tariff rate to agriculture to atleast 50 paise/kWh. And these tariffs will continue to be adjusted to cover costs andreduce cross subsidies. According to this reform programme no sector shall pay lessthan fifty per cent of cost of supply of electricity within three years of setting up of theElectricity Regulatory Commission, and it is the duty of this Commission to see thattariff is fixed in this manner. APTRANSCO shall adjust tariffs and take other measuresso as to produce revenues from all sources sufficient to cover all expenses that includea return on equity. If the State government decides to deviate from this tariff, thefinancial implications of such deviation were to be explicitly provided by the StateGovernment in the State budget.

The reform process is supposed to engender competition and as a result improveefficiency leading to cheaper power supply. But the way the reforms are being carried outin AP make these happen impossible. In order for competition to be realtransmission/distribution companies should be free to buy power from whichever source ischeap. But Power Purchase Agreements (PPAs) entered in to with several IPPS by thestate government and APSEB/APTRANSCO, which stipulates the power purchase costs,constrain the freedom of these transmission and distribution companies. Further, thecontents of these agreements also impose exorbitantly high power purchase costs.

In the case of distribution also scope for competition is very limited. For each distributionzone there will be only one distribution company. The consumers of that zone will have


31

no choice but to buy power from that company only. In the absence of bench marking theperformance consumers cannot be assured of efficient and cheaper supply of power.

With additional power demand at 2002 projected at 8000MW the government/Boardentered into PPAs for generation of additional power of more than 9000MW. Lateradditional power demand projection was scaled down to 3500MW. But in response to thechanged estimation of power requirement PPAs were not altered. If all the companieswhich have entered into PPAs set up generation stations by 2005 as agreed there will besurplus generation capacity of about 4400MW to 7250MW. If one were to follow theseagreements, consumers will be forced to pay for this surplus/unused power also.

The end result of the reforms will be replacement of public sector monopoly by privatesector monopoly, which is far more dangerous.

One of the important aspects of the reforms is that there should be no political/governmentinterference in the working of the sector. But the scene in AP is totally opposite to it. Herethe state government is not only interfering in the day to day work of the Corporations, butalso influencing the decisions of the APERC.

Salient Features of the Regulatory Framework

The AP Electricity Regulatory Commission was formed in 1998. It has one chairmanand two members. While the present Chairman is a retired IAS officer, one of themembers was a serving engineer of the erstwhile APSEB and another is a retired taxofficial. According to the Act the chairman as well as members will be appointed bythe state government from the persons selected by the Selection Committee. ThisCommittee consists of a retired chief judge of any high court or a retired judge ofSupreme Court as Chairman, and Chief Secretary of the state government, Chairman ofthe Central Electricity Authority as members and Secretary of the Energy Departmentof the state government as the member secretary.

The APERC is constituted as a quasi-judicial body. It is supposed to act independentlyand keep politics out of the functioning of the power sector. The APERC is broughtinto the picture to shoulder the regulatory function in the state, which hitherto has beendone by the government. As a part of its regulatory work the Commission issueslicenses to the companies involved in transmission and distribution of power, itstipulates the standards of performance for these companies, it addresses the disputesbetween different stakeholders in the sector including consumers, and more importantlydecides the bulk and retail tariff for power supply. It is the responsibility of the APERCto protect the interests of different stakeholders. The Act stipulates that it has to consultthe stakeholders who are going to be affected by its decision. It is also its responsibilityto see that the sector works in transparent, economic and efficient manner.

As the Reforms envisage an important work of the Commission is to insulate the powersector from political interference. It was pointed out that the root cause of the crisisengulfing the power sector is the pervasive politicisation of most decisions affectingAPSEB's operations and expansion, and the resulting lack of commercial orientation inits functioning. Subsidies are spiraling up because of political interference in the


32

running of APSEB. The only way, according to them, to reduce subsidies andconsequently losses is to keep APSEB, power sector away from political interference.

Power tariff is being seen as an area of decision -making wherein rationality needs tobe brought in on urgent basis. Especially consumers now look up to regulatorycommissions to protect them from the earlier unjust practice of burdening them withthe costs of distortions and perversions in the functioning of the state electricity boards(SEBs) such as theft, corruption, mismanagement, and inefficiency. Recent experiencewith the tariff formulation shows that the APERC is seriously lacking in bringingrationality prevail in decision making. Rather the Commission is interested only incarrying out the dictates of the World Bank and the state government.

Bringing in rationality in tariff-related decisions requires rigorous and detailed analysisof costs and revenues of utilities. This, in return, requires full information oncalculation of costs and revenues as well as data and information on key aspects offunctioning of the utility, which have implications for costs and revenues of the utilitymade available to the public, that too well in time. It is the duty of the Commission tosee that this happens. In the recent case, while the APTRANSCO submitted theirAnnual Revenue Requirement, on the basis of which new tariff are decided, inDecember 1999, it was not made public until April 2000, in spite of several requests tomake them public. Further, public were given less than three weeks time to makesubmissions. In the mean time public faced difficulties in obtaining these documents.Added to this, though the Commission claims to have conducted ‘public hearings’, only24 members of the public are allowed to appear before the Commission. They restrictedentry on the pretext that there is no space to accommodate many. Ironically there wasenough space to accommodate hordes of government, APTRANSCO and World Bankofficials and their consultants. Even press was not allowed in to venue.

The proceedings before the APERC on tariff revision are to be transparent if it is to bemeaningful and productive. But the experience with the proceedings shows that theyare not at all transparent. 83% of the proposed revenue goes towards power purchasesby the APTRANSCO. The documents supplied by the licensee do not contain all thedetails, particularly, Power Purchase Agreements (PPA). Without the knowledge of thefixed costs, variable costs, penalties, incentives, heat rate, nature of capital, debt-equityratio, etc., it is not possible to judge the expenditure requirement. While thesedocuments are made available to the Commission the same were kept away from thepublic. This was brought to the notice of the Commission. But the Commission did notgive a serious thought to it. The whole exercise shows that it is neither transparent norparticipatory.

Initially the Commission decided to hike tariff by 15%. This is the rate stipulated by theWorld Bank and demanded by the state government. This is borne out by the newsheadlines carried by the Eenadu (Telugu daily, mouthpiece of the present TeluguDesam government) in its May 27th, 2000 edition. The news item also mentioned thatbecause of problems with the computers the Commission has delayed theannouncement by a day. On the next day all the newspapers including Eenadu carriedthe news that power tariff is hiked by 20%. In the intervening period some thingdifferent from problems with computers happened. The Telugu Desam led state


33

government has the inkling that there will be public opposition to hike in tariff. Toappear popular it has to bring down hike. If the announced hike is 15% and if it isreduced by some percentage points in response to public demand it will be violatingone of the important conditionalities of the Bank. So, in order to save it self from thedevil and Deep Sea it has made the Commission to declare the hike as 20%. After a fewdays as if in response to the public demand the hike was brought down from 20 to 15%.It is another matter that public were not fooled by this drama, and protests continued.This shows that the Commission allowed itself to be used as a puppet. Independence isthe last word that will come to our mind in this context.

In its day to day functioning the Commission proved itself to be as bureaucratic as anyother government department. Rarely one will get response for repeated requests made tothe Commission to give some clarification or information. Even if some information isreadily available one has to follow cumbersome process to lay hand on it.

Since its inception the Commission has brought out many regulations. However, for thepublic there is no way of knowing about them. Recently the Commission has opened itsweb site. Hope that it will serve some useful purpose.

At the same time it is wrong to think that the Commission is inaccessible to all. TheCommission has passed exemptions in favour of many companies, which in turn willadversely affect the APTRANSCO. Few outside the commission and beneficiaries knowabout these exemptions.

Above all the Commission’s stance towards PPAs is even more dubious. It is unwilling tomake these agreements open to the public. On its own it is desisting from examining themon the pretext that all these agreements were entered before its formation. It is alsounwilling to talk about the PPAs that are revised after its formation.

The experience with the Commission until today show that it is more interested incarrying the dictates of the state government and the World Bank conditionalities, ratherthan making the whole process transparent and participatory. Its present functioningdefeats the very purpose of its formation, i.e., keeping politics away and let rationalityreign.

Status of the Independent Power Projects (IPPs)

In the wake of the liberalisation process at the national level the state government ofAP also attempted to attract private participation in power generation. It entered intoMOU with many private companies for setting up 119 power projects in the privatesector to generate an additional capacity of 7841 MW power. Besides this, the stategovernment also has gone ahead in giving green signal to eight short gestation powerprojects in the private sector and entered into Power Purchase Agreements (PPAs)with these private companies. The total generation capacity of all these 8 plants is 1950MW (Please refer Table 4).

Table 4: Information on Independent Power Projects


34

Sr.No

Name of the company Location C a p i t a l Cost

Capacity

Rs incrore

MW

1 Gautami Power Ltd. Peddapuram/EG 984.47 3002. Lanco Power Ltd. Kondapalli/Krishna 1100.00 3553. Snehalaa Power Ltd. Vemagiri/EG 351.66 1004. Snehalata Generation Ltd. Samarlkota/EG 351.66 1005. Ispat Power Ltd. Vemagiri/EG 1437.00 4686. N a g a r j u n a

Constn.Co.,Ltd.Ammanabrolu/Prakasam 739.35 227

7. Oakwell Engineering Ltd. Kakinada ‘A’ 379.22 1008. Oakwell Engineering Ltd. Kakinada ‘B’ 379.22 100

Besides this 32 mini thermal power plants with the total capacity of 1019.35MW, 19mini hydel stations with the capacity to generate 81,200KW of power, and 62 windpower stations with the generation capacity of 370.20MW of power are allotted toprivate companies..

Apart from these the state government has entered into PPAs with GVK IndustriesLimited for gas based power project of 216 MW capacity at a cost of Rs 816 crore atJeegurupadu, Spectrum Power Generation Ltd for gas based power project of 208 MWat a cost of 748.43 crore at Kakinada, Hinduja National Power Corporation Ltd. forcoal based power project of 1000 MW at a cost of Rs 4297 crore at Visakhapatnam,National Thermal Power Corporation (NTPC) for 1000 MW coal based power projectat a cost of Rs 3645 crore at Visakhapatnam. Among all these only GVK’s Jeegurupaduproject, Spectrum’s Kakinada project, and Lanco’s Kondapally projects becameoperational.

Following are the rates at which power is being procured from the IPPs for the year2000-01:

Table 5: Power Purchase Tariff

IPP Rs/kWhGVK 2.52Spectrum 2.50Lanco – Open Cycle 5.20Lanco – Combined Cycle 3.72

The average price at which the AP Transco is to purchase power from privategenerating companies for the ensuing year (2000-01) is Rs.3.05 per kWh, whereas theaverage price it will pays to all suppliers put together is 1.73 only. To Andhra PradeshGeneration Corporations (APGENCO) thermal stations it will pay Rs.1.93, to the


35

central generating stations (Thermal and Nuclear) it will pay Rs.1.64, to other StateElectricity Boards it will pay Rs. 2.05(p).

In all the cases where the government/board has entered into agreement with IPPs, thepower purchase agreements (PPA) are not made public. Given the impact andimplications of the PPAs, it is in the best interests of all parties in the sector that thesePPAs are made public. Even while these PPAs are being negotiated also, the processshould have been transparent. With the coming into force of the new Andhra PradeshElectricity Reforms Act 1998 the PPAs acquired added significance/ altogether newdimension. The Act stipulates that PPAs be entered in a transparent and economicalmanner. APERC has the duty to see that PPAs are entered so and protect the interestsof consumers. The contents of the PPAs, to the extent they that have come to the noticeof the public show that they very adverse to the interests of the consumers. But APERCis refusing examine these PPAs saying that these PPAs were entered before it wasconstituted. The state government, which brought these changes into force, is unwillingto play according to the rules of the game that itself helped to usher in. The stategovernment is still unwilling to make the PPAs public.

Some contents of only two PPAs (GVK and Spectrum) became public, thanks to theCAG report placed before the Assembly in 1998 and 1999. The CAG report shows thatthese two PPAs adversely affect the People’s interest through burdening them withincreased tariff. (See Annexure I)

Perceptions and Positions of the Main Actors

Government/APSEB/ APTRANSCO/Lenders

It can be said that the stand taken by the protagonists of the reforms, who consist of theWorld Bank, the state government and the Electricity Board has three elements.

They contend that the state's power requirement is huge and it cannot be met without amassive mobilisation of private financing. In the case of AP they point out that by theyear 2002 additional power of 8000MW is needed, and to generate and distribute it Rs.56,000 crore are needed. In the present financial situation the state government is not ina position mobilise that much amount. The only way is to turn to the private sector.Then, substantial expansion of supply through private power producers is not possiblewithout restoring the creditworthiness of energy off-takers. In order to attract privatecapital into the power sector, the sector need to be reformed/restructured completely.

These protagonists observe that the power sector crisis is represented by the growinglosses of the electricity board, and in order to save the Board from losses the stategovernment provides subsidy. In turn these subsidies are eating in to scarce governmentfunds, As a result of diverting the funds to meet the needs of the power sector socialsectors like education and health are suffering. As it is no longer advisable to neglect thesesectors, so subsidising of power sector must be stopped. In the absence of public fundsflowing into the sector as the government is starved of funds, there is no alternatives toturn to private sector to mobilise funds. And in order to attract the private sector there isneed to reform the power sector.


36

At a more fundamental level the protagonists of the reforms locate the ills of the sectorin the lack of competition and private sector involvement is sought to infusecompetition into the sector. Hence the reforms.

It is no exaggeration to say that the APERC just parrots the government’s analysis.There appears to be no effort on its part to address these issues independently. Further, theCommission tries to shield it self by claiming that as stipulated by the new ElectricityReforms Act it is duty bound to promote privatisation and competitiveness. TheRegulatory Commission sees its role as creating favourable conditions for privatesector investments and assisting the state government in implementing the reformagenda.

Political Parties

The recent people’s movement against the power tariff hike saw all the opposition partieson one side and the ruling TDP on one side. This does not mean that all of the oppositionparties are opposed to the reforms. One can say that while all the left parties are opposedto the World Bank led reforms in the liberalisation, privatisation, globalisation (LPG)mode, other parties are in support of the reforms. Only in the face of people’s vehementopposition to power tariff hike they mouthed some anti-reform statements.

It is significant to note that the present power sector reforms are being taken up in thebackground of the liberalisation process that started in 1991 at the national level as aprecondition to the IMF/WB bail out of India form the BOP problem. At that timeCongress was in power at the Centre. As the power policy of the centre changed,following it in AP NT Rama Rao’s Telugu Desam government also entered intoMemorandums of Understanding (MOUs) with many companies overnight. Some of theseMOUs entered the stage of PPAs. A good number of PPAs are also signed/altered duringcongress led governments’ regimes in the state.

Trade Unions

The state government and the electricity board entered into tripartite agreements withtrade unions in the Board to carry out reforms in the sector. Significantly, it is theCongress/INTUC affiliated APSEB employees’ Union - 327 which first signed thetripartite agreement on behalf of the Board employees. This union leaders contended thatthese reforms will protect the interests of the employees and also these are in keeping withthe reforms unleashed by the P.V.Narasimha Rao led Congress government at the centre.The TDP affiliated TNTUC, which does not have much membership, also signed theagreement.

The major trade union APSEB Employees Union - 1104 along with the EngineersAssociation opposed the reforms of the sector. They called for agitation against tabling ofthe reform Bill in the Assembly in 1998. Later the state government could manipulate theEngineers Association and see that it withdrew from the agitation and signed tripartiteagreement against the wishes of the engineers. The Employees Union 1104 went ahead


37

with the agitation. Once the Bill was passed in the Assembly this Union also has no otheralternative to sign the tripartite agreement.

When the state government came out with a policy paper the Engineers’ Associationcriticised it saying that it is based on wrong and misleading projection of future powerrequirement and capital needed to meet that requirement. It also pointed out that there areavenues to improve the functioning of the board. It also recommended formation of aconsortium at the national level with BHEL, NTPC and SEBs to pool resources. The thenoffice bearers succumbed to the manipulations of the government and signed theagreement. The new office bearers who succeeded them again raised the banner of revolt.They led a three month long agitation from April to June 2000 against privatisation of theboard. In the face of the Association’s opposition to government’s reform programme theestablishment is trying to shore up a rival Association, which is promoted by those whoinitialed the tripartite agreement on behalf of the engineers of the Board in the past.

Media

These days it is difficult to find analysis of any problem, including electricity, that iscritical of the state government in the local press including the English press. It is awidespread belief that the Chandrababu Naidu led state government has effectively keptthe media in its control. Yes we do find news reports on the conditions of the powersupply or people’s movements against power tariff hike. That is all.

Farmers’ Organisations

Farmers are the most agitated community in the state in the context of the ongoingchanges in the power sector, for al the ills in the power sector are attributed to their powerconsumption. Many of the farmers’ organisations argue that the sector does not consumethe quantity of power attributed to it. This is because the duration in which they aresupplied power and quality of power is such that consumption of that much power ispractically impossible. They contend that the number of pump sets, their capacity and theduration during which they are used are over estimated.Given the contribution made by the well irrigation to agriculture in the state, the numberof families dependent on it and its contribution to food security they argue that there isneed to continue supply of subsidised power. In this context, they also demand that powerproduced in the hydroelectric stations be allotted to the agriculture sector.

People’s Monitoring Group on Electricity Regulation (PMGER)

People’s Monitoring Group on Electricity Regulation (PMGER) emerged from a two-day workshop organised by the Centre for Environment Concerns, Hyderabad on 15th

and 16th of November 1999 on power sector reforms in AP. The workshop wasfacilitated by members of the PRAYAS, Pune; and attended by more than 50participants drawn from domestic consumers, farmers, farm workers, power sectoremployees, environmentalists, academicians, and NGO activists.

The PMGER is making efforts to utilise the space available for people’s participation inthe present dispensation under the APERC.


38

Lok Satta

Lok Satta, is an organisation working for democratisation of public institutions, formedCitizens Organisation for Regulated Electricity (CORE). Some former Chairmen ofAPSEB and some retired government officials are its members. According to it as resultof several years of criminal neglect, rampant corruption and rank incompetence, the oncemuch acclaimed APSEB and its successor organisations are now facing severe financialcrisis. It also locates the source of crisis in huge system losses, government’s failure toprovide subsidies, and failure to adopt rational policies to encourage energy saving inagriculture. In addition there has been interference in day to day functioning and routineexecutive decisions. Pilferage, hefts and corruption continued unchecked on account ofpolitical patronage and lack of political will to improve the system.

Lok Satta believes that the real issues in power sector are better management, moretransparent policies and decisions and reduction of expenditure and losses now and in thefuture. It shows that increasing tariffs in themselves provide no solution in the long termwithout addressing the fundamental problems plaguing the power sector. According to itthe real answer to the crisis lie in effectively dealing with T&D losses, transparent and fairpolicy in the case of PPAs to protect consumers from arbitrarily high tariffs, anddecentralisation of power distribution.Salient Features of the Tariff Order

According to the Act proposals for revision of tariff shall be submitted three monthsbefore the beginning of the next financial year, i.e., on 29th December 1999. ThoughAPTRANSCO submitted ARR by that date it did not submit tariff revision proposals. Itdid so only on 6th April, full six days into the financial year.

Though the Commission held public hearing, the terms of the discussion in the hearingwere different from the terms of the latter determination made by the Commission. Theoriginal proposal made by the APTRANSCO, on 6th April 2000 with the consent of thestate government was that it anticipated a revenue requirement of Rs.9211 crores butexpected only revenue of Rs.5437 crores at the then prevalent tariffs. It expected asubsidy of Rs.2100 crores from the State Government and sought tariff increase of14.8% to raise its revenues by Rs.808 crores. According to the Retail Tariff ProposalSummary (page.3) “APTRANSCO has considered various tariff options and has hadextensive discussions with its 100 percent shareholder, GoAP, before deciding upon theproposed tariff increases to bridge the shortfall. APTRANSCO has made efforts tobalance the objective of ensuring its financial viability without causing a rate shock toits consumers. Accordingly, APTRANSCO has filed its FPT with the HonourableCommission for its consideration and approval, to raise additional revenues of Rs.808crores. This will result in an overall increase of 14.8 percent for its consumers, althoughthe specific increases will vary amongst individual consumer categories and betweenslabs in each category. The additional revenues expected to be mobilised will still leavea gap of Rs.866 crores, after considering a GoAP subsidy of Rs.2100 crore”. This wasthe proposal that the public hearing discussed.

However, after the conclusion of the hearing the commission advised theAPTRANSCO about ways of reducing costs by about 823 crores. Instead of making


39

that advice part of its award, the commission put it before the State Government. Thegovernment promptly took advantage of the proposal and reduced the subsidy it offeredfrom Rs.2100 crores to Rs.1345 crores. The order of the Commission shows that thetariff hike is to the extent of 20% to mobilise 1095 crore. Thus the final tariffdetermination by the commission was made on this altered basis, which sets the earlierpublic hearing at naught. Public’s reaction would have been different if the changedpremises were the basis on which hearings were held. In effect, the final order ismerely an agreement worked out by the Commission with the State government, andnot a fair and transparent determination as envisaged by the Act.

Further the figures worked out by the APERC show that there is no need to raise tariffany more. While APTRANSCO has mentioned the annual revenue requirement (ARR)as Rs.9234 crore, APERC reworked ARR to Rs. 8366 crore. This implies that revenuerequirement is reduced by Rs. 868 crore. This is higher than the revenue, Rs. 808 crore,that APTRANSCO intended to mobilise through tariff revision. This leads to theunambiguous conclusion that there is no need to raise electricity tariff.

APERC shows that the losses to be incurred by APTRANSCO are to the extent of Rs.2417 crore. The state government has agreed, through the original proposal submittedby APTRANSCO, to pay Rs. 2100 crore. If this is so the additional resources to bemobilised are Rs.317 crore. This amount can be easily mobilised from the present tariffitself through plugging loopholes in the present distribution system. There is no need toburden the people with increased electricity tariff.

Another important feature of the tariff order is that the Commission set the tariffpayable by the Consumer without having had a decisive say in determining the supplyprice. The Commission has merely taken as given the numerous Power PurchaseAgreements (PPAs) entered into by the AP Transco, with private suppliers. Thus thepurchase price of power underlying the tariff determination has been determinedwithout reference to the Commission.

For the present tariff order PLF of 68.5% is taken for giving incentives to the powergeneration companies as against 80 to 85% as recommended by Central ElectricityRegulatory Commission.

In the present tariff order tariff is hiked in such a way that 12 months’ revenue wouldbe realised in 10 months merely because AP Transco submitted its tariff proposals toolate.

Cross subsidies that amount to a certain transfer of resources in this case power, fromthe better off to the poor is in accordance with Article 39 of the constitution of India.But it is one of the causalities in the tariff order. It appears that the Commission soughtto carry out the World Bank’s recommendation of removing subsidies as a way offiscal discipline. It is a part of the power sector reforms programme to eliminate thesubsidies. From the tariff order it is quite obvious that it is the lower end consumers andagriculture sector that experienced highest hike in power tariff.


40

Future Course

At present a particular set of reforms are being carried out in AP as if they are the onlysolutions for all ills of the power sector. More over the same set of reforms are imposed onseveral other states. In other words a uniform system is being imposed on all states. Thereis no attempt to examine specific experiences of different states and tailor the changesneeded according to the requirements of the particular states. The problems faced by theelectricity establishment in Andhra Pradesh are not the same as that of Orissa. One can seethat not only the Electricity Reforms Act passed in AP is a carbon copy of the Orissa Act,even the regulations formulated by the APERC are only a copy of the OERC.

In AP no other alternatives are explored to solve the problems facing APSEB. Even therecommendations made by the Hiten Bhaya Committee were brushed aside to impose theWorld Bank recommendations. While taking up these reforms stakeholders were notconsulted. Until the recent tariff hike public are not aware of the changes taking place inthe power sector. There is neither participation nor transparency, let alone accountabilityin the whole exercise. Even the proceedings before the Regulatory Commission are nottransparent and participatory.

The ongoing changes in the power sector demand two things: one is to comprehend theprocess and its implications, another is to enable citizens to interact with the RegulatoryCommission and participate in its proceedings effectively as this exercise is new to thepeople in this state.

Hitherto experience with the APERC show the need for capacity building of themembers of this and similar civil society organisations. This capacity building shouldencompass economic, technical, regulatory/legal issues. There is the need to involvemore and more people from different parts of the state in this regulatory exercise. Itshould not be confined to a few people in the capital city of the state, for stakeholdersare spread to the nook and corners of the state. It should be seen that the RegulatoryCommission is accessible to people from all corners of the state. Then only concerns ofdifferent sections of the people could be reflected in the functioning of the regulatorymechanism.

The civil society should proactively engage with the Commission. Instead of trying tocope up with the issues thrown up by the decisions of the Commission it should be ableto bring to the notice of the Commission the things to be done in the people’s interest,and see that the need full is done.

There is need to critically examine the functioning of the APERC and its mandate toprotect the rights of the consumers. The functioning of APERC itself should betransparent and participatory in order to see that the power sector as a whole works in atransparent and efficient manner.

In order to cope up with the emerging situation there is need build strong network of civilsociety organisations at the state as well as national levels. Wherever there already existsuch networks the same must be strengthened. As a starting point interested organisations,


41

individuals need to be identified. The capacities of these organisations and individualsneed to be enhanced to deal with the emerging situation. At the same time talented andcapable organisations/individuals with the electricity back ground at national and statelevel need to be brought together and see that there is exchange of ideas with thesecapable organisations/individuals and civil society networks.


42

CHRONOLOGY OF EVENTS

June 1995 Hiten Bhaya Committee Report

September 1996 World Bank’s Agenda for Economic Reforms in Andhra Pradesh

March 1997 AP State Government’s Policy Statement on Power Sector Reforms

April 1998 Passing of AP Electricity Reforms Bill in the State LegislativeAssembly

May 14, 1998 Chief Minister’s letter to the World Bank’s President reiterating thestate government’s reform policy

May 1998 World Bank’s PAD on AP Economic Restructuring Project

January 1999 World Bank’s PAD on AP Power Sector Reforms Programme(APPSRP)

February 1999 AP Electricity Reforms Act 1998 comes into force

February 1999 APSEB unbundled into APGENCO and APTRASCO

February 1999 Agreement between the World Bank and GoAP on APERP signed

March 1999 Agreement between the World Bank and GoAP on APPSRP signed

April 1999 AP Electricity Regulatory Commission starts functioning

November 1999 First Public Hearing conducted by the APERC on Tariff Philosophy

March 2000 APTRANSCO unbundled into APTRANSCO and four DISCOMs

April 6, 2000 APTRANSCO files its first Filing of Proposed Tariff

May 27, 2000 First Tariff by APERC

May 28, 2000 People’s Movement against tariff hike starts

August 28, 2000 Police firing on demonstrators in the centre of Hyderabad city

October 2000 High Court Judgement upholding the APERC order on tariff hike

REFERENCES

Andhra Pradesh State Electricity Board - 1996. Finances of APSEB

Dixit, Shantanu et al - 1998 - World Bank- Orissa Model of Power Sector Reform: CureWorse Than Disease, Economic and Political Weekly - Vol.33, No.17.

Ghosh, Arun - 1997 : Break-up and Privatisation of SEB in Andhra Pradesh : AnUpcoming Scam. Economic and Political Weekly - Vol.32, No.29

Godbole, Madhav - 1997 : Future of State Electricity Boards : Tunnel Vision. Economicand Political Weekly ,Vol. 32,No. 35.


43

Purkayastha, Prabir and Arun Ghosh - 1997: Power Policies : Need for a National DebateEconomic and Political Weekly, Vol. 32,No.3.

Reddy, Prabhakar T. - 1997 : Restructuring of APSEB : Some Important IssuesEconomic and Political Weekly ,Vol. 32, No.39.

Rao. Hanumanth V - 1997 : Veluthurunundi Cheekatiloki : Vidyuth Rangam PyPariseelana (Telugu), Prajapantha Pracharanalu, Guntur.

Srihari. V - 1997 : Is Restructuring of APSEB Inevitable? Economic and Political Weekly,Vol.32, No. 40.

Sudha Mahalingam - 1997 - Unbundling Trouble, Frontline , October 17, 1997.

World Bank - 1997 : Andhra Pradesh : Agenda for Economic Reforms,

World Bank – 1999: Project Appraisal Document on Andhra Pradesh Power SectorRestructuring Programme. Report No. 18849 IN

ANNEXURE - I

CAG’s observations on GVK’s Jeegurupadu Power Project

( Extracts from CAG Report – 1998 on Andhra Pradesh)

In the place of a plant of 400 MW capacity estimated to cost Rs 518.20 crore the plantbeing established by the Developer would be of 216 MW but costing Rs 816 crore.

Due to delay in completion of the project and the consequent exchange rate variations,the project cost may go up by Rs 113.62 crore. This increase entails an additionalburden in the shape of higher tariff on the Board by Rs 17.76 crore per annum.

The PPA provide for recovery of a maximum of Rs 30 crore by way of liquidateddamages (LD) for the period of delay in commissioning of the individualunits…However, on the basis of time allowed for commissioning for the second andsubsequent units, the Board became entitled for levy of LD of Rs 23.20 lakh. But thiswas not recovered so far.

Unlike in the case of payment of taxes on income to the Developer, the Board agreedfor payment of return on equity (ROE) on monthly basis instead of on annual basis.Payment of ROE monthly at 16 per cent per annum (Rs 39.17crore) thus would workout to 17.17 per cent per annum (Rs 42.03 crore).

Depreciation charges were computed for payment of fixed charges on the entire projectcost without excluding the cost of land. Since land does not attract depreciationprovision, failure to exclude it for computation of depreciation results in an overpayment of Rs 78.40 lakh to the developer per annum.


44

The PPA stipulated for computation of incentive for achieving higher PLF (above68.49%) on the equity instead on ROE. This results in undue benefit of Rs 1.07 croreper annum to the developer for every one per cent increase in PLF above 68.5 per cent.As compared to return of Rs #(.17 crore at 68.5 per cent at 90 per cent PLF would beRs 66.81 crore.

In deviation to PPA conditions, the Developer reduced the proposed equity in Indiancurrency by Rs 61.20 crore with a corresponding increase in the equity in foreigncurrency. This results in increase in the Boards liability towards foreign exchangevariations on the return on foreign equity which would be around Rs 1.35 crore perannum.

The foreign currency component of the total debt for project financing was fixed inIndian rupees at November 1993 rates of exchange. As this value in Indian rupees isfixed and does not undergo change and vary with exchange rate variations, theDeveloper had an undue benefit due to exchange rate variations between November1993 and actual dates of drawl of loans. On the loans drawn till May 1996, such gainamounted to Rs 23.38 crore and there would be a further gain of Rs 56.06 crore withreference to the prevailing exchange rates on the loans yet to be drawn. The PPA wassilent as to the treatment of such gain to the Developer due to exchange variations.

The Board so far purchased 432.13 MU of energy from the Developer on payment ofRs 94.69 crore. As against the projected unit rate of Rs 2.06 the actual purchase costper unit worked out to e Rs 2.19 resulting in an extra expenditure of Rs 5.62 crore onthe energy so far purchased.

In contravention to the PPA terms providing for fixation of variable cost ( cost of fuel)duly taking into account the transportation charges of gas, the Board paid transportationcharges separately without any regard to actual quantity of gas used. This resulted inover payment of transportation charges by Rs 3.84 crore relatable to the gas not usedfor the period from July 1996 to April 1997.

The land costing Rs 10 crore acquired by the Developer was adequate for two stages ofthe project. But, the entire cost of land was loaded into the project cost of first stage(216 MW). Non-apportionment of the cost of land equally between the two stages ofthe project, results in undue benefit of Rs 1.13 crore per annum to the Developer.

CAG’s observations on Spactrum’s Kakinada Power Plant

(Extracts from CAG report – 1999 on Andhra Pradesh)

With a view to encourage private investment in power sector, the state governmentselected Spectrum Power Corporation Limited (Developer) who had initially agreed toset up 400 MW gas based power plant at an outlay of Rs 780 crore. Due to reduction inthe allotment of gas from 1.5 to 0.75 Mcmd, the size of the plant was scaled down to208 MW and the outlay was revised to Rs 748.43 crore. As a follow up, the Board andthe Developer entered into a Power Purchase Agreement (PPA) according to which the


45

former agreed to buy the entire power generated on payment of fixed and variablecharges at rates mutually agreed upon.

Due to postponement of combined cycle commercial operation date (CCCOD) theBoard had to bear the extra burden of Rs 17.05 crore towards higher fuel cost (Rs 11.71crore) and additional fixed charges (Rs 5.34 crore ) during the period from 29September 1997 to 18th April 1998.

By agreeing for payment of ROE monthly on pro rata basis instead of annually theBoard extended additional benefit of Rs 2.63 crore per annum to the Developer.

As the foreign exchange component of total debt for the project was fixed in Indianrupees at December 1993 rates of exchange, there was an exchange gain of Rs 38.94crore to the Developer and further exchange gain of Rs 1.27 crore on the balance debtyet to be drawn. But the PPA was silent on the treatment of such favourable gains inarriving at the final project cost.In contravention to the PPA terms providing for fixation of variable cost (cost of fuel)duly taking into account the transportation charges of gas, the Board paid transportationcharges separately without any regard to actual quantity of gas used. This resulted inover payment of transportation charges by Rs 6.63 crore relatable to the gas not usedfor the period from 9 January 1997 to 31 December 1997.

The minimum PLF to be achieved during the stabilisation period was fixed at 51.37 percent. This was low when compared to the PLF of 68.49 per cent fixed in respect ofanother project implemented around the same time. The fixation of PLF on lower sideduring stabilisation period resulted in forgoing recovery of Rs 9.50 crore from theDeveloper by way of disincentive.

The threshold level of PLF at 68.5 per cent fixed for computation of incentive was notrealistic as the O&M contractors of the Developer guaranteed operation of the plant atan annual PLF of 85.6 per cent and agreed to pay penalty for every 1 per cent fall inPLF below 85.6 per cent. At 85.5 per cent of PLF the incentive payable to theDeveloper by the Board would be Rs 19.08 crore per annum while the PLF at this levelwas assured by the O&M contractors of the Developer without any extra payment.

As against the projected unit cost of Rs 2.22, the actual cost per unit of energypurchased was Rs 2.46. This resulted in an extra financial burden of Rs 18.51 crore inrespect of 771.33 MU of energy purchased during the period from 11 February 1997 to18 April 1998.

_________0_________


46

The Unraveling of the Reform Experiment in Orissa:A Case of Facile Assumptions, Glaring Fallacies,

and Unrealistic Targets

Sudha Mahalingam

The choice of Orissa for a pioneering electricity reform experiment seemed logical – a statewith low literacy rate, low-income levels and more importantly, negligible agriculturalconsumption (less than 7%) and hence lacking in a constituency which could effectively resist adrastic overhaul. Nevertheless, for the World Bank, which wrote the reform script, the choiceof Orissa came about more by accident than design. Around the mid-90s the Bank-fundedUpper Indravati Project in the state ran into rehabilitation problems. Unwilling to give up sucha sizeable account, (after all, India with its size and track record of repayments is a veryvaluable customer for the Bank) the Bank hit upon the idea of converting the Upper Indravatiloan into a reform-loan. It set aside 350 million US dollars to be disbursed to the Orissaelectricity sector in a phased manner linked to specific milestones in restructuring.

The World Bank’s Staff Appraisal Report (SAR) which drew up the blueprint and set themilestones and the procedures for the restructuring experiment was finalised in 1995. TheReform Act was passed in January 1996 and the experiment began in April 1996, with thesetting up of the Orissa Electricity Regulatory Commission (OERC) and the unbundling of theOrissa State Electricity Board (OSEB) into two entities, one for hydel generation, viz., OrissaHydro Power Corporation (OHPC) and the other for transmission and distribution (GRIDCO).Thermal generation was already vested in a separate company, viz., Orissa Power GenerationCorporation (OPGC). The total installed generation capacity in the state was 2120 mw ofwhich thermal was 1700 mw and the rest, hydel. GRIDCO was subsequently split into atransmission company with four distribution zones, which were later corporatised. There was abrief and unsuccessful experimentation with a private management contract for the centraldistribution zone. In 1999, the four distribution companies (DISTCOs) were privatised with thesale of 51 per cent of GRIDCO’s equity in each through a competitive bidding process. AESTranspower, a North American company (which also owns a generation company in Orissa)runs Cesco, the central (zone) distribution company while Bombay Suburban Electric Supply(BSES) runs the other three. The workforce of GRIDCO was allocated to the variousunbundled entities after a long-drawn out and painful severance process.

The Bank loan comes to GRIDCO at near-market interest rates, not on soft terms likethe IDA loans. It has been guaranteed by the Government of Orissa and counter-guaranteed by the Government of India. As is the Bank practice, the loan is disbursedin several milestone-linked tranches to GoI, which on-lends it at a slightly higher rate toGovernment of Orissa (GoO) which in turn lends it to the unbundled utilities. The totalcost of the restructuring and reform exercise is estimated to be $ 2.6 billion in which,apart from the Bank, other agencies such as Asian Development Bank (ADB),Department for International Development (DfID) of UK Government, Power FinanceCorporation (PFC), National Thermal Power Corporation (NTPC) and Government ofOrissa are also to contribute. The scheme envisaged investment by IPPs to the tune of $1447 million.


47

Of the $ 2.6 billion, $ 515 million would go towards strengthening transmission anddistribution (T & D), $ 80 million towards Demand Side Management, $ 28 milliontowards training of personnel, and another $ 28 million for the Upper Indravati project.The Staff Appraisal Report predicted that the power sector would be a net generator offunds for the GoO from the year 1997!

Six years later, Orissa’s power sector is in a worse financial crisis than it had ever beenin the pre-reform era. GRIDCO, the state-government-owned transmission companyhas toted up accumulated losses, which have completely eroded its net worth. It hasoutstanding loans of about Rs.2700 crores, and dues of over Rs.1200 crores on accountof power purchase. In fact, GRIDCO is technically bankrupt. What has kept thecompany from being sent to the cleaners (i.e., BIFR) is the concern that such a movewould send a negative signal to other reforming states. The reform experiment must beshown to have succeeded – even if it has not.

The four privatised distribution companies – which started with a clean balance-sheet -have not been able to make any significant dent in the commercial or technical losses.Distribution losses remain well over 40% in all the four DISTCOs despite somemarginal reductions achieved. . Of the 1.3 million electricity consumers in Orissa, only50 per cent were metered when the private distribution companies took over in 1997.Today, marginal improvements have taken place in metering and collection, but onlyfor low tension (LT) consumers. The DISTCOs have not been able to pay GRIDCO forall the power they have purchased from the latter. Together the four DISTCOs haveoutstandings of well over Rs.200 crores although GRIDCO does not have the leeway tocut off supplies to them despite the default

What Went Wrong?

Despite the collective wisdom of the Bank professionals and the numerous internationalconsultants, the reform road map contained too many facile assumptions and fallacies,which doomed it right from the start.

1. When the OSEB was unbundled, the assets of each of the unbundled entities wererevalued. This was done through an elaborate financial restructuring exerciseundertaken with the help of international consultants. In the case of GRIDCO, theliabilities were much higher than the assets. Hence, the latter were simply “upvalued”to match the former, on the advice of the reform consultants. This meant that thedifference between the actual value and the upvaluation was just a book adjustment,which merely bloated the capital base of GRIDCO even as it deprived the company ofany actual capital infusion. Whatever amount was owed to GRIDCO by theGovernment of Orissa was simply adjusted against the upvaluation. The large capitalbase implied huge allocations on account of depreciation. The large liabilities entailedsizeable debt-servicing burden. Besides, the World Bank’s SAR had assumed thatGRIDCO would earn a 16 per cent return on GRIDCO’s equity from day one. Thus, ifGRIDCO was to charge tariffs that would reflect its revalued asset base (including a 16per cent return on equity) from day one, in addition to its costs – power purchase,operation and maintenance (O&M), employee costs etc -it would have meantunconscionably high tariff hikes resulting in tariff shocks.


48

2. In tune with the Bank’s dictat, OHPC, the other unbundled entity also aligned itstariff with its revalued asset base. Thus OHPC’s tariffs post-unbundling shot up from10 paise per kWh to 49 paise from April 1, 1996. GRIDCO’s power purchase bill wentup from Rs.150 crores in 1996 to a staggering Rs.1200 crores in 2000. Hydel powerconstitutes 36 per cent of the total power procured by GRIDCO. Thus, a huge powerpurchase bill compounded the steep increases in revenue requirements necessitated bythe huge capital base sent GRIDCO’s revenue projections through the roof especially ina situation where dramatic improvements in T&D loss reduction were not possible. Inthe circumstances, the OERC fixed tariffs at a level which allowed power procurementcosts, employee and maintenance costs, but disallowed certain categories of interestcosts and unfunded past liabilities. There was no question of GRIDCO earning anyreturn on equity yet. Thus, there was an invidious asymmetry in the restructuring inwhich the generating companies could charge tariffs that reflected their revalued assetbase, but the transmission and distribution company could not. The tariff hikes allowedby the regulator took care of current liabilities of GRIDCO to an extent, but did notaddress the problem of past liabilities, which began to mount.

3. Even so, GRIDCO’s decline would not have been so precipitate had it not been forthe regulator’s decision to assume a T&D loss of 35 per cent when the actual losseswere in the region of 50 per cent. The regulator went by the SAR’s estimates, whichput T&D losses at 39.5 per cent. It allowed a tariff that was substantially lower thanwhat GRIDCO had asked for in both the tariff applications. The OERC issued threeretail tariff orders: the first in 1997 allowed 11% average increase, the second one in1998, 9.3% and the third in 2000, 4.5%. (The third order came after the privatisation ofthe DISTCOs.) The SAR had assumed tariff hikes of 15% and 18% for the first twoyears. The OERC held that GRIDCO would begin to earn return on equity (RoE) onlyif it brought down its losses to 35% over and above which targets for loss reductionwere set. The targets were clearly unrealistic. Here was a classic case of incorrectassumptions leading to impossible targets.

4. GRIDCO which had hitherto been earning a mandatory 3 per cent return on netcapital assets suddenly had to fend for itself since budgetary support was cut off fromday one.

5. When the distribution assets were to be privatized, the liabilities of the distributioncompanies were loaded on to GRIDCO’s balance-sheet to the extent of Rs.1950 crores.Only Rs.600 crores of liabilities were still retained in the books of the four DISTCOsput together. This was done once again at the instance of the reform consultants, tomake the DISTCOs attractive enough for private sector bidders. The OERC however,refused to allow these liabilities to be factored into the tariff computations of GRIDCO.GRIDCO’s debt-servicing burden kept mounting.

6. Similarly, the receivables for power supplied to state PSUs and state governmentdepartments were retained in the accounts of GRIDCO since the DISTCOs refused toinclude them in their balance sheets.


49

7. The SAR had assumed a load growth of 11.4% in 1997-98, 16.7% in 1998-99 and9.2% in 1999-00, but the actual load growth turned out to be much less thanks to therecession in the state. Captive generation also weaned customers away from the gridleading to lower revenues than anticipated.

8. The privatised DISTCOs found it difficult to achieve any significant reductions inT&D losses. Saddled with the baggage of the earlier set up, the DISTCOs were eitherunwilling or unable to take the steps necessary to check the losses. The Orissa supercyclone of 1999 exacerbated the situation.

9. While the umbilical cord of budgetary support had been cut off from April 1996itself, GRIDCO continued to carry out certain unremunerative but socially relevantactivities such as rural electrification for which it received no subsidy from theGovernment of Orissa.

10. The regulator ordered merit order dispatch in its tariff orders, but owing to theindiscipline of the DISTCOs which routinely overdrew from the grid especially inyears when the monsoons failed and hydel potential remained underutilised, GRIDCOhas had to purchase costly National Thermal Power Corporation (NTPC) power whichpushed up its costs, even as tariffs remained unchanged.

11. If Central Electricity Regulatory Commission's (CERC) 'Availability-Based Tariff'is implemented, GRIDCO’s financial position is likely to worsen since it will have topay capacity charges to NTPC whether or not it requires the power.

The Day of Reckoning

In December 1999, the World Bank conducted a review of the Orissa reforms and cameup with a report in which it admits that GRIDCO’s financial position is a cause forserious concern and exhorts the GoI and its agencies to pledge assistance to GRIDCO“beyond levels envisioned in current drafts”. To quote “The financial condition ofGRIDCO is precarious; and the privatization of the distribution business, thoughsuccessfully accomplished, will not immediately stop the financial hemorrhage in theelectricity sector”. Although it was the Bank and its experts whose reform recipebrought GRIDCO to this state and therefore one would expect the Bank to devise andfund a course correction, the Bank seems to think otherwise. The Aide Memoire of theBank adopts a hectoring tone telling each stakeholder what it should do. Thus there aredetailed directives for Government of India, Government of Orissa, the OERC,GRIDCO, OHPC and the DISTCOs.

The Aide Memoire claims there was interference in the functioning of the distributioncompanies. The Bank also claims that money disbursed to Government of India andfrom there on the to the Government of Orissa has not been passed on to the GRIDCOor the distribution companies, an observation that has been corroborated by GRIDCO.So far GOI has released Rs. 328.71 crores to Government of Orissa of which the latterhas released Rs. 238.90 crores to GRIDCO.


50

The Bank has also thought up new devices to deflect attention from its costly mistakes.In what amounts to a tacit admission that mere privatisation will not improveperformance, the Bank now wants village co-operatives to take over village-leveldistribution. It suggests micro-privatisation where the DISTCO's responsibility willstop at the village/rural transformer level and from then on, it would be the task of thelocal communities to supply and collect the dues from the consumers. This would entaillicensing these communities and fixing the tariffs that they could charge to the finalconsumers – which means, the regulator could be flooded with thousands ofapplications for licenses and tariff orders. The Bank also wants the DISTCOs andGRIDCO to do multi-tariff filing, which is tariff applications, should be filed for threeyears simultaneously.

The SAR had envisaged that cross-subsidies should be phased out. Even though it hasbeen observed that the thefts are widespread mainly in the HT segment, the Bank hasbeen preaching that industrial tariffs should be lowered and domestic and commercialtariffs should be increased – a notion that the regulator seems to have accepted to someextent in its first two tariff orders. If tariffs were to reflect costs of supply, rural andagricultural consumers would be the hardest hit since supplying to them would requirelong lines and several step-down transformers while high tension (HT) and extra hightension (EHT) would attract the lowest tariffs. Whether this is politically feasible ordesirable in a poor state like Orissa seems to have gone undebated.

Rescue Package for GRIDCO

The Government of India, prompted by the Bank, has put together a Bail-out MasterPlan for GRIDCO – which seems like a masterpiece in accounting jugglery. GRIDCOsubmitted the plan to OERC for approval since it was required to do so under theconditions of the Bulk Supply License. The OERC issued notices to all the fourdistribution companies, which had been named as respondents by GRIDCO as alsoother stakeholders, and after hearing all the parties, approved the plan with certainmodifications.

The plan assumes assistance from all the stakeholders, namely the National Thermal PowerCorporation, financial institutions, state generating stations, state govt. and central govt. Thesupport envisaged is in the form of a reduction of obligations to these, concessions in terms ofsale, issuance of bonds to these entities by GRIDCO, in lieu of financial obligations, andcertain concessional provisions to be made by the Govt. of India.

§ The generators will defer the collection of receivables from GRIDCO by acceptinglong-term bonds, and the Delayed Payment Surcharge (DPS) would be waived.

§ Power Finance Corporation and Rural Electrification Corporation will rescheduletheir loans and these will be refinanced by tax-free bonds.

§ The Govt. of India would have to allow tax-free status to these bonds.§ The distribution companies would have to reduce the T& D losses and make timely

payments of bulk supply bills as well as timely repayment of loan interest andinstallments on the basis of the back-to back arrangements.


51

§ Government of Orissa would guarantee the bonds and also provide cash supportover 5 years towards accumulated defaults and to cover cash deficits remaining afterthese measures.

§ OERC would be approached to increase the tariff at a desired rate.

The following are the salient components of the amended Financial Restructuring Plan (FRP)presented to OERC by GRIDCO

§ Dues to Central Generating stations to be securitised by issue of tax free bonds Rs.600 crores

§ Rural Electrification Corporation (REC) and PFC loans to be discharged by issuingtax free bonds with state Govt. guarantee Rs. 800 crores

§ GRIDCO’s dues to state-owned generating companies Rs. 560 crores§ Rs. 360 crores of the dues to the state govt. and OHPC would be managed through

the issue of tax-free bonds with State Govt. guarantee. The balance would be paid outof soft loans receivable from the World Bank.

§ The World Bank would be approached to provide another Rs. 200 crores formanaging deficits until the turnaround of GRIDCO.

Besides these certain other measures as a part of FRP have been approved in the 52nd

meeting of the Board of GRIDCO. These are as follows:

§ Rs. 340 crores taken out of GRIDCO at the time of the first transfer scheme, wouldbe reinvested in GRIDCO, by disinvesting OPGC and OHPC equity.

§ Set off of government dues against corresponding GRIDCO dues§ Conversion of zero coupon bond to equity§ Reduction of staff strength by 10%§ Waiver of DPS and penal interest.

On March 16, 2001, the OERC has approved the restructuring plan submitted to it byGRIDCO, but with certain conditions. The OERC has criticised the reform architectsfor their flawed original financial restructuring model, which landed GRIDCO in themess that it is in today.

The Commission also refused to make any commitments to GRIDCO regarding the futuredirection of tariffs. In its order, OERC disputed GRIDCO’s contention n that the restructuringplan will only push up bulk supply tariffs without corresponding increases in retail tariffs andthat GRIDCO had failed to take into consideration the new debt-servicing liabilitiesnecessitated by the FRP. It has also expressed concern about the debt-servicing and repaymentburden that GRIDCO would have to face five years from now and has therefore urgedGRIDCO to persuade some of the stakeholders to waive or write off their dues as one-timesettlement.

By all accounts, Orissa’s electricity consumers are in for some very nasty tariff shocks in thenot too distant future – if the reform experiment doesn’t collapse altogether, that is.

________0_________


52

Power Sector Reform Process in Haryana:A Review

Dr. Surinder KumarDepartment of Economics

Maharshi Dayanand University, Rohatak

The process of power sector reform was initiated in India in the early 1990s. Haryana was the secondstate after Orissa to undertake power sector reforms under the overall supervision of the World Bank.The Haryana Electricity Reforms Act 1997 came into force with effect from 14 August 1998.Consequently, a number of structural changes were undertaken. In this paper, we have examined theexperience of electricity sector reform process in the context of Haryana state. To provide perspective tothe reform process, it will be useful to examine the technical and financial performance of the StateElectricity Board before the restructuring was initiated.

This paper has been divided into five Sections. In Section 1, TechnicalPerformance of the erstwhile Haryana State Electricity Board (HSEB) has beenanalysed since its formation in 1967 to 1998 when it was restructured under thereforms' programme. In Section 2, the Financial Performance of the erstwhileHSEB has been examined. Section 3 describes the salient features of thereform process. In Section 4, we shall evaluate the functioning and orders ofthe Haryana Regulatory Commission. In Section 5, we have drawn lessonsfrom the reform process.

Section 1: Technical Performance of the Erstwhile HSEB

Haryana State came into existence with the reorganization of the former stateof Punjab on November 1,1966. The Haryana state consists of 19 districtscovering a geographical area of 44,212 square kilometers. Its total populationat present is about two crores inhabiting 6759 villages and 81 towns and cities(1). Haryana is a small peasant proprietorship based economy. The HSEB wasconstituted by bifurcating the Punjab State Electricity Board (PSEB) in May1967.

To meet the aspirations of the people in the newborn state, the StateGovernment initiated a massive programme of rapid economic development.Incidentally, this period coincides with the launching of green revolution in thecountry and this region was one of the major beneficiaries in terms of resourcedevolution from the central government. As infrastructure is of key importanceto accelerate the process of economic development, it was realized that powershould be made available at a reasonable price. Plan expenditure incurred onenergy sector is presented in Table 1. Almost whole of expenditure on energysector was incurred on electric power sector development in Haryana. It maybe noted that expenditure on energy sector ranged between 24.43 per cent and38.39 per cent of the total plan expenditure under various five-year plans. Infact, proportion of resources allocated to power was highest in Fifth and Sixth


53

Five Year Plans and next only to irrigation during Fourth, Seventh and Eighthfive year plans.

Haryana State is acutely deficient in Commercial Energy ResourceEndowment. It does not have coal or petroleum resources and it has very smallhydropower potential. Therefore, it depends heavily on its coal based thermalpower plants for which coal is transported over long distances. Haryanareceives hydel power from Inter-State multipurpose hydro projects namelyBhakra Nangal Projects and Beas project which Haryana shares with otherstates. It also purchases power from various central and other state hydro andthermal power plants to meet additional demand for electricity.

Total installed generating capacity owned or shared by HSEB as on 31.3.1998was 2392 MW (Table 2). HSEB’s own generating system consisted of twothermal power stations: 165 MW (3*55MW) at Faridabad and 650 MW(4*110MW+1*210MW) at Panipat. It also owned one micro hydel project of 48MW (6*8MW) at Western Yamuna Canal at Dadupur (Yamuna Nagar).Haryana is a partner in Bhakra and Beas Projects, which are controlled byBhakra Beas Management Board (BBMB). In Bhakra system, its share was 477MW and in Beas system 317 MW. Haryana has been allotted a share in powergenerating capacity in various central hydro and thermal projects in thenorthern region. Its share in central hydel projects was 204.30 MW and incentral thermal projects, 408.20 MW. From the central projects, statepurchases electricity at tariff rates determined by respective central powercorporations, which manage the power stations.

Table 3 summarizes the pace of growth in the generating capacity, energygenerated and other technical parameters during the period 1967-68 to 1997-98. It may be noted that total installed capacity increased at 8.99 percent perannum (from 383MW to 1173MW) between 1967-68 and 1980-81. It grew atrelatively slow rate of 4.28 percent from 1980-81 to 1997-98. The annualgrowth during the entire period comes out to be 6.29 percent. Hydel generatingcapacity expanded at a slower rate of 3.74 percent in comparison to 15.99percent registered by the thermal generating capacity. In fact Haryana’s ownhydel power potential was very small and the increase in Haryana’s share wascontributed by the central government projects located in the adjoining states.Over the period under consideration, thermal power generation registered agrowth rate of 18.25 percent and hydel power 5.71 per cent making the overallgrowth rate in the electric energy generation 8.31 percent per annum. Eleventimes increase in generation of electricity over a period of 30 years was quite asignificant achievement.

During the period 1967-68 to 1997-98, simultaneous peak demand has grownat a rate of 9.89 percent per annum whereas energy sale increased at 9.76percent which was made possible by 6.29 percent cumulative growth rate in theinstalled capacity along with a purchase of power from Central Sector and otherState Electricity Boards. The State’s own generating capacity failed to keeppace with the expansion of peak demand as well as energy demand, which


54

resulted in acute shortage of power in the state. The last generating unit, whichwas added to its own generating capacity, was of 210 MW coal based thermalpower generation unit at Panipat in 1989. During the past eleven years, therewas no addition to the generating capacity though energy demand hasincreased at about 10 percent rate per annum. Haryana generated only onethird of its total consumption, about one third was made available from its sharein Bhakra Beas systems and the rest of the one third, it purchased from theCentral Sector Power Companies. The overall energy shortage in the Statewas about 5 percent and peak power shortage is about 20 percent.Transmission and distribution network in Haryana consists of 220 KV, 132 KV,66 KV and 33 KV transmission and transformation systems, and 11 KV and LTdistribution system. Up to 1979-80, HSEB did not own even a single 220 KVsubstation. However, by 1996-97 it owned 15 such stations connected by 907Kilometers long transmission lines. During the period 1979-80 to 1996-97, allcategories of transformation stations taken together increased from 191 to 402.132 KV sub-stations increased from 28 to 71, 66 KV stations increased from 31to 67 and 33 KV substations increased from 132 to 249. During the sameperiod, total length of transmission lines increased from 4016 Km. to 8903 Km.registering a growth rate of 5.96 per cent per annum. Electric Power distributionSystem in Haryana consists of 11 KV and Low tension (LT) and distributionstransformers. Immediately after Haryana came into existence in 1966,distribution network was expanded at a very impressive rate. In the period1967-68 to 1980-81, LT lines, 11 KV lines and number of Transformersregistered an annual growth rate of 14.66 percent, 12.29 percent and 13.41percent respectively. These growth rates, declined to 2.59 percent, 2.40percent and 6.86 percent in the period 1980-81 to 1997-98 (2). Obviouslyinvestment in distribution network was highly neglected in the second phase.Consequently, distribution system was overloaded. This resulted in low voltageand frequent burning and tripping of the transformers.

Agrarian transformation in Haryana during the green revolution periodgenerated tremendous demand for power in agricultural sector. Haryana beingclose to Delhi, the national capital, industrialization and urbanization spread atrelatively faster pace in areas located in the national capital region. Haryanaagriculture is based on peasant proprietorship and therefore, increase inproduction and productivity in agriculture has enhanced the purchasing powerof almost all the sections of the society which gave a boost to the commercialactivities in the state. The accelerated growth in the wide range of economicactivities was made possible by a very high growth in energy consumption byvarious categories of consumers.

Consumption of electricity in Haryana grew at a quite high rate as is clear fromTable 4. Total energy sale in the state grew at the rate of 12.66 percent perannum in the period 1967-68 to 1980-81 (first phase) and 7.18 percent duringthe period 1980-81 to 1998-99 (second phase). In the first phase, agriculturalconsumption registered highest growth rate of 18.03 per cent, which wasreduced to 8.35 percent in the second phase resulting in overall growth overthe whole period under consideration to be 12.30 percent, which is really very


55

impressive. Domestic consumption also registered 15.25 percent and 12.88percent growth rates in the first and second phase respectively. Electricity saleto industrial sector grew at 10.31 percent rate in first phase, which declined to2.42 percent per annum in the second phase. Domestic, agricultural andindustrial consumption account for about 90 percent of the total sale ofelectricity. However, significant differences in the growth rates of electricity saleto various consumers categories over time period under consideration has ledto major changes in the relatives shares of electricity consumed by differentcategories of consumers. The share of domestic, industrial and agriculturalconsumers in 1966-67 were 6.61 percent, 62.70 percent and 20.36 percentwhich changes to 22.59 percent, 21.09 percent and 45.39 percent respectivelyin 1998-99. Large proportionate increase in sale of electricity to agriculturalconsumers is due to the preferential treatment given to agriculture withminimum cuts during the periods of shortage. Due to severe cuts and poorreliability in supply to industrial consumers during the period of scarcity,industries have shifted more and more to the captive generation andconsumption to ensure that their production does not suffer due to power cuts.This trend is wasteful and must be reversed.

Haryana has many significant achievements to its credit, as it was the first statein the country to achieve 100 per cent rural electrification by electrifying all the6745 villages in the state in 1976-77. The per capita consumption of electricityin Haryana in 1996-97 was 504 units (Kwh) against the all India average of 334units occupying fourth position after Punjab, Gujarat and Maharashtra states(3). Though the attainments in terms of physical expansion of the electric powersystem have been quite impressive, the technical performance of the systemwas a cause of worry. Overall capacity utilization of the thermal power plants asreflected by the plant load factors ranged between 32 per cent and 49 per cent(Table5) and plant availability was about 60 per cent, forced outages wereabout 30 per cent and the auxiliary consumption more than 10 per cent.

The transmission and distribution losses as a proportion of electric energyavailable for sale in Haryana has been presented in Table 6. Analysis of theestimates of T&D losses brings out a very erratic picture. In the initial years ofthe existence of the HSEB, T&D losses from 1968-69 to 1971-72 were in therange of 22% to 29%. In the period, 1972-73 to 1986-87, they declined to therange of 14% to 19%. Then in the next period from 1987-88 to 1994-95, thelosses rose to the range of 24% to 28% and thereafter, during 1995-96 to 1997-98, losses further increased to the range of 31% to 34% (4). Low levels of T&Dlosses in the seventies may be because the T&D system was not overloadedand supply was metered. However, after 1977 when flat rate system foragricultural supply was introduced and metering was discontinued, agriculturalconsumption was an estimate based on certain norms regarding numbers ofhours for which tube wells were operated and the sanctioned load etc. Soon,the management with the active connivance of the political bosses discoveredthat the account of agricultural consumption was a black box where itsinefficiency, extent of pilferage of power etc. could be transferred without anyaccountability. Therefore, the estimates of T&D losses became a policy


56

decision. Since early 1990s, it appears to be a conscious decision of thepolitical leadership and the management to show much higher T&D lossesincluding theft of power to provide legitimacy to reforms and privatization. Allthese indicators clearly establish that despite quite impressive expansion in thephysical infrastructure, the technical performance of the thermal plants andT&D system was quite unsatisfactory.

We may conclude from the above analysis that the achievements in terms ofexpansion in generation, transmission and distribution systems as well as roleof electric power in achieving high economic development have been quiteimpressive. However, the technical performance of HSEB was not satisfactoryand demand for electricity continuously outstripped supply, which rendered thephysical infrastructure inadequate making the existing system overloadedresulting in voltage fluctuations and poor quality of supply.


57

Section 2 : Financial Performance of HSEB

The financial position of the HSEB has been examined for the period 1990-91to 1998-99. The two rates of return (ROR) on the average capital base havebeen computed: one taking subsidy provided by the State Government intoconsideration and the other without it as is given in Table 7. The ROR withouttaking into consideration subsidy from the state government ranged between –16.0 percent and –47.79 percent in the period under consideration. It may benoted that performance in terms of ROR consistently deteriorated from 1990-91to 1997-98 as ROR declined from –15.76 % to 47.79 % except for 1994-95.The state government was expected to provide subvention to the StateElectricity Board for supplying electricity at a price lower than the cost of supplyat the consumer end. The Board charged lower tariff on the direction of thestate government that wanted to achieve certain socio-economic or welfareobjectives by making electricity available to certain consumer categories atprices less than the cost of supply. Even after taking subsidy given to HSEB into consideration, ROR in 1990-91 to 1993-94 kept declining from –12.31% to –27.5%. In 1994-95 ROR was –0.80 percent and in the following two successiveyears 1995-96 and 1996-97 ROR was positive (2.6 percent and 0.41 percentrespectively) as the State Government compensated the Board completely. Itmay be noted that commercial losses without subsidy kept increasing from Rs.164.76 crore in 1990-91 to Rs. 725 crores in 1997-98. However, commerciallosses after taking into account the subvention from the State governmentshow a declining trend after 1993-94 as State Government subventions in1993-94 was 60.0 crore and it was increased to Rs. 631.6 crore in 1996-97 (5).

The above analysis clearly brings out that though in principle the state isexpected to compensate the SEBs for its meeting socio-economiccommitments, the state government failed to discharge its responsibility tofinancially compensate the Electricity Board. Such an arbitrary interference alsomakes the management and administration complacent as well as despondenthaving little motivation or desire to improve administration or technicalefficiency.

It will be quite insightful to examine pricing policy in relation to the financialperformance of the HSEB. To examine the price policy of the HSEB in relationto the cost of Supplying power, separate analysis has been carried out for eachconsumer class with a view to determining the nature of relationship betweenthe Average Revenue realised from various consumer categories within thestate and average cost of supplying power. It will help us to bring out the extentto which energy sale to each consumer class involves profit earning orsubsidization. The analysis is confined to the period 1985-86 to 1997-98.

Most of the State Electricity Boards follow average cost based pricing principle.The actual tariff is worked out by the application of certain rules of the thumbkeeping an eye on the average cost of supply, the capacity of the consumers tobear the burden and certain other socio-economic considerations. The


58

consumers have been grouped in to various categories on the basis of thenature of use and type of demand.

Along with other factors, the cost of power supply increases with increase in thegeographical distance of the consumers from the power generating station dueto increase in the transmission and distribution costs. However, in actual tariffformulation these differences are ignored, as it is an accepted norm that everybody in a region has a right to get supply at the same price if the nature of theload is the same. The price charged from high capacity demanding consumersis normally based on two-part tariff. One part is called ‘demand charges’ isrelated to the maximum demand or connected load of the consumers and theother is related to the amount of energy consumed on the kilo-watt-hour (unit)basis. From the small consumers, the price is charged on the basis of per unitof energy consumed. Another component of price charged is the electricity dutyimposed by the state government.

The average revenue realized from the electricity sale within the state tovarious consumer categories and the average cost of electricity supply hasbeen presented in Table 8. The analysis of results provides an interestinginsight in to the dynamics of tariff making in Haryana over time. On technicalgrounds, the cost of electricity supply at the higher voltage is lower; the cost ofelectricity supply at the lower voltage levels is higher. Similarly, the cost ofelectricity supply in densely populated areas is lower than in the thinlypopulated areas as transmission and distribution costs and service charges perconsumer will be lower. As per the pricing policy of the HSEB, variouscategories of consumers are charged tariff at different rates. This gets clearlyreflected in the average revenue realized in a particular year from differentconsumer categories. Table 8 brings out that, normally, commercial consumerswere charged tariff rates consistently at higher rates than the domesticconsumers were. Similarly, big industrial (HT) consumers were charged atrates higher in comparison to the small and medium industrial consumers.Agricultural consumers were priced the lowest, though cost of supply is thehighest. This implies that tariff rates do not have any systematic relationshipwith the cost of supply. Capacity to bear the cost and some other socio-economic & political considerations appear to have played dominant role in thetariff formation.

A comparison of the average revenue realized from the electricity sold within the state and the averagecost of supply shows that over the period under consideration the overall average revenue increased from41.70 paise per unit in 1985-86 to 187.36 paise per unit in 1997-98. The average cost of supply in thecorresponding period increased from 71.57 paise per unit to 293.40 paise per unit respectively. It clearlybrings out that, the price per unit of electricity sold did increase over time, but it was inadequate to meetthe cost whereby the average revenue realized was consistently lower than the cost of supplyingelectricity though the shortfall did decline. There was not even a single year in which average revenuewas higher than the average cost of electricity supply. Figures in the brackets are the average revenue asa proportion of the average cost of supplying electricity (AR/AC) in percentage terms. It shows that in1985-86, average revenue was 58.3 per cent of the average cost. In the first half of 1990s, averagerevenue as a proportion of average cost of supply declined but since 1994-95, it consistently increasedbecause of steep increase in tariff of commercial and industrial consumers. Average revenue realizedfrom domestic consumers also increased significantly. Increase in tariff rates does not appear to have any


59

logical relationship to the cost of supply to various consumer classes (6). The only criteria appear to becapacity to pay without much political fallout. This behavior pattern indicates that there is no economicrationality in the pricing policy. Tariff rates were revised when financial crisis reached a flash point, thenthe situation was allowed to drift for the next one or two years. As the tariff was a political decisiondictated by the government, there did not appear to be any serious attempt to achieve the statutoryfinancial requirements or even the break-even point. The financial loss or surplus from the sale ofelectricity to various categories has been presented in Table 9. It clearly shows that revenue loss due tosubsidized supply in 1985-86 was Rs.82.12 crores and it increased to Rs.874.5 crores in 1997-98.

Total quantum of subsidy to domestic consumers was Rs. 14.81 crore in 1985-86 and it kept increasingconsistently over time up to 1993-94 when it rose to Rs. 136.67 crore. In 1994-95, it declined to Rs.114.28 crores. Whereas in the following years it again shows an increasing trend and in 1997-98 it roseto Rs. 162.91. Commercial tariff consistently generated a surplus over a period of time. Industrialconsumers were not subsidised and they significantly contributed to the surplus of the HSEB. Publiclighting has also been consistently subsidized. Tariff of electricity supply to public works and seweragewas lower than the supply for public lighting up to 1990-91 and it was raised subsequently and becomeshigher than the cost of supply, contributing to the surplus generation.

Analysis of pricing policy for tube well irrigation presents a very contrastingpicture. Average revenue realised from agriculture consumers recovers only 20percent of the cost of supply. As the total electricity consumption by agriculturalranged from 35 percent to 45 percent of the total sale within the state due tothis the amount of subsidy increased from Rs. 70.54 crore in 1985-86 to Rs.892.72 crore in 1997-98.

Above analysis of the financial performance of HSEB for the period of 1985-86 to 1997-98 brings outthat the performance has been highly unsatisfactory. During this period, domestic consumers andirrigation pump sets were the two major groups of consumers who were being highly subsidised.

To rehabilitate the electric power system in Haryana, it required large amount of investment resourcesfor renovation and modernization of exiting thermal power plant, to expand generating capacity, toexpand transmission and distribution systems. As the required finances were not forthcoming, Haryanagovernment decided to take a loan of $600 million from the World Bank and agreed to implement itsterms and conditions.

Section 3: Salient Features of the Reforms Process

The reform process was initiated on the direction of the World Bank. International consultants wereappointed who conducted restructuring studies. National Economic Research Associates, Inc (NERA) ofU.S.A conducted the restructuring study for the Haryana Power Sector Restructuring Project in 1994.M/S Price-Waterhouse-Coopers conducted financial Restructuring Study and Asset Evaluation Study.M/S Aurther Andersen Consultants were engaged as Reforms Consultants for corporatisation,commercialization and privatization of distribution. These studies provided the time frame and basis forthe reform process in the state.

The Haryana State Electricity Reform Bill, 1997 was moved in Haryana Legislative Assembly by thethen Chief Minister Sh. Bansi Lal on 21 July and was passed on 22 July 1997. The Act provides for theconstitution of an Electricity Regulatory Commission, restructuring of the electricity industry,rationalization of the generation, transmission, distribution and supply of electricity, avenues forparticipation of private sector entrepreneurs in the electricity industry and generally for taking measuresconducive to the development and management of the electricity industry in an efficient, economic andcompetitive manner and for matters connected therewith or incidental thereto (7 ).

The Haryana Electricity Regulatory Commission (HERC) shall act as the body which issues and enforceslicenses, which balances the interests of the State, the consumers, the units involved in generation,transmission, distribution and supply of electricity and investors in the electricity industry; which


60

monitors, controls and regulates the working of the units; which gathers information; which monitorsprice and quality of service; which prevents monopoly abuse; which regulates and adjudicates on thetariff and other related issues and also acts as a body to resolve or set up machinery to resolve speedilydisputes between the licensees.

Overall, the State Government will do policy planning and co-ordination. The Transmission Companywill undertake the technical co-ordination with the Central Electricity Authority, the State Governmentauthorities in the State and regional in the centre. Generation function would vest in a Governmentcorporation to be incorporated under the Companies Act, 1956. The distribution would be performedeither by Government Corporation or Joint Venture Company (ies) licensed by the commission being setup under this Act.

The Haryana Electricity Reforms Act came into force w.e.f. 14.08.1998 and the process of restructuringthe Haryana State Electricity Board was initiated the same day. The Haryana Electricity RegulatoryCommission (HERC) was constituted and all the electricity generating functions were transferred tonewly constituted Haryana Power Generation Corporation (HPGC). The Haryana Vidyut PrasaranNigam Limited (HVPNL) was created to perform transmission and bulk supply functions. Fordistribution and retail supply two distribution companies namely, Uttar Haryana Bijli Vitran Nigam(UHBVN) and Dakshin Haryana Bijli Vitran Nigam (DHBVN) have been formed. The distributioncompanies are at present functioning as subsidiary companies of HVPNL and have applied to the HERCfor separate licenses (details of the exact dates of the reforms process, process followed in constitution ofthe HERC, Boards of directors of various corporations and Commission Advisory Committee have beengiven in the Annexure).

At present, the state government as the sole shareholder owns all the generating companies, transmissionand distribution companies. The Boards of directors of various corporations consist of official membersonly and the bureaucrats of Indian Administrative Services have been appointed as Managing Directors.The state government did make effort to invite some Independent Power Producers (IPP) and privatedistribution companies but no deal has been finalized as yet.

Section 4: Experience of Electricity Reform Process

The Haryana Electricity Regulatory Commission has issued guidelines as regards its conduct of business,tariff philosophy and guidelines for load forecast, resource plans and power procurement process. As perthe Electricity Reforms Act 1997, the Transmission and Distribution Companies are required to file theirAnnual Revenue Requirement (ARR) and proposed tariff increases for the next financial year by 31December of the current year to enable the Commission to pass order before the commencement of thenext financial year. The Commission is expected to follow a transparent decision making process beforepassing its order. The Commission is required to hold public hearings and give opportunities to variousstakeholders, the public (consumers) and the licensees to present their views. It will be quite insightfulto examine various orders passed by the Regulatory Commission and their actual implementation.

A. HERC Order dated 4 February 1999 for Regular Licenses for Transmission &Bulk Supply and Distribution & Retail Supply

1. In pursuance of the Haryana State Electricity Reforms Act 1997, Haryana VidyutPrasaran Nigam Limited (HVPNL) was incorporated as a government company underthe Companies Act 1956 on 19.08.1997. The Government of Haryana holds all of itsshares.

2. Government of Haryana issued two provisional licenses on 14.8.1998 under theReforms Act to the HVPN for Transmission & Bulk Supply and Distribution & RetailSupply of electricity for a period of six months or up to the time the Commissioncommunicates its decision regarding grant of regular license, whichever is earlier.


61

3. HVPNL applied to HERC for two separate licenses for transmission anddistribution of electricity on 20.8.99. The Commission directed HVPN to publishnotice of its applications in at least two successive issues of two Hindi and two Englishnewspapers which was published on 2.09.98 and 3.09.98 inviting objections to thegrant of licenses to HVPN within a period of three months of publication of notice. Adraft Transmission & Bulk Supply license as well as a draft Distribution & RetailSupply license was submitted by HVPN to HERC on 14.10.98. Objections to the draftlicense were invited through newspaper notices dated 24th and 25 November 1998.

4. Seven organisations filed objections to the terms of the draft licenses toHVPN. Organisations were the Associations of Faridabad and Gurgaonindustries and PHD Chamber of Commerce and Industry.

5. Hearings were held on 12th, 15th, 27th, & 28th of January 1999. In the hearings, HVPN and theintervenors made their submissions. The Commission observed that underlying concepts, roles ofagents, process of regulation were not well understood by various stakeholders.

6. HVPN expressed its apprehensions regarding the role of Regulatory Commission in relation tovarious aspects of business. It was reluctant to provide accounting statements and Auditor’s reports toany person. The Commission rejected the plea on the ground that the whole process must be transparent.HVPN repeatedly argued that certain conditions may not be made part of the license and may be placedin the guidelines. The Commission observed that the responsibility for providing a safe, economical andreliable electric service rests in the first instance on the licensee and the Commission was responsible forensuring that the licensee is in a position to carry out its responsibilities.The Commission insisted that interface metering must be installed for FY2000-01, for which companyhad enough time. The Commission clarified that phasing out of unjustified tariff differentials is afundamental part of the regulatory reforms in the state.

7. The intervenors raised main issues regarding subsidisation of certain consumers and crosssubsidisation. Industry representatives forcefully argued that no subsidy whatsoever is permissible,unless the state Government undertakes to reimburse the same within a fixed time frame (not exceeding90 days). The Commission agreed that the same was the ultimate goal of the statute but it cannot beachieved overnight. Therefore, at present, it may be left to the discretion of the Commission.

Intervenors also objected to cross subsidisation clause. The Commissionrejected the plea on the ground that it was unpractical to eliminate crosssubsidisation at the present stage.

After listening to the arguments of all the parties, HERC issued License No.1 of 1999to HVPN to carry on Transmission and Bulk Supply business and License No.2 of 1999was issued to HVPN to carry on business of Distribution and Retail Supply in the stateof Haryana.

B. HERC order dated 26.11.1999 on HVPNL ARR for Transmission and BulkSupply Business for 1999-2000

1. To meet statutory requirement of filing ARR for 1999-2000 by 31December1998, HVPNL submitted a composite application of ARR for its transmissionand distribution business on 30 December 1998.

2. On 14 January 1999, the Commission observed that application for ARRwas incomplete as it lacked required information and secondly, separate ARRs


62

be filed for its Transmission & Bulk Supply and Distribution & Retail SupplyLicenses that it holds. The Commission directed HVPNL to file revised ARRswithin ten days. On HVPN’s request time period was extended to March 15,1999. HVPNL filed revised ARRs on March 19, 1999.

3. The Commission appreciated the problems of HVPNL but asked it toprovide more information as the information supplied was just not adequate tofulfill its obligations under the Act i.e. to pass any order on ARR. HERC gave 30days from April28, 1999 to the company to file supplementary information.HVPNL filed supplementary information on May 27,1999 which was still foundwanting. The staff of the Commission organised a meeting with HVPNL staff onJuly 23,1999 to seek certain clarifications on information so far.

It was noted that the transfer schemes were provisional (to be finalised up to 31December 1998). Accounting data was provisional; it lacked segregation ofaccounts by business. Therefore, the whole exercise of ARR was a stopgaparrangement.

4. Though information was not adequate, the possibility of its better availabilitywas dim, the Commission decided to proceed with organising public hearingson the ARR. Though notice of hearings was published in the newspapers on9.9.1999, there was little response. The staff of the HERC was allowed to be aparty to the proceedings. Public hearing was held on October12, 1999.

5. The Commission observed that better methods for estimation of power supply and demand should befollowed. It allowed 9.89 per cent transmission losses against HVPNL’s 10.31 per cent for 1999-2000.The Commission expected that all the interface meters should be installed by 31 March 2000.

6. HVPN estimated average cost of supply to be Rs. 1.52 per unit. However, HERC allowed Rs.1.44per unit for the ARR. The Commission allowed operation and maintenance cost as proposed byHVPNL except for the terminal benefits, which were proposed to be 20%, but the Commission allowedonly 8.38 per cent. Depreciation was allowed @6.38 % on straight-line basis. Rate of Return on averagecapital base asked for by HVPNL was 10 %, the same was allowed. As per Schedule Six, company wasentitled to 13% ROR, however, the company elected to adopt 10% ROR to keep tariff within reasonablelimits.

7. The major difference between HVPNL and HERC was regarding treatment of terminal benefits,pension and provident fund liabilities. HSEB did not deposit any money in any separate account to payfor terminal benefits. HVPNL wanted a special provision of Rs. 248.17 million for pension fundliabilities. The commission did not allow it. Secondly, the commission viewed that PF liability andunfounded pension liability do not form part of the loans as defined in the sixth schedule. Thecommission rejected the claim of interest on it. The commission argued that it would not be fair to passon the burden of provident fund money to the consumers through the revenue requirement.

8. The Commission did not allow any subsidy to transmission business. It allowed HVPNL Rs.2317crores as ARR for the year 1999-2000 against the proposal of Rs.2488 crores (the actual figure was Rs.1957.25 crores but it included aggregate subsidy of Rs.531.31 crores ).

C. HERC Order on HVPNL’s ARR for the Distribution and Retail SupplyBusiness for FY 1999-2000


63

1. A combined hearing for Transmission & Bulk Business and Distribution &Retail Supply Business was submitted by the HVPNL. Revised application withsupplementary information was filed on May 27,1999.

2. HVPNL stated that total system T&D losses were 33.25 percent and non-technical losses were approximately 47% of total losses. The Commissionexpressed serious concern over T&D losses and suggested that there was noalternative to metering all the supply. HVPNL stated that its first priority was toimprove the quality of service and metering will come only next. TheCommission expressed concern over lack of plan to install meters. It directedHVPNL that it should submit a plan for installing the meters for un-meteredconnections within one month of this order.

3. The Commission argued that unless agricultural consumption was metered,it would be difficult to determine the exact amount of subsidy to be paid by theGovernment of Haryana for agricultural consumption.

4. HVPNL proposed that transmission losses were 10.31 % and distributionlosses were 20.69 %. However, Commission allowed 9.89% and 19.86%respectively for the ARR.

5. Emphasis of HERC was on installing meters; reduction in T & D loses.Regarding terminal benefits, PF and pension fund treatment, the commissiontook a similar view as in the case of transmission and Bulk supply business.

6. The licensee did not submit any tariff application. The commissionrecommended that the deficit, if any, in the business should be made good bythe grant of subvention by the Government of Haryana.

D. HERC Order Dated 29.5.2000 on Review Petition of HVPNL (against26.11.99 order of HERC) for Transmission & Bulk Supply Business for1999-2000

HVPNL was the petitioner and Gurgaon Chamber of Commerce and Industryand PHD Chamber of Commerce and Industry were the intervenors.

HVPNL filed a review petition on 27.12.1999 seeking a review and reversal ofcertain findings and observations of HERC order dated 26.11.19999. Under theAct, review application should be filed within 30 days of the order, however, thedelay was condoned. Supplementary submission was filed on 3.2.2000.

Review requested was in relation to the following issues:§ Treatment of retirement benefits (PF and Pension Funds)§ Transmission losses§ Treatment of shared fixed generation assets§ Treatment of stores, cash & bank balance

HVPNL proposed Rs.145 millions for terminal benefits. HERC allowed onlyRs.60.64 millions. HERC argued that HVPNL calculations of terminal benefits


64

at 20% of basic salary and D.A. were arbitrary. However, for this ARR, theactual amount required by the petitioner was allowed. Commission allowedspecial appropriation to discharge pension liabilities. Thus, in the review order,terminal benefits were raised to Rs. 641.99 million. However, it included specialprovision which was asked for in the first ARR of Rs.248.17

After all the arguments, the Commission allowed revised approval ofRs.23491.31 million, an increase of Rs 33 crores over the previous order.

As the company did not propose any tariff increase, it was assumed that therevenue requirement would be equal to the revenue realised.

E. HVPNL Application for ARR and Tariff Revision for its Transmission & BulkSupply and Distribution & Retail Supply Business for FY 2000-01

HVPNL submitted application for its ARR for 2000-01 for T&BS and D&RS businesson 31.12.99 to the HERC. The HERC on 4 February 2000 asked for additionalinformation within three weeks. Supplement to ARR was submitted on 25 February2000. HERC again wrote to HVPNL on 21 June 2000 that it will not be possible toprocess the ARRs unless the following conditions are satisfied:

1. HVPNL conforms to the directions given in the ARR review order of 29May 2000for the year 1999-2000.

2. HPVNL must file bulk supply tariff application separately to enable theCommission to determine expected revenue to be earned by the licensee.

HVPNL submitted modified ARRs for its transmission and distribution business andproposed tariff for 2000-01 on 30.6.2000. HERC held three hearings on 27 September,19 November and 2 October 2000.

Highlights of the Application

HVPNL assumed transmission and distribution losses to be 33% (transmission losses to be 8% anddistribution losses to be 25%) in its calculations of revenue requirement. The HERC believed the figuresto be inflated and directed the HVPNL to take T&D losses to be 25 % (8.31% for transmission businessand 16.69 % for distribution business) in its revenue calculations.

1. In the modified application, HVPNL has taken transmission losses to be 8% anddistribution losses to be 16.69%. However, it underlined that the actual losses will bemuch higher though it has agreed to file ARR as per the directions of the HERC.

2. For Repair and Maintenance (R&M) cost applicable to D&RS business, the actualcosts were allowed by the commission for the FY1999-2000. However, for 2000-01,Commission allowed only 3% of the Gross Fixed Assets. The HVPNL in its initialapplication had assumed R&M cost to be 3.5%.


65

3. Reasonable return has been taken to be 10% on the net worth of the distributionassets of the distribution companies, namely, Uttar Haryana Bijli Vitran Nigam Limitedand Dakshin Haryana Bijli Vitran Nigam Limited.

4. Government of Haryana indicated that it would pay Rs.4226 millions towardssubsidy. HVPNL proposed that might be allowed to its distribution companies in sucha way that without unbearable losses, the companies could carry on their business andalso ensure that same tariff structure remains applicable to the whole State of Haryana.The UHBVN was allocated Rs.3243 millions and the DHBVN has been allocated Rs.987 millions.

5. Though separate ARRs were filed for both the distribution companies, separateaccounts of the companies were not firm and tentative in character.

Analysis of the application brings out that the transmission and distribution companiesalways have a tendency to exaggerate their revenue requirements. T&D loss figuresused in calculations are guesswork. Proposed subsidy by the State government has norelationship with the actual additional cost which the distribution companies will haveto bear because of low tariff for agricultural sector supply on the direction of the Stategovernment which it should in fact bear if the company is to run with a commercialoutlook

F. An Analysis and Evaluation of the HERC Orders dated 14 December & 22December 2000 regarding ARR & Tariff for FY 2000-01

As the information supplies by the HVPNL was not adequate the Commission directed the Transmissionand Distribution companies to submit additional information three times. Though the quantity andquality of information was not up to the mark to evaluate the technical and financial performanceprecisely, the process did bring out the gaps in the information that needed to be bridged. TheCommission did allow waivers in the supply of information this time and directed the companies tosubmit all the required information while filing ARRs for the next financial year.

Some of the findings of the Commission are very illuminating:

The exact amount of power received from BBMB power station was not known as the HVPNL (alsoerstwhile HSEB) did not have metering arrangement at receiving points in Haryana. In the absence ofinterface meters at the transmission and distribution interface, it is not possible to know the actual levelof transmission losses. As supply is mostly unmetered, HVPNL has estimated that free supply to itsemployees and offices & own works may be 63.55 Million Units (MU), which is not metered. About80% of agricultural supply is unmetered and is supplied at a flat rate. In such a situation evaluation oftechnical performance is not possible. The HERC had directed HVPNL in November 1999 that it mustinstall meters at transmission and distribution interface and it promised to do the needful by December2000. However, it failed to honour its commitment and asked for an extension up to June 2001.TheHERC reluctantly agreed and directed the HPVNL to complete interface metering by 31 July 2001positively or it will attract some punishment. The Commission has directed HVPN and its subsidiaries toreplace all defective meters by 31July 2001. Government of Haryana has accepted the Minimum ActionPlan and has committed to meter all agricultural pump set connections by the end of 2001.

Metering is the foremost task to ensure transparency in the system’s functioning In the absence ofmetering, estimation of T&D losses to say the least has become a policy decision on the part ofmanagement that at times appears to be scandalous. Before reform process was initiated, the generaltendency on the part of management was to underestimate T&D losses and to transfer the lossesincluding pilferage of power to the agricultural consumption account which served double purpose:


66

political leadership could project that it is supplying 40-45 per cent of the total supply to the agriculturalsector and thereby it was pro-kisan and at the same time it was quite handy for the management toconceal their inefficiency and evade accountability.

As a result of such an active connivance among the vested interests, up to early 1990s, the HSEB used toproject that its T&D losses were about 20 %. Then to provide legitimacy to reform process and todiscredit the existing institutional set up the management and the political leadership informed the peoplethat T&D losses have increased to about 35% and reforms were inevitable to improve technicalperformance and to escape from financial bankruptcy. No questions were asked or accountability fixedfor the previous mess. While passing orders on ARR for 1999-2000, the HERC reluctantly allowed36.56% T&D losses for financial calculations. However, it directed HVPN to reduce them to 24.69 %including distribution losses of 16.69%. During 2000-01 T&D losses did not show any decline. TheCommission has estimated that T&D losses in Haryana were 40,76 % out of which 7.76% weretransmission losses and 35.77% were the distribution losses. To bring to an end the game of your guessagainst my guess, statutory metering and monitoring of power is indispensable. Society must act as awatchdogs otherwise the vested interests shall scuttle this plan of action or at least delay it as far aspossible.

There are some other startling facts that need to be highlighted. Arrears of receivables (dues) on 148.98when HSEB was restructured were Rs.758.64 crores and by 31.3.2000, arrears increased to Rs. 986. 50crores. This shows that the performance of HVPNL for the first 19 months of restructuring in factdeteriorated and added to the unrecovered dues by Rs. 227.87 crores which is an increase of 30 %! Whatis no less intriguing is that unpaid dues of government offices were Rs. 132.77 crores out of a total ofRs.986.50 crores. Obviously, such a performance in collection indicates deteriorating efficiency incollection of dues that poses a serious threat to the financial viability of the distribution licensee.

HVPNL has estimated that free supply was 63.55 MU out of which 21.79 MU was the supply to itsoffices and other work places and the rest 41.76MU was supplies free to its employees. The HERCestimated that in case of distribution companies, these concessions amount to 16% of the totalAdministration & General expenditure and 5.7% of the basic salaries of the employees respectively. Anyconcession given must be transparent and its implications defendable. A very alarming finding of theCommission appears to be that the load factor of small (LT) industrial consumers is abnormally lowwhich implies that they use electricity on the average 2.06 hours per day. It signals a case for large-scalepilferage of power. The Commission has rightly recommended that meters of all LT industries may begot checked by some independent agency in order to plug leakage of substantial revenue, which appearsto be taking place.

The HERC’s arguments to enhance tariff for domestic consumers seems to defy any socio-economicrationality. HVPNL had proposed that tariff be raised by 11 paise from 191 paise per unit to 202 paiseper unit. However, the Commission has ordered three slab based tariff: for the first 40 units consumption@ 260 paise per unit, for the next 260 units at 360 paise per unit and for consumption above 300 units @425paise per unit. The rationale provided by the Commission is that its cost of service study shows thatthe cost of supply to domestic consumers was 451paise per unit. The Commission has not been fair to thedomestic consumers, as while computing cost of service, average T&D losses assumed were 40.76 % outof which transmission losses were 7.76% and distribution system losses were 35.77%. While filing ARR,the Commission had asked the HVPN to make its calculations taking distribution losses to be of theorder of 16.69%. This means that genuine domestic consumers have been penalized and asked to pay forthe pilferage of the order of 15% to 20%. At the top of it, the HERC has argued that domestic consumersare being still subsidized by 85 paise per unit as the average revenue realization from the new tariff willbe 312 paise per unit against the cost of 451 paise per unit. The arguments of the Commission are notfair. The tariff rates for commercial consumers have been kept unchanged at 419 paise per unit. For HTindustrial consumers, tariff has been reduced as they get supply at higher voltage for which cost ofsupply is lower.

For metered supply to agricultural sector, the Commission has accepted the proposal of the licensee toallow a tariff increase of 12 paise per unit whereas for flat rates supply, the Commission has accepted theGovernment of Haryana’s request to reduce the tariff rates due to drought situation in lieu of which thegovernment has agreed to provide an additional subsidy of Rs.413 crores in addition to the already


67

committed subvention of Rs.412 crores. We think it is fair enough so long as it does not adversely affectthe finances of the licensee.

The approved ARR for the distribution business for FY 2000-01 was Rs.3730.44 crores and new tariffwas estimated to fetch Rs. 2738.11 crores over the full one-year leaving a gap of Rs. 992.33 crores (onlythree months of FY2000-01 were left when order was implemented). It is estimated that for FY2000-01,gap between allowed ARR and revenue realized through new tariff will be Rs. 1292 crores. After takingin to account the government subsidy for concessional supply to agricultural sector of Rs.613.08 croresand deferred liability of Rs.156.22 crores, the deficit of Rs.432 crores still remains uncovered. Rs. 259.2crores was allowed as deferred cost for which borrowings are allowed and the licensee has been asked tomake up Rs.172.8 crores though efficiency gains. The Commission has allowed the HVPNL to borrowfrom the market but this will add to the interest liabilities for which genuine consumers will have to payin future. This expedient option is not justified beyond a point.

Section 5: Lessons from the Regulatory Experience

On the basis of above analysis of the physical and financial performance of theerstwhile Haryana State Electricity Board since its inception in 1967 to 1998 whenit was restructured and there after, of the regulatory process in Haryana, followinglessons may be drawn:

1. Despite impressive expansion in the physical infrastructure of the electric power system in Haryana,its technical and financial performance was unsatisfactory. The HSEB was run like a state governmentdepartment and all decisions were dictated by the state bureaucracy on the direction of the politicalleadership without any transparency and accountability. Obviously, the Board did not have commercialoutlook and its performance was poor.

2. Analysis of the ARRs and Tariff applications of the transmission and distribution companies for1999-2000 and 2000-01 brings out that:

To improve technical efficiency of the transmission and distribution systems, energy audit is a must, forwhich all the electricity supply at transmission as well as distribution ends must be metered. This is aprecondition to identify system inefficiencies and also, pilferage of power.

Data management system of the transmission as well as distribution companies is found wanting forproper economic analysis of the financial management of the companies. The HERC had to orderrepeatedly to provide required information to evaluate revenue requirement and tariff proposals.Obviously, the companies inherited a data management system from the Haryana State Electricity Board,which did not meet the requirements of proper economic analysis. With the existing database, evenaverage cost of supply at various consumer ends at different voltages cannot be computed. Therefore,tariff rates based on any rational pricing policy could not be worked out. Tariff structure remains ad-hocand arbitrary.

It has been reported that there is lot of resistance from the consumers who get unmetered supply and theemployees to meter the supply. It is obvious as people have developed vested interests in the existingsystem and metering will make them accountable. This resistance has to be overcome by persuasion, byisolating and exposing the habitual offenders and by social marketing techniques.

3. The management of the transmission as well as distribution companies are yet to change theirmindset and develop a professional and commercial outlook.

4. The composition of the Boards of Directors of various Generation, Transmission and Distributioncompanies shows that they still remain under the effective control of the state bureaucracy, which hascommitment to the government and not to the company. Management professionals with technicalknowledge should be appointed chief executives and the management must be provided requiredautonomy. The chief executive must be made accountable for the performance of the company.


68

5. Haryana does not have any significant private power generating company (IPP) and the presentpolitical leadership appears to be reluctant to privatize distribution. In fact, it has created a deadlock withthe World Bank, which has withheld the next trench of the committed loan. This can prove to be ablessing in disguise provided the state government ensures that the restructured companies functionefficiently ensuring transparency and accountability in their operations. This is not an impossible task.State Governments must learn from efficiently run central public sector enterprises. Now, it is beingreported that adequate financial resources are available from the national financial institutions and thereis no need to go for tied borrowings. But it must be ensured that borrowings will be used for investmentand not for current consumption which political expediency always warrants.

6. We believe that if the restructured generation, transmission and distribution companies are allowedto function efficiently in a transparent manner by the accountable professional management under theoverall supervision of the State Regulatory Commission which ensures that government takes fullresponsibility for payment of subvention for subsidized supply to any consumer class on socio-economicconsiderations, there will be no need for privatization. If pilferage of power is eliminated, system is runefficiently, the present cost of supply will fall and at the existing tariff rates, the electricity companieswill be in a position to generate sufficient surplus to earn the statutory 3% rate of return, which willgenerate resources to meet the investment requirements of the system. If credibility of the companies isensured, finances should not be a problem. For this, national consensus should be evolved thatmanagement and pricing policy of the electricity companies will be depoliticised and the companies willbe allowed to operate with a commercial outlook. Privatisation per se will not solve the problem,especially under existing political and economic environment and social ethics. The danger is thatexpected efficiency gains from privatization become victims of scandals and we are left with exploitativemonopolies, which will be a worse scenario than even the present one.

7. The Haryana Electricity Regulatory Commission‘s role and efforts to make functioning of thetransmission and distribution companies transparent are laudable. Whether the regulatory commissionsare being established because of external pressures or otherwise, their establishment was a historicnecessity. However, if the commission consists of competent people and its autonomy is ensured, it cango a long way to ensue efficiency in the functioning of the electric power industry and to protect theinterests of various stakeholders. Here the role and commitment of the government becomes a criticalfactor. No institution like Electricity Regulatory Commission will be in a position to withstand pressureson its own. The success of the commission in bringing about transparency and accountability will notonly depend on the legal authority vested in the members of the commission but also on the vigilanceand effectiveness of intervention of various social groups. The consumer interest groups will have to actas watchdogs and actively participate in the regulatory process. The new structure is fragile and needs tobe nurtured otherwise there is every danger of vested interests taking over which will be worse than cure.

Haryana Electricity Reform: Chronology of Important Events

Event DateHaryana Electricity Reform Bill passed by Haryana Assembly 22.07.1997Reform Bill Received the Assent of the President of India 20.02.1998Gazette Notification of the Haryana Electricity Reform Act 10.03.1998Haryana Electricity Reforms Act came into Force Haryana ElectricityRegulatory Commission (HERC) & Two Corporations (HPGC and HVPNL)were created

14.08.1998

HERC issued two licenses to HVPNL to carry out Transmission and BulkSupply (License 1 of 1999) and Distribution and Retail Supply (License 2 of1999)

04.02.1999

By the second transfer scheme, transmission business and distribution wereseparated HVPNL was retained as transmission company while twodistribution companies were created, namely i) Uttar Haryana Bijli VitranNigam Limited (UHBVN) ii) Dakshin Haryana Bijli Vitran Nigam (DHBVN)

01.07.1999


69

HERC issued two separate licenses to HVPN to carry on distribution businesson Behalf of the two distribution companies namely UHBVN & DHBVN

21.04.1999

Both distribution companies applied for grant of independent regular licenseApplication of both the distribution companies for grant of independentregular license is pending with Haryana Electricity Regulatory Commission.

20.07.1999.

HERC order on Annual Revenue Requirement for FY1999-2000 of HVPNLfor the Transmission and Distribution Business:

26.11.1999

HERC order on Review Petition on ARR for FY 1999-2000 29.5.2000HVPNL Application regarding ARR for FY 2000-01 for Transmission AndDistribution Business

31.12.1999

HVPNL Supplementary application regarding ARR for FY2000-01 25.02.2000HVPNL modified ARR for FY2000-01 30.06.2000HERC held public hearings on 27/09; 19/10; &

2 / 11 2000Order on ARR and Tariff for 2000-01 was issued 14 & 22/12/ 2000Footnotes (and References)

1. Economic and Statistical Organisation, (2000): Statistical Abstract of Haryana 1998-99, PlanningDepartment, and Government of Haryana.

2. Based on information collected from various Annual Administration Reports of the Haryana StateElectricity Board.

3. Ministry of Finance (2001): Economic Survey 2000-01

4. T&D losses data for various years is collected from the Annual Statement of Accounts and AnnualAdministration Reports for various years published by HSEB.

5. Planning Commission (2000): Annual Report on the Working of State Electricity Boards andElectricity Departments

6. Electricity is supplied to various categories of consumers at different voltages. Higher the voltage ofsupply, lower will be the cost of supply. HSEB does not calculate cost of supply at various voltages.Here, comparison has been made with the average cost of supply of the whole system.

7. Haryana Government Gazette (Extraordinary), March 10,1998: THEHARYANA ELECTRICITY REFORM ACT, 1997

Analysis in Sections 4 & 5 is based on various documents published by the Haryana ElectricityRegulatory Commission given bellow.

§ Order dated 04.02.1999 granting licenses for Transmission & Bulk Supply and Distribution & RetailSupply Business

§ Order dated 21.04.1999 allowing HVPN to carry on business of Distribution & Retail SupplyBusiness

§ Review Petition Order dated 29.05.2000 in respect of ARR filing by HVPN for the Transmissionand Bulk Supply

§ Order dated 27.07.2000 passed on application for Fuel Surcharge Adjustment for the Financial Year2000-2001

§ Order dated 14.12.2000 on Annual Revenue Requirement for Transmission & Bulk Supply§ Order dated 22.12.2000 on Annual Revenue Requirement for Distribution & Retail Supply Business

and Distribution & Retail Supply Tariff§ HERC CONSULTATION PAPER-II: ISSUES OF TARIFF PHILOSOPHY, 1999§ Guidelines for Filing of Annual Revenue Reports, 4 December 1998§ Guideline No.3 Commission Advisory Council


70

§ Guidelines for load forecast, Resource Plan, and Power Procurement Process, July 12,1999§ Conduct of Business Regulation§ Transmission and Distribution License§ Distribution and Retail Supply License§ Tariff Regulations§ Fines and Charges Regulations§ Code of Practice on The Payment of Electricity Bills and Procedures for Disconnecting Consumers

for Non-payment§ Complaints Handling Procedure Relating to Distribution and Retail Supply

Table 1: Haryana: Plan Expenditure on Energy Sector (Rs. in cores)

S.No. Particulars Total PlanExpenditure

Expenditure onEnergy

% Energy Expend(4/3)% (percent)

1 2 3 4 51. 4th Five Year Plan (1969-74) 358.26 87.53 24.432. 5th Five Year Plan (1974-79) 677.34 260.01 38.393. Annual Plan (1979-80) 202.95 56.40 27.794. 6th Five Year Plan (1980-85) 15995.47 491.62 30.815. 7th Five Year Plan (1985-90) 2510.64 639.03 25.456. Annual Plan (1990-91) 615.02 155.92 25.357. Annul Plan (1991-92) 699.39 182.97 36.168. 8th Five Year Plan (1992-97) 4889.89 1197.68 24.499. 9th Five Year Plan (1997-2002) 11600.0 3305.00 28.49

(Source: Statistical Abstract of Haryana: Various Issues)

Table 2: Generating Capacity as on 31.03.1998

S.No. Name of the Power Station Total installedcapacity (MW)

H a r y a n a ’ s Share (MW)

A. Hydro:i) Bhakra Nangal Complexii) Dear Power Houseiii) Pong Power Houseiv) Central Hydro Project

1405.309903602002.2

477.00317.0060.00204.30

Total (A) 4757.50 1058.30B. Steam:

i) Central Thermal Power Stationsii)I.P. Station Ext. at Delhi

5772.27187.50

408.2062.50

Total (B) 5959.77 470.70C. HSEB own Projects:

WYC Hydel(MW)Aridabad Thermal n 2x55 MW unit I&II 1x55 MW unit IIIPanipat thermal power station 2x100 MW Stage I 2x110 MW Stage II 1x210 MW Stage III

48.00165.00

650.00

48.00165.00

650

Total (c) 863.00 863Grand Total (A+B+C) 11580.27 2392.00

}}


71

(Source: HSEB: Annual Statement of Accounts 1997-98)


72

Table 3: HSEB: Salient Features of Power System(Figures in the bracket are of %)

Annual Compound Growth RatesS.No.

Particulars 1967-68 1980-81 1997-981967-68 to

1980-811980-81 to

1997-981967-68 to

1997-981. Installed Capacity (MW)

a) Hydrob) Thermal

368(96.08)15(03.92)

696 (59.34)477 (40.66)

1106.3 (46.25)1285.70 (53.75)

5.0230.49

2.766.00

3.7415.99

Total 383 (100) 1173(100) 2392 (100) 8.99 4.28 6.292. Actual Generation (MU)

a) Hydrob) Thermal

624.05(96.14)25.01 (03.86)

2460(69.18)1096(30.82)

3297.06 (46.29)3826.22 (53.71)

11.1233.74

1.747.63

5.7118.25

Total 649.60(100) 3556(100) 7123.28 (100) 13.97 4.17 8.313. Connected load (M.W) 446.70 2358 6939.00 13.65 6.55 9.574. Simultaneous Max. Demand (MW) 134 779 2272 14.50 6.49 9.895. Power Available for Sale (MU) 649.64 4184.0 13303.06 15.40 7.04 10.586. Energy Sale (MU) 542.92 3391.0 8864.44 15.13 5.82 9.767. T & D losses (MU) percentage (%) 106.78(16.42) 793.00(18.9) 4438.62(33.36)8. LT and 11 KV Lines (Circuit kms)

a) L.T. Linesb) 11 KV linesc) No. Of transformers

979670895390

664933593931385

10526655059

103678

14.6612.2913.41

2.592.406.86

7.706.629.68

9. Total No. Of Connections 311914 1093630 3422926 10.13 6.20 7.78Source: HSEB: Annual Statements of Accounts: Various years.


73

Table 4: Electricity Consumption in Haryana: Relative Shares & Growth Rates(In Lakh Units) and (Figures in bracket are of %)

Annual CompoundGrowth Rates

S.No.

ConsumerClass

1967-68

PeriodI

1980-81

PeriodII

1998-99

PeriodIII

PeriodI

PeriodII

PeriodIII

1. Domestic 358.78(6.61)

2271.95(8.89)

20107.16(22.59)

15.25 12.88 13.87

2. Commercial 242.87(4.47)

729.54(2.85)

3511.19(3.95)

8.82 9.12 9.00

3. Industrial 3408.10(62.70)

12202.01(47.74)

18770.41(21.09)

10.31 2.42 5.66

4. Agricultural 1105.42(20.36)

9537.7 (37.32) 40396.58(45.39)

18.03 8.35 12.30

5. Public lighting 32.27(0.59)

73.8(0.29)

300.45 (0.34) 6.57 8.11 7.46

6. Public Works 34.91(0.64)

186.04(0.73)

2385.18(2.68)

13.74 15.23 14.60

7. O f f i c e / W o r k shops

39.31(0.72)

64.61(0.25)

506.58 (0.57) 3.92 12.12 8.60

8. Bulk 207.51(3.82)

491.70(1.52)

3021.54(3.40)

6.86 10.61 9.02

9. Total 5429.17(100.0)

25557.18(100.00)

88999.09(100)

12.66 7.18 9.44

Note: Figures in Parentheses are relative shares of various consumer classes in electricityconsumption in a particular year.Sources: Data collected from statistical Abstract of Haryana 1998-99.

Table 5: HSEB: Plant Load Factor

Years PTPS FTPS Haryana State India1980-81 32.60 30.00 32.30 41.601985-86 44.14 26.05 32.00 52.401990-91 - - 34.50 53.091995-96 39.70 55.15 42.50 63.001996-97 48.36 44.92 47.70 64.4%1997-98 50.38 44.41 49.40 64.7%1998-99(Up to 14.8.98)

40.27 52.93 48.80 64.6%

Source: i) HSEB: Annual Statements of Accounts- various issues ii) Planning Commission, April, 2000


75

Table 6: Transmission and Distribution Losses as a Proportion of Energy Available for Sale

Sr.No. Period Range in percent1. 1968-69 To 1971-72 22% to 29%2. 1972-73 To 1986-87 14% to 19%3. 1987-88 to 1994-95 24% to 28%4. 1995-96 to 1997-98 31% to 34%

Sources: Statistical Abstract of Haryana 1995-96, pp.428-29 & Planning Commission- April 2000. P.66

Table 7: Financial Performance of HSEB

S . No.

Particulars 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98(Prov.)

1998-99(RE)

1. ROR without subsidy (%) -15.96 -19.24 -26.1 -31.2 -27.90 -31.80 .38.35 -47.79 -33.27

2. ROR with subsidy (%) -12.31 -16.44 -23.8 -27.5 -0.80 2.60 0.41 -2.02 -10.52

3. Commercial losses without subsidy (in croreRupees)

-164.76 -275.38 -403.6 -506.9 -468 -554 -625 -725 -532

4. Commercial losses with subsidy (Rs. Crores) -128.71 -235.35 -368.4 -446.9 -13 46 7 -32 -168

5. State Subsidy (Rs. Crore) 36.05 40.03 35.2 60.00 455 599.7 631.6 732.4 364

Source: HSEB: i) Annual Statement of Accounts various years.ii) Planning Commission: Annual Report on the working of State Electricity Board and ED, April 2000.


76

Table 8: Consumer Class-Wise Average Revenue and Average Cost of Supply (Paise Per Unit)

S . No Descriptio

n

1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

1. Domestic 41.10(57.4)

61.09(58.91)

67.80(58.7)

70.11(52.2)

76.91(46.6)

100.48(56.0)

133.46(63.95)

169.00(67.63)

203.95(69.51)

2. Commercial 62.89(87.9)

133.05(128.41)

139.5(120.8)

149.61(111.3)

175.05(106.0)

209.99(116.97)

253.24(121.35)

300.45(121.69)

338.27(115.29)

3. Small Power/ Law& Medium

48.96(68.4)

113.69(109.7)

129.52(112.2)

149.85(111.5)

170.68(103.4)

207.42(115.53)

256.58(122.95)

326.40(130.62)

381.59(153.00)

4. Industrial HT 77.44(108.2)

142.93(137.91)

162.32(140.6)

179.27(133.4)

206.18(124.9)

227.89(126.94)

270.38(162.68)

317.41(127.02)

368.09(125.46)

5. Public Lighting 63.18(88.3)

98.21(94.7)

109.53(94.9)

105.25(178.3)

105.27(63.7)

168.17(93.67)

191.66(129.56)

248.87(99.59)

344.49(117.41)

6. Irrigation 19.95(27.9)

20.51(19.8)

16.18(14.0)

21.97(16.3)

28.98(17.6)

45.38(25.28)

51.93(24.88)

52.41(20.97)

61.08(20.82)

7. Public Work 48.96(64.4)

102.98(99.3)

130.39(112.9)

144.10(107.2)

164.8(88.8)

198.04(110.31)

266.31(127.61)

310.38(124.20)

356.90(121.64)

8. Average Revenuefrom sale with state

41.70(58.3)

66.63(64.3)

66.13(57.4)

72.54(54.0)

83.34(50.5)

110.81(61.72)

132.76(63.62)

155.28(62.14)

187.36(63.86)

9. Average cost ofsupply

71.57 103.66 115.47 134.40 165.10 179.53 208.69 249.89 293.40

Note: Figure in brackets represents average per unit revenue as a percentage of average unit cost of electricity supply in a particular year.Source: HSEB Annual Statement of Accounts 1985-86 to 1999-2000.


77

Table 9: Consumer Class-Wise Surplus/Subsidy (Rs. in crore)

S.No.

Particulars 1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

1. Domestic -14.81 -48.46 -61.58 -95.51 -136.67 -114.28 -123.17 -145.13 -162.91

2. Non-Domestic/Co-mmercial -0.64 +5.14 +4.91 +3.45 +2.21 +7.32 +11.48 +14.57 +14.20

3. Small PowerLow & Medium Power

-5.59-1.29

+4.80 +7.029 +8.31 +5.05 +15.38 +26.30 +42.88 +52.00

4. HT Industrial +5.29 +49.74 +59.37 +61.77 +49.79 +65.27 +90.54 +93.63 +100.41

5. Public Lighting -0.126 -0.128 -0.154 -1.072 -2.91 -0.45 -.68 -0.37 +1.60

6. Irrigation -70.54 -225.48 -350.72 -456.77 -538.91 -492.55 -612 -806.53 -892.77

7. Public Work & Sewerage N.A. -30.057 +1.45 +1.17 -0.048 +2.98 +10 +12.01 +13.38

8. Total Surplus/loss -82.12 -214.45 -339.70 -478.65 -620.89 -516.33 -597.53 -788.6 -874.5

Source: Computed from data collected from various issues of HSEB: Annual Statement of Account

________0________


78


79

An Overview of Electricity Sector in Kerala

Abey George

The electricity scenario in Kerala is at a turning point, as the state is making a shiftfrom hydro sources to non-hydro sources (fossil fuel) of power generation. The year1940 marked the beginning of the electricity generation in Kerala, under theDepartment of Electricity, at Pallivassal. This hydroelectric project with an installedcapacity of 37.5 MW was the first of its kind in Kerala. With another 8 more hydroelectric projects including the Sabarigiri Project (1966), with an installed capacity of300 MW and the Idukki Stage I (1976), with an installed capacity of 390 MW, the totalinstalled capacity in Kerala had gone upto 1011.5 MW by 1976. (Economic Review,1976). Fig No. 1 indicates the growth in the installed capacity of electricity in Kerala.

Later, with the commissioning of more hydroelectric projects, Kerala achieved thestatus of a power surplus state, which lasted till the late 1980’s. The period of surplusbetween 1969 and 1985 enabled Kerala to sell power to the neighbouring states atvery cheap rates. (Economic Review, 1997).

During this period, the state resolved to encourage the setting up of power intensiveindustrial units. In the case of some of the industries, power is used as a raw material.Examples are the Indian Aluminium Co. Alwaye, the Travancore Electro Chemicals,Kottayam etc. In1979-80 as against 35.82 paise per unit realised from the domesticconsumers, the realisation from these big industries was a mere 9.36 paise per unit.

However, by the late 1980’s there occurred a total reversal, from a position of powersurplus, to one of power deficiency. This reversal was explained away by the KSEB asa monsoon failure. “A power surplus state till 1987, when the state was in a position tosupply power to the neighbouring states, Kerala faces to lay a reversal of the situationwith power shortages of varying magnitudes, depending on the intensity and vagariesof the monsoons.” (Economic Review, 1997. P 59).

It has been further explained that the increasing environmental objections and interstate differences stopped the further development of hydropower. (Economic Review,1997). The Silent Valley Project, which the state wanted to take up in the late 1970’s tomaintain the pace of hydro development, was denied clearance on environmentalconsiderations.5 The Pooyamkutty project, which was proposed by the KSEB as asubstitute, is still to be given clearance, in spite of it being scaled down in the face ofenvironmental objections. Some other projects involving inter state sharing of waterare awaiting clearance.

The KSEB’s explanation of the power crisis as one brought about by monsoon failureis too simplistic. The reasons for the same need to be unravelled. All through theprocess of building dams across the major rivers in Kerala, there was no initiative toprotect the catchments of these reservoirs. Even if one perilously keeps aside theecological implications of deforested catchments and unsustainable land use, at least 5 The State Government’s plan in the 1970’s, to generate hydro power by damming the Kuntipuzha, which drains theSilent Valley watershed was opposed by different sections of society. This 89.5 sq. km area of relativelyundisturbed, wet evergreen forest, is one of the richest in terms of biological and genetic heritage, across the world.A campaign was launched against the destruction of this very valuable forest, and the government was forced toabandon the idea of damming the Kuntipuzha.


80

for ensuring the water availability in the reservoirs which in turn guarantees consistentpower generation, we should have protected the catchments of these reservoirs. Eventhis basic logic was ignored, as the state encouraged the conversion of forests intoplantations, and to agricultural land, and gave silent support to encroachment onforestland. Hence, even the small fluctuations in the monsoon pattern, began to affectthe inflow of water into the reservoirs which were successively getting filled withsediments from the destabilised upstream.6

However, in order to understand the projected power crisis, we need to look into someof the other crucial factors such as the intricacies in the overall pattern of powerconsumption, the T & D losses, the increasing domestic consumption etc.

Pattern of Power Consumption

As has been stated earlier, during the 1970’s and the early 1980’s, when electricitywas in surplus, the KSEB was busy selling it out to the neighbouring states. Further,the industrial development of Kerala was expected to get a boost with very cheapelectricity supplied to them. The construction of more and more dams was justified onthe above two grounds. This understanding of ‘cheap’ hydro electricity was based onthe assumption that hydropower came free of cost. The social and ecological costswere considered as indirect costs and were written off.

Cost of Hydro Power

Kerala’s hydro projects are located in the hilly, forested Western Ghats. The forestsare ‘owned’ by the state, and hydroelectric dams are also implemented by the stateagency. So, in most of the cases, there was no assessment of the costs pertaining toforest loss due to submergence, migration etc. Forests get fragmented due to artificialreservoirs, transmission lines etc. In case of the Pooyamkutty Hydro Electric Project,the study conducted by the Kerala Forest Research Institute, KFRI, concludes that ifthe economic value of the forests to be submerged is taken into account, then thecost-benefit ratio will be negative. (KFRI, 1992). There have been no detailed studieson the number of people displaced by dams in Kerala and their rehabilitation.However, a detailed listing of forest damage due hydroelectric projects is available.(Nair, 1988-See Appendix 1).

The thought that characterised the govt. and the KSEB thinking is reflected in thefollowing quotes:

“Availability of cheap power is an essential precondition for rapid industrialisation.Power generation in Kerala is perhaps the cheapest compared to the other states inIndia. Gifted with a large number of rivers the state is naturally placed in an enviableposition in respect of power development. Due importance was therefore given forgeneration of hydel power during the two decades of planning in the state.” (EconomicReview, 1975 P. 162). Moreover, the policy guidelines were in favour of harnessing“clean and cheap” hydro potential of Kerala, to the maximum, so that even theSouthern Regional Grid of the country, could be fed by the same. “Under theintegrated operation of the Southern Regional Grid (SRG), if Tamil Nadu ElectricityBoard or other constituent Electricity Boards require surplus energy at low load factors,from Kerala, to meet peak demand, installation of three more units of 130 MW eachunder the Idukki Second Stage will be necessary… Therefore it is a step in the right

6 The change in the land use pattern caused by the Idukki dam includes massive in-migration causingsevere deforestation in the catchment area of the reservoir, causing siltation of the reservoir, leading to areduction in the storage capacity of the same.(Nair, 1984).


81

direction to pose two or three large hydro electric schemes of Kerala forimplementation as part of the power pool for the participant States of the Grid”. (FifthFive-Year Plan: A Draft Outline, 1974-79 P.250). Accordingly, large dams wereconstructed and a major portion of the power generated was supplied to the neighbourstates as well as to the big industrial units within the state at considerably low rates.Sale of energy to the neighbouring states was one of the major sources of income tothe KSEB upto 1985.(See Fig No. 2 & 3, which indicate the sale of electricity to theneighbouring states, and the revenue realised from the same, during the period of socalled surplus, 1969-85).

It needs to be underlined that, electricity was supplied to high-tension industries and tothe neighbouring states at very low rates especially when compared to the rate atwhich it was supplied to other sectors within the state, especially the domestic sector.For example, the industrial consumption of power, especially that of high voltagepower was of the order of 60.65% in 1970, while the revenue from this sector was thelowest (27.3%). On the other hand the domestic consumption of electricity in the sameyear was only 3.43% of the total, while the percentage of the revenue collected fromthis sector was 15.33%.

By 1977, the percentage of energy consumed by the high voltage industrial sectionwent up to 63.91%, while the domestic sector was only 10.43%. However, the revenuecollected from these two sectors was 35.5% and 18.23% respectively. Even in 1984-85, the industrial sector had a share of 54.35% of the total energy consumed in thestate, with a contribution of only 40.87%, to the revenue. In successive years, if one isto go by percentages alone, the percentage of energy consumed by the industrialsector seems to be declining and that of the domestic sector seems to be increasing.However, this does not imply a corresponding decrease in the net energy consumedby the industrial sector. In fact, the net consumption of energy in this sector has beenincreasing over the years.

Even the relationship between the amount of electricity consumed by these industries,and the employment generated is not at all satisfactory. Table No. 1 indicates therelationship between electricity consumption and employment generation in theindustrial sector of Kerala. For instance, it may be noted here that electricityconsumed by the Indian Aluminium Company, in order to generate employment forone labourer per day is as high as 1000Kwh. There seems to be no plausible reasonas to why these high energy consuming and low employment generating, electrochemical and electro metallurgical industries continue to thrive in the state. Here it maybe noted that as against the policy decision taken by the government in 1994, todiscourage the further establishment of such industries in Kerala, ten such industrieshave been set up in the Palakkad district recently. Not only have these energyintensive industries been given electricity at a subsidised rate of 54.25 paise per unitfor the first five years, but they have also been exempted from any hike in the rateduring this period. In Palakkad district, two such units alone consume 8.70 million unitsof electricity per month generating employment for less than 350 people. Had theseindustries been located in the state of Tamil Nadu, they would have to pay 345 paiseper unit of electricity consumed. The profit that they derive from this alone is more thantwo and a half crores per month. ( Menon, 1999).

Added to the fact that they are under charged for the electricity they use, these HT andEHT consumers do not even pay up for the under-priced electricity that they consume.For example, as on 31-3-93, the arrears of payment of EHT and HT consumers wasas high a figure as Rs. 568,626,274 and Rs. 154,967,055 respectively, totalling uptoRs. 723,593,329. (KSEB,1994). As against a major portion of power being suppliedcheaply to the HT and EHT consumers, and even being sold to the outside states, the


82

electrification of villages in Kerala remained as declarations on paper. If one goes byGovernment and KSEB declarations alone, 100 % of all Kerala villages have beenelectrified by as early as 1979. However, 40% of the households in this state are notelectrified, even today. (Economic Review, 1997).

THE STAR ATTRACTION TO ELECTRICITY.

The entire range of subsidies provided to the different types of consumers and thecorresponding amount of energy consumed by each category of consumer, is notmade available to the general public. For example, tourism has been included in thecategory of industry, and accordingly, electricity was supplied to this sector at asubsidised rate. Recently, the KSEB decided to cut off the subsidies, and to increasethe rate from Rs. 2.20 per kWh to Rs. 6.60 per kWh. However, the powerful tourismlobby put up a strong opposition and forced the KSEB to cancel this order. Here it maybe noted that it is mandatory that 25% of rooms in all star hotels be air conditioned,with a restaurant and bar etc. This implies a huge consumption of heavily subsidisedelectricity.

It should be further noted here that the KSEB purchases electricity from NTPC @ Rs2.75/kWh. Hence, the supply of electricity to the Star Hotels at the rate of Rs 2.20/kWhimplies a loss of 55 paise/kWh to the KSEB. So the Star Hotels flourish at the cost ofthe taxpayers of the state.

Source: (Malayala Manorama, 9.11.99)

It is a fact that this remaining 40 % of the households do not lie in close proximity tothe main grid. However, this has not been an accidental development. The grid systemhas been designed and developed in order to ensure quality power supply to theindustries. In this process of ensuring quality power through well-laid out grids to theindustrial centres, the T & D systems to the domestic sector got neglected. This‘remoteness’ which is a fall out of the grid design catering to the industries, is oftenportrayed as the reason for discrepancy in the distribution system. The other reason ofcourse is the fact that many households cannot afford to pay monthly electricity bills.Even in cases where the supply was made free, the initial capital investment (wiring,connection charges etc.) was not affordable.

Increasing Domestic Consumption

Over the years, as in the case of all other consumables, the per capita consumption ofelectricity has also been increasing in Kerala. (See Fig. No.4). Given the fact that eventoday 40 % of the households are un-electrified, an increase in the per capitaconsumption implies an increasing consumption by the already existing consumers.This reflects the increasing consumersitic trends in Kerala, especially among themiddle and the upper middle classes. This situation is further aggravated by increasingimpact of tourism, star hotels, entertainment parks, urbanisation etc. This trend is likelyto continue and will accentuate the existing power crisis. Unlike the T & D issue, wheretechnical interventions can make positive changes, this issue is much more complex.However, the perspective plans and the policy guidelines are seemingly not assessingthis situation with due seriousness. It may be noted that night time consumption (6pm-10pm) is more than twice that of the day time consumption, creating a very highdemand during peak time (Govt. of Kerala, 1998). A carefully planned out strategy fordemand side management can effectively address this issue.

Transmission and Distribution

For the past 50 years, Kerala has been consistently maintaining a very poor T & Dsystem, which led to a very high T & D losses. (See Fig. No.5). As may be noted from


83

the figure, T&D loss is not a new phenomenon, though measures to overcome thesame were initiated only a few years back. It may be added that after the initiation ofthese measures, there has been a perceptible decrease in the % of T & Dloss.However, even gross figures like 19.95% of T&D loss in 1987 is questionable inthe light of micro level studies which indicate that T&D loss at the local leveldistribution alone, is over 30%(Suresh, 1999).

Are We Ready for Demand Side Management?

There are 5210674 consumers in Kerala, as on 31-3-98. Even if we approximate thistotal number of consumers to 50 lakhs, and assume that all of them use only two 60watts bulbs during the evening peak time, the total consumption will be 2x60x50 lakh,which is 600 MW. If we replace these 60 watt bulbs with 11 watt compact fluorescentlamps which will give equal illumination, the electricity consumption will be 2x11x50lakh, which is only 110 MW. Thus, the energy saved will be 600MW-110MW, which is490 MW. Even if we assume that a CFL costs Rs. 500, the total cost incurred for sucha transition will be Rs. 500 crores. This will be much lower than the cost of producingthe saved 490 MW of electricity.

(Source: Calculated from Economic Review, 1998, (p. S-80) and Menon, 1999, (p. 5).

T & D loss is essentially a problem which can be explained and corrected by acombination of technical and managerial efforts. In developed countries, the T & Dloss is limited to 6-7% by the installation of appropriate technical interventions.However, in Kerala, till recently, the state never looked into this matter with dueseriousness due to the ‘surplus’ and ‘cheap’ nature of electricity available in the state.Further, we never invested enough resources in developing the T & D system in parwith the electricity generation. Even today, when the government is planning foranother power surplus scenario by setting up of a series of thermal power stations, theT & D system to take care of such an increased power generation is not beingdeveloped. Across the state, the work related to voltage improvement and extension oflow-tension distribution system has been pending for years. According to the policydocuments of the state government, they will be able to complete the T & D worksanctioned on 31-3-97 only by 2001 AD (KSEB, 1998). This implies that even in 2001,the state will be 4 years behind schedule.

“The existing ratio between HT & LT distribution system is 1:5. This should have been1:1 only”. (KSEB, 1998. p. 14) The increase in distribution loss is mainly due to thisfactor. The necessary infrastructure development for voltage improvement and supplyof good quality electricity has been pending for years. The quantity and quality ofequipments, especially that of transformers, play a crucial role in ensuring effective T& D. This can be ensured only by a competent and committed management systemwithin the Electricity Board.

Cost Escalation and Delay in Implementing Projects

Almost all hydro projects implemented by the KSEB have been delayed in the processof completion. Correspondingly, there has been a notable increase in the actual cost.Table No. 2 gives details regarding the same. It may be noted here that the %increase of the revised estimate over the original estimate, in each of the projects,varies from 12 to 957.7%. However, based on the justification that some money hasalready gone into it, the work continues, sometimes for more than a decade and more.

T & D LOSS OR GAIN?

T &D system depends upon the installation of quality equipments. However, eachyear’s audit report from the AG brings out more and more stories of purchase of low


84

quality equipments. For example, 400 transformers of 160 KV each were purchasedand 95% of the cost of the same (Rs. 3.16 crores) was transferred to the Hyderabadbased company on delivery of the transformers. Later when, these transformers wereinstalled in the Malabar region, which suffers from a very poor T & D system, most ofthese systems were found to be faulty.However, the then Chief Engineer, who wasresponsible for the purchase, went onto become the Board Member of the KSEB, andcontinues in the very same position.

(Source: Malayala Manorama 9.11.99)

Conclusions

Hence all the above factors namely high levels of T & D loss, increasing domesticconsumption by a few, subsidised supply of electricity to the industrial and the tourismsector, decreasing storage capacity of reservoirs, the unreliability of monsoons etc.have led to a very vulnerable electricity generation system in Kerala. The KSEB’sanswer to this very complex issue was rather simple, viz. in the form of fossil fuelbased electricity generation systems. Three of the same are already operational andanother five are in the pipeline, including both public and private sector undertakings.

The state has therefore been looking for options to meet the demand for power fromnon-hydro sources such as coal, diesel, etc. The statistics indicate the growing shifttowards non-hydro options. (Economic Review, 1998). However, the search for non-hydro options is not going to be very smooth, on the following grounds:

• The coal bearing regions being situated far from the state, it may not beeconomically viable to operate coal-based systems.

• It is not easy to find out locations for coal based thermal power stations anywherenear the sensitive coastline or within the densely populated midlands.

• High per unit cost of power production in the case of any option other than hydro,including diesel and naphtha make it less attractive. However, the state hasdecided to go in for non hydro options, so much so that by 2002 AD, as much as50% of the state’s electricity needs will be met from non hydro sources.

The above is an outline of the pattern of electricity generation in Kerala, and theproposed plan for the future. It is in this present context of declining priority given tohydropower, that we need to evaluate the history, potential and the future of SHP’s inKerala.

________0________


85

Power Sector Reforms: An Overview of Kerala

K. RamachandranSociety for Eco-friendly Development

Geographical, social, economic, political and cultural factors of a region have a bearingon its power consumption patterns. The case of Kerala with regard to reform in thepower sector reflects the positive as well as negative aspects characteristic of a societywith a rural production base and an urbanized culture.

The Kerala State Electricity Board (KSEB) is catering to the electricity needs of theentire state with an area of 38863 sq. Km and a population of 305 lakhs (i.e., hundredthousands). The state has 1452 revenue villages situated in 14 districts and the densityof the population is 747/sqKm. Kerala's quality of life index is high with literacy, lifeexpectancy, infant mortality rates and birth rates comparable to those of developedScandinavian countries. At the same time, per capita income is low. Food productionand industrial production are also meager. Despite glowing tributes to the 'KeralaModel' of development, this contradiction has created many problems for Kerala. It is aconsumerist state in spite of the fact that real income is low. The fact remains that ithas a people sustained more or less by remittances from natives working abroad orelsewhere. The facade is that of a prosperous city with palatial houses, well-dressedpeople, five star hospitals and people fond of conspicuous consumption of expensiveconsumer goods. The entire state appears to be an out-stretched town, with people of atotally urban orientation.

With the advent of economic liberalization Kerala's agricultural products (mostly forexports) which have been bringing in foreign exchange and supporting most of thepeople, viz. coconut, rubber, pepper, arcanut, and cashew nut have lost out tocompetition and have reached rock-bottom prices. At present, farmers (most of themhave only small holdings, unlike in other states) and agricultural labourers are facingthe worst economic crisis of their life. Cottage and small-scale industries like handloomand readymade garments are also crumbling down in the global market place.Unemployment both for the educated and the uneducated has reached alarmingproportions. These are harsh realities to be reckoned with while considering theproposed power sector reforms. Reform is a must as the KSEB is not free from thetrials and tribulations of other SEBs; but one has to he careful before suggesting ahomogenous set of measures and procedures in all the states of the country. Kerala isnot Orissa; nor is it Haryana or Andhra Pradesh. What is meant is just that the uniquesocio-cultural and politico-economic peculiarities of each state have to be taken intoaccount before proposing a package of reforms in one of the most vital sectors likepower. Reform, which is intended to promote the efficiency and viability of the SEB’sand welfare of the people should not culminate in perpetuating the inefficiencies andmaking electrical energy a luxury item, which people can not afford. Reform shouldtherefore be region specific and people specific if it has to deliver the goods. If reformhas failed in other states on many counts, one of the lessons to be learnt is thatprivatization per se is no solution to the ills of the power sector.


86

KSEB and Reforms: The Promise

The Power Policy Statement of the Government of Kerala 1998, categorically statesthat private investment will not be allowed in transmission and distribution and that theSEB will be retained in public sector. It also states that through restructuring, andreorganization, the SEB's efficiency will be enhanced to make it a flawless publicsector undertaking.

The declared aims of the reform include making Kerala a power surplus state by theyear 2000; revival, expansion and modernization of existing projects; permanentsolution to power cut and load shedding, providing encouragement to investors in thegeneration sector: reduction of T&D losses; adjustment of production and consumptionthrough proper and careful demand side management; enacting legislation to ensurequality of equipment and consumption patterns; achieving conservation of energy andcompletion of projects within strict time limits. A detailed programme has beenproposed in each sector for these purposes.

In the policy document there is a proposal to reorganize the SEB into three ‘profitcenters’, each one for generation, transmission and distribution. In the case ofdistribution, the state will further be divided into three regional profit centers with headquarters at Trivandrum, Franakulam and Kozhikkode. The profit centers will haveautonomy with powers to take decisions in matters of vital importance like capitalinvestment, resource mobilization and appointment of staff. At the same lime the broadaims and objectives and spheres of activity of each profit center will be decided by theKSEB.

Owing to resource crunch the board has resorted to loans, both internal and external,and has issued bonds and debentures in the recent past. The policy document declaresthat private capital investment will be allowed in the generation sector and that allpossible co-operation will he extended to promoters who have signed power purchaseagreements (PPAs) with SEB for timely completion of projects. The SEB also proposesto ensure 16% return to the board on equity fund, instead of the existing 3% on totalassets, in the light of the practice adopted by the Government of India (GoI) recently.The board also declares that the subsidy provided at present by various governmentdepartments, will he made directly available to the consumers. There is also adeclaration that a State Electricity Regulatory Commission (SERC) shall be constitutedto regulate tariff from time to time and that the recommendations of the commission inthis regard will he final and binding.

The Performance

The board appointed task forces comprising of board officials and representatives oftrade unions to study the proposed reform package and to submit recommendation. Thetask forces have already submitted comprehensive reports and the board has already


87

started its initial movements towards reform. As a result, the following measures havebeen undertaken.

§ Spot billing system, which has prevalent in certain cities and towns has beenextended to all the areas of the state, making revenue collection faster.

§ The existing anti-power theft squad has been given powers for stringent actionagainst offenders.

§ The initial step towards the reorganization of the SEB’s into profit centers has beenundertaken.

§ Regarding the constitution of a regulatory commission there was a controversy andit has been stalled for the time being.

§ A Canadian agency is over seeing the reorganization and restructuring of the SEB

§ The board has entered into contract with Ms SNC Lavelin of Canada for renovationof hydroelectric projects.

§ Metering equipment have been installed to assess the total intake of energy fromgeneration to transmission and from transmission to distribution at, differentdispatching points to measure the exact quantity being distributed and to ensureaccountability.

§ TOD meters have been made mandatory for major industries. To check thedifferences in base load and peak load.

§ Computerization on a large scale is being envisaged to promote efficiency ofoperations and quick managerial decisions.

§ Vydyuthi Adalaths have been resorted to, to redress long pending grievances of thepublic.

§ Work norms of employees have been modified to rationalize work input.

Benefits

The attempt to enhance efficiency has started yielding results. It has improved theoverall performance of the SEB. Installed capacity prior to 1996 is given in Table 1.Emphasis on time bound completion of projects has resulted in the enhancement ofinstalled capacity by 977.2 MW within a short span of two years (see Table 2). Systemimprovement measures have gained momentum. Rapid construction of substations andstrengthening of lines have helped to reduce low voltage problem in many areas. About50 numbers of 33 kV substations will be completed shortly reducing line loss to aconsiderable extent. T & D losses have come down from 21-22 % to 17-18%. There isno more power cut or load shedding in the state from November 2000 onwards, thoughthe northern districts like Kannur and Kasaragod even now face low voltage problems.

Interest in demand side management has resulted in local bodies supplying compactfluorescent lamps to several entitled households. The prejudice against mini microhydel projects is slowly vanishing and the Board has entered into contract with Chineseagencies for implementation of many a mini project.


88

All these developments indicate that cleansing the Aegean stables of SEB’s is noHerculean task if the Boards are willing to insist on reforms and if they enlist thecooperation of employees. Much remains to be done for improving the efficiency ofthe system and the quality of service to the consumers. Yet, the fact that it is in publicsector need not hamper any SEB’s attempt to manage changes and if reforms arecarried out transparently.

Table 1: Installed Capacity as in 1995

Sr. No Station InstalledCapacity in

MW

GenerationCapacity in MU

Date ofCommissioning

1 Pallivasal 37.5 284 19-03-19402 Sengulam 48.0 182 01-05-19543 Neryamang

alam45.0 237 27-01-1961

4 Panniyar 30 158 29-12-19635 Peringalkut

hu32 170 06-03-1957

6 Sholayar 54 233 09-05-19667 Sabarigiri 300 1338 18-04-19668 Kuttiyadi 75 268 11-09-19729 Idukki 780 2398 12-02-1976

10 Edamalayar 75 380 03-02-198711 Maniyar

(private)12 36 31-03-1994

12 Kallada 15 65 05-09-199413 Kanchikod

e (wind)2 3.0 15-08-1995

Total 1505.5 5752

Table2: Capacity Addition upto December 1999Sr.No.

Station InstalledCapacity in MW

Generation Capacity in MU Year of Commissioning

1 Peppara 3 11.52 Brahmapuram (diesel) 106 5353 Lower Periyar 180 4934 Mattupetti 2 6.45 Kayamkulam NTPC I, II, III 359.5 20646 Kochi BSES I, II, III 129.6 8497 Peringalkuthu Left bank 16 388 Kakkad 50 2629 Malampuzha 2.5 5.6

10 KDPP 128 674Total 977.2 4938.5


89

Bottlenecks

Fossil fuel based power veneration is going to face acute crisis in Kerala as it has nosuch resources. Imported fuel will result in higher costs. Diesel Naphtha based plantscause escalation of costs driving SEB to losses. The Board cannot accept even the rateat which NTPC is supplying power at present from Kayamkulam Thermal power Plant.The proposed costs of power purchase from various sources are given in Table 3.

Table 3: Cost of Power Purchase 2000-2001

Source Purchase Rate (Rs/kWh) Total Cost (Rs in crores)NTPC 1975.6 136.4 269.47MAPP 259.60 220.42 57.22NLC I 528 125.37 66.19NlC II 627 186.59 1 16.99BSES, Kochi 138 428 59.6

890 383 340.87Kayanikulain 1426 303 431.37KasarauodRPG 30 3.30 9.90

If private sector is roped in on a large scale and is to be paid heavily for fossil fuelbased generation, the SEB will have to hear the brunt of mounting losses.

Scope for tariff enhancement is limited as the existing tariff itself is fairly rational andcross subsidies are much less when compared to those of other SEB’s. The domesticsector consumes a major share of electricity and tariffs range from Ps 70 to Rs 3.55 perunit based on the different slabs of consumption (see Table 4). The average tariff comesto Rs 1.04. Details of net power available and the consumption pattern are given intables 5 and 6 respectively.

Table 4: Domestic TariffUnits Rate(Paise) Unit RateUpto 40 70 151-200 210

41-80 110 201-300 26581-120 130 301-500 345

121-150 160 500 & above 355

Table 5: Net Energy Available

1. Total insured capacity 1993MW2. Tolal internal generation 8665.75 MKWH3. Less auxiliary consumption 110.974. Net internal generation 8554.785. Power purchase 6072.20


90

6. Total energy available 14626.987. Less T&D losses (17%) 2523.158. Net energy available 12103.83

Table 6: Consumption Pattern

Category of Consumers Sales in units(MKWH)

Ps/KWH Revenue inlakhs

1. Domestic & residential 5804.88 104 40370.772. Commercial 729.62 458.3 33438.43. Public lighting 167.07 130 2171.864. Irrigation & Dewatering 529.77 59.55 3154.755. Public water works 396.93 158 6271.536. Industrial LT 1075.20 268 28815.39 HT&EHT 3085.06 281.79 86933.87. Railway traction 17.12 151 258.468. Bulk supply 248.19 185 4591.48Total 12053.83 187.5 226006.45

The acute crisis that Kerala's economy is facing due to declining prices of plantationcrops makes chances for upward revision of tariff bleak. Political considerations alsostand in the way of further revision of tariff to make good the losses. In addition tothese, people's stiff resistance to tariff revisions by governments like AP will naturallyhave its repercussions on a politically conscious state like Kerala.

The chances for private sector players do not appear to be rosy in the state for politicalas well as environmental reasons. None of the major projects for which PPAs havebeen signed has materialized so tar. Projects like KPPL (513 MW) Kasaragad PowerProject initialed by promoters like KPP Nambiar and RPG have not come through,hitting against vehement public opposition on environmental and economic grounds. Inspite of the Government’s attempts to promote the private sector, foregoing its boldideological stances, people at large are in no mood to hear heavy financial burdens forenergy; nor are the industrialists ready to share the burden. Attempts to install TODmeters in a few energy intensive industries invited resistance not merely from theindustries but also from workers, threatened by lockouts. The overall mood in Keralais not conducive to privatization or to enhancement of tariff. Proposals for nuclearplants and coal based thermal power plants were aborted in the past in the face ofstrong protests raised by environmentally conscious people’s movements. Theapprehensions about the reluctance of the private sector in ensuring pollution control onthe grounds of cost effectiveness make its credibility very low.


91

At present, all trade unions are spearheading a movement against the introduction ofElectricity Bill 2000 and are seeking revocation of all unjust measures adopted in thename of reforms in other SEB’s. A national strike is scheduled on 12th December inwhich all electricity employees, irrespective of their political affiliations willparticipate.

Thc lesson to be learned, but persistently ignored, is that any reform would bewelcomed only if it is preceded by open discussions and debates among the public.Anything imposed from above will be opposed even if some of its implications might bebeneficial to the public. KSEB appears to be resorting to the new process of reform,slowly but steadily. Enlisting consumers' support for it. People will co-operate if theyare convinced that they will be benefited; not just by promises and demagoguery. Thecredibility of an institution, be it an SEB or SERC should be established beyond doubt,it people are to accept a reform package. What is true of Kerala in this respect, can hetrue of other states as well.

Recommendations for the FutureFrom the experiences so far, the following suggestions could be proposed to improve theconditions of the Kerala power sector.

§ Complete all hydel plants that have already been started. This will add capacity of about150-200 MW.

§ Construct MINI-MICRO Hydel plants to the extent possible. Feasibility studies have beencompleted for more than 100 such units. Some experts indicate the possibility of capacityaddition of about 4000 MW though this type of plants.

§ Continue the betterment of T & D system to reduce the losses at least by 10% so as to save200 MW at least.

§ Reduce the usage of thermal plants to a minimum. Stop construction of all Diesel plantsimmediately.

§ Reduce unnecessary wastage of energy in public and private sector.

§ Change the industrialization pattern of the state (this is to reduce the population in the statewhere the pollution density is very high). Move towards industries using the availableskilled labor and away from the present energy-intensive chemical industries.

Geo Jose, C. R. Neelakandan Namboodiri

________0________


92

Uttar Pradesh Power Sector:

Past Problems and the Initial Phase of Reforms7

Anjula Gurtoo and Rahul PandeyIndian Institute of Management, Lucknow

Abstract

UPSEB’s poor financial condition and growing power shortages called forradical reforms of the state’s power industry. However, our analysis shows thatthe reforms model being implemented is based on incomplete diagnosis of theBoard’s past problems. High cost of power purchase, arbitrary depreciationnorms, mis-representation of agriculture consumption and over-reporting ofimpact of subsidy, were as important reasons as poor maintenance, poorproductivity, high T&D losses, poor billing efficiency and high subsidy toagriculture, in affecting financial performance of the Board. Besides lack ofrecognition of the former set of causes, the reforms process is ridden with othermajor pitfalls like sabotage-prone gaps in the proposed model and ad-hochandling of its implementation. These pitfalls are reflected in jettisoning ofsocial objective of equitable electricity distribution, entrustment of enormousauthority but little accountability on the regulatory commission, gap between theprofile of persons eligible for selection as commission’s members and thecomplex techno-economic knowledge requirements of the job, non-participatoryapproach of the implementing process, and absence of recognition of serviceconcerns and training needs of the Board’s employees. It looks as if theproposed reforms model was conceived out of desperation to escape fromfinancial burden imposed by past mistakes, rather than out of a conscious re-orientation of past policies, structures and systems in keeping with internationalchanges in technological and competitive environment.

The Indian power industry is going through a phase of radical reforms,recommended by big institutional lenders like the World Bank (WB) and theAsian Development Bank (ADB), and supported by the Central and StateGovernments. These reforms have initiated a phase of dynamism anduncertainty in the power sector of many Indian states. This paper looks at thecase of Uttar Pradesh power sector. It analyses the problems faced by UttarPradesh State Electricity Board (UPSEB), and chronicles the events and issuesin the initial phase of on-going reforms, before and after the dissolution ofUPSEB into three corporations. This study is based on analysis of datagathered from published and unpublished documents, and interviews/discussions held with officials of Uttar Pradesh (U.P.) Power Corporation Ltd.

7 Authors gratefully acknowledge the financial support provided by IIM Lucknow for part of this study.Inputs given by Mr. Amarendu are thankfully acknowledged.


93

UPSEB was established in 1959, under the Indian Electricity (Supply) Act,1948, as an autonomous corporate body, under state ownership. Immediatelyafter national independence, Indian policy makers decided to keepinfrastructure and other core sectors under control of the state. Responsibilityof the state to ensure supply of essential products and services to its citizens ataffordable prices, particularly because majority of the population was poor, wasone of the key motivations behind this decision. Thus, the Acts governingnationalized industries had a social agenda of bridging the socio-economic gapwithin the nation, besides economic agenda of fueling growth. Features likekeeping electric utilities under state ownership, cross subsidization of electricitytariffs, and maximum limit of 3 percent return on net fixed assets for electricutilities, reflected this policy. However, experience of the past few decades hasmade the government rethink on these policies. By the end of last century,many State Electricity Boards (SEBs), including UPSEB, had accumulatedhuge financial losses, huge debt, and were on the verge of bankruptcy. U.P.had been witnessing increasing power shortages and inability of UPSEB andthe State Government to propel further investments on their own. This posed aserious threat of collapse of power supply system as well as credibility of theGovernments to attract further loans for revival of the system. Therefore, theState Government of U.P. has started following the footsteps of other stateslike Orissa who have implemented power reforms, largely based onrecommendations of WB and ADB.

Table 1 shows losses, accumulated loans, interest payable and subsidyreceivable over last 11 years. Huge accumulated financial loss and debt hadweakened UPSEB’s capability to invest in system expansion and upgradation.Undoubtedly, reforms were called for. The state passed its Electricity Reforms Billin 1999, established a Regulatory Commission, and on January 14, 2000, theBoard was dissolved and divided into three independent corporations – U.P.Power Corporation Ltd. (UPPCL), U.P. Rajya Vidyut Utpadan Nigam Ltd.(UPRVUNL) and U.P. Jal Vidyut Nigam Ltd. (UPJVNL) – responsible fortransmission & distribution, thermal generation, and hydro generationrespectively. Another distribution company, Kanpur Electricity Supply Company(KESCO), was formed as a 100% subsidiary of UPPCL. The State Governmentalso announced it plans of subsequent privatization. The WB has sanctioned aloan of $ 150 million for the U.P. power sector restructuring project, which is apart of its total loan package of $ 511.3 million for supporting three projects in thestate, the other two being fiscal reforms and public sector restructuring, andhealth systems development projects (The World Bank, 2000).

The remaining part of this paper is divided in four sections: a) official reasonscited for restructuring and privatization of UP power sector, b) our diagnosis ofUPSEB’s poor financial performance, c) events and issues in handling of thereform process, including employees concerns and the strike, and d) discussionand conclusions.


94

OFFICIALLY CITED REASONS FOR UPSEB’S POOR PERFORMANCE

In early 1990s, the U.P. Government appointed M/s Putnam, Hayes and Bartlett Inc.consultants of the UK to analyse UPSEB’s situation and suggest improvements. TheWorld Bank funded this study. Key findings of this study, submitted in 1995, were: a)There was high political interference in UPSEB’s functioning, b) Its financial losseswere mainly due to existence of high subsidies, low tariffs, high T&D losses and poorbill collection, and c) Causes of UPSEB’s poor efficiency included poor financialpolicies, poor revenue collection and losses, over-staffing, poor service quality andpolitical interference. The study recommended division of the Board into three separateentities – Thermal generation, Hydro generation, and Transmission & distribution.

In January 1998, a High Powered Committee (HPC) headed by an ex-Cabinet Secretaryto Government of India was appointed by the Supreme Court to look into the problemsplaguing UPSEB. Its report, submitted in May 1999, highlighted political interferenceas the primary factor responsible for dismal state of affairs in UPSEB. It stated that thetop management of UPSEB frequently conspired with politicians and big consumers incorruption and theft of power. It reported that UPSEB witnessed ad-hoc humanresource policies, ad-hoc transfers and promotions of employees, large-scale meter-tampering, theft of power, and disgruntled employees. The HPC recommendedimplementation of the reforms suggested by M/s Putnam, Hayes and Bartlett Inc. Inaddition, it recommended preparation of terms and conditions of Chairman andmembers of UPSEB and formation of a selection committee for fresh appointments(UPSEB Engineers Association, 2000).

The U.P. Government maintained that it initiated restructuring and privatization of itspower sector as a move to attract capital investments for meeting the growing demand,attract efficient technologies, improve the management of generation, transmission anddistribution functions, reduce T&D losses, ensure reliable and uninterrupted supply toconsumers, and make the entire operations financially viable. In an advertisement, thegovernment said that it needed to privatise UPSEB because it was facing cuts in loansfrom the Central Government for its other developmental programs due to its inabilityto pay back the power sector loans (Appendix I). It further said that the existing price ofelectricity charged to the consumers did not have any scientific basis, and would becorrected as a result of proposed restructuring. The government cited UPSEB’s poorfinancial condition as the reason for poor maintenance and upgrade of its power plantsand equipment.

To summarize the above official reports, oft cited reasons by the StateGovernment and its consultants for poor performance of UPSEB were highagriculture subsidy, irrational tariff structure, overstaffing, poor operations &maintenance (O&M), low plant load factor (PLF), poor billing system, high T&Dloss, and political interference.

ANALYSIS OF UPSEB’S PROBLEMS


95

Table 2 shows the last 11-year data for sales, import, price, capacity, electricity loss,and various cost-components of UPSEB. UPSEB’s average tariff has consistentlyremained below its average cost. This has led to significant accumulation of financiallosses, resulting in overall weak financial condition as reflected in huge debt, interestpayable and poor working-capital situation. In order to analyse the causes for this poorfinancial performance of UPSEB, let us look into various components of itsexpenditure and revenue.

The rate of change in different costs and revenue parameters of UPSEB between 1988and 1999 have been compared by pegging the respective values in 1988 at index 1.UPSEB’s expenditure and revenue in this 11-year period increased at the almost thesame rate (Figure 1). In other words, the profitability ratio (or the ratio of loss torevenue) of UPSEB did not change much since 1988 until 1999. In order to makeUPSEB profitable, its revenue should have progressively increased at a rate higher thanits expenditure. For this to have happened, either its expenditure should have increasedat a rate lesser than observed, or its revenue should have increased at a rate higher thanobserved, or both. Let us look at how the specific components of expenditure andrevenue changed over last 11 years.

Expenses: In order to estimate relative performance of different cost components, wehave looked at their increasing trends over past eleven years and their contribution tototal expenditure in 1999. Increase in different cost components from 1988 to 1999,relative to their respective values in 1988, is shown in Figure 2. ‘Expense onelectricity-import’ and ‘expense on depreciation’ increased at rates far higher thanexpenses on fuel, establishment, O&M and interest, and also far higher than rate ofincrease in the revenue. It is surprising and counter-intuitive that both power purchaseexpense and depreciation expense should simultaneously increase at a high rate. Costper unit of electricity imported itself increased by about 3.5 times from 1988 to 1999.Therefore, while units of electricity imported increased by about 3.5 times in thoseeleven years, its expense increased by about 11.5 times in the same period.Depreciation expense increased by over 8 times in this period. In addition toextraordinarily high rates of increase, expenses of electricity-import and depreciationalso constituted significant proportions of 29% and 11% respectively, of the totalexpenditure in 1999. Although expenses of fuel, establishment, O&M and interestcontributed to respectively 18%, 16%, 6% and 21% of total expenditure in 1999, theyincreased at rates lesser than that of the revenue over last eleven years. Therefore, it canbe concluded that the two expense components, namely power import and depreciation,were significantly responsible for high increase in UPSEB’s expenditure, andconsequently, for accumulating losses. If they had been kept in check so as not toincrease by more than six times from 1988 to 1999, rate of increase in total expenditurewould have been less than that of total revenue, and UPSEB would have progressivelygotten rid of its financial losses. Rate of increase in costs of O&M(operations/maintenance of power plants and wages of operators) and establishment(wages of administrative staff and overheads) remained below the rate of increase inrevenue. This means that despite huge subsidy, the average tariff had well covered thecost of internal operations and personnel of UPSEB. Thus, the oft-cited over-criticismof inefficiency of UPSEB’s internal operations and overstaffing compared to othercosts was unjustified.


96

UPSEB witnessed a high increase in cost of electricity-import over the last twodecades. During this period, both share of power purchased from National ThermalPower Corporation (NTPC) and its purchase cost, increased significantly. Power waspurchased from NTPC at a high price. This was because less than twelve-yearcapitalization period was assumed for NTPC’s plants (as against a standard average of25 to 30 year plant-life of thermal power plants) while calculating the cost of powersold to SEBs. This resulted in a high annual capital cost of over 20%, and over half ofthe purchase unit price comprised fixed charges (as communicated by the UPPCLofficials). The Post-1980 period saw rise in the financial health of NTPC and decline infinancial health of some SEBs who progressively purchased significant proportion oftheir requirement from NTPC. Study by Das and Parikh (2000) observed that even incase of Maharashtra State Electricity Board (MSEB), power purchase cost increased ata rate higher than all other cost components, between 1991 and 1997. This high importcost was clearly due to imposition by the Central Government. High increase in ruralsubsidies imposed by the State Government added to the adverse effect of high importcost, resulting in post-1980 decline in UPSEB’s financial performance. The other high-increase cost-component, namely depreciation, can be attributed to arbitrarydepreciation policy adopted by the top management of UPSEB and imposition by thegovernment. On one hand, assets like land and building were under-appreciated(compared to market rates), and on the other hand, certain assets were over-depreciatedat times by the State Government in order to write-off some of its past loans to UPSEBon the Board’s balance sheet.

There is no doubt that technology and management of internal operations of UPSEB, asreflected in establishment and O&M costs, were also inefficient compared to someother SEBs and international standards. For instance, while UPSEB served 89customers per employee, MSEB and Andhra Pradesh State Electricity Board (APSEB)served 103 and 134 customers per employee respectively, in 1999. However, theoverall employee productivity of UPSEB was not bad in comparison with well-performing SEBs like MSEB and APSEB. Sales per employee was 0.33 GWh or Rs.6.5 lakh (i.e., hundred thousands) for UPSEB, as compared to 0.38 GWh or Rs. 7.7lakh for MSEB and 0.29 GWh or Rs. 4.8 lakh for APSEB, in 1999.

Although interest cost of UPSEB increased by only about three times between 1988and 1999, it constituted a significant portion of its total expenditure. This was due tolarge accumulated debt and inability of UPSEB to pay back past loans. The fuel costfor UPSEB was also high. Reasons for this could be the same as those observed by Dasand Parikh (2000) in case of MSEB, viz., hike in cost of coal and reduction in itsquality.

However, the fact remained that despite internal inefficiencies in technology,operations, management and personnel, increase in their costs were well covered by theincrease in revenue. This was also in spite of huge subsidy for agriculture. Costs ofpower purchase and depreciation of assets were most importantly responsible forUPSEB’s increasing expenditure. Had the annual rate of increase in power purchasecost and depreciation cost of UPSEB been respectively 24 percent and 14 percent lessthan what they actually were, the Board’s losses would have progressively declined and


97

it would have eventually witnessed positive operating profits in spite of subsidy andinternal operational inefficiencies. This finding contradicts the official claims thatinefficiencies and overstaffing of UPSEB were among the important reasons for itshigh costs.

Revenues: If we look at the revenue-components of UPSEB, we observe that ‘non-technical losses’ due to theft (meter-tampering, inefficient billing) are as importantreasons as ‘subsidy to agriculture’ and low PLF in keeping the revenues low. UPSEB’sPLF has remained unchanged at about 49% over last 11 years. This was mainly due topoor maintenance resulting in high equipment downtime. UPSEB’s billing efficiencytoo remained unchanged at about 82%, as billing still remains manual. Many influentialconsumers, including large commercial consumers and government offices/buildings,owed large payments to UPSEB against past consumption, parts of which weregradually written off as bad debt. T&D losses of UPSEB, reported at about 27% (Table2 & Figure 3), and auxiliary consumption of thermal plants, reported at about 10%(Table 2), did not change much between 1988 and 1999. Hence, there has not been anysignificant increase in UPSEB’s sales as a proportion of the installed capacity. The U.P.State Government’s advertisements published in local newspapers in January 2000, aswell as UPPCL’s official statement of its performance published in 2000, claimed thatthe actual T&D loss of UPSEB in recent years was over 40%. This is a sudden bigjump from the figure of 27% quoted in UPPCL’s official statement of 1999. Assumingthat the figure of over 40% is real, it implies that almost all of the jump of 13% is theftthat was previously being mis-represented as electricity consumption in agriculture –the only un-metered consumer category.

Suspicion of mis-reporting of some part of electricity theft as agriculture consumptiongains ground when we look at the indicators for growth of electricity use in agriculturein U.P. Figure 3 shows that electricity consumption by agricultural consumers, asreported by UPSEB, increased by about 70% from 1988 to 1999. In the same period,number of agriculture consumers, number of electrified villages, and number of privatetube-wells in U.P. increased by only about 40%. Some part of this difference can beexplained by the fact that the reliability of electricity supply in rural areas hasincreased. However, the effect of increase in reliability of electricity supply to ruralareas would, to some extent, be neutralized by the effect of increase in averageefficiency of newly installed pump-sets. Further, the Government’s statisticsthemselves do not report any significant improvement in the productivity of food grainsand other crops in U.P. over past decade (CSO, 1999). Therefore, a substantially highincrease in electricity consumption by agriculture sector can be attributed to mis-reporting of a part of power theft as agriculture consumption. Reddy and Sumithra(1997) have corroborated this finding for Karnataka State Electricity Board (KSEB).Gulati and Narayanan (2000) reported that about half of the agriculture subsidy forpower is stolen by non-agricultural consumers. Most of the large-scale theft in UPSEB,reported as agriculture consumption, is by influential industrial and commercialconsumers, probably in connivance with the officials of UPSEB’s and the StateGovernment. This is also corroborated by the unexplained anomaly that ‘electricityconsumption per MW of connected load’ declined for commercial and industrialconsumers by 23% and 10% respectively, but increased for agricultural consumers by14% over last 11 years. It is difficult to believe that increasing use of captive power by


98

industries and increase in reliability of supply to rural areas can account for such largedifferences in consumption patterns. These conclusions, however, need furtherinvestigation.

While reporting theft as non-technical losses (as part of T&D loss and billinginefficiency) leads to under-reporting of total physical sales figure, mis-reporting theftas agricultural consumption has an effect of under-estimation of average tariff sinceagricultural tariff is very low compared to industrial and commercial tariffs. Botheffects lead to loss of reported revenue. In addition, the second effect also artificiallyenhances the adverse impact of subsidy. Assuming that mis-reporting of electricityconsumption by higher tariff consumers (industrial, commercial, residential) asconsumption by agriculture accounts of 13% of generation, it translates into a loss inthe range Rs. 400-800 crore in 1999. This is 25-50% of the annual operating loss ofUPSEB in 1999.

Clearly, most of such ‘non-technical T&D and billing losses’ and ‘inflated reporting ofagricultural consumption’ cannot occur without connivance of the top officials ofUPSEB and the State Government in such mal-practices. There has not been anyserious attempt by UPSEB’s top management to either upgrade billing/meteringmethod from manual to electronic or calculate transmission loss in each feeder-cable inorder to better analyse the extent and areas of losses. ‘Large-scale theft of electricity’,‘mis-reporting of theft as agriculture consumption’ and consequent ‘over-reporting ofeffect of subsidy’ were rarely mentioned as important reasons for poor revenue byofficial statements of the State Government or its consultants. Thus, official statementshighlighting high subsidy to agriculture, irrational tariff structure, low PLF and highT&D losses, did not present the complete picture for explaining poor revenue ofUPSEB.

Strategic and Policy related factors: Factors like ‘very high debt:equity capitalstructure’ and ‘provision of large subsidy to farmers without adequate arrangement forreplenishment by the state’ adversely affected UPSEB’s financial condition. Absenceof a clear financial policy at UPSEB and a high degree of political interference in itsfunctioning were obvious reasons behind these factors. As stated earlier, Board and theState Government resorted to large debts for investments mainly because of theBoard’s poor financial condition, which was due to reasons like political interferenceand mal-practices by the State Government and the Board. Further, ‘subsidy to farmers’looked bad mainly because its significant portion was being swindled away, whichcould not have been without knowledge of the Board’s management. Thus, the policyof ‘subsidy to farmers’ by itself did not hit the performance of the Board adversely.Rather, it was the misuse of such policies through political interference and mal-practices at the top levels that was primarily responsible for creating the Board’sfinancial mess.

A significant portion of the accumulated loans to UPSEB was from the CentralGovernment, given under the Rural Electrification and Emergency Relief schemes. TheUPSEB’s management felt that most of this loan should have been given as ‘grant’since it was for a social cause and did not earn revenue. However, the Governmentgave all such money as loans at annual interest rate of over 14%. Such liabilities of


99

UPSEB, imposed by the Central Government, adversely affected its balance sheet. Alarge portion of this loan has recently been waived at the cost of writing off equalamount of receivables (mainly from large consumers) as bad debt – a classic case ofpunishment without any fault.

Of all the prominent factors leading to poor revenue or excess expenditure of UPSEB,‘rural subsidy’ and ‘low PLF’ are the only factors that can be attributed to policy andinternal operations respectively. All other factors, namely ‘high import cost’, ‘arbitrarydepreciation method’, ‘irrational capital structure’, ‘large-scale theft’, ‘mis-representation of consumption figures’ and consequent ‘over-reporting of subsidy’, canbe attributed to political interference and mal-practices at the top levels of both theState Government and the Board. All these factors have together made UPSEB lookfinancially bankrupt. While it is true that the efficiency of technologies, efficiency ofoperations in UPSEB and the tariff structure had a significant scope for improvement,there were many not-officially-quoted and more important reasons for UPSEB’s poorfinancial performance. Such reasons were rarely cited either by the State Governmentor its official consultants. Thus the reforms models proposed by the consultants wasbased on an incomplete diagnosis of past problems.

EVENTS AND ISSUES IN THE REFORMS PROCESS

This section attempts to touch upon various events and issues during thereforms process so far. It begins with a brief description of the small experimentwith privatization of electricity distribution carried out by the U.P. Government in1993-94, even before the formalization of reforms model in the state was givena serious thought. This is followed up with a discussion of the keyapprehensions of UPSEB employees about the proposed reforms model whileit was being considered for implementation by the State Government, alongwith a summary of events and issues during the employees strike that occurredimmediately after formal announcement of the new industry structure. Finally,we outline major developments that have taken place as part of the reformsprocess until December 2000.

Early Efforts at Privatization

The Central and U.P. Governments started contemplating privatization ofelectricity distribution in early 1990s. The first experiment began in 1993-94with the privatization of distribution of greater NOIDA region, a small region inwestern UP. Greater NOIDA was treated as a test case for privatization. About77 percent of consumers in greater NOIDA were industries, and the rest werehouseholds. There was almost no subsidy offered in that area. An agreementwas signed, in 1993, between UPSEB and a private company, NOIDA PowerCompany Ltd. (NPCL), to sell UPSEB’s assets valued at over Rs. 10 crore toNPCL. Before selling distribution rights to NPCL, UPSEB was charging aboutRs. 2.40 per unit from NOIDA’s industrial consumers, and its average tariff(including the domestic consumers too) was above its average cost of aboutRs. 1.60 per unit at that time. The agreement between UPSEB and NPCLstated that NPCL would purchase electricity from UPSEB at Rs. 1.66 per unit.


100

However, disagreement erupted soon afterwards, and UPSEB and NPCL couldnot arrive at a consensus over the power purchase price. An arbitrationcommittee, set-up for review, recommended the purchase price to be fixed atRs. 1.59 per unit. This was not agreed to as NPCL desired a lower price whileUPSEB wanted a higher price. The 1993 deal required that NPCL would startits own generation facility of about 90 MW by 1997-98, after which this dealwould no longer remain valid. However, even in 2000, NPCL has not built itsown generation facility and continues to buy electricity at a base-price of lessthan that recommended by the arbitration committee. NPCL’s purchase pricehas not increased much, whereas UPSEB’s cost increased to about Rs. 2.60per unit in 1999. This development thus forced heavy loss on UPSEB. InNovember 2000, UPPCL (ex-UPSEB) maintained that it had accumulatedreceivables of over Rs. 100 crore from NPCL on account of selling electricity ata rate lower than Rs. 1.59. This matter is still not settled and UPPCL officials donot look back at the 1993 agreement with a positive light. Thus, the firstexperiment with privatization in U.P. power sector has still not streamlinedsuccessfully.

Until 2000, NPCL was the only private power distributor in U.P. Talks ofprivatization of another urban distributor, Kanpur Electricity Supply Authority(KESA), began in mid 1990s, following the formation of NPCL, and stillcontinue after the Board’s restructuring.

U.P. Electricity Reforms Act

The U.P. Electricity Reforms Act was formulated in mid 1999, and the U.P.Electricity Reforms Bill was passed by the Advocate General in August-September 1999. Salient features of the U.P. Electricity Reforms Act, 1999 aregiven in Appendix B.

As is evident from Appendix B, the UPERC enjoys enormous powers and littleaccountability. It can decide the regulations, norms and standards as per itsown yardsticks, and will still have the powers of a Civil Court to enforce itsorders. The fact that its members will be senior bureaucrats whose selectionwill be influenced by the State Government, and these members will enjoyexclusive authority in taking decisions that require expert understanding ofeconomic dynamics of a complex industry has grave socio-economicimplication. It amounts to vulnerability of the Commission and the state’s powersector to tampering by bigger forces. Decisions regarding tariff structure,investment approvals and performance benchmarks will influence the long-termtechnology-mix, fuel-mix, import content, prices and environmental emissions inthe power sector. This will, in turn, affect the competitiveness of electricityintensive industries like aluminum, cement, textiles, steel, fertilizer, chlor-alkali,paper and sugar, of which the first three are present in moderate capacity inU.P. Over 98% of the industries in U.P. - belonging to traditional sectors likeleather, glass, brassware, locks, handloom, etc, or modern small-scale sectorslike electronics, computers, automobiles, mechanical spares, etc - badly needimprovement in process efficiency for sustaining their competitiveness. Tariff


101

decisions will affect efforts of these industries towards modernization. Tariff andinvestment related decisions in power sector thus require an understanding ofmultiple options on both supply and demand sides, global trends intechnological progress and its determinants, local and global environmentalimplications of various options, complex inter-linkages with other industries,and long-term uncertainties in technology development, economic growth,prices of internationally traded fuels and global environmental policy regime.Hence, it is important that the decision making structure in the power sector istransparent enough to involve inputs from expert energy-economy modelers,policy analysts, environmental activists, and feedback/criticisms of differentsections of consumers. The proposed decision structure is likely to curb thistendency.

Further, there is no provision in the Act for promoting efficiency, conservation andenergy management at the consumers’ end. For an economy like India’s, that is riddenwith increasing electricity supply shortage and weak ability for aggressive capacityinvestments, demand side management should be an important policy option along withexploring avenues for capacity expansion, for meeting its power crisis. Options liketime-of-use tariff aimed at inducing consumers to switch non-critical load to off-peakhours, provision of incentives to consumers for improving efficiency of end-usedevices, promotion of general awareness about energy conservation, are activelypursued in many developed countries partly under market pressures and partly by thegovernment’s intervention. However, the electricity industry’s structure proposed in thereforms model in U.P. and other Indian states does not provide any incentive that canfacilitate such behaviour on part of either consumers, suppliers (licensees), regulatorycommission or the government.

Apprehension of Employees and The Strike

Apprehension of employees: A key apprehension of the UPSEB employees towardsrestructuring and privatization of UPSEB related to the uncertain status of their GeneralProvident Fund (GPF) and Pension Fund. The UPSEB, being an autonomous body, hadits own schemes for GPF and Pension Fund, independent of the Government. Thesefunds were payable by UPSEB when the employee retired. These employee funds,totaling about Rs. 3000 crores, were completely used up over time by UPSEB’smanagement and the State Government to make new investments on fixed assets.Though this method of investment made practical sense (using the in-house liquidityavailable), by Indian law it was illegal for an organization to use employees’ insuranceand pension funds for asset investment. Although UPSEB employees did not object tothis policy in the past, they were not consulted or taken into confidence when the StateGovernment planned to restructure and privatize the Board. Employees feared thatsince the use of employee fund for asset investments was illegal, if UPSEB wasprivatized, no private organization would take up the burden of putting in their moneyin rebuilding this huge fund. Since over half of the 87,000 strong workforce was due toretire within 5 years, there was apprehension among the workers about ever gettingback their GPF and Pension Fund. The workers felt cheated that the State Governmentmade plans of privatizing assets bought from their money, without even consultingthem.


102

Second employee concern was the sudden withdrawal of advantages they had of thethree divisions, of generation, transmission and distribution, being under oneorganization. First, employees of large organizations have more bargaining power fordemanding better service conditions. Second, large organizations have the capacity toadjust and absorb shocks better, hence provide a greater sense of security to theemployees. Third, after serving in remote areas for about 5 years in the rural thermaland hydro electricity generation plants, employees had the choice of shifting to thecities, in the sub stations, transmission or distribution division. This was important fromfamily point of view as it gave employees’ children an opportunity for better educationand shifting to urban centers opened up other opportunities for the family that weremissing in remote rural areas.

The employees were disturbed that despite announcing restructuring of UPSEB, nooperational norms and terms had been evolved for the three proposed organizations, nosolution was being considered for the problem of empty GPF and Pension fund, and nopolicies had been formulated regarding their service conditions.

The experience with the similar restructuring and privatization of the Orissa StateElectricity Board (OSEB) had not been encouraging. Until restructuring, the OSEB wasreeling under huge losses and debt. Post restructuring, the Transmission Corporationwas the only state-owned organization, while generation and distribution were openedto private players. The fact that the financial condition of Transmission Corporation inOrissa worsened after restructuring, added to the apprehension of UPSEB employees.

The Strike: In March 1999, UPSEB Engineers Association filed a Public InterestLitigation in the State High Court against the latest purchase price decided for NPCLand the threat it gave to the survival of UPSEB. The employees had been formallyinformed about the State Government’s contemplation on restructuring andprivatization of their organization, but no formal or informal discussion had beeninitiated with the employees on this matter. Many UPSEB employees struck workimmediately after the Electricity Reforms Bill was passed. However, the StateGovernment succeeded in crushing that strike within a couple of days by summoningthe Army, invoking the Essential Services Maintenance Act (ESMA) and the NationalSecurity Act (NSA). In response to employee apprehension, the State High Courtpassed an order assuring employees that their interests and rights will be honored.Despite court orders, the State Government did not initiate any discussion withemployees, and did not design an implementation plan to replenish the GPF andPension fund or to formulate their post-reforms service conditions. In December 1999,U.P. Power-men Joint Action Committee (UPPJAC), consisting of engineers, staff andoperators, decided that all except the shift employees would go on strike if the boardwas restructured.

Soon after the State Government’s announcement of restructuring the UPSEB intothree separate organizations, the three organizations were put under the Companies Actregulations. All UPSEB employees (operators, engineers and staff) went on strike from14th Jan 2000 to protest against the trifurcation and placing the three organizationsunder Companies Act regulations. The State Government again responded with


103

repressive actions but was not able to contain the employees’ agitation this time. Thisstrike grew on to become one of the most important actions of organized workers inIndia after the railway strike of 1974.

According to the General Secretary of a Trade Union, “Dissolution of SEB was anemotional issue for most. In this act we saw the end of our organization. Further, thisdivision has led to apprehension among our minds about the Pension Fund and GPF.Coming under the Companies Act regulations, our jobs are no longer safe.”Following is a chronological summary of events during the strike (Gurtoo, 2000):

Jan 14th, 2000: The State Government broke the UPSEB Board into three separatecorporations of Thermal generation, Hydel generation, and Transmission &distribution. In protest about 80 percent of the 87,000 strong work-force did not go towork. Talks between government and striking employees begin through mediators(press and some senior UPSEB employees). The striking employees demanded that thegovernment revert the decision to trifurcate, secure their Pension fund and GPF, initiatea discussion on service conditions, and decision for privatization be deferred.

Jan 15th and 16th, 2000: The State Government declared the strike illegal (Appendix B)and began large-scale arrest of employees under the provisions of National SecurityAct (NSA) and Essential Services Maintenance Act (ESMA). Power generation in thestate fell to 820 MW. Six union leaders were detained and 1700 employees put underhouse arrest.

Jan 17th, 2000: Chairmen of all SEBs in the northern states of India met to work outdetailed schedules of drawl of power in order to prevent any grid collapse in UP.

Jan 18th, 2000: The Union Energy Minister assured the UP government of Central helpto meet any situation arising out of this strike. He said that these reforms had becomenecessary for the state and it was wrong to suggest that these reforms were at the behestof the World Bank. Houses of striking employees were raided and people picked up forquestioning by the state police.

Jan 20th, 2000: Negotiation talks between the government and UPSEB employeescontinued. UP Government terminated services of 208 striking engineers and declaredthat there would be no going back on the trifurcating of the Board.

Jan 21st, 2000: Negotiation talks failed. The state High Court restrained the StateGovernment from ‘disturbing the privacy of striking employees by visiting their housesat odd hours’. That halted the police raids. The Union Power Minister declared that thestrike was being sustained by the Mafia and threatened to refer UPSEB to the Board forIndustrial and Financial Restructuring (BIFR) incase the strike continued.

Jan 22nd, 2000: Government gave ultimatum to the employees that if they did notresume duty by Jan 24th they will be dismissed from service. The police arrested moreUnion leaders.


104

Jan 23rd, 2000: Stalemate in talks persisted. Government started fresh recruitment inlieu of the sacked employees. It advertised for clerks, technicians and labourers anddismissed 495 engineers and arrested 6279 power operators.

Jan 24th, 2000: A one-day token strike was organized by electricity workers andengineers across India to express solidarity with the agitating employees. The fourmajor Central trade unions – All India Trade Union Congress (AITUC), BharatiyaMazdoor Sangh (BMS), Center of Indian Trade Unions (CITU), Hind Mazdoor Sabha(HMS) – came together to express solidarity with the UPSEB’s striking employees.Fourth round of talks began in the morning and failed by night. UPPJAC demandedrelease of some of their key leaders so that talks could be held in a democratic way.The UP government invoked NSA and ESMA again and resorted to large-scaledismissal and mass arrest.

Jan 25th, 2000: The eleven day power strike ended with the employees accepting thetrifurcation of the board and the government agreeing to defer further privatization thatwas to start from Kanpur Electricity Supply Company, discuss the service conditionsand review trifurcation after a year of its implementation. The state government alsoagreed to pay Rs. 1000 crore towards the employees’ GPF before 30th April, 2000 andto pay the remaining part subsequently.

Events during the strike like imposing NSA, large-scale arrests of employees, andpublishing of one-sided advertisements in local newspapers with criticism ofemployees and partly incorrect portrayal of reasons behind UPSEB’s problems(Appendix 1), highlight the autocratic and non-participatory approach of the StateGovernment. Concerns of employees about the status of GPF, pension fund, new workroles and authority structures after a radical change were genuine. The StateGovernment’s handling of the strike was autocratic particularly because it had nottaken employees into confidence or attempted to understand their concerns beforefinalizing its plans of restructuring.

The Year following the Strike

Although the Board is divided into three corporations, it continues to function as in pre-trifurcation days for most of its operations. It will take a year or two before UPPCL,UPRVUNL and UPJVNL, in association with UPERC, will come up with clear set ofnew policies and norms for inter-organizational transactions, operations, administrationand workforce issues. Developments until December 2000 are summarized inAppendix C.

Following activities are going on in the current phase of reforms in U.P.: a) finalizationof commercial and trading arrangements of UPPCL, UPRVUNL and UPJVNL, e.g.tariff and revenue filing to UPERC, b) defining technical interfaces betweengeneration, transmission and distribution, c) finalization of accounts of threecorporations, finalization of employees’ service conditions and policies, and d)privatization of KESCO and a few other distribution zones.


105

There is enormous uncertainty among various stakeholders regarding the evolvingshape of reforms and their impacts on consumers, employees, and corporations’performance. Not only the operators and engineers, but also many senior officials ofUPPCL, including some who are involved in the reforms management process, areapprehensive about the reforms model and skeptical about its success. The next phasesof reforms, probably spanning 6-8 years, are likely to be as follows:

i) Horizontal division of generation corporations (hydel and thermal) into smallergenerating companies (probably power station wise).

ii) Privatization of generation companies through competitive bidding.iii) Division of transmission corporation into two corporations – GRIDCO (for

owning and managing grid assets) and UPPCL (for managing systemcoordination and commercial activities, i.e., mainly a distribution corporation).

iv) Division of distribution corporation into smaller distribution companies.v) Privatization of distribution companies.

DISCUSSION AND CONCLUSIONS

The case of UP highlights the following shortcomings in the power sectorreform process: i) ‘inadequate ground-work before recommendation of thereforms model’ as reflected in inadequate official diagnoses of UPSEB’sfinancial problems and lack of recognition of important causes like high cost ofpower purchase, arbitrary depreciation norms, mis-representation of agricultureconsumption and over-reporting of impact of subsidy, ii) ‘major sabotage-pronegaps in the proposed model’ in terms of jettisoning of the social agenda ofequity of distribution from the Electricity Reforms Act, entrustment of enormouspowers with little accountability on the Regulatory Commission, and selection ofsenior bureaucrats as members of the Commission, and iii) ‘ad-hoc handling ofimplementation of the model’ as reflected in the undemocratic manner in whichthe State Government and the Board’s top management acted before, duringand after the employees’ strike.

An important theme that emerges from the study of the history of UPSEB is theimpact of weaknesses in the ‘administrative/political system’ on performance ofa large state-owned organization. The reasons cited by the government and itsconsultants for poor financial performance of UPSEB do not show the completepicture. In fact, two of the most important reasons for extraordinarily highexpenditure, namely ‘high power purchase cost’ and ‘arbitrary depreciationmethods’ were almost never officially mentioned. Additionally, reportedagricultural subsidy amount was highly inflated. A significant portion of it wasactually electricity theft. Although ‘high subsidy to farmers’ and its adverseeffect on UPSEB’s financial performance was criticised both by the WorldBank-supported consultants and later by the State Government, the fact that asignificant part of this effect was ‘made-up’ and due to mal-practices by officialsof the State Government and the Board, was rarely highlighted. In comparisonto these, causes like inefficiency of internal operations and overstaffing wereunduly exaggerated. The combined factors of political interference and mal-practices point to a deeper malaise of weak governance institutions rather than


106

fault of previous power sector policies. Besides inadequate diagnosis of pastproblems, there was no official attempt to estimate the losses borne by UPSEBon account of selling electricity to NPCL and analyse what went wrong in thatfirst experiment with privatization.

The manner in which the reforms model has been implemented so far in U.P.,points to an extremely serious concern of breakdown of institutions ofdemocratic governance and possibility of similar and more autocraticsubversions in future. The undemocratic handling of reforms has beenmanifested in the behaviour of the State Government before, during and afterthe employees’ strike. Neither the employees nor the consumers wereconsulted and taken into confidence before official announcement ofrestructuring. The State Government handled the union leaders and employeesof UPSEB in a dictatorial manner, as reflected in unilateral imposition of NSAwithout much justification, large-scale arrests, and publishing of advertisementswith one-sided and incorrect information in local newspapers. Even a year afterthe strike, the State Government has defaulted on its official promise given tothe High Court of filling in the GPF gap up to the extent of Rs. 1000 crorebefore 30th April, 2000. So far there has not been any formal thinking in termsof providing training to employees as part of preparation for taking up new jobroles, working in new organizational structures, and dealing with newtechnologies that are likely to emerge as a result of reforms. Our observationthat even many senior officials of UPPCL, including those entrusted withresponsibility of implementing reforms, expressed concern over the reformsmodel, does not portend well for the future of the state's power sector.

Due to its mammoth size and age, restructuring and privatization effort ofUPSEB was like breaking of an institution. The consequent strike by employeeswas an emotional response for an organization that was the center of theiridentity. Few people had thought that the State (seen as a protector, more sodue to its socio-economic objectives) would let go of them so suddenly. Overthe years, UPSEB’s management and its employees had developed aconsensual relationship. It was this relationship that allowed the use of GPFand pension fund money in building assets, without any employee raising anobjection. They viewed the organization as their own. This relationshipcollapsed when the State and Central Governments unilaterally decided toprivatize UPSEB without taking the employees into confidence or attempting tounderstand their concerns. It was this absence of participatory approach thatmade the implementation of reforms look like an imposition. The employeesperceived that an unspoken contract and faith had been shattered. The causeof the strike was situated less in the specific issues and more in the institutionalbreakdown that was to take place because of restructuring and privatizationand the ad-hoc nature of these change efforts. UPSEB’s experience providescritical lessons for policy makers. The Indian public sector is facing multipleproblems like accumulated inefficiencies and financial losses. But the fact that itis aged, huge and heterogeneous in terms of workforce, technological andother assets, and organizational structure cannot be ignored. Any radicalchange in its structure and ownership status, implemented with haste and


107

without careful preparedness in terms of diagnosis of its problems, assessmentof implications for the society and taking various stakeholders includingemployees into confidence, is not likely to succeed.

An important point of thought is whether restructuring and privatization of thekind being carried out in case of U.P. power sector is a desirable model ofchange. The fact that UPSEB was ridden with a deeply rooted crisis, and asystemic change was required, is beyond doubt. However, suddenrestructuring and transfer of ownership, without a comprehensive diagnosis ofpast problems, may not be a solution to the ills facing state owned enterprisesof developing countries. Privatization or restructuring of a large state ownedenterprise is also a sociological transformation for the organization. Withgradual reduction in cross subsidy, manpower and non-viable operations, andprogress towards privatization, as proposed by the government, theorganization will shift from its previous ‘socio-economic’ orientation to a purely‘economic’ orientation. With the shift in orientation a different set of issues andcircumstances, like purely economic focus to operational issues and change inpromotion and other human resource policies, will come into play for theemployees. An individual will need training and time to adjust to the changingenvironment. No study has come to light, which examines the effect ofprivatization and organizational restructuring of a huge organization likeUPSEB, on its employees. A few studies on reforms in Indian public sectorenterprises suggest that several changes for promoting efficiency and economymay not need privatization as a pre-condition (Ramanadham, 1989; Reddy,1989).


108

Table 1: Financial Performance of UPSEB between 1988 and 1999*

Indicator 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99

Operating revenue 1124 1152 2631 3486 4251 5635

Operating expenditure 1562 2233 3321 4452 5637 7382

Operating loss 438 681 690 966 1386 1747

Cumulative loan fromGovts.

+ + 7623 9016 10477 12300

Cumulative interest + + 632 2315 4308 6706

Cumulative subsidyreceivable from Govt.

+ 246 1934 4331 7404 11266

* All figures in Rs. Crore.+ Figures not available.Source: U.P. Power Corporation Limited, Statistics At A Glance 1998-99.

Table 2: Performance of UPSEB on Other Indicators

Indicator 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99

Average price (Rs./KWh) 0.66 0.72 1.08 1.24 1.46 1.80

Average cost (Rs./KWh) 1.05 1.23 1.55 1.80 2.26 2.59

Sales (billion KWh) 16.1 19.7 22.3 25.8 27.0 28.5

Generation (billion KWh) 17.1 17.8 16.6 20.1 21.8 23.1

Import (billion KWh) 4.8 8.9 12.8 12.9 14.0 15.9

Generating capacity(MW)

4966 4987 5059 6049 6049 6065

T&D losses (%) 26.4 26.1 24.1 21.7 24.6 26.8

Auxiliary consumption ofthermal plants (%)

11.1 11.6 11.2 10.2 9.7 9.9

Fuel expense (Rs. Crore) 449 479 656 821 1014 1355

O&M expense (Rs.Crore)

130 138 185 227 297 414

Establishment & adminexpense (Rs. Crore)

285 296 391 470 798 1166

Power import expense(Rs. Crore)

230 728 1018 1373 1676 2133

Depreciation (Rs. Crore) 108 152 263 392 735 804

Full interest (Rs. Crore) 482 639 944 1358 1601 1529

Source: U.P. Power Corporation Limited, Statistics At A Glance 1998-99.


109

Table 3: Targets for UPPCL

1 9 9 9 -00

2 0 0 0 -01

2 0 0 1 -02

2 0 0 2 -03

2 0 0 3 -04

2 0 0 4 -05

2 0 0 5 -06

2 0 0 6 -07

2 0 0 7 -08

2 0 0 8 -09

T&D loss(%)

41.5 40.5 39.5 38.5 35.5 32.5 29.5 26.5 24.0 22.5

Billing (%) 82 83 84 87 90 92 93 95 97 97

Aid fromState Govt(Rs. crore)

1138 2105 2198 1781 906 264 - - - -

Annual rates of increase in tariff (%):

Bulkconsumption

0 16 16 16 16 6 6 1 1 1

Light & fan 0 14 16 18 18 6 6 1 1 1

Commercial 0 10 10 10 10 6 6 1 1 1

Industrial 0 10 10 10 10 6 6 1 1 1

Publiclighting

0 16 16 16 16 6 6 1 1 1

Agriculture 0 16 16 16 16 6 6 1 1 1

Source: Introductory note on U.P. Electricity Reforms Transfer Scheme and future targets, by B.S. Goyal, 2000.


110

F i g u r e 1 : E x p e n d i t u r e a n d R e v e n u e o f U P S E B

re la t ive to the i r 1988 va lues

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Mon

etar

y in

dex

(peg

ged

at 1

for 1

988)

Expenditure

Revenue

Figure 3: Indicators for electr ici ty consumption in agriculture,

re la t ive to the i r 1988 va lues

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Ind

ex (

peg

ged

at

1 fo

r 19

88)

Elec_cons_by_agri

No_of_agri_consumers

Electrified_villages

Private_tubewells

Figure 2: UPSEB's expenses relative to their 1988 values

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Year

Cos

t Ind

ex (p

egge

d at

1 fo

r 198

8)

Fuel

Establishment

O&M

Depreciation

Interest

Power_Import


111

Appendix A: Sample advertisements issued by the UP Government in local newspapers inJan 2000

(translated from Hindi)

WHY IS THE POWER SECTOR IN U.P. BEING RESTRUCTURED?

Because…

n UPSEB suffers loss of Rs. 2,500 crores every year.n Accumulated loss of UPSEB stands at Rs. 10,600.n UPSEB owes Rs. 19,000 crores to the State Government.n PLF is 40%. Therefore cost of generation per unit is very high.n Technical/non-technical line loss (theft) is 42%. Hence excessive capital is being lost.n UPSEB’s total external debt is more than Rs. 6,000 crores. The Central Government has

reduced the loan granted to the State Government because UPSEB is not able to pay backfor the purchases of electricity from NTPC and NHPC.

n Existing power tariff does not have a scientific basis. Hence consumer is suffering theburden of power sector’s inefficiency.

n Future power need in the state will be an additional 14,500 MW. This will require Rs.69,000 crores. Existing generation of electricity is only 5,886 MW against the connectedload of 13,994 MW.

n The state has been refused new loans by financial institutions because it has not been able topay back its existing loans.

n UPSEB is incapable of maintaining its equipment because of its poor financial health.However, the power infrastructure urgently needs modernization.

UPSEB EMPLOYEES’ STRIKE IS ILLEGAL

In the people’s interest, following decisions have been taken with respect to the power strike:

n UPSEB employees’ strike is illegal under the Essential Services Act.n No pay without work.n The striking employees will have to bear the cost of alternative arrangements of meeting the

increased electricity supply shortfall during the strike period.n Obedient/working employees will get complete protection.n Severe action against those engaged in destructive activities.n Strict action against striking employees.n Services of those employees will be considered automatically withdrawn who do not report

for work in the newly created corporations.


112

Appendix B: Salient Features of the U.P. ElectricityReforms Act, 1999

§ Formation of U.P. Electricity Regulatory Commission (UPERC), a corporate bodycomprising three members (including the Chairman), to oversee the process of reforms andregulate the State’s power sector.

§ Members of UPERC to comprise two senior bureaucrats and a High Court Judge, who areto be selected by a three-member selection committee set-up by the U.P. Government.

§ Key functions of UPERC include determination of tariffs for sale of electricity, use oftransmission facility and procurement of power from generating companies, issue of licenseto utilities, regulation of working of licensees, promotion of privatization, competition,efficiency and economy in the State’s power industry, setting of standards for technicalperformance of utilities (licensees), regulation of investment approval, adjudication ofdisputes between licensees, publishing of demand forecast data and requiring licensees topublish data, and supporting the State Government on overall power sector’s planning.

§ UPERC to have powers of a Civil Court while performing its adjudicatory functions andenforcing its orders to the licensees.

§ UPERC to have the authority to change the terms and conditions of a licensee, and torevoke the license of any licensee on any ground it deems fit.

§ Any dispute between the State Government and UPERC, over whether the StateGovernment has a right to issue directions on a certain matter, to be referred to the CentralElectricity Regulatory Commission (CERC).

§ Powers of the State Government include decisions with respect to subsidies provided theState Government contributes the amount to compensate the affected licensee.

§ Formation of the U.P. Power Corporation Ltd. (UPPCL), a company registered under theCompanies Act, 1956, for the purposes of procurement, transmission and supply, andhaving powers of the Board under the Electricity (Supply) Act, 1948. All properties of theBoard to be transferred by the State Government to UPPCL or generating company, as perthe terms set by the State Government.

§ UPERC to decide tariff norms and guidelines for the purposes of encouraging efficiency,economics, optimum investments, and interest of consumers. UPERC can depart from suchpurposes provided it records the reasons for such departure.

Source: U.P. State Gazette (1999)


113

Appendix C: Developments in UP Power Sector Reforms until December 2000

§ Four organizations, besides UPERC, have been formed by the State Government formanagement of reforms – a Steering Committee headed by the Chief Secretary of the U.P.Government; Implementation Task Force headed by the Principal Secretary (Energy) of theU.P. Government; Board Restructuring Committee headed by the Director (Finance) ofUPPCL; and Reforms Project Management Organization (RPMO) headed by a ChiefGeneral Manager of UPPCL. These organizations will work together with UPERC.

§ A power purchase tariff of Rs. 2.15 per unit has been proposed for private players biddingfor KESCO. This could become a benchmark for future biddings. Privatization of KESCOis presently under consideration. Besides Kanpur, talks of privatization of distribution ofMoradabad and Agra zones have also begun.

§ The State Government has signed a few power purchase agreements (PPAs) withindependent power producers (IPPs) for new projects, including two thermal, one hydroand seven small hydro generation projects.

§ In its first tariff petition to UPERC, UPPCL envisaged a loss of Rs. 1561 crore for 2000-01,and proposed to recover Rs. 1041 crore of this gap by increasing its tariff by 25% for last 8months of the year. UPERC subsequently increased UPPCL’s consumption forecast anddecreased some of its costs related to power purchase, wages and bad debt, and lowered theprojected loss to Rs. 399 crore. It has allowed UPPCL an increase of 10.17% in its averagetariff to cover this loss (UPERC, 2000).

§ The State Government has so far (until December 2000) deposited only Rs. 100 crore in theemployees’ GPF, as against the Rs. 1000 crore promised in the agreement with unions. TheState Government has not come up with any plan for how it would repay the remainingamount of about Rs. 2900 crore.

§ Under the U.P. Electricity Reforms Transfer Scheme, over Rs. 16,000 crore of UPSEB’sloan and interest liabilities have been written off by the State Government. The StateGovernment has reinvested Rs. 2,639 crore of its past loans to UPSEB as equity in thethree new corporations. In exchange of writing off UPSEB’s loan and interest liabilities, itsentire subsidy receivable (about Rs. 11,000 crore) from the State Government and about90% of receivable (about Rs. 6,000 crore) from consumers have been written off, and itsfixed assets have been depreciated by about 10%. There is little scientific rationale behindthese changes. It looks as if there is an artificial attempt to make UPPCL, UPRVUNL andUPJVNL look financially attractive to prospective private bidders. The gross fixed assets ofthree corporations together have been book-valued at over Rs. 14,000 crore in the TransferScheme. The actual market value of these assets is expected to be significantly higher thanthis.

§ UPERC has directed UPPCL to reduce its T&D losses and improve its billing efficiency.The T&D losses of UPPCL have been shown as 41.5% in 1999-2000, as against 26.8%recorded by UPSEB in its audited balance sheet of 1998-99. This is probably due toacknowledgement of the mis-representation of some portion of theft as agriculturalconsumption and also due to an effort by UPPCL to get a higher tariff approved fromUPERC. Table 3 shows, for next 10 years, UPPCL’s targets for reducing T&D losses andimproving billing efficiency, as recommended by Reforms Project ManagementOrganization (RPMO), RPMO’s proposal for increase in tariff for different consumers,


114

proposal for UPPCL receiving certain subsidy from the State Government until 2004-05.After this UPPCL hopes to recover its entire costs from sales. However, there is no mentionof how the improvement targets will be achieved.

§ The UPSEB employees have demanded that the precedence set by a similar case of transferof GPF, Pension Fund and other benefits during absorption of about 500 Central ElectricityAuthority (CEA) employees in Power Grid Corporation of India Ltd. (PGCIL) in the pastshould be followed in their case too. The GPF contribution of employees made in CEA waspaid in cash, and the pension on the basis of their service and pay in CEA was started inPGCIL. Other employee benefits also continued as per the governmental serviceprocedures.

§ No major decision has been taken by UPERC with respect to tariff, except that theminimum payment requirement (against minimum consumption guarantee) for domesticconsumers has been abolished. Since the billing and metering has not yet improved, thischange has already resulted in about 10 percent reduction in revenue collection untilDecember of this year as compared to same period of last year (as communicated byUPPCL officials). Orders for purchase and installation of new meters have been placed.

§ UPERC has blamed bad tariff structure, cross-subsidies, bad investment, poorbilling/metering, T&D losses, and bad debt treatment policies of UPPCL (ex-UPSEB) forits poor financial condition. It claims to correct these inefficiencies through its orders withrespect to tariff structure, finance-handling norms and performance norms.

Sources: 1. UPERC, 20002. Kumar, 2000

3. Goyal, 2000

4. Communication with UPPCL officials


115

ReferencesCherns, A.B (1976): ‘The Principles of Socio-Technical Design’. Human Relations, 29 (8).

CSO – Central Statistical Organisation (1999): Statistical Abstract India 1998, Department ofStatistics and Programme Implementation, Government of India, New Delhi.

Das, A and J Parikh (2000): ‘Making Maharashtra State Electricity Board CommerciallyViable’, Economic and Political Weekly, 35(14).

Dhar, P (2000): ‘Reforms Progress Apace’, Indian Infrastructure, 3(5).

Goyal, B S (2000): ‘Introductory note on U.P. Electricity Reforms Transfer Scheme and futuretargets’, Unpublished note, UPPCL, Lucknow.

Gulati, A and S Narayanan (2000): ‘Demystifying Fertiliser and Power Subsidies in India’,Economic and Political Weekly, 35(10).

Gurtoo, A (2000): The UP Power Strike, Unpublished teaching case. IIM Lucknow.

Kumar, D (2000): ‘Corporate Governance of UP Power Sector’. A Note, Prepared by Dy.G.M., RPMO, UPPCL , Lucknow.

Macavoy, P W, W T Stanbury, G Yarrow and R J Zeckhauser (1989): Privatization and StateOwned Enterprises, Kluwer Academic Publishers, USA.

Pasmore, W C, C Francis, J Haldeman and A Shani (1982): ‘Socio-Technical Systems: A NorthAmerican Reflection on Empirical Studies of The Seventies’, Human Relations, No. 35,129-144.

Ramanadham, V V (1987): ‘Studies in Public Enterprise: From Evaluation to Privatization’,Frank Cass and Co. Ltd., London.

Ramanadham, V V (1989): Privatization in Developing Countries, Routledge, London.

Reddy, A K N and G Sumithra (1997): ‘Karnataka’s Power Sector: Some Revelations’,Economic and Political Weekly, 32(12).

Reddy, Y V (1989). ‘Privatization in India’, In V V Ramanadham (Ed.), Privatization inDeveloping Countries, Routledge, London.

The Gazette of India (1998): The Electricity Regulatory Commissions Act, 1998, Act No. 14 of1998, New Delhi.

The World Bank (2000): ‘World Bank Provides US$511 Million To Accelerate GrowthAnd Fight Poverty In Uttar Pradesh, India's Most Populous State’, Press Release No.2000/318/SAS, New Delhi.Trist E L and K W Bamforth (1951): ‘Some Social and Psychological Consequences ofLongwall Method of Coal Getting’. Human Relations , 4, 3-38.

U.P. Power Corporation Limited, (2000): Statistics at A Glance 1998-99, Lucknow.

UP Power Corporation Limited, (2000): Statistics At A Glance 1997-98, Lucknow.

UPERC, (2000): Power Diary, August, Lucknow.

UPSEB Engineers Association, (2000): Abhiyanta Sangh Samachar, Issue-2, April-May,Lucknow.

U.P. State Gazette (1999): The Uttar Pradesh Electricity Reforms Act, 1999, U.P. ActNo. 24 of 1999, Lucknow.


116

Woodward, N (1989): ‘Some Organizational Implications For Privatization’. In V VRamanadham (Ed.), Privatization in Developing Countries, Routledge, London.

__________0__________


117

Competing Interests in the Reform Process:The Case of the Philippine Power Sector Restructuring

Jenina Joy Chavez-MalaluanFocus on the Global South

I. Introduction

The power industry is the most scrutinized industry in the world today. Sweeping reforms are beingpushed in many countries even as California, one of the earliest states to adapt similar reforms, comesunder attack for its supposed failure to protect consumers and ensure stable power supply. Reform of thepower industry has increasingly been used as the basis for the release of funds by multilateraldevelopment banks and international financial institutions.

The strong push to reform the industry has been met with jockeying up from privatesector interests that see increased earning potentials in a restructured power industrysetup. At the same time, long-term fiscal relief encourages governments to support thereform. Unfortunately, such push from many quarters tends to relegate to the backseatequally pressing issues in government participation, regulation, consumer protection,and many other concerns. Expectedly, civil society is again the one who takes the taskof mainstreaming these issues in the hope of substantially enriching the reformprocess, if not steering to an entirely new direction.

In the Philippines, a proposed power reform bill awaits finalization by the bicameralconference committee (a joint committee of the House of Representatives and theSenate). The bill had been in deliberation for the past five years. While a widesegment of civil society has been involved in crafting the bill, their key concerns havebeen conveniently swept aside or inadequately addressed. No doubt this was due tothe successful and powerful lobby of business with vested interests in the passage ofthe present version of the bill.

On January 20, 2001, the Filipino people have again shown to the world the power ofpersistent concerted action. On that day, Joseph Ejercito Estrada stepped down fromthe seat of power. This was at the insistence of the people who would not tolerateanother day of his corrupt and immoral administration, following the breakdown of theimpeachment process lodged against him. Thus came about EDSA 2, in directreference to the non-violent people power uprising against the Marcos dictatorship in1986.

Owing to the events at EDSA, civil society has earned the chance to make substantialchanges to an otherwise lopsided power reform bill. Initially, newly-installed PresidentGloria Macapagal-Arroyo announced a deferment of the passage of the Bill to addressthe concerns of civil society. However, citing the bill’s decisive role in putting on streamseveral loan commitments from the country’s creditors, some members of Cabinet arepushing for the passage of the bill in the present Congress. Upon this urging, the newPresident took back her word and claimed preference for the passage of the bill, withthe condition that civil society will be heard and their concern addressed.What will ultimately become of the bill is still uncertain. But the Philippine case is instructive, as it putsin perspective the difficult position civil society is thrust into in the general process of reform. Whilethey raise valid issues, it often requires special circumstances before they are given more than the cursoryattention they usually get. Philippine civil society is also hailed as among the most vibrant in the Asian


118

region, and the Philippines among the relatively most democratic countries. Imagine another country, sayone that is in transition, where a similar push for power sector reform can be felt and you see not a verygood picture indeed.

This paper attempts to outline some of the issues raised on power sector reform, and the roles ofmultilateral actors, the multinational business community and local business elite. While the Philippinecase takes center stage, the reform sweeping Asia today follows very clear patterns and similarities.Hence, many of the arguments being raised in the Philippines may also be raised elsewhere in Asia. Thepaper ends on an upbeat note, encouraging actions by civil society at many levels, in the belief that theyare crucial if genuine progress is to be achieved.

II. The Philippine Power Industry

Power generation in the Philippines is shared between the National Power Corporation (Napocor) andvarious independent power producers (IPPs). Transmission is the responsibility of the Napocor.Distribution is spread to 15 private utilities, 11 municipal systems, and 119 rural electric cooperatives(RECs).Total installed capacity in the country is around 12,000 megawatts. Napocor accounts for more than 70%of total capacity, while the IPPs take up the rest.

Generation

The National Power Corporation (Napocor)

Government’s direct participation in the power industry began in 1936 with the creation of the NationalPower Corporation under Commonwealth Act 120. Napocor was given the task to develop hydraulicpower, and was given monopoly rights over remaining public waters. The Act also compelledgovernment units and government owned and controlled corporations to buy electricity from Napocor.Napocor was converted into a stock corporation in 1960 under Republic Act No. 2641.

In 1971, Republic Act No. 6395 revised the charter of Napocor, and expanded thescope of energy sources for power generation. It also mandated Napocor to establishand operate nationwide power transmission. By 1972, Napocor’s monopoly powerover the power industry was clinched with the issuance of Presidential Decree No. 40.PD 40 declared the state objective of owning and operating power generation facilitiesas a single integrated system to the entire area covered by any grid set up byNapocor. Private sector participation in the industry was limited to the areas notcovered by the grid, already existing private generating facilities allowed by Napocor,and the distribution of electric power. In 1979, Napocor bought the thermal powerplants operated by the Manila Electric Company (MERALCO), bringing government’sgenerating capacity to 90 percent of total installed capacity.

By end-1999, system capacity in Napocor grids totaled 12,050 MW, a 25 percent increase from 1995.Napocor’s own generating facilities made up 45 percent (5399 MW) of this capacity. Independent powerproducers (IPPs) with power purchasing contracts with Napocor took up the bigger part (6650 MW or55%).

The Independent Power Producers (IPPs)

IPPs have started to mushroom in the early 1990s as the government’s quick-fix response to thedebilitating power crisis. Failure of government to prudently manage, rehabilitate and add to existingfacilities rendered it incapable of meeting energy demands. The country suffered as long as 12 hours ofdaily power outages, severely impairing economic productivity.


119

In 1993, Republic Act No. 7648 or the Electric Power Crisis Act of 1993, gave the President power toenter into negotiated contracts for the construction, repair, rehabilitation, improvement or maintenance ofpower plants, plants and facilities, and to reorganize the Napocor as required to address the crisis. Thepowers had a limited time of one year. The severity of the power crisis, and the short period of efficacyof the emergency powers, resulted into a near-panic signing of power purchase agreements with IPPs tocover the huge energy shortfall.

Prior to 1993, two crucial laws were passed that made possible the entry of private contractors in thepower generation sub-sector. The first was Executive Order 215 issued by President Corazon Aquino inJuly 1987. EO 215 amended PD 40 to allow private sector participation in electricity generation. Threeyears after, Republic Act No. 6957, called the Build-Operate-Transfer Law, further expanded privatesector participation in the power industry as well as in other infrastructure projects. All governmentagencies, including government corporations and local government units were authorized to enter intoBOT contracts.

The severity of the situation – the crippling power supply shortage was exacerbated by unstable politicalsituation towards the entry of 1990 – led to less than prudent choices. Half of the 46 IPP projects signedbetween 1988 and 1998 were of the ‘fast-track’ category, or projects with short gestation periods but notnecessarily the cheapest or cleanest sources of energy. These were mostly diesel and bunker fuelgenerators. Per unit cost of electricity stipulated in the contracts also appeared to have been much higherthan the actual cost borne by the Napocor in operating its own generating plans. On top of this, Napocorshoulders most of the reasonable risks (foreign exchange risk, inflation risk), taxes, and for many plants,even fuel costs.

According to the World Bank in its study, Power Sector Study: Structural Framework for the PowerSector, Philippines (World Bank, Industrial and Energy Operations Division November 30, 1994), "theaverage economic cost of the IPP is 11% higher than the estimated base load avoided cost (i.e., cost tothe consumer due to the absence of adequate service)". The same report stated that "the average price ofall IPPs analyzed of US $0.0652/kWh is quite high compared to the current average bulk energy tariff ofNPC which includes generation, transmission, subsidies for rural and small-island consumers, peakcapacity, and the provision of reserve capacity. This indicates that commissioning of these plants (IPPs)has and will continue to put strong upward pressure on tariffs."True enough, the IPPs have become a great burden to Napocor’s finances. They cost Napocor 45 billionpesos a year or nearly $1 billion a year at today’s exchange rate. The huge contractual obligations to IPPshave contributed significantly to inflate Napocor’s debt, which currently stands at $5.6 billion or 1/5 ofthe country’s external liabilities. What makes the situation ironic is that only 20 to 40 percent ofminimum off-take requirements of IPPs is actually being used or sold by Napocor.

Almost two-thirds (64.4%) of the total capacity contracted to IPPs were signed during the term ofPresident Fidel V. Ramos, and most are within the period when the emergency powers were in place.Hence, these were not subject to transparent and open bidding processes.

As of end-1999, IPPs account for 6,650 MW or 55 percent of current installed capacity. IPPs still underconstruction (included in the 46 signed contracts) promise 2,422 MW more.

Industry Self Generation

A very small portion of generated capacity is accounted for by own-generation initiative of someindustries, mostly cement manufacturing firms that want to ensure their own electricity supply. They arenot necessarily on-site generating facilities. They also use Napocor’s transmission facilities and thedistribution facilities of private utilities.

Transmission

Transmission is the monopoly of Napocor. There are four grids: Luzon which accounts for 73 percent oftotal power sales; Visayas, 12 percent; Mindanao, 13 percent; and the Small Islands Grid, 2 percent.


120

Distribution

Private Distribution Utilities

The Manila Electric Company (MERALCO) is the largest distribution company. It is private andoperates in Metro Manila, the capital region, and its immediate environs. It accounts for bulk (62% as atend-1998) of Napocor’s total deliveries. MERALCO is able to service/electrify 98 percent of itsfranchise area (as of January 2001).

Other private distributors operate in the rest of Luzon, the main island, and in the two other major islandsof Visayas and Mindanao. They account for less than 20 percent of sales and together with municipalsystems have an electrification rate of 95 percent in their franchise areas (also as of January 2001).

Rural Electric Cooperatives (RECs)

More than 100 rural electric cooperatives account for around 15 percent of Napocor sales. As of January2001, the RECs’ electrification rate was 80 percent.


121

Policy and Regulation

The National Electrification Administration (NEA) is responsible for financing and providing technicalassistance to RECs.

The Department of Energy (DOE) is responsible for energy policy and coordinationwith other government institutions for its implementation.

Price and price-related regulations are the domain of the Energy Regulatory Board (ERB). It fixes alltariffs from generation to distribution, except the price of power being sold by IPPs to its directcustomers.

Pricing of bulk electricity from Napocor is regulated and includes both transmission and generationcosts. The basic rate consists of generation fixed and variable costs, subsidy to small power utility group,and return on rate base (RORB) for replacement and expansion of systems. An inter-grid subsidy andsmall islands grids subsidy are also embedded. On top of this, a cost adjustment mechanism is in place toaccount for fluctuations in fuel prices and foreign exchange rates.

The design and component costs in distribution differ according to utility. For example, MERALCO willhave a structure where the first 50 kWh of household consumption is subsidized. Cost structure forindustrial, commercial and residential users also carries implicit cross subsidies.

The ERB was created by Executive Order 172 in July 1987. The Board is composed of a Chairman andfour members, all of whom are Presidential appointees. Their appointment is supposed to be on the basisof their “recognized competence in the field of law, economics, finance, banking, commerce, industry,agriculture, engineering, management or labor.”Civil society, particularly consumers’ groups’ participation in the ERB is weak. It is limited topublication of notice and appearances before adjudication hearings for petition of price changes, issuanceof franchise to operate electric power utilities and services, zoning, and introduction of rules.

III. The Restructuring

The government envisions a radical restructuring of the industry. The basic premise of the restructuringis unbundling, or the separation of the three power sub-sectors of generation, transmission anddistribution, for the purposes of operation and pricing.

Government intends to fully dismantle its monopoly, exercised thru Napocor, over the generation ofelectric power. Napocor will privatize its generation assets, and entry in power generation will beliberalized.

Power transmission, while remaining a regulated monopoly, will be privatized over time. Ultimately,government aims that end users will be free to choose their suppliers of electricity. Delivery from thesuppliers to the end users will be made feasible by giving suppliers open access to transmission anddistribution lines, for a fee that will be fixed by a regulatory agency called the Energy RegulatoryCommission (ERC), to replace the ERB.Like transmission, the distribution sub-sector shall be a regulated common carrier business that requires afranchise. Distribution may be done by private utilities, cooperatives, and local government units, whoshall provide open and non-discriminatory access to users of the system in their franchise area.There shall be a contestable market, or the group of end-users who have a choice of electricity suppliers.Some threshold consumption determines which consumers qualify in the contestable market. Those notqualifying remain the captive market of the distribution company that operates the franchise in theirareas. Those in the contestable market may deal directly with generating companies or other formationsauthorized by the ERC. Outside negotiated contracts, there shall be a wholesale spot market where price


122

setting will be determined. The Department of Energy is responsible for formulating the rules that willgovern the spot market.

These restructuring features are the main selling points. But there are two aspects of the present versionof the bill that make the scenario unlikely at least in the medium term.

First, the end-users are segmented so that a large portion, the small ones, will not be able to participate inthe competitive transactions for a potentially long-drawn transition period. The competitive market willoperate once the open access to distribution wires is implemented, which will not be later than three (3)years after the efficacy of the Act. It will initially consist of end-users with energy demand of at least two(2) megawatts. This threshold will be reduced further by June 2003 and for at least two years thereafter.Only after then will the ERC determine if the threshold can be further decreased until it reacheshousehold demand level.

Those that do not qualify will remain the captive market of the distribution utility with the area franchise.This brings us to the second defect of the bill from a competition perspective.

It is silent on the issue of cross-ownership. A forum with representative from the DOE even revealed thatit is not explicitly discouraged. This means that the distributor can freely contract with an alliedgeneration firm, even if it is not the cheapest supplier in the market.

Already, the big distribution outfits have stakes in different independent power production activities.Some IPPs and allied interests also enjoy seats in the Board of big distribution companies. The issue ofconflict of interest, therefore, is very real.

Consider, for instance, the following. Six of the eleven directors of MERALCO are also in the Boards ofpower generating companies like Panay Power Corporation and Bauang Private Power Corporation, orholding companies which have stakes in power generation like First Philippine Holdings Corporation andFirst Private Power Corporation. Information from its website also reveals that “MERALCO has alsosigned agreements with six IPPs for a cumulative capacity of 2,174 MW from 1999 to 2004”.

Several other related issues arise. To be able to liberalize and deregulate the generation sub-sector, it isimperative that the Napocor privatize its generation assets. For this to happen, three important questionsmust be asked: (1) how much and what are the sources of the losses?; (2) are there ways of mitigatinglosses to bring down the cost of restructuring?; and, (3) how will costs be distributed amongstakeholders?

There are two things being contemplated to cover the losses. One is for the National Government toabsorb 100 billion pesos (around two billion dollars) of Napocor’s liabilities. The other is the impositionof the so-called Energy Industry Reform Charge (EIRC) that will cover part of the stranded costs, as wellas pay for missionary electrification, etc.

Losses come in two forms: stranded liabilities or that part of the Napocor debts that will not be assumedby the National Government, and stranded costs or loss incurred when existing contracts are privatized atless than guaranteed price. Under the current bill, these costs shall be managed by a power sector assetsand liabilities management (PSALM) group, using recoveries from the EIRC and other authorized acts(borrowings, etc.).

Two related issues on stranded costs arise. One questions whether private distribution utilities withexisting power purchase agreements (PPAs) with IPPs should be allowed to recover their stranded costsfrom the EIRC. It is the very strong contention of civil society that they should not, because they werenot compelled to take on the PPAs in the first place. They were simple private investment decisions. Thesecond argument is that, if in the current version of the bill they are not required to divest, why shouldthey be allowed to recover stranded costs at all?The second question is whether a renegotiation of Napocor’s PPAs with the IPPs, or otherwise an orderlyworkout may be feasible. It has been shown that for many of the PPAs, the government has beencompelled to pay highly uneconomic prices. While a big part of this may be considered as premiums(perceived investment risks were translated into part of the price), there just might be cases that parties


123

representing the government abused their discretion. Therefore, all PPAs should be reopened andreviewed, giving priority to those that were not subject to open bidding.

IV. The Wider Context

The deregulation and privatization of a big section of the electricity industry is not isolated. It follows avery visible and systematic path of scaling down the scope of government activities beginning in thestructural adjustment era in the 1980s.If one examines when the start of the focus on the power sector begun, it will berevealed that it coincided with the big glut in the international equipment market in theearly 1990s. Further, power sector reform studies have been done at almost the sametime, particularly between 1992 and 1996. Most have been done in 1994. The WorldBank funded these studies.

The model proposed is the same for all cases, irrespective of current/prevailing market structures andviability of national and state utility companies. The push also came with the introduction of Build-Operate-Transfer (BOT) and related schemes in the legal framework of Asian countries, particularly inpower and general infrastructure. In Asia, the biggest players were/are the World Bank, the InternationalFinance Corporation, the Asian Development Bank, big multinational energy suppliers, and export creditagencies.

The strategy almost always starts with “state-bashing”, or highlighting the inefficiencies of stateenterprises, while keeping mum on proven successes. And lately, multinational institutions have startedto concentrate on the so-called “constituency-building”. Huge resources are poured into privatefoundations and even NGOs to help ‘advertise’ the reform process. In India, you have the Rajiv GandhiFoundation. In the Philippines, we have the Foundation for Economic Freedom who ran a two-part seriesof television advertisement enjoining the audience to support the power reform bill. Of course it did nothurt that perhaps they are fully convinced of the reform agenda.

The most blunt action yet was the alleged bribery of the House of Congress in the Philippines. At thetime that the Power Reform Bill was heatedly being discussed in the Lower House, congressmen andwomen were suddenly given at least half a million pesos (ten thousand dollars) from out of nowhere. Upto this day, no investigation has been done. When the matter was brought up to the ADB – whoincidentally is financing the Power Sector Restructuring Program – it conveniently washed its hands andtook cover with the “we do not want to be perceived as meddling” stance.

It is unfortunate that such action indicates that the ADB is not really concerned about the integrity of thereform process. This smacks of intellectual dishonesty. It is not belief in the market, in competition, inreform per se that drives them. It is business! They actually act as proxies for big business in the region.They finance public and private power-related projects thru its various co-financing and guaranteeschemes. They do not have the money to leverage actual projects. Instead, they mobilize private capitaland just charge premiums over that. (Of course it is not this simple. But the point that the ADB isconstrained to follow even its own anti-corruption policy is a glaring indication of how limited its poweris in the face of big business.)

V. Doing Reforms Right

Reform must be done right. The cost implication of bad privatization, for instance of Napocor in the caseof the Philippines, may be staggering, not only in relation to the privatization process but also in relationto the building of a constituency for genuine reforms. If reforms are designed haphazardly, or if they areso slanted as to favor entrenched interests, the promise of reform is compromised and support for it isdiluted.


124

That the basic assumption that government cannot run public utilities effectively commercially isWRONG needs to be emphasized. Examples from South Korea, Malaysia, Indonesia, Singapore, evenHong Kong, would show that it is not public control and ownership per se that is the problem, but thespecific inefficiencies prevailing in many utilities. Often, it is also lack of capital.There is market failure as much as government failure. In situations where competition cannot obtain, asin the case of natural monopolies, there is need for strong government regulation. Even in a privatizedsetup, regulation is crucial to ensure that no single player will gain substantial power so as to reverse thegains of competition. Or in the absence of a market, there is need for government intervention.Divestiture to private hands need not be the only solution to inefficiency problems. The important thingis to work out appropriate alternatives, which also includes divestiture too, but with stringent regulatoryhandles in place.Finally, even in a privatized regime, pressing issues like subsidy, ecological costing, missionary service,pricing, and regulatory capture can be addressed, at least during the period of transition, or even longerfor identified “vulnerable” or “non-market” groups. The point being that the power of policy remains inthe hands of government.

VI. Imperatives of Strategy

On the broader issue of strategy, there is need to work on many different levels.Internationally, it has to be exposed that how meddlesome international development and financialinstitutions have been, and that how irresponsible they have been for being doctrinaire in their approach.

Regionally, it is very important to link the uncannily very similar issues obtaining in the reform process.It may be said that the state’s performance has not exactly been exemplary in the region, and that peopleare clamoring for reform. Unfortunately, these are the states where democratic processes are also not infull play, such that multilateral development banks and international financial institutions have becomethe battering ram for reforms to take place. Still, even granting that certain reforms are needed, so manyissues – like appropriateness, sequencing of reforms, etc. – have to be dealt with. And no internationalinstitution can ever claim they have the answers to these, having failed as they have so many times in thepast.

And locally, the movement for change should be broadened. The Power Sector Restructuring Programcannot be isolated from the wider development context.

Building alliances and coalitions between and among the progressive opposition and reformers, the basicsectors, and the most critical groups in the campaign for change is needed. Expectedly each will employtheir specific approach, but it is always possible to agree on a minimum agenda while pushing for thewider goal.

In the Philippines, the campaign against the one peso oil levy was a big success. The campaign was ledby the Freedom from Debt Coalition, abroad coalition of individuals and groups representing people’smovements, NGOs, the academe, and labor unions. It was able to mobilize the basic sectors, academics,business and other interest groups, and succeeded in making the government scrap the one peso levyimposed on oil products.

Massive information work on various aspects – the techno-economic, the moral, etc.—is imperative. Thisshould be done in the most sympathetic manner and the most accessible language.

And finally, we need to put to task the different players in the reform process: the government, theindustry (power sector), the creditors, and the regulators.


125

References

Asian Development Bank. Report and Recommendation of the President to the Boardof Directors on a Proposed Loan and Technical Assistance Grants to the Republic ofthe Philippines for the Power Restructuring Program. RRP: PHI 31216. November1998.Freedom from Debt Coalition. Contracted Power Failure. Statement of the FDC beforethe Senate Committee on Government Corporations and Public Enterprises on theInvestigation of the National Power Corporation’s Contracts with IPPs. June 2000.Republic of the Philippines

Commonwealth Act No.120. An Act Creating the “National Power Corporation”, Prescribing itsPowers and Activities, Appropriating the Necessary Funds Therefor, and Reserving theUnappropriated Public Waters for its Use. 3 November 1936.Presidential Decree No.40. Establishing Basic Policies for the Electric Power Industry. 7November 1972.

Executive Order No. 172. Creating the Energy Regulatory Board. 22 July 1987.EO 215. Amending Presidential Decree No.40 and Allowing the Private Sector

to generate Electricity. 10 July 1987.Executive Order No. 473. Providing for the Segregation and Unbundling of Electrical PowerTariff Components of the National Power Corporation and the Franchised Electric Utilities. 17April 1998.Republic Act No. 6395. An Act Revising the Charter of the National Power Corporation. 10September 1971.Republic Act No. 6957. An Act Authorizing the Financing, Construction, Operation andMaintenance of Infrastructure Projects by the Private Sector, and for Other Purposes. 9 July1990.Republic Act No. 7638. An Act Creating the Department of Energy, Rationalizing theOrganization and Functions of Government Agencies Related to Energy, and for OtherPurposes. 9 December 1992.Republic Act No. 7648. An Act Prescribing Urgent Related Measures Necessary and Proper toEffectively Address the Electric Power Crisis and for Other Purposes. 5 April 1993.An Act Ordaining Reforms in the Electric Power Industry, Amending for the Purpose CertainLaws and for Other Purposes. (Proposed Power Reform Bill)

Torregosa, Charity Lao. The Philippine Power Supply Industry: A Case Study. FDC, May 2000.World Bank. Power Sector Study: Structural Framework for the Power Sector,Philippines. November 30, 1994. Industrial and Energy Operations Division.Information from the Department of Energy website: http://www.doe.gov.ph/Information from the Manila Electric Company website: http://www.meralco.com.ph/Information from the National Power Corporation website: http://www.info.com.ph/~npc/Loose files on existing Power Purchasing Agreements with Independent PowerProducers. Compiled by the Freedom from Debt Coalition.

________0_________


126

Observations and Remarks

Prof. Amulya Kumar N. ReddyFormer President, International Energy Initiative

Observations as the Chairman of the First Session

1. With regard to Mr. Matthai’s presentation the one point that was unclear towhom the Regulatory Commission was accountable. There was however ahint in his conclusion. The real source of strength of the RegulatoryCommissions is the public, which has to act like the watchdog.

2. In context of tariff determination, we should not see international experiences asbenchmarks, because these experiences were based on market determined priceseven in the pre-regulated era. In India, however, there was an administered priceregime in the pre-regulated era and that is no reflection of true cost. Therefore,when we try and reflect true costs, the prices are going to increase.

3. The point of merit order dispatch is that it will not work in a scarcity scenario. Wemust be careful when we say scarcity because scarcity may be artificial or real. It isbased on demand, but demand calculations may be based on exaggeration and theyexclude the possibility of efficiency improvements and demand side management.

4. Tariff fixing requires that people should be consulted. In Andhra Pradesh, we havejust seen that although tariffs may have been revised using rational methods, ifpeople are not involved, they are not going to accept these revisions. Maharashtrahas done a good job in this regard

5. As regards the regulatory commission and their current resource constraints, Ibelieve that this constraint might actually be a strength, because when the RCs donot have internal capacity they have to turn to civil society and when that happensthe combined resources are enormous.

6. At times the governments tend to ignore the commissions and keep on issuingorders to the commissions and the state electricity board and at other times thegovernment puts up its hand stating that the regulatory commission has the entireresponsibility for the sector. The state governments need to be reminded that theystill have the role of determining policy.

_________0_________


127

Remarks by Prof. AKN Reddy in the Second Session

Let me change the focus and look at the big picture. To begin with let usunderstand where the regulatory commissions come from. They aredefinitely the product of the power sector reforms. In the pre-reform era, thesector was government controlled, had administered prices, governmentsubsidies, theft, large T & D losses and a capital crisis. A decision wastaken to go away from this and the solution thought of was to corporatisethe sector and liberate it from government control.

The first assignment of the regulators was the process of tariff reform andthis has become a preoccupation and many approaches have beendevised. Basically the entire exercise is to match expenditure with revenueand the question of therefore apportioning the revenue increase betweenthe consumer groups. Currently no logic is being applied to this except thelogic of pushing all the groups to the maximum limit. From a long-termpoint of view this cannot continue, how can we expect people to payincreased tariff unless there is a perceptible improvement in the quality ofthe power supplied? Also, we are not looking a coupling efficiency withtariff.

There is also the question of public benefits like efficiency and sectoral planning,which will get jettisoned with increased corporatisation. Then there is a question ofgreater access. The regulators are so preoccupied with existing consumers that no oneis thinking about future consumers who need to get added on. There is also the questionof environmental soundness through efficiency and use of renewable resources,question of long term R & D in this sector and consumer empowerment. The entireprocess has to be synergistic i.e. transparent, participative and accountable. In short, thepower sector must contribute towards sustainable development.

_________0_________


128

Presentation by Dr. Madhav Godbole

Former Home Secretary, Government of India; Former Chairman, MSEB;

Chairman, Energy Review Committee, Government of Maharashtra

FOCUS and Prayas need to be complimented for their effort in bringing peopletogether to deal with the issues raised in this workshop. First point raised by Mr.Matthai is whether the institution of regulatory commission has been forced upon us.Even if it has been, then it was long overdue. It is dependent on what we do with thisinstitution. The topic of this discussion was “Sharing of concerns & expectationsbetween the regulators and the civil society groups”. It needed to be expanded toinclude the state governments. Unless they are included we cannot succeed. We haveseen in Maharashtra that the government till date has not adopted the Order passed bythe Commission. Civil society must raise it’s voice against this. Also one must questionthe State Government’s decision to subsidize various groups to the tune of Rs. 650crores. The rate of tariff for agricultural use, which was fixed in 1977, which wasrevenue neutral has been consistently brought down over the years even though thecosts have kept on increasing. Such irrational decisions need to be questioned.

Second question raised by Mr. Matthai is about the commitment to social concerns. Weshould respect social concerns and cross subsidization could provide a solution in thisregard, but it has to be within limits.

We also need to look at PPAs more aggressively. The Commissions have to take acourageous view and use their statutory authority for the greater public good.

Expectations from the ERC

1. Transparency2. Accountability3. Monitorable program of action4. Tariff hike should be the last option. Consumers have to be convinced that the

commission has looked at all aspects and there is no option but tariff hike.5. Make all orders issued by the commission “speaking orders” so that even a layman

can understand the same

Expectations from the Civil Society organizations

1. They must undertake studies and make presentations to the commission whichshould be as objective as possible

2. They need to take a balanced approach to the whole thing rather than protest againsteach and every action taken by the commission

3. They have to ensure that subsidies are well targeted


129

4. They have to be open to bearing a reasonable burden of the tariff.

Expectation from the State government

1. After having created the Regulatory commissions give them a free hand and do notinterfere in their working

One radical solution, which I would like to propose, is that we need to abolish the postof the energy minister in each state because we observe that The Ministers have takenover the job of the chairman of the SEB and also of the regulatory commission.

___________0___________


130

Electricity Sector: What Difference the Regulators Can Make

P. SubramaniyamChairman, Maharashtra Electricity Regulatory Commission

Utility regulation is important to the public interest. It is, generally speaking, asubstitute for competition in industries characterized by high concentrations of marketpower. Today, Regulators in our society are identified with the Government and it’sfunctioning. Under this perspective, Regulators have all the more difficult issues to faceand often-conflicting interests to serve. It is necessary, on one hand, to make sure thatutility companies receive enough return on their investment to ensure that they arefinancially viable. At the same time, regulators must ensure that consumers receivereliable service at reasonable rates. It is often difficult to balance these objectives, aswell as to take into account other important goals, such as encouraging competition andprotecting the environment. However, some of the objectives may be more important topromote than others, depending on the evolutionary stage of the industry and economyat issue. As long as there is competition, the average consumer stands a reasonablechance of getting a fair deal.

There is no universally acceptable model of regulation. Regulatory traditions are rootedin the culture of a society, its political and governmental institutions, the need of thegovernment for revenues, the rights of private citizens, the importance of inexpensiveenergy, and even the need for employment. There appear to be “first principles” ofenergy regulation that can apply everywhere. They include openness, predictability,expertise, and fairness.

Regulations and regulatory bodies work best when independent of undue politicalinfluence. Regulators ought to be experts in the law and economics of the industry theyregulate. They should make their decisions, such as whether a rate is “just andreasonable”, based primarily on that expertise. Independent regulation appeals toinvestors. If investment bankers and other investors are confident that regulatorydecisions will be based on the economic merits and that decisions by regulators can beroughly predicted, they will be encouraged to invest.

In fact MERC has set some trend in this matter addressing the following issueseffectively:

§ The first issue, which MERC emphasized, is that of process. The MERC followed acompletely transparent process.

§ Second important issue, which I must emphasise, is that the Commission workedwith no external pressure.

§ Thirdly, while setting tariffs, we followed two principles. First, “No Tariff Shock”to any category of consumer and second, every tariff movement must be in thedirection of the average cost of supply i.e. tariff rationalisation.


131

Now let us look at some of the practical issues in implementing the electricity market inIndia.

While we all welcome the advent of market economy in the best interest of theconsumers, there are onerous tasks ahead in the hand of Indian Electricity SectorRegulators today to build up a better tomorrow.

First and the most important task is tariff rationalization. You must have noticed that inthe new proposed structure ( under the Electricity Bill 2000), bulk consumers, sayabove 5 MW contract demand, will go out of purview of the Distributors or SupplyCompanies as these players can have contracts based on the pool price or can havecontract with the generators directly. Currently these consumers are paying consumers,who are subsidizing sales to the categories like domestic and agriculture. Clearly this isnot the welcome situation. So if market is to be implemented, subsidy has to be givenby the Government either to the Distributor or to the consumer directly. This meansthat the subsidies involved should be explicit. The problem here is not only the abilityof the government to pay subsidy but also one of accurate estimation of subsidyrequired. The government will have to carry out structural changes to transfer thesubsidies from ratepayers to tax payers by making provisions in the governmentbudget. This structural change will take some time to implement.

Second task is adept handling of the pace of reforms and removing the uncertaintyabout the industry structure. During 1991, we opened generation sector to privateinvestors by signing long term Power Purchase Agreements (PPA). Also, some of theStates, while carrying out reforms, have implemented a single buyer model wherein thetransmission company is purchasing all the power from the generators and selling it tothe distribution companies. The Transmission and Distribution companies have signedlong terms power supply contracts along with other contracts like Escrow Agreements.These long term PPAs will hinder the creation of the power market.

Third important focus is universal service obligation. Today, SEB has obligation tosupply power within a period specified in the Electricity (Supply) Act to supply powerto anyone who desires to have power connection. There will be no one to perform thisuniversal service obligation in power market, as there will be no incentive to supplypower in a remote and far-flung area.

Apart from the above mentioned areas, there are various issues like open access totransmission lines, loading of technical losses on generation costs, adequacy oftransmission and distribution infrastructure, capacity building for supply business,demand side management, building up the cost for protection of the environment etc,which will have to be looked into detail. These issues are prominent in India. Thegovernment and the Regulators will have to work in unison to find an acceptablesolution. The public opinion resulting from the public process will be critical for thesuccess of the implementation of the future electricity market.

We must not forget that though the concept of electricity markets is theoretically a verygood concept, however, a lot of restraint will have to be shown while implementing itas we definitely would not like to commit a mistake which we committed while


132

opening generation sector without trying to solve the underlying problem of theviability of the distribution sector.

A major strength of a fairly regulated system is centralized decision-making. When autility wants to change the rates that it charges its inter-state customers, it knows that itcan come to the Commission and only the Commission, to seek that change. If acustomer feels that a utility group is not treating it fairly, it knows that it can file acomplaint with the Commission.

The Commission must have the responsibility for such of our country’s energy policyto encourage balanced action by the Commission. Since the Commission regulateselectric utilities, it must understand the impact of its decisions regarding one type ofutility upon other energy companies.

With the evolution of Commission’s work in energy regulation, the Commission shallbe able to develop expertise and what we call institutional memory, today, which weare acutely in shortage. The Commission has among its employees some of the leadingexperts in many areas of the energy field and can call upon those experts to assist inmaking decisions that are in the public interest.

The diversity in the makeup of the Commission means that the Commission hasdiffering view points available to it at all times. This helps ensure that theCommission’s decisions are well balanced.

The diversity of decision-making tools available to the Commission is also strength.The Commission can decide which matters require broad solutions like issuing newregulations and which matters should be decided narrowly. The Commission can issueorders, conduct rule-making proceedings, order hearings, and so on.

The complexity of the industries that Commission regulates presents a difficultproblem. The decisions we make have implications that often are not obvious. TheCommission must evaluate carefully how its actions affect the public. The complexityof regulation leads to other problems. For example, the language regulatorstraditionally use is simply not something that most people can understand. We tend touse complicated sounding terms and acronyms that make it difficult for anyone who isnot an expert to figure out what we are saying. The Commission’s orders sometimeshave to be so long that no one would read them who doesn’t have to.

The dictum is that regulation must adapt; if a mistake is made, regulators must correctit.

_________0_________


133

Sharing of Expectations and Concerns between

Regulators and Civil Society Institutions8

Mr. Venkat Chary, IAS (Retd.)

Member, Maharashtra Electricity RegulatoryCommission

Mr. Chairman, Dr. Godbole, distinguished participants and friends,

Let me first talk about the Regulator’s concerns at this point in time in Maharashtra. You are perhapsaware that the regulator has been given a very limited role to play in this State, unlike in other States. Tillrecently, our role was largely confined to the determination of tariff. Since the 27th October 2000, theadditional power of adjudicating disputes and differences between utilities and licensees has beenconferred on the Commission.

Now, as regards tariff determination, our first concern was to ensure a totally transparent process and, asa first step, we directed that the utility's proposal should be made known widely to all those who wouldbe affected by any revision in the existing rates. Earlier, the procedure was different altogether in that itwas more or less non-transparent so far as the consumer was considered. A tariff revision proposalwould be received from the MSEB. It would be examined by the Energy Department of theGovernment. The file would be sent to the other concerned Departments, namely, Finance, Industriesand Agriculture. These departments would record their views on the proposal. Thereafter, a Note forCabinet would be prepared and circulated to the members of the Cabinet. If the Cabinet thought that thetime was right for a revision from all points of view, especially political, the matter would be decided. Ifnot, the matter would be postponed. It may even go into limbo till the time was considered right. Assoon as it was decided, the Chief Minister would announce it at a press conference. No consultationswith consumers, bodies representing consumers, etc., was envisaged.

So, as soon as we in the MERC received the proposal from the MSEB in October 1999, our first step wasto make the proposal widely known all the over the State. We directed the Board to make availablecopies of the proposal in every office of Executive Engineer in the State, of course, at a nominal price.We invited objections from the consumers before a certain date in December in the form of affidavits. Acopy of these affidavits had also to be endorsed to the MSEB by the objectors. We received some 500such documents. We then announced the dates of public hearings at six different places in the State:Aurangabad, Nagpur, Amravati, Nashik, Pune and Mumbai.

Our next concern was to hold these public hearings in such a manner that it would afford an opportunityto everyone concerned to offer any oral evidence that he may have to support whatever he has stated onaffidavit about the proposal. We had made arrangements to record all this evidence on audio tapes andwe selectively videographed the proceedings for our record. For assisting us during the proceedings, wehad appointed two well-known NGOs, Prayas of Pune and Mumbai Grahak Panchayat, to represent theinterests of consumers as required under the Electricity Regulatory Commissions Act. These twoorganisations made very effective presentations before the Commission and literally x-rayed the proposalof the electricity board. For helping the Commission to conduct the quasi-judicial proceedings, we hadengaged a Counsel for the Commission.

Our third concern was to get a sufficiently senior representative of the Board to answer the various pointsraised in the affidavits and the oral evidence adduced, on each day of the proceedings. TheSuperintending Engineer, the Chief Engineer, the Accounts Member, the Technical Member and the

These are Mr. Chary’s Personal Views


134

Chairman of the Board gave evidence on oath clarifying the various points at these hearings from theMSEB's viewpoint.

The next step that we took in the tariff determination process was to validate the data presented by theBoard with the help of our techno -economic consultants, M/s ICRA Advisory Services, and therepresentatives of consumer organisations. The data examined was relating to the revenue andexpenditure of the Board. When we found serious discrepancies in the data, we directed the Board tosubmit a more comprehensive proposal for the year 2000-2001. We held another round of publichearings based on the comprehensive proposal and then wrote out our tariff order for release on the 28thApril/5th May 2000.

Our concern, while preparing the tariff order, was to ensure that it would be a speaking order in the sensethat it would answer every one of the issues that arose during the hearings. Our tariff order is a 197-pagedocument. Even at the risk of being called immodest, we would say what the press and other informedpeople have already said, namely, that our order is a path-breaking order. We introduced a number ofinnovations. We have directed complete meterisation within three years in the State. We have insistedon the installation of Time of Day meters for high tension industries within a certain time-limit. We haveincentivised shifting of load from peak hours to non-peak hours. The two part tariff system will beimplemented progressively for all categories of consumers. We have attempted to quantify the realtransmission and distribution losses in the Board's system. We have directed the Board to reduce theselosses by 5 per cent during 2000-2001. In the matter of power purchase, the Board will have to followthe merit order principle. We have disallowed certain expenses as we considered them to be not properlychargeable within the meaning of Section 59 of the Electricity Supply Act of 1948. Our order is, ofcourse, appealable before the High Court.

Our concern was also to create, through our tariff order, an atmosphere where any intending investor inthe power sector would feel assured that the setting of tariffs is based on objective, logical and rationalconsiderations and was not actuated by political or populist considerations.

Imitation, they say, is the best form of flattery. The Gujarat Commission, which is presided over by aformer High Court judge, has recently come out with its tariff order. If you peruse it, you will find that itfollows the pattern of the Maharashtra order to a large extent. I am confident that other Commissionswould also do likewise in the days to come.

Let me now say a word or two about our expectations from civil society. Setting up of ERCs is only onepart, though an important part, of power sector reforms in our country. Our SEBs, almost withoutexception, are in a financial mess today. The Rajadhyaksha Committee report submitted to the Stategovernment in December 1996 had spelled out eloquently the reasons for this state of affairs in theMSEB. It had also charted out the rational steps to be taken to get out of this mess. There was, howeverconsiderable reluctance, delay and dragging of feet on the part of the MSEB and the State government toimplement their recommendations. I would say that the failure of civil society in this regard was itsinability to put pressure on the MSEB and the Government to take timely steps to remedy this situation,to ensure that things did not become worse, that they did not go beyond repair.

Take this question of power sector reforms. Setting up the ERC is one aspect of the reforms. So far, sogood. It would help in insulating tariffs from considerations of politics and competitive populism. Moreimportantly, a number of other steps have to be taken by the State governments. It is almost axiomatic tosay that monopolies breed inefficiency, lackadaisical attitudes in staff and workers, insensitivity toconsumers, and, often, corruption. For SEBs which are as large as the MSEB, there is an urgentnecessity to split them up into at least three entities of manageable proportions: one each for generation,transmission and distribution. This will help in locating where the malaise is most serious. Focusedattention can then be given. Today, the problem is to identify where to start the repair. In their wisdom,Central and State governments thought in 1991 that the best place to start was from the generation end.The famous IPPs approach. Fast track projects. Where has it got us? Practically no where.

Now, everyone is veering around to the view that the real test is on the distribution side. Unless thepresent monopolistic situation is replaced by a system where there is healthy competition, things will notimprove. Tariffs will keep on going up on a cost plus approach, from tariff revision to tariff revision.


135

This is where civil society can play a role. It can help to change the mind -set of governments and evenof union leaders. Other States have gone ahead. Maharashtra has lagged behind, unfortunately.

For all this, civil society should be prepared to impose some self -restraint and self-discipline. Peoplewill have to be educated to believe that they must be prepared to pay reasonable user charges, whether itis for electricity, drinking water and sanitation, cooking gas, telecommunications or for transportservices. If a politician promises free power to, say, farmers, as one politician did, not very long ago inthis State, civil society must protest and rebel against that idea and should give vocal and otherexpression to it.

Take, again, this question of reintroducing meters for every consumer in the State. If you go to purchasebrinjals or potatoes in the vegetable market, will you not insist that the vendor measures the commodityon his weighing scale? Or, will you say, OK, don't bother, you look too old or too ignorant to make theeffort. Apply flat rate tariff. Give me something, anything. I will give you Rs. 5/-. That is preciselywhat the State government and the MSEB did in 1997 when the system of horse-power tariff wasintroduced for agriculture in this State. And all the other States followed suit like dumb, driven cattle.And if the SEBs are in the mess that they are in today, that fateful decision in 1977 is almost the genesisof this situation. What exactly was civil society doing at that time, I would like to ask? Should notsomeone have protested? My expectations from civil society would be to be ever vigilant in such mattersat least from now onwards and to apply the corrective before the situation goes out of control. On thatnote, I will end. Thank you for your attention.

___________0___________


136

Consumers and Electricity Sector Regulation

Sanjeev AhluwaliaFormer Secretary, Central Electricity Regulatory Commission

Independent regulation is good for consumers. Whether we look atdeveloping or developed countries we see that independent regulation hasbenefited consumers though lower prices and improvement in the quality ofsupply and service.

In India however the situation is different. A large section of thepopulation, which consume roughly 60-70 % of the power generated, do notpay the cost of making this supply available to them. These consumers arebroadly classified into domestic consumers, low-tension consumers andagricultural consumers. Since they have been paying less than the cost ofsupply it is somewhat inevitable that with the setting up of the regulatorycommissions, these consumers would in the medium term have to pay morethan before. However it is wrong to associate price hikes with reform andthus conclude that the post reform supply system is more costly than theone prevailing prior to reform. The supply system prior to reform hadbecome bankrupt and restoring financial viability to this system will ensurethat consumers continue to get supplies as demanded by them. Not to setthe system right would mean a worsening of the supply position and lowerlevels of consumer satisfaction.

Consumers should also remember that tariff hikes are not an exclusivephenomenon of the post reform era. Even prior to reforms, tariff hikeskept the cost of supply high and even inefficient costs were passedthrough to consumers. The average tariff for NTPC has increased by 9%every year whereas the average inflation has been at 6%. So the averagetariff for NTPC has gone up by more than 50% as compared to theincrease in the consumer price index. The same system exists in all states.There are periods when the state government has been very conservativein increasing tariffs followed by periods when they suddenly increase thetariffs. On an average in the last 10 years SEB tariffs have increased by10-12% annually which is a significantly high number considering thatinflation has been at 6 % over the same period. This was not a result ofindependent regulation but an outcome of non-transparent intervention byState Governments, which set tariffs prior to reforms. Even if


137

commissions continue to increase average tariffs at the same average rateas in the past, so long as they rationalize tariffs they will end up doing agood job.

Rationalising tariffs would involve charging consumers what it costs toserve them. Industry pays 180% of the cost of supply at high voltageswhereas the farmers pay 15-20% and domestic consumers pay 60-70%.There is a need to change as to who pays how much so that not only theaverage goes up but the correct prices signals are introduced into thepower economy. Why is this important? Firstly, charging much less thanthe cost of supply induces wasteful use of energy which is avoidable bothfrom the financial viewpoint and that of the environment since energy useis one of the primary causes of air, water and soil degradation. Secondlyensuring that goods and services are made available at "efficient" prices isgood from economic growth. We talk about the fact that all the moneygoes into generation. How can any money be allocated to transmission ordistribution if correct price signals are not sent to these sectors? If theprice signals are correct and if managerial incentives exist and iforganizations are working on commercial principles there would be anoptimum capital allocation which would result in a more efficient and morecapable power industry. Rising prices and increased cost burden of supplyare the result of the poorly organized, poorly financed and inefficientindustry. This is exactly what independent regulation has to address.

People do no believe in regulatory commissions because they see no earlygains. The first tariff order was issues in 1996 in Orissa. The gains fromthis are not yet visible. One of the positive results of regulations has beenthe ‘Availability Based Tariff order’ of the Central Commission. It lookedat the kind of incentives available to the central power generators toimprove the availability of their capacity. It found that over timeincentives had become redundant. Plants were running at 70% while theirtarget availability to NTPC was stuck at 62.5%. Therefore the minimumtarget availability for recovery of fixed cost was up scaled up sharply from62.5 to 80%.The Central Commission looked at operational and maintenance norms. Itlooked at depreciation rates, which have been revised twice in the last 12years from 3% to 8%. This was done by the Government of India at thetime as it was felt that the cash flow generated by the power producerswere insufficient to finance future growth of the industry. As a result thiswas one of the quick-fix solutions found by the government. But from the


138

consumer point of view the cash burden increased from 3% to 8% within 10years. This was not necessarily a good measure. There are other ways toincrease the cash flow. As a result of the this order of the CERC reducingthe applicable depreciation rates and the increasing the target level forclaiming incentives and for claiming recovery of fixed costs NTPCanticipates that it will lose Rs 1800 crores per annum. NTPC's loss is theconsumers gain.

The objective of the commission is to make producers use their existingcapacities better and in a more efficient manner. Higher utilitisation ofcapacity is the best way to reduce the burden of fixed cost on theconsumer. Pegging incentives at challenging levels will incentivise suppliersto increase capacity utilisation which in turn will bring down the charge forthe consumers. This is a result of independent regulation. If we look at the5 orders issued by the different state commission we observe that theyare all in the right direction even if the specifics differ from state tostate.

We should therefore support independent regulation. We can support it inmany ways. Firstly they need your support in the appeal process once theyhave issued an order. Regulators feel helpless in the appeal process. Beinga quasi judicial institution itself it is not best placed to defend its ownorder on a judicial platform. It is therefore the duty of the civil society tobecome participants in this process.

Independent regulation needs support in other ways. Public utilities arevery powerful. Channels of information need to be monitored by civilsociety groups and feedback provided to the regulators. They can also lookat becoming distributors in their own areas and take over managing theprocess at the local level. It has worked in other countries like Argentinaand we can definitely try the same.

In conclusion, my message to you is please support the good guys. Pleasesupport competence, integrity and public purpose. Public utilities canfunction well only if civil society has a stake in good management. Consumergroups need to live upto this responsibility. Please recognize that there is acost to producing power. Quick comparisons across countries of the cost ofdelivered power without factoring in differing tax rates, labour laws,minimum wage levels etc, all of which are country specific, does not providea useful statistical base for making intelligent comparisons. Civil society


139

groups can also help out in demand management by propagatingconservation and increased use of renewable energy sources. Remember insupply constrained economies like India the Long Run Marginal Cost will bemuch more than the historical cost. Hence the path to affordable power isalso the path to more efficient generation, supply and consumption ofpower.

_________0_________