Power Sector Reforms in India:

A Critical Appraisal of Orissa’s Reforms

Experience

A Thesis Submitted to the Utkal University in Partial

Fulfilment of the Requirement for the Degree of

DOCTOR OF PHILOSOPHY
IN
COMMERCE

By
MR. SARBESH MISHRA

Under The Supervision of

PROF. AMBIKA PRASAD DASH

DR. MALAY KUMAR MOHANTY

UTKAL UNIVERSITY
Bhubaneswar
2008
Department of Commerce
Utkal University,
Bhubaneswar.

DECLARATION

I hereby declare that this thesis entitled “Power Sector Reforms in India: A
Critical Appraisal of Orissa’s Reforms Experience” submitted to the Utkal
University in fulfillment of the requirements for the award of the Degree of
Doctor of Philosophy in Commerce is a bonafide record of original research
work done by me under the supervision and guidance of Professor Ambika
Prasad Dash and Dr. Malay Kumar Mohanty and the thesis has not been
submitted to any other University or Institution for the award of any degree or
diploma.

(Signature of the Candidate)

SARBESH MISHRA
Enrolment No: 6-commerce-2003-2004
Date of Registration: 27.5.2004.

2
Prof. Ambika Prasad Dash Dr. Malay Kumar Mohanty
Power Management Institute Ravenshaw University
NOIDA – 201306 (U.P) Department of Commerce
Cuttack – 753003, Orissa.

CERTIFICATE

This is to certify that the thesis titled “Power Sector Reforms in India: A critical

Appraisal of Orissa’s Reforms Experience” submitted to the Utkal University,

Bhubaneswar in fulfillment of the requirements for the award of the Degree of

Doctor of Philosophy in Commerce is a bonafide record of original research work

done by Mr. Sarbesh Mishra, under our supervision and guidance and this thesis has

not been submitted to any other University or Institution for the award of any

degree.

(Ambika Prasad Dash) (Malay Kumar Mohanty)

3
Prof. Ambika Prasad Dash Dr. Malay Kumar Mohanty
Power Management Institute Ravenshaw University
NOIDA – 201306 (U.P) Department of Commerce
Cuttack – 753003, Orissa.

AREA CERTIFICATE

The work done by the candidate is original and within the area of registration for

which the candidate has already been for the registration.

(Ambika Prasad Dash) (Malay Kumar Mohanty)

4
 ACKNOWLEDGEMENT

I express my profound gratitude to my supervisors, Professor A.P Dash and

Dr. M K Mohanty, whose benign guidance has enlightened my path through the
course of this work. Besides their dedication to academic life, their disciplined and
austere habits have been a source of constant inspiration to me. They are humane
with willingness to help others, care for everyone, and always being concerned
about the progress. With these rare qualities I have found in them not merely
supervisor but a noble soul, a “Guru”.

I express my gratitude to Prof. Arabinda Mishra, TERI University, New

Delhi, Prof. Tanmay Panda, BITS, PILANI (DUBAI) Campus for their continuous
concern about my progress in research. My special thanks to Mr. Sovan Kanungo,
IAS, Prof. Rajat Bakshi, MDI, Gurgaon, Mr. P Chanda, AGM, NTPC Ltd. Dr. G N
Patel, Registrar, BIMTECH, Prof. Mukesh Chaturvedi, MDI, Gurgaon, Maj. Gen. N.
K Dhir, Prof. P K Mishra, HoD, Environmental Science, Jyotivihar, Mr. Dillip Raj
Behera, DGM, Public Relations, OPTCL and Mr. S.N Sabat, IPS, DIG of Police,
Uttar Pradesh for their guidance during different stages of this research.

I am thankful to other teachers of the department Prof. S Moharana, HoD,

Department of Commerce, Prof. Ranjan Kumar Bal, Dr. J K Parida, Dr. P K Hota,
Dr. K B Das, Dr. M Sahu, Mr. A K Sahu for their encouragement and interest in my
academic pursuit.

I acknowledge my sincere gratitude to University of Delhi for allowing me to

pursue PhD work being a faculty member. I also acknowledge the help and facilities
availed from Army Institute of Management & Technology, Greater NOIDA and I
extend my profound regards to late Director of the institute Prof. (Brigadier) M. M.
Trivedi, VSM for his timely help and encouragement.

5
 I cannot express my gratitude in words to my late father Shri Indramadhab
Mishra, whose blessings have always been with me throughout this work along with
the best wishes from my family members, mother Ms. Puspalata Mishra, my elder
brother Mr. Abesh Mishra, my brother-in-law Mr. B P Dwivedi, my sister Ms.
Ajanta Dwivedi and my sister-in-law Ms. Saswati Mishra . It’s needless to mention
about my wife Sushree’s contribution, in each and every step of this research work
she has willingly extended her cooperation

My special thanks must go to my guide’s family for their timely help and
constant inspiration. My sincere regards and thanks to Prof. Suman Mahapatra,
Dean, School of Languages, Ravenshaw University for his painstaking effort of
correcting my thesis meticulously and also to Mr. K. Anand, Acquisition Editor,
Vikas Publishing House for undertaking to publish my thesis after its
acknowledgement.

It is my pleasure to acknowledge Mr. Vineet Sahu, Mr. Satya Sundar Panda,

Mr. Saurav Rath and Mr. Amarendra Mohanty for their moral support and timely
inspiration.

(Sarbesh Mishra)

6
 LIST OF TABLE
Page No.
1. Table 1: Power Sector Performance: Gaps between
Targets and Realities on Key Indicators in a sampling 17
of regions and Countries.

2. Table 2: Generation of Power – Sector wise 22

and Compositions

3. Table 3: Hydel Potential – Global Scenario 23

4. Table 4: States with substantial undeveloped 23

Hydro potential

5. Table 5: Inter-regional Links under Operation 24

6. Table 6: Plan Outlay On power Sector (1961-90) 27

7. Table 7: Installed Power Capacity 1950 to 2000 27

8. Table 8: Installed Capacity (MW) At a Glance 27

9. Table 9: Physical Performance (At the All India Level) 28

10. Table 10: Public Sector Investment In power 1992-2002 32

11. Table 11: Capacity Addition 1992-2002 32

12. Table 12: Tenth Plan Power Sector Outlay (2002-07) 36

13. Table 13: Financing Pattern of Central Sector outlay in 36

Tenth Plan (Rs. Crore at 2001-02 prices)

14. Table 14: Electricity Consumption in Brazil 55

Twh (1994 – 2002)

15. Table 15: Comparative statement of sops extended by 108

different countries

16. Table 16: Estimated Break-up of T& D losses in M.P 149

17. Table 17: Achievement of OSEB during 35 years 163

18. Table 18: Accounting P\L 173

7
19. Table 19: Cash P\L 173

20. Table 20: Details of Revaluation 178

21. Table 21: Debt Equity Comparison 180

22. Table 22: Profit / (Loss) Comparison Over The Years 181

23. Table 23: Details Of Loans 182

24. Table 24: Statement Of Power Purchase, Sale, T& D Loss 183
Billing Collection, etc

25. Table 25: Sources & Application of Funds 184

26. Table 26: Expenditure Incurred On Consultancy Services 185

27. Table 27: Revaluation of Assets 204

28. Table 28: Financial Result Analysis of Andhra Pradesh 211

29. Table 29: Financial Result Analysis of Orissa 211

30. Table 5.1: Indicators of Access to Electricity by 219

Sample Households

31. Table 5.2: Metering of Households in Rural and 222

Urban areas

32. Table 5.3: Uses of Electricity by Households in Rural 223

and Urban Areas

33. Table 5.4: Economy in use of electricity by members of 224

the household

34. Table 5.5: Reasons for Economy in Use by Households 225

in reform period

35. Table 5.6: Perceived changes in electricity tariff in reform 226

period

36. Table 5.7: Billing frequency as reported by the households 228

37. Table 5.8: Irregularity in Billing 228

38. Table 5.9: Billing efficiency in rural and urban areas 230

8
39. Table 5.10: Consumer perceptions on power supply 231
in the reform period
40. Table 5.11: Duration of Power Failure in pre-reform 232
and reform periods
41. Table 5.12: Duration of power cut during pre reform 234
And reform periods
42. Table 5.13: Alternative sources of lighting used by 235
consumers during power cut/failure
43. Table 5.14: Consumer perceptions on voltage 236
quality in reform period
44. Table 5.15: Difficulties reported due to voltage 237
problem in the reform period

45. Table 5.16: Protective measures by households in 237

case of voltage problem

46. Table-5.17: Consumer perceptions about reform’s 240

impact on education of children

47. Table-5.18: Consumer perceptions about reform’s 242

impact on health services and health care in households

48. Table-5.19: Consumer perceptions about reform’s 243

impact on women

49. Table 5.20: Employment in cottage, tiny and small 244

scale industries

50. Table 5.21 Summary statement of the perceptions 246

of HHs on impact indicators

51. Table 5.22: Consumer’s Willingness to Pay for 247

Electricity at a Hiked Rate of Tariff by Levels of Education

52. Table 5.23: District wise status of Metering 248

of sample units belonging to commercial and
industrial category
53. Table 5.24: District wise status of Supply of 249
Electricity to commercial and industrial users

54. Table 5.24: Alternative Sources of Power / Stand 250

by Facilities and the associated cost for commercial
and industrial users of different capacity size (KW terms)
9
 List of Charts
Page No.

1. Chart 1: Power generation mix during several 21

plan period

2. Chart 2: Reasons for poor financial health 25

3. Chart 3: Plant load factor (PLF) 41

4. Chart 4: Load duration curve 41

5. Chart 5: T&D loss determination between four states 140

6. Chart 6: Relationship between different party 161

7. Chart 7: GRIDCO structure 169

8. Chart 8: Reasons for economy in use of electricity 218

10
 CONTENTS

Page No.
Declaration ii
Certificate iii
Area Certificate iv
Acknowledgements v
List of Table vii
List of Charts x

CHAPTERS
1. INTRODUCTION
I. Backdrop of Power Sector Reforms 1
II. Review of Literature 2
III. Significance of Study 10
IV. Objective of the Study 11
V. Hypotheses of the Study 12
VI. Scope and Limitations of the Study 12
VII. Methodology of the Study 13
VIII. Organisation of the Study 14
2. POWER SECTOR REFORMS: A CONCEPTUAL
FRAMEWORK
i. Introduction 15
ii. What is Reforms 17
iii. Role of Power Sector in Indian Perspective 19
iv. Power Sector in Pre-reform Period (1961 – 90) 26
v. Indian Economy: Growth of Power Sector 26
vi. Power Sector during Reforms period (1992 – 2002) 29
vii. Original Electricity Bill 2001 35
viii. Private Sector Participation in Generation 37

11
 III. GROWTH OF POWER SECTOR
i. International Scenario of Power Sector 39
United Kingdom (UK) 39
United State of America (USA) 44
Brazil 52
Argentina 56
iii. Indian State’s Experiences 60
Andhra Pradesh Reforms 62
Delhi Reforms 79
IV. POWER SECTOR REFORMS
i. Electricity Act. 2003 97
ii. Single Buyer Vs. Multi buyer Model in Distribution 105
iii. World Bank Models on Unbundling of PSUs 109
iv. Reforms in Electricity Tariffs 110
v. Availability Based Tariff 122
vi. Methods of Calculation of Cross Subsidy 132
vii. High Transmission Energy Audit 138
V. RESTRUCTURING INITIATIVES IN ORISSA’S POWER SECTOR

i. Introduction 158
ii. First Phase of Reforms 159
iii. Second Phase of Reforms 164
iv. Restructuring of GRIDCO 166
v. Sequence of events of reforms 170
vi. Benefits of Reforms 172
vii. Analysis of Fault lines – 186
Kanungo Committee’s Findings
viii. Turnaround of GRIDCO – A Case Study 202
ix. Comparison of Financial Performance: 211
Orissa Vis-à-vis Andhra Pradesh

12
VI. SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER
SECTOR REFORMS
i. Introduction 213
ii. Micro level data source: Sampling framework 214
iii. Analysis of household data 216
iv. Uses of Electricity 223
v. Electricity Tariff 226
vi. Problems in supply of Power 230
vii. Socio economic impact of reform on education 238
viii. Socio-economic impact of reforms on Health 241
ix. Socio economic impact of reforms on women 242
x. Impact of power sector reform on livelihood 244
xi. Consumer’s willingness to pay at hiked rate 247

VII. CONCLUSION

• Summary 252
• Findings 256
• Suggestions 266
• Scope for further research 268

VIII. SCHEDULE OF ENACTMENTS 269

IX. LIST OF ABBREVIATIONS 270

X. BIBLIOGRAPHY AND REFERENCES 273

13
Backdrop of Power Sector Reforms

The Indian constitution has included power in concurrent list, which means
both the centre and state share the responsibility for this sector. Article 246 of
the constitution vests the parliament as well as the state legislature with the
power to frame laws. The Electricity Supplies Act. 1948 was amended in
1991 to permit private sector participation in generation. Many Independent
Power Producers (IPPs) came with their proposals but very few could get the
financial closure and commissioning of power plants in 10 years. The most
important factor was that most of the state electricity boards were fast moving
towards bankruptcy. The reforms carried out in 1991 in the area of power
generation made us realize that reform has to begin from distribution end for
sustainable development of power. The process of distribution reform started
with the enactment of regulatory Act. In 1998 to minimize the political
interference in power sector and rationalize the tariff. In pursuance to reforms,
states started unbundling the vertically integrated structure of state electricity
boards (SEBs) into three separate corporate identities of Generation,
Transmission and Distribution as a precursor to the participation of private
sector in distribution.

Learning from the Orissa experience, the main metric for choosing companies
was not based on valuation, but on performance improvement goals. In order
to promote competition in the electric power sector, the Electricity Act 2003
(E. Act) mandates open access to the transmission and distribution network
for any supplier of electricity. Successful implementation of structural reform
requires both the hardware of technological advances in the power system and
the software of workable contractual relationships. Utilities need to make
efforts to identify such links / areas of high losses; there is still significant
uncertainty and differences over the real level of total as well as Transmission
and HT losses. Even two to three years after the establishment of the SERCs

14
and the reforms process, there is still ambiguity over the real level of T&D
losses.

Review of Literature:-

Industry and Energy Department, World Bank (1996) in its research paper
“Power Sector Reforms in Developing Countries and Role of World bank”
discusses the experience of the Bank with the sector and the main drivers for
sector reform, the expected benefits of reform, the formulation of the Bank's
policy in this area, the principles and elements of reform, and the
methodologies of bringing about reform. The key message with regard to the
last point is that selection and design of the reform process and final sector
structure must be adapted to each country. Hence, the country's authorities
must make judicious choices among the many power sector restructuring
models and concomitant regulatory frameworks. The paper also discusses
issues of implementation lessons of experience, and the role of the Bank in
the reform process.

The precise dimensions of the governmental and sectoral reform may vary,
but in each case the reform effort needs to be governed by a set of clear
objectives. These are to (a) increase efficiency in generation through
competition, whenever possible, or through regulation based on efficient
enterprises and energy and other measures; (b) maintain service reliability by
setting strict rules to supply and variations from the technical standards (e.g.,
in voltage and frequency levels); (c) increase the security of supply in terms
of numbers of suppliers and types of energy resources; (d) improve
environmental protection by establishing clear rules in the construction and
operation of energy facilities, coupled with enforcement mechanisms and the
requisite penalties or incentives; (e) attract capital, domestic or foreign, by
establishing clear and stable" rules of the game" that relieve the government's
burden of funding the sector; and develop competition in the electricity

15
services to customers, where viable, as a means of increasing the economic
efficiency of the sector.

The policy advisory group of Infrastructure Development Finance

Company Limited (IDFC), 1998 in its research paper “Power Sector Reform
in Orissa: Should and can it be replicated?” This research reviews this process
in Orissa, to examine its replicability for other states. It concludes that it
should be possible to transfer the reform process well beyond Orissa, subject
to a few safeguards. The objective of the privatisation process must be to
transfer the companies to the private sector, followed by obtaining a fair price
for government assets. At the same time it is imperative to insulate the
outcome against the possibility of renegotiations and default.

To reiterate, the replicability of the Orissa experience lies in ensuring that the
private sector is able to run the privatised entities, i.e., they are fundamentally
commercially viable. Doing this will require structuring distribution zones
properly and ensuring adequate financial support for the reforming entity, i.e.
the DISCOMs, during the transition process, so that it does not end up with an
unhealthy balance sheet, even when it is operationally efficient. It is also
essential to remember that people are as important as structure. To that end,
the selection and continuance of persons in charge of the process is of utmost
importance, as is the composition of the regulatory body. Subject to these
safeguards, which appear relatively easy to implement, it should be very
much possible to transfer the electricity reform process well beyond Orissa.

Asian Development Bank (ADB), 2001-02 in its research paper which acted
as Blue Print for “Power Sector Development” has identified the fault lines
and has found out the probable reasons which have emanated from:
• inadequate power generation capacity;
• lack of optimum utilisation of the existing generation
• capacity;
16
 • inadequate inter-regional transmission links;
• inadequate and ageing sub-transmission & distribution
network leading to power cuts and local failures/faults;
• large scale theft and skewed tariff structure;
• slow pace of rural electrification;
• inefficient use of electricity by the end consumer;
• lack of grid discipline

In view of the fact that addition of new capacity takes relatively longer time,
strategies have also been formulated to augment power supply in
short/medium run. These are:
• Increased generation through Renovation and Modernization (R&M)
of old stations.
• Utilisation of the surplus capacity of the captive power plants into the
grid
• Demand Side Management (DSM) to flatten the demand curves
(introducing time of day tariffs and metering).
• Introduction of a new system of matching time and load profiles for
different zones in the country.
• Energy Conservation (The Ministry is piloting the Energy
Conservation Bill, which, when enacted, will provide necessary legal
framework for promoting conservation and efficiency).
• Evacuation of power from the power surplus eastern region.

Sankar, T.L (2002), Advisor-energy, Administrative Staff College of India,

Hyderabad, in his work on “Power Reforms in India – the search for an
indigenous model for promoting competition” has identified the major
problems namely, the slow rate of addition to power generating capacity; the
lack of noticeable improvement in the governance, management and level of
service to consumers; the failure of efforts to induct the private sector into

17
distribution; the inability to find a solution to the problem of subsidised
supply of power to agriculturists; the chaotic condition of governance of LT
distribution with, inter alia, the level of T&D losses remaining undetermined
and the annual loss reduction in the system being very slow; the
rationalisation or rebalancing of tariffs becoming a losing game because the
average cost of supply increases faster than the possible rates of increase of
tariffs; and the deficits accumulated over the years imposing an unbearable
interest burden limiting the capacity to raise funds in the commercial market.
He has also attempted to find out the followings:

• Should farmers, like other customers, pay the cost-of-service or the

average cost of supply?

• If farmers cannot pay the tariff and have to be provided power at

subsidised rates, what should be the level of subsidy?

• Who should pay the subsidy -- other users of power or all taxpayers
through the state government?

• Should the Government of India pay part or the entire subsidy as it

does in the case of fertilizer?

• If the tariff for agriculture is very low, is it worthwhile installing

meters for these consumers?

He has suggested of Revised Reform Programme (RRP). The RRP should be

taken as a comprehensive integral programme consisting of the following
elements, which should be implemented together.

Declaration that all new generating capacity would serve the consumers or
DISCOMs directly, abandoning the single-buyer model.
18
 Agricultural pumpsets and small households, which on socio-political
considerations have to be provided electricity at below the average cost,
should be supplied by an earmarked allocation from the generating plants
with the lowest generating costs. The quantity supplied thus as an
‘‘entitlement’’ should be specified by the government.

DISCOMs should be much smaller than currently contemplated and have

a maximum turnover of Rs. 6-8 billion.

All management of the distribution system below 11 kV should be

gradually shifted to the consumers themselves, with the requisite technical
and investment support coming from the DISCOMs.

Regulators should settle within one year the issues of relevance for long-
term multi-year tariff fixation, with explicit targets for T&D loss reduction
and for various other parameters.

Accumulated deficits and securitization and APDRP should be linked as

proposed above.

Abraham, P (2003), ex-power secretary, Government of India in his work on

Power Sector Reforms; Focus on Distribution has emphatically identified as
the one of the prime movers of the economic development. In his work he has
stated the non-availability of sufficient power and of good quality which is
going to be the single most critical constraint for the overall development of
the country.
Power distribution throughout India is plagued by:-

• Inadequate and deteriorating physical infrastructure

• Skewed tariffs, high T&D losses, theft of energy

19
 • Poor collection of revenue
• Dissatisfactory management practices and extreme consumer
dissatisfaction and more particularly the situation is acute in rural
areas.

The budgetary provisions of the state governments were reducing and the gap
between demand and supply was ever increasing and the gap between cost of
supply and tariff was widening. He stressed on the need for a comprehensive
accelerated reforms basing on the global experiences particularly from South
American Nations and USA, UK, Canada, etc.

He has impressed on the need of choosing right kind of reforms model among
the laid down models. The pre-requisites for carrying out such reforms and
privatization and the road map ahead for bringing the reforms to their logical
conclusion, so that a healthy and viable power sector can be created to
contribute substantially to the alround growth of our economy.

He has elaborated on the need of Government’s support for reforms, including

support during the transition period, organisational and financial restructuring,
and all other such issues which are germane for reforms.

Tongia, Rahul (2003), in his Stanford – CMU Indian Power Sector Reforms
Studies has analysed the following things: -

• Will reforms lead to economic viability of the system? Will this come
through tariff increase or cost control (or both)?

• What is the best role for the regulator, and are they equipped to be fair,
transparent, and independent regulators?

20
 • If we open the sector up to privatization (distinct from retail
competition), who will come in? Are there enough players? What
returns do they want or expect?

• Should rapid privatization of viable (urban) areas be done quickly, or

will such cherry-picking harm the overall system? To what extent
should there be pooling of costs (both at the generation level, and at the
retail level)? How fair and effective are such systems?

The analysis indicates several important ingredients for successful reform. For
starters, initial assumptions must be realistic and accurate, as must targets for
the participants. This was one of the major failures in Orissa, where the losses
were significantly higher than thought, and the growth of paying customers
did not materialize.

In addition, there needs to be sustained government support for reforms,

ranging from things varying from anti-theft legislation, to managing SEB
unions, to overcoming public opposition in general. In addition, if the newly
corporatised (or privatized) entities are to behave like companies, any gap
between average tariff and average cost of supply must be met through
explicit government subsidies (which, ideally, should be target driven and
time-bound).

At the end of the day, India’s reforms have thus far gone a fair ways towards
the ingredients necessary to reaching the goals of increased access, efficiency,
and viability, but they have not yet directly done so. These reforms, necessary
but perhaps not sufficient, will be the focus of enormous effort and
expenditure by the government, funding agencies, and companies in the
coming decade.

21
Ranganathan, V and D, Rao Narasimha (2004), IIMB in their research
paper on “Power Sector Reforms in India” have analysed the progress of the
reforms in India which formally started along-with economic liberalization in
1991-92, though the impetus for private sector participation in the power
sector predates this. Despite aggressive reform policies in the 90s, private
sector participation was moderate at best, and the financial losses and cash
flows of State Electricity Boards (SEBs) reached crisis proportions.

They have outlined the stages of power sector reform, placing the
development of markets in context. They warn that in a situation of supply
scarcity, competitive markets – namely spot markets – can lead to price
increases and volatility, which will be slow to change due to short-term
supply inelasticity. More important is the need for bilateral trade under open
access to better exploit cheap, remote hydro and coal fuel resources in
northern India. They envision an environment of managed competition in a
bilateral market with regulated (capped) contract prices.

Shahi, R V (2005), currently the power secretary of India, in his work on

“Indian Power Sector; Challenge and Response” has highlighted the
infirmities in the power sector namely:-

• Power supply to Industry and Agriculture

• Poor quality of supply of power
• Lack of concern for consumers
• Highly skewed tariff structure

He has recognised the importance of manufacturing sector as it contributes

significantly to the growth of economy and helps in generating employment.
For them enabled to be competitive issues such as price of power, supply of
power without interruptions and quality of power are all equally important
and relevant. Risk perception of developers and lenders has been so high that
22
in spite of best of private power policy formulated and notified in early
nineties, active responses were negligible. Having failed to get right and
adequate response from private sector, in order that vital infrastructure sector
does not get starved of funds for required expansion, during the 10th. Five
year plan public sector outlay was substantially enhanced. Continued inflow
of Government resources without commensurate commercial revival of this
sector would not only be an unsustainable arrangement, but as a matter of
fact, this may not even yield desired results.
Lesson learnt from Orissa’s privatization is that in India private sector today
is not equipped to handle adequately rural electricity distribution. It needs to
be recognised that consumers need not and should not wait for improved
services only when privatization happens. Competition is needed even within
the public sector on basis of performance benchmarks. He has maintained that
significant amount of improvement can be brought about even without any
substantial investment, just by way of toning up the operational maintenance
practices, better inventory management, training and development of people
and sharpening of work culture.

Significance of the Study: -

The present work aims to highlight the extent of reforms in power sector
commenced since Sept. 1991 to till date. It shows the comparative study of
rate of growth in generation, distribution and per capita consumption of power
along with several developed nations.

It also systematically studies the experience of ORISSA, which adopted

reforms process in late 1996 and its problems over these years. The findings
of the study will highlight the various aspects in this regard, which require
attention of the Govt.

23
Objective: -

Orissa is the first state in India to initiate reforms in the Power Sector. It has
left a benchmark for the whole of country and for a good experimentation.

Again in this backdrop, the objective of the project would be to study the
impact of reforms in the development of Generation, Transmission and
above all in the Distribution end. A concerted effort would be made to
have comparative analysis among different states that adopted reforms.

In an effort to achieve these objectives, the following steps would be

undertaken
- To ascertain the provision of quality power on demand to all
consumers.
- To study the different elements which determines the tariff structure?
To see whether there’s availability of alternatives to consumers.
- To verify the creditworthiness of power sector and if it is capable of
funding future investment needs.
- To check the extent of progress made in rural electrification.
- To measure the degree of transmission and distribution loss, if it’s in
the permissible limit.
- To systematically analyze the reasons for Orissa’s failure to become a
financially viable corporation.
- To make the interstate comparison of efficiency i.e. Orissa with Delhi
(Which adopted reforms in 2002) and to bring out the weakness of the
previous at the distribution end.
- To suggest alternatives to increase the cash flow without tariff hike.
- To examine the existing laws prevailing in different states to curb the
menace of power theft (Inter state comparison on state Electricity Act.)

24
Hypotheses: -

- To study if the power sector reforms have brought in commercial

viability in Power Supply Industry.
- To study if the power sector reforms resulted in the Supply of power at
Reasonable and Affordable Rate.
- To study if the power sector reforms have brought in Fiscal Discipline.
- To check if the introduction of OERC (Orissa Electricity Regulatory
Commission) has led to rationalization of Tariff structure and protected
the consumer’s interest.

Scope: -

The scope of present study has been with an eye on the process of power
sector reforms in India that was initiated in early 90’s. The present study is
restricted to few aspects i.e. a conceptual background on legislative aspect of
Indian Electricity Act. 1910 and Electricity Supplies Act.1948 and its reforms
that was initiated by amending them in 1991 and subsequent in Electricity Bill
2003.

It also empirically studies the various functional reforms carried out by

different state governments. It covers time series and cross section analysis on
trend scenario.

Limitation of the Study: -

The compilation and execution of the present study have to pass through
several constraints due to unavailability of adequate primary data. The
available data is very unsystematic which discouraged the systematic

25
treatment of data. Hence the study would have been more systematic if
detailed data would have been available.

Methodology: -

The present study is carried out by using some primary data and rest on
secondary statistical data. The data has primarily been obtained from Power
Management Institute, NTPC Ltd. POWERGRID, University Library -
University of Delhi, Corporate Office-GRIDCO/OPTCL and from several sub
divisional offices across India. Apart from this, several published journal viz.
TERI, Energy Watch, powerline, ADB Review and by interviewing some
senior personnel of different areas related to power industry. The method of
study includes the following:

-A survey of available literature on topic.

-Collection of data (Both time series and cross section)
-Analysis of published & Non-published Journals.
-Analysis of Primary & Secondary Data.
-Analysis of circulated Questionnaire.
-Classification and tabulation of data.
-Preparation of charts, graphs and schedules for proper presentation
-Suggestion and remedial measures for overcoming the problems faced by the
organization officials and scope for further study.

26
 Organisation of the study

I. INTRODUCTION

II. POWER SECTOR REFORMS: A CONCEPTUAL FRAMEWORK

III. GROWTH OF POWER SECTOR

IV. POWER SECTOR REFORMS

V. RESTRUCTURING INITIATIVES IN ORISSA’S POWER SECTOR

VI. SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR

REFORMS

VII. CONCLUSION

• Summary
• Findings
• Suggestions
• Scope for further research

VIII. SCHEDULE OF ENACTMENTS

27
POWER SECTOR REFORMS: A CONCEPTUAL FRAMEWORK

Introduction
Electricity was entirely under the provision of the states as per the
Government of India Act 1936 but it was because of Dr. Ambedkar, who
was a member of the executive council for Power during 1942-46, Power was
included in the Concurrent List, Schedule VII of the constitution.
Recognizing the potential for the growth of power at that time, Dr. Ambedkar
felt the development of electricity in the whole country which cannot be left
to the provinces alone. According to Article 246 of the constitution,
parliament as well as the state legislatures has the concurrent powers to make
laws with respect to electricity. Whenever there is any conflict in the laws, the
central law shall prevail over the state laws. Dr. Ambedkar’s philosophy for
jurisdiction of central govt. over the electricity had withstood the test of time.

“The most challenging unbundling of all would be that of the

bureaucracy”
– Editors’ comment, India Infrastructure Report 2002.

Need For Reforms

Developing countries needs energy particularly electric power for social and
economic development. Many developing countries are unable meet their
energy demands of their economies because of the poor performance of their
existing plants and the shortage of adequate investment for new facilities to
meet the growth in demand.

Although the World Bank experience has been mixed, the performance of its
client countries electric power utilities has generally been poor to dismal. The
sub standard performance is usually reflected in low plant availability and
productivity, poor service to customers (Characterized mainly by energy
shortages leading to frequent blackouts and substandard system frequency)

28
and poor financial returns. The proximate causes of these problems are, on the
physical plant level, lack of readily available spare parts, scarcity or poor
quality of operating materials viz. lubricants, chemicals etc, poor maintenance
practices, inadequate training of operation and maintenance personnel and
lack of investment in necessary upgrading.

On financial front, government policies that have kept electricity tariffs well
below the cost of supply, combined with weak collection efforts by utilities,
have drained government budget resources instead of contributing positively.
It has thus been common for World Bank borrowers to request financing of
new plant at the same time as they maintain existing plant availabilities of less
than 50 percent.

A final problem for the power sector is on the institutional side, where
governments have controlled their power utilities as if they were departments
of the state and have used this control to pursue populist politics and social
policies that are incompatible with the commercial objectives. Governments’
inability to continue large subsidies to these utilities for operating purposes
and to mobilize funding for large investments needed for new plant to satisfy
the growing demand, with the private sector’s reluctance to invest in such
poor risk ventures, are leading to further deterioration in the performance of
electric utilities.

29
Table 1: Power Sector Performance: Gaps between Targets
and Realities on Key Indicators in a sampling of regions
and Countries

INDICATOR TARGE REALIT REGION /

T Y COUNTRY
Percentage of Population Served 90% 5% SSA

Utility management
• Customers per employee 150-250 42 Bangladesh
• Blackouts (hrs. / Yr.) 7 750 Philippines
• Load Factor 70% 46% Nepal
• System Losses 10-12% 35% Bangladesh

Commercial Performance
• Accounts receivable 30-45 462 Nigeria
(days)

Financial Performance 8-12% -19.8% India

• Return on assets >25% 0% Jordan
• Self-financing ration

Note: SSA – Sub- Saharan Africa

What is Reform?
Power sector reform consists of process of changes along four different but
inter-dependent axes: management, ownership, structure and regulation. The
structural change begins with the realization that a monolithic structure, often
established as part of a centrally planned or command economy is too
inflexible to respond to market forces and to provide appropriate incentives
for such responses. The government functions need to be broken into

a. That the government cannot relinquish such as the roles of setting

general policy & strategy, and sector regulation and supervision.

30
 b. Those that are subsidiary to the role of government and that can be
transferred, wholly or partially, to the private sector, such as
ownership, operation and management of energy facilities.
c. Those are not the core functions of the sector & that can be transferred
to other sectors such as research & development and construction and
manufacturing services.

The government’s function can be assumed by a ministry of energy, or state

energy commission or state supervisory agency. The ownership function can
be retained by the state, or it can be transferred to municipal or regional
companies or private sector. In any case the day to day, the day to day
management of the enterprises, even if fully state owned, should be exercised
by commercially operating entity. Finally the third category of functions
should be left to universities, research and development institutes, and
independent private sector companies.

Thus, the process of reform moves along two intertwined paths, one relating
to the other government actions and one relating to sector & enterprise
restructuring. The first path involves legal and institutional framework;
second involves commercialization and corporatisation of enterprises. It is
clear that the type of the regulatory framework and sector structure are closely
interconnected. The precise dimension of governmental and sectoral reform
may vary, but in each case the reform effort needs to be governed by a set of
clear objectives. These are to

a. increase efficiency in generation through competition. Or through

regulation based on efficient enterprises and energy use, conservation
and other measures.
b. maintain service reliability by setting strict rules to limit unreasonable
interruptions of supply and variations from technical standards ( e.g.
voltage and frequency levels)

31
 c. increase the security of supply in terms of numbers of suppliers and
types of energy resources
d. improve environmental protection by establishing clear rules in the
construction & operation of energy facilities, coupled with
enforcement mechanisms and the requisite penalties or incentives
e. attract capital, domestic or foreign, by establishing clear and stable
“Rules of the Game” that relieves government’s burden of funding the
sector
f. develop competition in the supply of electricity services to customers,
where viable, a means for increasing the economic efficiency of the sector.

Role of Power Sector in Indian Perspective

The growth of economy calls for a matching growth for infrastructural

facilities where power is a major tool. Invariably power is an indispensable
unit of infrastructure, whose growth can never be compromised with. The
growth rate for the demand of power in developing economy like India is
generally higher than the growth of GDP (Gross Domestic Product). In order
to achieve a healthy growth rate of GDP around 8 per cent per annum, the
growth rate for power is prescribed to be more than 10 per cent per annum. So
far power sector has been greatly dependent on budgetary support and
external borrowings.

This thrust on generation, and even expensive IPP power, is best

characterized by Homi Bhabha’s oft-quoted statement,
“No power is as costly as no power”

The power generation grew from one MW in 1900 to 1363 MW during the
independence. After independence, the need for wide spread availability of
power was felt. Thus Electricity (Supply) Act, 1948 was enacted with an
intention to rationalize generation, transmission and distribution of electricity
in the country. The state electricity boards (SEBs) were allowed to start their

32
own generating stations except the nuclear power stations. To meet the
growing demand of power centrally sponsored Public Sector Enterprises like
National Thermal Power Corporation (NTPC) & National Hydro Power
Corporation (NHPC) were formed in 1975. Earlier being entrusted with
generation of power from coal and gas whereas later was asked to look after
the hydro based power generation. Power Grid Corporation of India Ltd.
(POWERGRID) was formed in 1989, to look after transmission of power and
to develop the interconnected grid system across the country.

NTPC was set up in 1975 with a view to promote and develop thermal power
in India. The corporation has grown geometrically in terms of both production
and quality power supply, within the country. The corporation has 13 coal
based thermal power projects and 7 gas / liquid fuels based combined cycle
projects. NTPC has adopted multi pronged growth strategy to become 40,000
MW plus company by the end of 2012. It has also acquired 314 MW of
captive power plant of SAIL through formation of joint venture with SAIL.

National Hydroelectric Power Corporation (NHPC) was set up in 1975 and

soon got the title of “Largest Producer” of hydro Power in India. NHPC has
commissioned several big hydro based electric generation projects across the
country including some in the difficult terrains. It also lends technical advice
to different state govts. in their projects.

Of course, hydro projects are attractive since, once constructed, they have
very low marginal costs (no fuel costs), and they offer reasonably high levels
of load control and quick start capabilities (subject to water availability).
However, Indian dispatch mechanisms do not fully account for marginal
cost pricing. While the ash content is high, the sulphur content is quite low,
reducing the need for clean-up technologies. No Indian coal plant today
incorporates Flue Gas Desulphurization (FGD) technology.

33
Nuclear power generation in India is in its infancy. It hardly meets 2.5% of
total generation. So Thorium, like Uranium 238 is the primary raw material
whose isotopes are available. (The primary form, or isotope, of natural
uranium, is fertile.

It can not undergo a fission reaction until converted into another element
through a nuclear reaction, such as in a Fast Breeder Reactor). Breeding is the
process of producing more fissile material from fertile than consumed to
sustain the reaction. India has the largest thorium reserves in the world, which
if converted to fissile material, could provide hundreds of thousands of
megawatts of power, for many, many centuries.
(Chidambaram, R. and C. Ganguly (1996). "Plutonium and Thorium in the Indian
Nuclear Programme)

Chart 1: Power generation mix during several plan

period

34
Table 2: Generation of Power – Sector wise & Compositions

ALL FIGURES IN MW X PLAN XI PLAN TOTAL

CENTRAL SECTOR
• Ministry of Power 23,000 23,500. 46,500
• Ministry of Coal 210 1,500 1,710
• Department of Atomic 1,220 5,160 6,380
Energy 4,055 6,625 10,680
• Ministry of Non-
conventional Energy
Sources

Total Central Sector 28,485 36,785 65,270

Total State Sector 8,300 10,600 18,900

Total Private Sector 9,400 13,500 22,900

Overall Capacity Addition 46,000 61,000 1,07,000

(approx.)

35
Table 3: Hydel Potential – Global Scenario

COUNTRY Exploitable Installed capacity % of potential

potential utilised
NORWAY 47,000 27,360 58

CANADA 1,60,000 65,678 41

BRAZIL 17,000 52,427 31

CHINA 3,10,000 56,000 18

INDIA 1,50,000 23,488 17

Table 4: States with substantial undeveloped Hydro potential

State Assessed In Under Balance

(MW) Operation Construction (MW)
(MW)

Arunachal 50328 10.50 405 49912.50

Pradesh
U.P. / 18898 1609.85 3453 13835.15
Uttaranchal
Himachal 18820 3822.95 1926 13071.05
Pradesh
Jammu & 14146 1394.25 469 12282.75
Kashmir
Sikkim 4286 84 519 3683.00
Karnataka 6602 2789 222 3590.60
Meghalaya 2394 185.20 000 2208.80
Mizoram 2196 000 60 2136.00
M.P. / 4485 898.50 1550 2036.50
Chhattishgarh
Kerala 3514 1799.50 30.25 1684.25
West Bengal 2841 300.50 936 1604.50
Manipur 1784 105 90 1598.00
Nagaland 1574 75 24 1475.00
Orissa 2999 1837.50 66 1095.50

36
Table 5: Inter-regional Links under Operation

Name of the Link Regions inter- Capacity (MW)

connected

HVDC Links

Vindhyachal HVDC back to back West and North 500

Chandrapur HVDC back to back West and South 1000
Gazuwaka HVDC back to back East and South 500

AC Links

Korba-Budhipadar 220kv 3 ckts West and East 450

Balimela-Upper Sileru 220 kv S/c East and South 200
Kolhapur-Belgaum 220kv D/c West and South 300
Lower Sileru and Burgur West and South 100
Dehri-Sahupuri 220 KV S/c North and East 200
Karmnasa-Sahupuri 132Kv D/c
Biharshariff-Sarnath 400 kv D/c North and East 500
Birpara-Salakati 220 kv D/c East and North-East 100
Auraiya-Malanpur 220Kv D/c North and West 200
Bongaigoan-Malda 400 Kv D/c North-East and East 800

Total 4850

37
Chart 2: Constituents of Financial Parameter

REASONS FOR POOR FINANCIAL HEALTH OF

SEBs/STATE UTILITIES

Negative Returns on
investments

Average cost of power Low PLF High T &D losses High Accounts
Average Revenue Receivables

• Skewed tariff • Inadequate • Technical losses • No firm policy

system R&M account for on
subsidising investments about 15-20% of disconnection
domestic and resulting in these losses
agricultural less than
• Varies widely
consumers at optimal PLF
• Commercial across stats
losses account (lower in
expense of
for 20-25% Tamilnadu and
industrial
higher in Bihar)
consumers

38
Power Sector in Pre-reform Period (1961-90)

Soon after the independence, parliament enacted Electricity (Supply) Act,

1948 bringing the entire power industry in the country into the fold of public
sector, establishing separate SEB (State Electricity Board) as a vertically
integrated utility in each state and setting up the Central Electricity Authority
(CEA) as the apex technical body to oversee the power industry at the
national level. But till 1970s the development of power sector was wholly the
responsibility of the individual state governments. The government of India
decided to play a positive role in augmenting the power generation in the
country by establishing NTPC & NHPC in 1975.The idea was to set up large
thermal power stations and optimally located large hydropower stations
whose benefit can be utilised by the regions of the states as well. From the
above table, we can see that central investment in power sector started rising
from the 1980s. But the state governments accounted for the major share of
the outlay on the power sector and allocations under the state plans were
highest among all sectors of development. Because of certain historical
reasons, a small share of generating capacity under private ownership was
seen in the cities of Ahemadabad, Mumbai and Calcutta.
In the early 80s, Rajadhyaksha Committee (Committee on power) stressed on
the need for higher investment in the areas of Transmission & Distribution
(T&D) was required to overcome the problem of high technical losses.

Indian Economy and Growth of Power Sector

Electricity reforms in India formally took off along with the economic
liberalization in 1991-92.Prior to this the pattern of investment in the power
sector looks like this as mentioned below.

39
 Table 6: Plan Outlay On power Sector (1961-90)
Centre States & UTs Total
Outlay % of Outlay % of Outlay % of
(Rs. Plan (Rs. Cr.) Plan (Rs. Cr.) Plan
Cr.) outlay Outlay Outlay
Third Plan 109 3.0 903 23.1 1012 13.5
(1961-66)
Fourth Plan 447 5.0 2001 28.5 2448 15.4
(1969-74)
Fifth Plan 825 4.1 6469 33.4 7294 18.6
(1974-79)
Sixth Plan ( 4725 10.0 14,540 28.9 19265 19.8
1980-85)
Seventh Plan 11,051 11.6 23,222 27.5 34,272 19.0
(1985-90)
Source: Planning Commission – respective plan documents

Table 7: Installed Power Capacity 1950 to 2000

(MW)
Year Public Non-utilities Total
1950-51 1,710 590 2300
1970-71 14,710 1560 16,270
1990-91 66,100 8,600 74,700
2001-02 1,04,900 16,100 1,21,000

Table 8: Installed Capacity (MW) At a Glance

Ownership/Mode Hydel Steam Gas Diesel Wind Nuclear
State 22636.02 36302.00 2661.70 582.89 62.86 0.00
Central 3049.00 21417.51 4419.00 0.00 0.00 2720.00
Private 576.20 4411.38 4082.40 551.94 1444.60 0.00
Total 26261.22 62130.89 11163.10 1134.83 1507.46 2720.00
% of Installed 25.03 59.22 10.64 1.08 1.44 2.59
Capacity
Source: Annual report (2001-02) on working of SEBs by Planning Commission

40
Table 9: Physical Performance (At the All India Level)

Year Plant Availability Plant Load T&D Losses (%)

(%) Factor (%)
1996-97 79.00 64.40 24.53
1997-98 79.40 64.70 24.79
1998-99 78.70 64.60 26.45
1999-2000 80.30 67.30 30.80
2000-01 80.50 69.00 29.90
2001-02 NA 69.90 27.80

Source: Annual Report (2001-02) on working of SEB by Planning Commission

41
Power Sector during Reforms Period (1992-2002)

The government realised that the gap between demand and supply of power
was widening and requirements of future expansion and improvement of
power sector cannot be fully achieved through Public resources alone which
augmented the need for encouragement of private players in generation,
transmission and distribution of power. The most important factor was that
the state electricity boards were fast moving towards bankruptcy. In the
Common Minimum National Action Plan for Power (CMNPP), this was
approved by chief ministers in the conference convened by Prime Minister in
1996 which ushered in the comprehensive reform programme for power
sector, including reforms in the distribution sector. The resolution passed in
the CMNPP includes:

1. Establishment of Central Electricity Regulatory Commission (CERC)

and the State Electricity Regulatory Commission (SERC) in each state
in time bound manner.
2. Rationalization of retail tariff, under which no sector shall pay less
than 50 per cent of the average cost of supply and tariffs for agriculture
should not be less than fifty paise per unit and should be increased to
50 per cent of the average cost in not more than three years.
3. Finalization of National Energy Policy.
4. Gradual private participation in distribution, initially in one or two
viable geographical areas covering both urban and rural areas and
extend to other parts of state gradually.
5. Restructuring and corporatisation of SEBs and make them function on
commercial basis.
6. Improvement in plant load factor (PLF).
7. Compulsory metering of all sub-stations and all major feeders, all new
connections and all connections including agricultural connections
should metered by the year 2002.

42
 8. Compulsory energy audit for all consumers.
9. Evolvement of a national policy on hydro power development
10. Encouragement for co-generation and captive generation.

At the time of approval of CMNPP, the power sector was full of hopes as
country was expected to add about 10,000 MW of generation capacity every
year and 50,000 MW in next five years out of which three fourth would be
coming from the private sector.

In the wake of this large number of Memorandum of Understanding (MOUs)

were signed between the state government and different prospective investors.
As many as 58 schemes having a capacity of 30,000 MW (Approx.) were
cleared by CEA.

The single most important factor which became a stumbling block in

attracting foreign direct investment was the fact that the SEBs were on the
verge of bankruptcy. They had defaulted in payment to central PSUs for
supply of coal, power etc. The industry was characterized by lack of
efficiency, excessive manpower, poor project management, irrational tariffs,
and high proportion of Unmetered supply, large scale theft of power in
collusion of SEB staffs, poor billing and collection mechanism, perennial
problems like theft of cable, wires etc., non payment of government dues and
even resistance to disconnection of supply for non-payment of dues, poor
customer grievance redressal mechanism by SEBs.

Due to ailing state finances, state governments did not show any willingness
to stand guarantee for payment for power purchased by the SEBs. In 1992, the
government of India offered counter guarantee to few fast track projects but
none of these could reach financial closure. Investors had to face formidable
procedural hurdles; negotiations had to be carried out with numerous agencies
both at centre and state level. Since the raw material for thermal power being

43
coal, so IPPs wanted to ensure the smooth and timely supply of coal. But both
coal companies and railways, which transport the coal, expressed their
unwillingness to enter in to any legally enforceable fuel supply agreements.
The public perception was that power supply from IPP is costlier than from a
similar publicly owned generating station which led to the reopening of the
Power Purchase Agreements (PPAs). Added to this was the bureaucratic
delay. Single window mechanisms proved to be ineffective. This was not
conducive in attracting the private investment in the power sector. The
questions were raised about the Government commitment to power sector
reform especially for the private players.

Private players did not show any interest in power transmission. The scope
available for the owner of a transmission line to cut costs or maximize
revenue is remote because the owner has no control over the flow of power in
his line. In developed countries also investors did not show much interest in
erecting transmission line.

The private sector has to play an important role in power distribution. The
sizeable backlog of investment required to reduce technical and commercial
loss and keep pace with load growth. More importantly improvement in
operational efficiency and quality of service, proper billing and collection
mechanism, greater responsiveness to consumer needs will be the principal
gains from private ownership and management of distribution network. A
successful distribution reform holds the key to success in restructuring of
power sector.

44
Table 10: Public Sector Investment In power 1992-2002

Centre States and UTS Total

Investment % of Investment % of Investment % of
(Rs. Cr.) Plan (Rs. Cr.) plan (Rs. Cr.) Plan
outlay outlay outlay
Eighth 30,426 11.0 46,251 24.0 76,577 15.8
Plan
Ninth 53,299 10.8 70,926 18.9 1,24,526 14.5
Plan
Note: In the ‘investment” column, expenditure is shown for eighth plan and outlay for ninth plan.
Source: Planning Commission, Annual Report (2001-02) on the working of State Electricity Boards
and Electricity Departments. Annexure 2.3 & 2.4

Table 11: Capacity Addition 1992-2002

Central State Private Total Central State Private Total

Sector Sector Sector Sector Sector Sector
Eighth Plan (1992-97)
Hydro 3260 5860 162 9282 1465 795 168 2428
Thermal 8498 9010 2646 20,15 6252 6041 1262 13,555
6
Nuclear 1100 - - 1100 440 - - 440
Total 12858 14870 2810 3053 8157 6835 1430 16423
8
Ninth Plan (1997-02)
Hydro 3455 5815 550 9820 540 3912 86 4538
Thermal 7574 4933 17038 2954 3084 5538 4975 13597
5
Nuclear 880 - - 880 880 - - 880
Total 11909 10748 17588 4024 4504 9450 5061 19015
5

Source: Planning Commission, Ninth Plan, Vol II, Chapter 6, Table 14 and Draft Tenth
Plan, Vol 2, Table 8.2.2

45
From the above two figures namely Public Sector Investment in Power and
capacity addition during the ten year period led us to this conclusions-
1. The central government started spending more money on power in
comparison to previous years and a substantial hike in central outlay in
ninth plan can be seen.
2. Actual capacity addition fell seriously short of target in both Eighth
and Ninth Plan.
3. Private sector participation in capacity addition was worse among these
three. In eighth plan actual capacity addition almost 50% of the target
set but in ninth plan it was even less than 30% of the target set.
4. Capacity addition of hydro power in state sector was steadily
increasing & phenomenal rise can be observed in ninth plan.
5. Actual capacity addition fell seriously short of target both in Eighth
and Ninth Plan periods.
In short, the post reform performance shows that far from any improvement in
power situation, this sector suffered severe setback.

Table 6: Electricity – GDP Elasticity in India

Elasticity
First Plan 1951-1956 3.14
Second Plan 1956-1961 3.38
Third Plan 1961-1966 5.04
Fourth Plan 1969-1974 1.85
Fifth Plan 1974-1979 1.88
Sixth Plan 1980-1985 1.39
Seventh Plan 1985-1990 1.50
Eighth Plan 1992-1997 0.97
Ninth Plan 1997-2002 0.75

Calculated and compiled from data from the Planning

Commission and Ministry of Finance (Economic
Surveys)

While many Plan documents claim growth targets of 40-60,000 MW for the
coming 5 Year Plans, and even segment these into state, central, and private,
it is unclear how such growth will be financed or sustained in the current

46
operating environment. Assuming a target of 100,000 MW expansion, which
would less than double the per capita consumption given the increase in
population over 10 years, the estimated investment would be 150 billion US$,
using the rule of thumb (coal-centric) that 1 MW of capacity addition requires
1 billion dollars investment for generation, and half that more for T&D. 15
billion dollars per annum is almost 4% of the GDP, a number too high for
domestic savings rates and budgets alone. This was one of the prime reasons
that the government wanted foreign investment in the power sector, making
this a central feature of the 1991 reforms.

(India’s development is largely based on Soviet-style 5 year plans, and a few

Annual Plans in between. Critics state that too much effort is placed on Plan
(largely capital) expenditure, and not enough focus is there on operating
expenditures, like maintenance, monitoring, enforcement, analysis, etc. In
most states, if a consumer needs a new connection, they have to pay non-
trivial connection fees if the lines need to be extended. The charges vary by
state. Part of this may be due to poor metering. Older electromechanical
meters have a threshold below which they fail to register consumption. Newer
electronic meters only became available in the 1990s.)
(The Indian (British-based) system was supposed to have a near permanent bureaucracy, giving
stability as the elected politicians shifted over time. This is in contrast to the American system, where
the new executive office brings in a new (but fixed term) operating staff for the various departments.)

47
Electricity Bill 2001(Power for all by 2012)
There is a major revamping of India’s power sector planned via the Electricity
Bill 2001, which is in Parliament but has not yet been passed. This legislation
was originally planned for 2000, and was renamed for 2001, but the act was
ratified by the parliament only 2003, referred as Electricity Act. 2003.

Main Features of Bill include

1. Formulation of a National Electricity Policy by the Govt. of India

2. Strengthening anti-theft laws
3. Generation free from licensing except for hydro units
4. Requirement of techno-economic approval done away with
5. Captive generation free from controls
6. Open access to transmission lines
7. Setting up of State Electricity Regulatory Commission (SERC)
mandatory
8. Open access in distribution to be allowed by SERC in phases
9. Retail tariff to be determined by regulatory commission
10. Trading a distinct activity permitted with licensing
11. Establishment of Appellate Tribunal

This would be a major bill, revamping the 1910 and 1948 Laws, and
extending reforms further. Fundamentally, it moves the country towards
power markets, but it provides very little detail on the operations of such a
system, e.g., the role of any Independent System Operator (ISO). It states that
Regional Load Dispatch Centres will be responsible for grid operations, and
failing their abilities or powers, the Central Transmission Unit (i.e., Power
Grid) will take over this role. The Electricity Grid Code referred to in the bill,
as formulated today (Power Grid 2002), states that these entities will not trade
power, but only facilitate power transactions. The Power Trading
Corporation, though designed to trade power, is not set up as an ISO. Both the
Bill and the Code indicate Regional as well as State Load Dispatch Centres.

48
 This appears to be a poor design, as the synchronous grid should not operate
with such granularity.

The Electricity Bill 2001 has a strong focus on bulk (High Tension)
consumers, who can get open access to generators (captive or IPPs).
However, it doesn’t indicate how much surcharge the utilities can pose, for
the losses they incur (loss of paying customer) (Mahalingam 2002). This
tension, over paying customers that sustain the cross-subsidies of today, is
one of the major issues facing the Indian power system.

Table 12: Tenth Plan Power Sector Outlay (2002-07)

Ministry/Department Outlay
Centre
Power 1,43,399
Coal 8,008
Atomic Energy 25,577
States & UTs 82,224
All-India 2,59,208
Note: The outlays of Ministry of Coal and Department of Atomic energy are for ‘Power
programmes’
Source: Derived from Planning Commission, draft tenth plan, Vol 2, Annexure 3-A to 3-C

Table 13: Financing Pattern of Central Sector outlay in Tenth Plan (Rs. Crore at
2001-02 prices)

Ministry Budgetary Support Internal and Extra- Total Outlay

/ Dept. budgetary resources
9th. Plan 10th. Plan %
Realisation Projection Increase
9th. Plan 10th.Plan %
9th. 10th. % Realisatio Projection Increase
Plan Plan Increase n
Realisat Projecti
ion on
Atomic 6771 21550 218.3 1671 10820 547.5 8442 32370 283.4
Energy
Coal 2233 1050 -53.0 14623 30541 106.0 17058 31591 85.2
Power 14907 25000 67.7 29785 118399 297.5 44692 143399 220.9

Note: 1.The outlay under Atomic Energy covers both power and R&D programmes. In the
Tenth plan Rs. 25577 are for power 2. The budgetary support for coal includes Rs. 1257.4
cr. And Rs. 8007.6 cr. Under ‘Ninth Plan Realisation’ and ‘Tenth Plan Projections’
respectively for power. (Neyveli Lignite Corporation).
Source: Planning Commission, Draft Tenth Plan, Vol 1, Annexure 3-B.

49
Private Sector Participation in Generation

The reform policy introduced in 1991 allowed private sector to set up

companies to act as licensees, generating and distributing power, or simply as
generators. Up to 100% foreign equity participation was permitted, with a
maximum debt to equity ratio of 4:1. The return on foreign equity was
protected in foreign currency and numbers of tax concessions were also made.
In order to determine tariff for the purchase of power, a notification, which
laid down the guidelines for a two part tariff, was issued. The main features of
the notification were:

1. The tariff would constitute two parts- a fixed part comprising return
on equity (RoE), interest on loan capital, depreciation, operations
and maintenance costs (O&M); and a variable part comprising fuel
costs.

2. A maximum of 16 per cent RoE was allowed to be included on the

tariff (this was protected against fluctuations in the exchange rate)

3. Fixed cost would be recovered at a PLF of 68.5% (equivalent to 6000

hours of operations) in case of thermal plants, and at an availability
factor of 90% in case of hydroelectric plants. The normative PLF for
thermal plants was revised to 75 percent in February 1997.

4. As an incentive, a maximum of 0.7 per cent additional RoE could be

given for every one per cent increase in PLF or availability.

50
Clearance & Approvals

In order to clear a thermal project, the CEA requires an approval from the
state government and electricity board concerned, clearance of water
availability, and fuel linkage approval from the petroleum and natural gas
ministry or from the coal ministry. Projects also require environment
clearance and chimney height clearance from the National Airport Authority
of India.

Fuel supply and Transportation: Fuel supply has become a contentious issue
as the supply of coal, naphtha and natural gas is controlled by public sector
units (PSUs). The PSUs are not willing to enter into agreements for assured
supply, mainly due to the lack of experience with such contracts, particularly
with regard to the evaluation and quantification of the associated risk and
premium. Further the Indian Railways, the principal carrier of fuel, is
unwilling to assure uninterrupted supply. The IPPs insist that the penalty for
supply interruptions should cover the loss of revenue (Fixed cost component
of tariff) attributable to the default in fuel supply; some of them suggest that
the penalty could be on the basis of the additional cost incurred in procuring
fuel from alternate sources. PSUs and Railways however contend that it
should be related to the value of the fuel not supplied. In the absence of any
satisfactory resolution to this problem, financial closure is getting delayed
because the lending institutions, understandably, are reluctant to bank on risky
fuel supply agreement (FSA).

51
III. Growth of Power Sector

Global Perspective

Many countries have started reforms in the power sector before India
embarked on reforms. Notable among them were UK, USA, and Latin
American countries like Chile, Argentina, Peru, Columbia, EU Nations and
Australia. Their reforms programs were based on country’s governmental
structure, demographics, socio-economic and political environments and
resource availability. But it was amply clear that those countries had
undertaken restructuring electric utilities were for improving the efficiency,
reducing tariff and to provide better quality of service to consumers, through
competition and consumers would gain from efficiency gains in generation,
transmission and distribution. Restructuring also led to the removal of certain
problems like load shedding, blackouts, and high degree of T&D losses which
includes theft of energy, etc. The private investment has become essential to
pump in additional generation, improvement in transmission and distribution
improvements.

International Scenario of Power Sector

1. United Kingdom

UK was pioneer in unbundling government owned vertically integrated

electric utility and privatizing the same. It also introduced competition in
generation through power pool and a spot market. Initially there was
resistance from opposition parties but it became popular with electorates. The
small investors saw an opportunity to make investments and earn good
returns. The British Model became the bench mark of reforms and it provided
a platform for other countries to follow the same.

52
Privatization of Power Industry

The electricity industry was under public ownership from 1948 to 1990. The
Central Electricity & Generating Board was in charge of generation and
transmission. The Board was engaged in selling the bulk electricity to 12 area
distribution boards. This monopoly resulted in excessive capital costs, over
dependence on high-cost indigenous coal, low productivity growth, low return
on assets and inefficient consumer redressal. The Electricity Act 1989 paved
the way for privatization of electricity industry in UK. The industry was
segregated in to four functions namely Generation, Supply, Transmission &
Distribution. Open access was thus introduced. The basic underlying
objective was to foster retail competition by allowing increasing number of
consumers to shop around for the best service.
The initiatives in this regard were taken as early as 1980s, which were
comprised
1. Generation and Transmission was segregated and all the generating
stations were made in to separate companies.
2. Two generation companies and regional distribution, which was owned
by distributors, were floated on the stock market.
3. A centrally co-ordinated power pool, which acts as a spot market was
created.
4. Generators compete to dispatch to the power pool as well as to enter in
to bilateral contracts with distributors/retailers and end users.
5. Retail competition was allowed for large users.
6. All generators had the open access to the transmission network to
ensure retail competition.

All power utilities were unbundled into generation, transmission and

distribution segments. Generation companies except nuclear generation
companies and distribution companies were privatized; a central pool was
created, which enables the companies to dispatch the power to the pool or

53
even to enter bilateral contracts with distribution companies as well as large
end users. The principle of competition was introduced at every stage and
open access was created for transmission network on payment of wheeling
charges which also allowed retail competition.
Labour productivity doubled in the first six years. There was a market shift in
consumption from coal to natural gas. The prices of coal delivered to power
fell by 20 percent in real term and unit costs fell by about 50 percent.
Privatization resulted in a cost reduction of about 5 to 7.5 percent of prices or
an extra 40 percent return on assets. The price of power fell almost by 20
percent in real terms and unit cost fell by about 50 per cent. Privatization
resulted in a cost reduction of about 5 to 7.5 percent of prices or an extra 40
percent return on assets. The price of power fell by about 20 percent.

Chart 2: Load Duration Curve

54
The Pool

The most innovative reform was the pricing of power sold by the generation
to the Regional Electricity Companies (REC), who are the distributors or
bulk users. In UK, all generators sold power to a pool operated by the national
grid company. The generators would bid to supply power in half hour slots
during a day. The dispatch was done on the basis of merit order of these bids,
as per the demand. The main reasons for establishing the pool were:

1. The advantage of minimal change from pre-privatization arrangements

2. The advantage of transparency bidding
3. The advantage of substantial market, a new supplier can enter
4. The belief that an efficient market would be characterized by a uniform
price for all participants equal to marginal cost.

In order to protect themselves against the potential variability of pool prices,

generators and suppliers entered in to a series of short-term contracts which
allowed both parties to manage the risks caused by uncertainty about pool
prices. Initially pool prices fluctuated sharply and a review had shown that it
was subject to severe manipulation and it came in for lot of criticism. It
included lack of transparency regarding the price determination, lack of
proper competition, lack of demand side participation and lack of flexibility to
adapt to changing circumstances.

National Electricity Trading Arrangements (NETA)

In order to overcome the above problems a New Electricity Trading
Arrangement (NETA) was introduced to replace the pool system with
forward future market and short term spot market and balancing mechanism.
The forward contract market is where customers and distributors can enter
into bilateral contracts for electricity directly with generators. The prices will
be negotiated and the contracts will be “take or pay” contracts. The future

55
markets are legally binding arrangements between a buyer and a seller to
deliver and take delivery on a specified future date a quantity of electricity at
a price agreed today on the day of the contract. A short-term spot market
where simple offers and bids for electricity, including demand side reductions
can be traded.

A balancing mechanism will be used by the National Grid Company (NGC)

to balance actual supply and demand on the system as well as to solve
transmission constraints. This market will open 3 to 5 hrs ahead of the
moment of delivery and operate up to the moment of delivery. Through this
mechanism, NGC will be able to contract for increases or decreases in
generators’ output or decreases in customer demand.
The British model demonstrates that unbundling is feasible and generation,
transmission and distribution can be separated from one another. It shows that
it is very important that competition needs to be introduced in power market
by structural reform at the start of the reform process itself. The power sector
reform can yield substantial productivity gains.

The government and regulator must expect to face unanticipated challenges,

during the transition period. The sequencing and the timing of the reforms are
critical. The government’s full and sustained commitment is vital to the
success of its reform programme, as the government must resist tendencies by
some power entities to pre-reform structure.

The UK experience has considerable relevance to the developing countries.

The main development priorities of the power sector in developing countries
are to meet rapidly increasing demand for power and to expand access to
electricity. Power reform in developing countries tends to be driven by failure
to meet these priorities.

56
From UK experience it became clear that it is possible to introduce and foster
competition that permits consumers to buy directly from producers with
Transmission Company as just for fee, a carrier like road transport business.

2. United States of America (USA)

In a federal country like USA the situation varies across states. The electricity
industry in the US comprised about 200 vertically integrated privately owned
utilities, over 4000 non-utility generators, about 3000 distribution utilities
including local city controlled utilities and rural electric cooperatives. The
existing legislative framework for regulating electric industries has Federal
Energy Regulatory Commission (FERC) at the national level and separate
regulatory commission at state level. While most regulatory functions are
exercised at the state level, the federal agency is responsible for regulating
mainly the wholesale trade across the states.
In the US, the Federal Energy Regulatory Commission (FERC) is
promoting an agenda for open access to transmission, and a number of states
and utilities are considering restructuring the industry to set up power pools,
separate generation from other functions and provide better customer service.
Thirteen states in the US have already enacted electric industry restructuring
legislation, five have issued regulatory orders, and all the rest are considering
the issue.

The California Power Crisis 2000-2001

“Its problems are largely manmade.”

—Newsweek Magazine, April 3, 2001, p. 23
The California power crisis is so sudden and serious that it is prompting
policymakers in many countries as well as other U.S. states to look for lessons
that can be applied to the reform of their own power sectors. Concerned
policymakers around the world are asking: If things can go so badly wrong

57
with a reform that did not involve wholesale privatization of the electricity
supply industry in such a rich and sophisticated economy, what are the
implications for much less well-endowed countries embarking on the full
menu of reform including privatization?

When a power sector reform like California’s fails, political authorities are
inevitably under strong pressure to “do something” to solve the crisis. In a
special session of the California legislature called by the governor, legislators
introduced more than 75 bills intended to solve one or more aspects of the
crisis. Unfortunately, quick-fix “solutions” often lead to outcomes that can be
inconsistent with the original reform objectives and can produce outcomes
that are even worse than the conditions that triggered the reform. In 2001 the
California and federal governments had proposed or undertaken actions which
include the following:

Price caps. The Federal Energy Regulatory Commission (FERC) imposed

price caps that may deter the investment needed to overcome the current
supply shortage.

Forced sales. The U.S. Secretary of Energy issued several orders that
required generators and natural gas suppliers to continue selling to non-
creditworthy California buyers.

Government energy trader. A new state law authorizes the state government
to spend up to $10 billion on the state’s credit to purchase wholesale
electricity that can be resold to the three large privately owned utilities.

“Nationalization” of the grid. The State of California may become the new
owner of the portion of the high-voltage transmission grid currently owned by
the three large privately owned utilities.

58
“Balkanization” of wholesale electricity trade. The state’s Assembly has
passed a bill that would make it difficult to export electricity produced from
new generating plants located in California to buyers outside the state.

Many elements of the California reform package are peculiar to a complicated

and unusual market design that was the outcome of a political compromise
reached by various stakeholder groups. Many of these features will have no
immediate, or even near-term, relevance for most developing countries.

In developing countries, the California power crisis may be creating the

impression that power reform is too risky. The power crisis in California does
not justify this conclusion. For many developing countries, the status quo in
the power sector is the riskiest alternative of all. The status quo often creates a
drag on economic growth through inadequate and poor-quality power supply.
In addition, limited government funds are frequently diverted to the power
sector that would otherwise be available for schools, clinics and roads.
Therefore, most countries simply have no alternative to a substantial and basic
reform of the sector that almost always requires restructuring and
privatization. But like all human endeavours, power sector reform can be
done well or done poorly. The principal lesson of California is that good
intentions are not enough. Any reform must pay close attention to starting
points, the particular problems that need to be solved, and the appropriateness
of the path selected for solving these problems.
The paper is organized into three parts. It begins with an overview of the key
features of the 1998 California power sector reform: how it differs from
reforms elsewhere, the events and actions that have put it in a crisis mode, and
the main lessons that can be learned from the crisis.

Following the overview, the main text is divided into two parts. Part I
discusses in depth the lessons learned, which concern mainly the
establishment and regulation of a mandatory, wholesale power market based

59
on spot pricing. Since this is not a near-term option for many developing
countries, the paper also describes other, more-limited forms of competition
that may suit their situations. Although privatization was not an element of
California’s reform, the state’s experience does indirectly provide important
lessons for the privatization and regulation of distribution enterprises and new
market entities in developing countries.

Part II details the specific reforms initiated in California, reviews the factors
that led to the crisis, and examines whether the crisis could have been avoided
through better market design and management. The paper draws on numerous
sources such as published articles, reports and websites, as well as the
working experience of World Bank staff in numerous countries.

The Nature of the Reform

Key Features
• The three privately owned utilities were “encouraged” to sell off their
generating plants but without any vesting contracts to buy back the
output of plants.

• In return, the utilities were allowed to recover their “stranded costs”

(i.e., anticipated above-market costs) associated with the two high-cost
nuclear power plants and the state-mandated purchases of power from
certain IPPs through a “competitive transition charge” on consumers’
electricity bills.

• The state government mandated a 10- percent reduction in retail rates.

Retail rates were frozen for four years or until stranded costs were
recovered. Actual consumer bills went down little because the
reduction in rates was largely offset\ by the competitive transition
charge.
60
• Retail (residential, commercial and industrial) customers were given
the right to choose alternative electricity suppliers.

• A non-profit, Independent System Operator (Cal ISO) was created to

operate the transmission facilities owned by the private utilities (about
75 percent of the state’s high-voltage grid). The Cal ISO also operated
a bid-based real-time energy market as well as several other markets to
acquire grid support services (i.e., ancillary services).

• A separate Power Exchange (Cal PX) was created to operate a bid-

based, centralized market for forward (day-ahead and day-of) power
sales. The two largest private utilities were required to buy and sell all
of their electricity through the Cal PX.

• Both the Cal ISO and Cal PX were governed by large boards, each of
which was made up of more than 30 stakeholder and non-stakeholder
members.

• The retail electricity rates of individual privately owned utilities

continued to be regulated by the CPUC. Even though the Cal PX and
Cal ISO were under the regulatory jurisdiction of FERC (the national
electricity regulator), the CPUC and the state government had
substantial de facto influence over their actions. The two regulatory
entities, the CPUC and FERC, sometimes issued conflicting orders.

• The coverage of the reform was incomplete. Municipal utilities were

given the option of not participating in these new arrangements. In
general, they chose not to participate.

61
How the California Reform Differs from Other Power Sector Reforms

• Initially, the major private distribution companies were not allowed to

buy outside of the spot markets. (No vesting or forward contracting
was allowed.) Hence, they were totally exposed to the price volatility
of the Cal PX spot markets.

• Distribution companies and others who serve retail customers were not
required to own or have under contract sufficient generation capacity
to meet their peak demands.

• No provision was made for pass-through of wholesale purchase power

costs to retail rates until full recovery of stranded costs or March 2002
(whichever came first).

• The complicated design involved multiple, sequential wholesale

markets operated by two new separate entities (the Cal PX and the Cal
ISO). In other U.S. regions, the ISO and PX are combined in a single
entity.

The Reform Process

The reform operated by “political consensus.” The final version of the

reform package reflected a compromise among competing
stakeholders. It was incorporated in a bill that was passed unanimously
by the California legislature.

Criticisms of the final design by outside power sector reform experts

were generally ignored by state and national political and regulatory
authorities.

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The Crisis

• The highly contentious sitting and permitting process for new

generating plants blocked the installation of any major new generating
plants for more than 10 years. California’s installed generating
capacity declined by about 1,200 MW between 1997 and 2000.

• Wholesale markets operated by the Cal PX and Cal ISO worked

reasonably well for the first two years (1996–98) while the initial
surplus of generating capacity disappeared. Less than 2 percent of
residential customers exercised their option to pick new electricity
suppliers because new suppliers could not offer substantial reductions
in consumers’ electricity bills under the rate freeze and competitive
transition charge during the reform transition period.

• A shift in market fundamentals occurred: large increases in electricity

demand in California and neighbouring states, reduced availability of
hydropower in California and the Pacific Northwest, and big increases
in the prices of gas and pollution permits to emit nitrogen oxides
(NOx).

• Wholesale spot prices skyrocketed starting in the spring of 2000.

California utilities paid around $11 billion more for electricity in the
summer of 2000 than in the summer of 1999. Similar wholesale price
increases in neighbouring states had less impact because, unlike
California, only 5 to 10 percent of their overall supplies are purchased
on the spot market.

• Mandated rolling blackouts throughout the state since December 2000

seriously disrupted the state economy (the sixth largest in the world).

63
 Even more widespread blackouts are expected in the upcoming
summer.

• Some evidence indicates that the growing shortage of generating

capacity, combined with certain features of the complex wholesale
market design, may have allowed some generators to exercise market
power.

• Limited or no pass-through of wholesale costs to retail customers has

forced the two largest private companies to incur around $12 billion in
unfunded liabilities since April 2000. They are on the verge of
bankruptcy.

• The Cal PX ceased to operate its two markets on January 31, 2001.

The Lessons

Overall Design of the Power Market

• A poorly designed power market will not operate properly, and

inadequate attempts or delays in correcting market distortions will spill
over into a serious financial crisis.

• The California power reform crisis offers many valuable lessons on

“what not to do” for reformers of power sectors, particularly for the
establishment and regulation of a mandatory, wholesale power market
based on spot pricing.

• The California experience indirectly provides important lessons for the

privatization and regulation of distribution enterprises and new market

64
 entities in developing countries, even though privatization was not an
element of California’s reform.

• The California experience also provides a lesson about crisis

management: there is no way out that is quick, painless or cheap.
“Quick-fix” solutions to basic design flaws usually fail and may
aggravate the problems. Any real solutions will impose heavy costs on
stakeholders such as suppliers, consumers, shareholders, and
legislators.

3. Latin American Countries

Almost two decades after the beginning of the UK experiment in the power
sector reforms and privatization, many other countries have either adopted or
are adopting a model that promotes competition in the power market to
achieve economic efficiency and higher quality services, as well as lower
consumer prices for electricity.

A. Brazil
Brazil started its power sector reform in the mid nineties implementing
changes in the management, organization, ownership and decision-making of
its electricity sector. Privatization was one of the initial steps of the process
which aimed to attract private investments and create competition within the
industry. As these changes have taken place it was observed that public
interest activities related to energy efficiency and R&D undertaken in the past
by state-owned utilities also changed.

Nature of Electricity Reforms in Brazil

The restructuring process started in the country without a prior establishment

of a clear regulatory framework and at the same time the tradition of

65
centralised planning ended. Centralised government planning previously
required that ELETROBRÁS, the state national holding electrical utility,
organised, planned, financed, built, and operated the entire electrical power
system. The 2015 Power Sector Plan (ELETROBRÁS 1994) was the last
edition of a periodically updated document that served in the past to focus
ELETROBRÁS’ resources and those of its subsidiaries. Now, however, the
Plan is only indicative of the course that overall system expansion may
follow, not a plan for which ELETROBRÁS is directly responsible for the
implementation. The new system is based on the premises that it should foster
competition where possible (generation and commercialisation of electricity)
and regulate where necessary (transmission and distribution – monopolies
with open access). The restructuring process started with de-verticalisation
and the privatisation of distributing utilities. By 2001 more than 80% of the
electricity sold in the country is done by privatised distributing companies.
This contrasts with the situation found in the generating side, which is still
dominated by state owned companies and only 30% of generating capacity is
done by private enterprises. The new system re-defined the role of the public
sector which is no longer the main financial agent, planner, but now
responsible for the indicative planning for generation and normative for
transmission and regulator.

Reforms included the creation of the National Energy Policy Council (NEPC)
which is designed to be the most important body to determine overall energy
policies that can shape the future development of the sector and its
commitments towards sustainability. However, although created in 1997,
NEPC only had its first meeting in year 2000, and has met only to decide on
specific actions since then. It has not set out a national energy policy that
should guide long term actions for the sector. NEPC is responsible for macro-
energy policies, including division of federal/state responsibilities. The
committee includes a wide range of ministries representatives and is chaired
by the Minister of Mines and Energy.

66
In late December 1996 the Brazilian Congress passed a law creating the
Agência Nacional de Energia Elétrica (ANEEL). Until then all utilities being
privatized were regulated only by the terms of the contract at the time of the
sale of assets by the public utility. This new agency has been entrusted with
regulatory oversight of the restructured Brazilian electric industry. Initially
ANEEL relied on the structure of the previous DNAEE, or National
Department of Electric Energy, a now-extinct MME department, and started
to function only in December 1997. ANEEL is responsible for setting up the
regulatory regime necessary to provide the right signals to the market and
other measures in accordance with national energy policies that should be
promulgated by NEPC. ANEEL regulates the power sector, sets guidelines for
tariffs and rate-making, approves tariffs, and has the authority to grant
concessions to service providers.

Such an authority resembles a licensing or authorization power to grant a

private agent the right to use public resources to generate, transmit, or
distribute power. ANEEL is also charged with establishing competition
among the actors, as well as reliability and cost effectiveness of service,
including to rural areas. ANEEL has decentralized its activities, transferring
regulation oversight to some State Public Utility Commissions that are better
positioned to monitor the performance of distribution utilities. Power sector
reforms also included the creation of a National System Operator (ONS) and a
wholesale electricity market (MAE).

After six years of the first privatised utility Brazil faced a severe electricity
shortage and had to implement a rationing plan during June /2001-
February/2002 (Table 1). This crisis resulted largely due to the absence of
national energy planning and energy policy guidelines that should shape clear
regulation which are needed for private investors to assess their risks and
returns on investments. The end result was the lack of investments in

67
 generation and transmission lines that have not come in the expected speed
and amount.

Table 14: Electricity Consumption in Brazil Twh (1994 – 2002)

SECTOR 1994 1995 1996 1997 1998 1999 2000 2001 2002
Residential 55.957 63.579 68.581 74.089 79.340 81.249 83.494 73.770 72.660
Industrial 116.759 111.632 117.128 121.717 121.979 123.550 131.195 122.629 127.69
Commercial 28.885 32.277 34.388 38.198 41.544 43.562 47.437 44.517 45.256
Other 34.026 35.598 37.234 39.276 41.659 42.739 44.621 42.882 44.924
236.627 243.096 257.331 273.280 284.522 291.110 306.747 283.798 290.529
Total

Source: Electrobas (2003)

Lessons learned

It is very unlikely that initiatives in energy efficiency and R&D would have
taken place without the regulators’ enforcement in 1998 and later with the
implementation of Bill 9.991/00 by the National Congress. Power sector
reforms in Brazil provided the opportunity to enhance support and in fact
increase significantly the level of funding in these areas. However, provisions
in legislation alone are not sufficient condition to ensure that resources are
being used efficiently to maximize the public interest of energy-related
services. Analysing the country’s experience since 1998, it was observer an
important learning process within the regulator and also amongst the utilities.
Some utilities are perceiving the strategic importance of pursuing activities in
R&D, such as the technical improvement of their own staff, some small
companies are appearing as results of some more successful projects and a
better relationship between research centres and universities is being
developed (ABRADEE, 2003). This is a significant change in the relationship
with utilities and research establishments in the country. It also helped to
promote interesting spill over effects inducing the creating of new businesses
represented by small consulting firms and ESCOs. The experience with the
68
public benefit fund CTEnerg is more recent. However it is illustrative that it
has invested much less than the amounts invested under the regulated utilities
efficiency and R&D programmes. The federal government has limited annual
spending in order to comply with macro-economic targets for public spending
and CTEnerg has been affected by these types of interventions.

The management of this fund is done by representatives from government,

academia and private sector, and this has been a novelty in the administration
of public funds in Brazil, and has contributed for a better screening of
investment options, during the period 2001-2002. This model, however, needs
yet to be consolidated and CTEnerg has to demonstrate a higher degree of
consistency and predictability over time. Interesting enough, legislation gives
conditions for a more stable operation, but indigenous institutions have not
been able to implement these conditions.
The provisions to ensure funding support for energy-efficiency and energy
R&D had an important impact for the institutional learning both in the public
sector and utilities.

B. Argentina

Restructuring of electricity industry began in 1992, prior to which the

electricity industry in Argentina suffered from lack of investment, resulting in
low availability of generation capacity; widening gap between demand &
supply; poor tariff policies; dependence on government for financial support;
frequent power interruptions; non-paying customers; illegal connections;
increase in technical and non-technical losses; overstaffing; a demotivated
work force; inefficiency and poor consumer service. The electricity industry
conditions were very much similar to the general conditions prevailing in
India. By the time of reform the system had deteriorated badly and was
characterised by considerable operational and financial problems. The cost of
electricity was high (around $60 per MWh), there were large commercial

69
losses due to theft and non-payment and periodic threats of blackouts,
aggravated in times of low rainfall by a large dependence on power from
hydroelectric stations.

NATURE OF ELECTRICITY REFORM IN ARGENTINA

The goal of the reform process was to have an electricity industry that was
capable of ensuring sufficient energy to the economy at the best price which
reflected the economic costs of maintaining and expanding the activity. It was
also driven by the increasing inability of the government to service the public
debt and the need to attract private investment into the sector.

In January 1992, the electricity privatisation law was passed. The reform was
based on the principle of open access to the wholesale capacity, energy pool
for generating facility & least cost dispatch. A national regulatory body,
ENRE (Ente Nacional Regulador de la Electricidad) and a national wholesale
market for electricity (CAMMESA) were established. Transmission and
dispatch were mandatorily separated from generation and distribution and no
generator was allowed to control more than 10% of the system’s capacity.

Three federal companies1, SEGBA, AYEE and HIDRONOR were

restructured by separating their generation, transmission and distribution
activities Companies to be privatised were sold through auction, using a two-
envelope process. This included a qualifying technical offer and a competitive
financial offer. Usually, at least a bare majority (51%) was offered for sale,
and sometimes much more. For example, 98% of a 448 MW hydroelectric
plant was sold to a domestic aluminium company, retaining 2% for the
employees2. In transmission and distribution, long-term concessions were
awarded. The first of SEGBA’s generators was sold in April 1992, followed
by two more in May and August. Two distribution companies were sold in
September, followed shortly by the high-voltage transmission company. The

70
success of the privatisation depended to a great extent on the regulatory and
commercial environment as determined by ENRE and CAMMESA.

Demand and supply determine energy prices. The supply side of the
wholesale market is composed of independent power producers, privatised
generators, publicly owned generators, and imported electricity. The demand
side of the market is made up of private and public distribution companies,
large users (currently more than 100kWh annually) and foreign consumers.
There are three main types of prices: contractual, seasonal and spot.
Transmission and distribution prices (for supplies through distribution
companies) are regulated.

Like transmission, firms may enter distribution only by bidding for a

concession. They also have regulated prices and a commitment to allow open
access to third parties. The price caps are reset every five years; in the interim,
the regulated company can avail of the benefits of cost reduction. Large users
can however, choose to be supplied directly by the generators or buy directly
in the spot market, instead of through the distribution company. The number
of large users in the wholesale market has risen rapidly. As distribution
companies must supply to large users at the same rate they charge other
customers, this helps to keep prices under control. While all federal
distribution assets have been privatised, many provincial distribution
companies remain in the public sector.

Effect of reforms

1. Low prices & higher reliability- Following the reform process, electricity
prices fell sharply. After a period of turbulence, they stabilised at around half
the pre privatisation levels (See Figure 4). The extent of outages also reduced
considerably (See Figure 5). In EDENOR’s distribution areas, outages fell
from over 20 hours to around 5 hours a year. Generators were fitted with

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power system stabilisers, which permitted minimal disconnection of
generating capacity while addressing transmission faults.

2. Increased Efficiency- Electricity loss for non-technical reasons, such as

faulty billing and theft came down and generation availability increased
considerably. For example, the La Plata distribution company increased its
customer base by over 20%. Similarly, the availability of Costanera, a
generator near Buenos Aires went up from 30% to 75%.

3. Increased Investment- Substantial investments were also made in

upgrading the assets bought from the government. EDENOR, for instance,
made capital investments of $380 million over 1992 to 1995, and plans an
additional $500 million until the year 2000. It is anticipated that the total
investment in the electricity sector by 2000 will be around $ 7 billion.

Conclusion
The Argentine experience demonstrates that it is possible to effect measurable
changes in a state-owned electricity sector suffering from lack of funds and
inefficient management, within a reasonably short time frame. A number of
problems that plagued Argentina, such as high distribution losses, low
generator availability are similar to what India faces today. The Argentine
power system is much smaller, and has a better hydro thermal mix when
compared to Indian power system as a whole, but it may prove profitable to
examine the Argentine experience to see whether it would help with the
design of reform in India.

Indian States’ Experiences

The majority of states in India have started the reforms process, mostly in the last
few years. Even before official reforms, Karnataka had the first semi-unbundled
power sector in the country, with a separate PSU in charge of generation,

72
Karnataka Power Company Limited (KPC), established in 1970. However, there
was still some capacity with the SEB, and true unbundling didn’t begin in India
until 1995-96, with Orissa’s reforms. Even Orissa had a PSU for generating
thermal capacity, but this was not considered an unbundled sector, with some
capacity remaining with the Orissa SEB. We present below some details on the
restructuring of various states, focusing on Orissa, Andhra Pradesh, Maharashtra
and New Delhi.

Orissa was not only a forerunner, but its reforms were under the aegis of the World
Bank. Andhra Pradesh has also been ahead in reforms, and has received extensive
World Bank funding for its reforms. Delhi, the capital, was unique in that its
utility had extremely high losses (40+ %), despite virtually no agriculture. This
very recently underwent full reforms with privatization of distribution, only the
second in India after Orissa. There are indications that Delhi’s reforms incorporate
lessons learned from the mistakes of Orissa.

Modes of Reform

While Orissa’s reform done with privatization, most of the subsequent states,
up until Delhi in 2002, reformed with corporatisation (unbundling) of the
SEBs across segments. Even when different distribution companies were set
up, these were on a geographic basis, 57 with no competition for retail
customers. Given the nature of the industry, institutionally there are no
structural barriers to competition in the generation sector. GENCOs already
share the market with Central PSUs and IPPs (it is a different matter that the
dispatch norms and tariff agreements don’t lead to real competition).

India appears to be relying on the single buyer model for now (making the
role of TRANSCO special – monopoly seller to DISTCOs, and monopsony
buyer from the GENCOs). While there is recognition of the pros and cons of a
single-buyer model, the government hopes this is a transitional solution,

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leading to open access to the wires (Deepak Parekh Expert Committee on
State Specific Reforms 2002). Instead of the transmission companies,
privatizing the handful of DISCOMs per state appears to be the thrust of the
government. However, a large number of options were considered by the
government, as indicated in Figure 7.

Financing and Past Debt

After the March 2001 Chief Minister’s conference, there was a consensus to
find a solution to the outstanding SEB dues (to PSUs), then about 41 thousand
crore Rupees (of which interest/surcharge was almost 16 thousand crore).
Under the Chairmanship of Montek Singh Ahluwalia, former Finance
Secretary, the Expert Group on Settlement of SEB Dues submitted its report
in May 2001. The aim was to come up with a one-time settlement scheme to
ensure timely payments in future. The report suggests reducing the surcharges
by 50%, and securitizing the remaining dues through the issuance of bonds by
the Reserve Bank of India (RBI). If the SEBs fails to pay for their fuel/power
in the future, this would impact their central assistance and access to coal
supplies. The report also recommended incentivizing states to undergo
reforms (Ahluwalia 2001), including establishing State Electricity Regulatory
Commissions, and metering distribution transformers. It is important to
recognize, as indicated in the Report, that the main challenge is the ongoing
(future) financial viability of the power sector, and clearing off the debts will
not solve that. SEBs complains that their finances consist largely of loans, and
conversion to equity would improve their finances significantly. However, it
remains unclear how much such a one-time solution would cater to solvency
improvement, instead of mere liquidity improvement, that is, unless, their
debt be wiped off, and the equity is allowed to operate with no minimum
returns requirement? In such a case, the State balance sheets would take a hit.
Overall, states find it easier to access funds after undergoing reforms,

74
especially corporatization. These entities can access state, central government,
and even international (multi-lateral agency) funding.

Reforms in Andhra Pradesh

Andhra Pradesh has made phenomenal progress in the development of Power

sector since Independence. Andhra Pradesh State Electricity Board (APSEB)
established in April 1959 was responsible for overall growth of Power
generation, transmission and distribution in the entire state like any other
SEB. The state had 7,236 MW of installed generating capacity, third highest
among all the states in the country only after Maharashtra and Gujarat in
that order. It included 5,976 MW of state-owned generation 919 MW IPPs
and 1,000 MW from NTPC. It has electrified most of the villages in the state.
APSEB’s generation stations had been operating at high levels of PLF and
other performance efficiencies and the power stations have been rated among
the best performing power stations in the country.

In spite of the overall impressive growth, the growth in installed capacity

could not keep pace with the demand from various categories of customers
and therefore shortages; both energy and peaking have been experienced in
the system resulting in power cuts. Energy shortages increased from about 6.7
per cent in 1991-92 to about 22.1 per cent in 1996-97 and peak shortage had
reached from almost 15.8 per cent in 1991-92 to 23.6 per cent in 1996-97,
from a situation of helping neighbouring states in mid eighties. The
investments in transmission and distribution system have also not kept pace
with the demand for power. The transmission and distribution system was
beset with problems of high T & D losses, poor voltages, interruptions and
low reliability due to overload and shortages of power. Consequently,
customer service has also deteriorated considerably.

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The overall financial position of APSEB deteriorated and the SEB started
incurring losses, which resulted in greater dependence on the state
government. The accumulated losses of APSEB as on Mar 31, 1998 were
estimated to be Rs. 41 billion (excluding subsidy from the state government).
The poor financial viability came in the way of APSEB’s ability to further
develop the power sector.

Since 1995, it has been governed by the techno-savvy Chief Minister,

Chandrababu Naidu, a central figure in the reforms process. The state’s
policies have been progressive, and it is considered a success in terms of IT,
but its human development indices are generally below the national average.
A closer look indicates that much of the success has been in the cities, and the
benefits of plans have not trickled down to the villages. Naidu has been
successful in pushing reforms, no matter how unpopular, such as reducing
food subsidies. However, perhaps with an eye towards upcoming (2004)
elections but also driven by his push towards rural empowerment, Naidu
announced in August 2002 that the state should be power surplus, and that
agricultural power supply would be guaranteed at 9 hours per day, a big
improvement over then supply.

But this lofty promise made them a political target, and power sector reform
promises to be one of the largest election issues in the state. As mentioned
before, protests against tariff hikes in 2000 turned violent, but the AP
government still vowed to proceed with reforms. When considering the
success of AP’s reforms, political will is possibly the most important factor,
coupled with the efforts of management at the utilities. The key has been not
only efforts at policy, but execution.

In looking at the reforms, the first step was likely the 1995 high level
committee, chaired by Hiten Bhaya, to suggest reforms to be introduced in
the power sector (Reddy 2000). While focusing on unbundling APSEB and

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operating on commercial lines, as well as tariff rationalization, the World
Bank commented that the Hiten Bhaya Report didn’t go far enough with the
reforms process. The regulatory commission should focus on all tariffs, and
full unbundling, without holding companies, should be the way forward. The
World Bank also advocated a minimum 50 ps/kWh for agriculture. While the
AP government stated the WB role was only advisory, studying the reform
paper showed nearly full correlation with such recommendations (Reddy
2000). Driving ahead with reforms, the government pushed the Andhra
Pradesh Electricity Reforms Act of 1998 through with stunning speed. The
Telugu Desam Party government introduced the Bill on April 27, 1998, which
was passed within one day. Helping ensure its smooth passage, the entire
opposition was suspended from the Assembly (Reddy 2000).

Because of its reform programs, AP was the beneficiary of the major portion
of World Bank funding in India, and it received 6,600 crore of loans towards
total reforms, two-thirds of which were for the Andhra Pradesh Power Sector
Restructuring Program. These loans were under the Adaptable Program Loan
(APL). Such disbursements were despite sanctions imposed on India after its
May 1998 nuclear tests.
Implementation of Reforms

The functions of APSEB were segregated into generation, transmission and

distribution companies, each under a separate company. The existing
generating stations and those under construction were also transferred to a
state owned generation company, called APGENCO, which is also mandated
to set up on its own or jointly with private sector new thermal or hydro or
other power stations. A single buyer model was put in place under which
APGENCO would sell power to APTRANSCO, which in turn would sell to
the various distribution companies. Both companies have become effective
from 1st. February, 1999. The assets, liabilities and personnel were allocated
to these companies with effect from 31st. March 2000. The unbundling of the

77
sector was primarily aimed to increase operational efficiencies and to allow
these entities to function independently and put them in decision taking mode.
More than 90% of the employees were allotted to the company of their
choice. The new power generation projects would be mainly developed by the
Independent Power Producers (IPPs) selected through International
Competitive Bidding (ICB) and joint venture companies of APGENCO with
private parties, other states or central undertakings.

Power Transmission

The power transmission network from 132KV and above including O&M of
interstate tie lines in the state, have been entrusted to APTRANSCO. It is
responsible for purchase of power from all purchasing sources under a
competitive and transparent power purchase process and dispatch power on
merit order basis, so as to avail the least cost power available in the grid. The
pooled power is being supplied to the different distribution companies. It is
also responsible for grid operations. The private sector may also be allowed in
developing power transmission networks, in future, keeping in view the
national policy.

Power Distribution

Initially the distribution function was with APTRANCO, and subsequently

the state was geographically divided to East, South, Central and South power
distribution companies. The borders for the 4 DISTCOs were chosen not on
operational rounds, but to ensure that no one company had an extreme mix of
consumers (too many agricultural or all the paying, i.e.,
industrial/commercial, customers). All the distribution companies are working
under separate licences granted by APERC. In order to involve the employees
in the reform process, the government of Andhra Pradesh proposed to invite
the employees to participate in the equity of new companies. The state

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government and the new companies signed corporatization Agreements to
specify the role, rights and obligations of the state government as owner and
give managerial, operational and financial autonomy to the companies to
perform.
Regulations of the Power Sector

The Government of Andhra Pradesh has established the Andhra Pradesh

Electricity Regulatory Commission (APERC), which has started functioning
from 3rd. April 1999. The objectives of the APERC are to regulate the power
sector, promote transparency, efficiency and economy in the operation and
management of the power utilities, encourage competition and help Andhra
Pradesh to attract private investment for development while ensuring fair
tariffs to the customers.

Restructuring and Private Participation

The distribution companies buy bulk power through APTRANSCO initially

and subsequently, these will be able to purchase directly from the generation
companies with the APTRANSCO only wheeling such power.

Andhra Pradesh has followed the Orissa model. It is expected that the
progress would be rapid as compared to Orissa as the state had demonstrated
strong political will to improve the infrastructure and to attract private
investment in to various sectors of the economy.

Business Plan

While approving the original plan, the state government has agreed to provide
financial assistance to the sector during the transition period till the sector
achieves a turn around and ceases to be a burden on state government
finances.

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Demand Side Management (DSM)

The power sector reforms will also tackle issues such as energy efficiency and
demand side management to improve efficiency in supply and end-use of
electricity, introduction of tariff linked DSM; time-of-day tariffs for certain
categories of customers to flatten load curve and to meet the peak demand,
improvement of efficiency of agriculture pumps, installation of capacitors and
installation of meters on all unmetered supplies and conservation of energy
with incentives and disincentives. Awareness campaigns will be launched to
promote energy conservation. All resources of energy will be encouraged and
various options to bring in demand-side-management measures will be
explored.

Funds Flow in Support of Reforms

Since announcement of Government policy to take up the reforms and

restructuring of the power sector and also various measures initiated by the
state government in pursuit of reforms, both national and international
funding agencies have come forward to support the reform programme and
Andhra Pradesh has been the biggest beneficiary of funds. The details of
some of the projects sanctioned / under consideration are:

• The World Bank agreed to lend, up to $1000 million for

transmission and distribution improvements and augmentation of
system over a decade. This would be given as a series of loans
under their Adaptable Program of Loans (APL). The first loan of
$210 million is already being used.

• Department for International Development (DFID) sanctioned

$42.7 million as a grant to revamp the distribution system. DFID is

80
 also providing $2.7 million as technical assistance grant to the
power sector.

• The Overseas Economic Cooperation Fund (OECF) now known as

JBIC sanctioned funds to the extent of Rs. 390 crores for Srisailam
Power evacuation scheme and Rs. 311 crores towards the Simhadri
power evacuation scheme.

• PFC is extending support to the tune of Rs. 275 crores out of which
Rs. 113 crores towards counterpart funding for the projects funded
by World Bank and OECF. PFC also sanctioned a loan of Rs. 240
crores for transmission and distribution schemes.

• Rural electrification corporation (REC) sanctioned Rs. 720 crores

for the period from 1998-2001 for APTRANSCO for rural
electrification works, in addition to rescheduling outstanding loans.

• Technical assistance extended through grants by DFID and CIDA

for implementation of Reforms and restructuring program.

Regulatory Support to Reforms

The APERC is considered independent, and has a retired Civil Servant as its
Chairman, a tax official as its member and former APSEB officers. It has a
strength of 60 staff members (high for SERCs in India), and has issued some
unique pronouncements in terms of power. They have published a “cost to
serve” model, whereby the different classes of consumers have different costs
explicitly calculated on economic grounds. They have also issued an order to
the utilities to meter all consumers within 3 years. The APERC tariff orders
have been challenged in the courts, but the Tariff Order for 2000-01 was
upheld in the Supreme Court in March 2002. Many more cases were ongoing
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in the Supreme Court (6 cases) and the High Court (nearly 100 cases) in 2001
(Prayas 2001).

APERC Tariff order 2002-2003: an Analysis

This is the third tariff order promulgated by APERC, and follows the model
whereby tariffs are determined by the APERC, and utilities must follow the
pricing models. An Annual Revenue Requirement (ARR) analysis leads to the
costs that each utility would face, and any shortfall from the revenues must be
borne by the State. APERC allowed explicit subsidy by the state, which had
to be paid to the DISTCOs. APERC announced Bulk Supply Tariffs (BST)
that the Transco would charge the DISTCOs (aka Discom). In arriving at its
calculations, APERC invited petitions and presentations from various parties,
not only the utilities and the State, but also consumers. Notable among the
challenges to submitted information were the transmission losses claimed by
APTRANSCO, and the amount of consumption by agriculture (submitted by
the DISTCOs). As per APERC, “The tariff design was further rationalized to
achieve the objectives set forth in the Reform Act of 1998. Attention was on
i) rationalization of categories; ii) rationalization of tariffs and iii) incentives
for incremental consumption by HT consumers.”

The tariff order modified the slabs as well as the tariffs for many consumers,
and introduced an optional metered tariff for agriculture. Any takers-up could
find lower tariffs than the flat-rate tariff, assuming low to normal
consumption. There were also incentives to consumer more electricity for
bulk consumers (industry), with rebates given for higher usage.

Efficiency Improvement Initiatives in A.P

Several initiatives have been taken to improve operational and financial
performance of the companies and notable among them are

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Enactment of “Anti Pilferage Legislation” in July 2000 providing for
very stiff penalty including mandatory imprisonment for a minimum
period of 3 months and a maximum of 5 years in addition to a penalty
varying from Rs. 5,000 to Rs. 50,000. The Act also provides for
denying electricity supply for 2 years to the premises where the offense
is committed and proved. Special Courts have been set up for speedy
trial of these offences. The tempo of inspections is being maintained
and all out efforts are being made to curb the menace of theft of energy
in the state. Consumer Analysis Tool (CAT) facilitates organizing raids
for detection of pilferage of energy. This has also helped in bringing
down the T&D losses. The T&D losses have come down from 38 per
cent in 1998-99 to 24.8 per cent in 2002-03 which was possible due to
introduction of metering at all interface points coupled with
enforcement of the Anti Theft Act.

Andhra Pradesh has taken up full-fledged energy auditing of 114 towns

and the T&D loss levels in these towns have been brought down to
less than 10 per cent.

The utilities have provided tamper-proof high accuracy meters for high
value services and installed 21,000 energy meters on low voltage side
of transformers exclusively feeding agricultural consumption in the
state. A massive metering plan is being implemented in the state, 2.8
million energy meters are already installed. The programme envisaged
fixing of HT & LT electronic meters on industrial services and
providing one lakh LT 3 Phase electronic meters on High Value
services and three lakhs single phase electronic meters for replacing
defective meters. The utilities have also provided exclusive express
feeders to high revenue yielding industrial services by bifurcating 702
existing mixed feeders in an effort to improve the reliability of supply
to industrial consumers which would result in better revenue.

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 The introduction of electronic spot billing system in all the towns using
a handheld computer has facilitated the issue of bills on the spot, which
has facilitated the issue of bills on the spot, which has also reduced the
number of complaints relating to the wrong meter reading, wrong
billing etc.

The Transformer Information Monitoring System (TIMS) has helped

tracking failures and repair of distribution transformers and helped the
inventory management of distribution transformers. The “Supervisory
Control and Data Acquisition System” (SCADA) for operation and
control of 106 sub-stations in greater Hyderabad has facilitated
capturing data on real time basis and unmanned sub-stations.

Information Technology Initiatives

Many IT initiatives have been taken up to improve the quality of information,
maximize revenue, monitor operational performance and facilitate improved
customer service. A WEB based MIS system is in operation for conducting
detailed reviews at various levels. Similarly, a total consumer database has
been established which is being used not only for consumer service but also
for identifying cases of potential commercial losses. An information system
plan which is a road map for all IT related initiatives has been prepared for
the sector.

These efforts have helped in bringing down T&D losses from 38 per cent to
24.8 per cent i.e. a ten per cent reduction within 03 years. The revenues have
increased from Rs. 4,484 cr. To Rs. 7,238 cr. (2002-03) in the last 03 years
period, especially against revenue demand of Rs. 6,434 cr. The percentage of
collection of revenue has increased substantially. Realisation of cost per unit
has increased from 57 per cent to 82.5 per cent. Percentage of transformer
failures has come down from 28 per cent to 18 per cent. This has been
possible due to introduction of technology to reduce human intervention.

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CRISIL Rated Andhra Pradesh as the Best Utility in Implementing
Reforms

The power sector in Andhra Pradesh has been making steady progress in
achieving its cherished objectives while adopting the reform path. There is,
undoubtedly, a significant improvement in technical, financial and
commercial operations of the companies. Significant improvements are also
seen in metering, billing, revenue collection and reduction of losses especially
through the control of theft energy by implementing stringent punitive
measures. There has been marked improvement in consumer related services.
Several states are evincing keen interest in the progress made by A.P power
sector.

The CRISIL and ICRA have undertaken the performance analysis of all the
SEBs across the country to assess the commitment of the state governments
for reforms, performance of SERC’s and utilities. The state governments were
evaluated on their commitment on subsidy payments, outlook on tariff
reforms and enabling legislation, and operational support extended to the
utilities to tone up their functioning and implement the reform agenda. The
SERCs were evaluated on their tariff philosophy, efficiency norms,
implementation of tariff orders, while ensuring commercial operations and
protection of interest of consumers, utilities, investor and lenders. The utilities
were assessed on performance of generation and T&D related parameters. The
financial performance was measured on cost-revenue analysis, level of
receivables and liabilities.

Andhra Pradesh stood first among the states in three of the four sub-
parameters viz. payment of subsidy, and commitment for reforms, role of
SERC and the performance of successor utilities to SEB. However it occupied
third position after Karnataka and Maharashtra in respect of financial risk

85
analysis. It has however pointed out that further focus is needed to further
improve operational and commercial efficiency as well as improve customer
service. The utilities in A.P have planned several initiatives in operational,
commercial and consumer service, to show better results in the near future.

While there is no doubt about the existence of considerable scope for further
improving the technical, financial and commercial parameter, the A.P
experience demonstrated that improvement can be achieved by the utilities
given the will and the support by the government and the SERC, even without
privatization.

Future Course of Action

While the impressive performance of the power sector since initiation of
reforms is laudable, the government’s commitment for reforms, in spite of
considerable resistance, criticism and even demonstration by some opposition
political parties, is commendable. The state is however required to carry
forward the reforms further to get the fullest benefits to all the stake holders.

I. Need to Increase Domestic and Agricultural Tariffs

The government of Andhra Pradesh, however appears to be averse to
increase the tariffs in general and domestic and agricultural tariffs in
particular, keeping in view the opposition parties proposals to supply
power for agriculture consumption free of cost and the ensuing general
elections in 2004. However at the time of last general elections in
Andhra Pradesh, the electoral manifesto of a major political party
promised complete waiver of electricity arrears for the agriculturists
and also supply free power, if elected. The farming community
however did not bite this offer as is evident from the election results.
This outcome of the result reflects that farmers don’t expect free power
but wants quantitatively and qualitatively reliable power without
breakdowns, low voltages, etc. at a reasonable tariff, which is possible

86
 only by restructuring and reforming the power sector. While the farmer
certainly needs relief during the periods of drought as it is during 2003-
04, there should be gradual increase in tariffs to cover sizable portion
of cost of supply. It is therefore imperative that there’s a need to build
up consensus among the major national political parties on the need to
reform the electricity sector especially in respect of agricultural tariffs.
The state government should take the lead in building up such
consensus in the overall national interest.

II. State Governments Continued Support for Reforms Needed

It is often assumed that once the process of reforms and the associated
legal framework and various institutions are established, the
government has a limited role in the functioning of the electricity
sector. Indeed it is not so. The government’s support subsequently also
is indispensable to the successful completion of the reform process and
the sustainability of the sector in areas such as tariff reforms, subsidy
delivery, 100 per cent metering of the consumers and controlling theft
of energy.

III. Support for Tariff Reforms

With the introduction of regulatory regime, the task of rationalization
of existing tariff structure, the issues pertaining to efficiency
improvements, quality of supply and facilitating private investment
have entrusted to the regulators. The bedrock of the new tariff fixation
process is the involvement of the public through a transparent system
of public hearing and other forms of public consultation. This is a good
forum for sensitizing the general public about the problems being faced
by the utility and take stock of the utility’s performance as a public
utility, looking to the general interest of the public.

87
 It appears that the government owned utilities in Andhra Pradesh have
not been able to use this forum to present a true picture of the costs and
performance levels to improve their commercial viability. The tariff
proposals received from the utilities do not seem to reflect the
economic costs of the supply. The utilities have been optimistic in
forecasting higher percentages of sales to subsidizing categories of
industrial and commercial sectors than subsidized categories of
agricultural and domestic consumers with a view to preventing fixation
of realistic tariffs and making the regulator to enhance the tariffs,
though have not been projected by the utilities themselves to ensure
their financial viability.

It also appears that the licensees in AP have not been generally

demanding a 16 per cent rate of return in their revenue requirement. It
has been the regulators initiatives to provide for the same, again to
ensure long term viability of the utilities.

As the government ensures full cost recovery to the licensee by

providing subsidy transparently in the budget, the regulators role in the
final tariff determination has become limited, which causes hindrance
to the regulator to fix cost reflective retail tariffs by allowing the
government to exercise control indirectly over the regulators role in
determining viable and cost related tariff. There is need to taper off
subsidies over a period and the amount spent on subsidies could be
diverted to much neglect other sectors including social sectors.

IV. Agriculture Subsidy to Targeted Groups

In spite of regular and timely payment, including advance payment of
subsidy by the government during 2002-03, the licensees in AP are still
incurring huge financial losses due to excess purchase of power, which
goes to agriculture at a highly subsidized rate. In the current scheme of

88
 operations, the licensees’ supplies to agriculture are dictated by the
government rather than any financial or other guiding principle. It is
necessary to make realistic estimates about agriculture consumption
and encourage growing of less water intensive crops.

The other major issue is whether the current form of subsidy

administration is the most optimal one. The unrestricted supply to
agriculture at nominal fixed costs has resulted in cultivation of highly
water intensive crops in a surface irrigation deficit area, leading to
indiscriminate installation of tube wells and high capacity pumps in
order to grow crops like cotton. Besides the real gainers from such
measures are the financially well off farmers. There is a need to ensure
that it is the poor, marginal and below poverty line farmers who should
get benefits from the subsidy scheme and not the rich farmers. It is
therefore necessary for the government to ensure that the agriculture
subsidy is extended only to deserving target groups. A fool-proof
monitoring mechanism for subsidy mechanism has to be devised and
monitored.

V. Support for Efficiency Improvements

Andhra Pradesh is one of the few states that have allowed the strict
implementation of the Anti Theft Act, which allows the licensees
greater powers in detecting and controlling commercial losses
effectively. Necessary supports for enforcement of anti-theft measures
by the state government are required to be continued even after
privatization. However, the unmetered supply of nearly 25 per cent
power to the agriculture sector imposes restrictions on the effective use
of the Act. The APERC has directed all licensees to complete
agricultural by March 2003 and the licensees have fallen well short of
such directives. The regulators role is limited to directing the licensees
to address this problem through accurate metering of the interface

89
 points, regularization of the unauthorized consumers, metering of all
services, proper recovery of dues, etc. The commission is forced to go
in for alternatives like distribution transformer level metering to
estimate the quantum of agricultural consumption in the state which
does not give accurate picture about T & D losses.

VI. Timely Payment of Dues by Government Agencies

The central and state organizations, municipalities, local bodies, etc.
are some of the biggest defaulters in paying their bills. The government
should either ensure timely payment or the DISTCOs should be
allowed to disconnect as being done for other consumers. The state
Governments directive for prompt payment of dues failing which
power supply would be disconnected will go a long way.

VII. Need for Reduction of Subsidies

While the revenue gaps faced by the licensees have been stabilized
around Rs. 3,000 crores per year, they being Rs. 3,064 crore for 1999-
2000, Rs. 2,872 crore for 2000-01 and Rs. 2,942 crores for 2001-02
supported by subsidies by the Government, any such support is also
affected by other factors like additional support for debt repayment for
the licensees, Government of Andhra Pradesh support for capital
investment plans, electricity duty, water royalty, interstate power
purchase, guarantee commission, interest of repayment of Government
of Andhra Pradesh loans etc. The net input from Government for 2001-
02 is reduced to Rs. 2,378 crores which is a positive signal. It is also
noticed that the cross subsidy from other consumers to agricultural
consumers continue to be over a Rs. 1,000 crores or even more. The
Government of Andhra Pradesh still continues to pay substantial
amount towards power subsidy, thereby not allowing the tariffs to be
fixed on cost related basis which obviously deprives the other socio

90
 economic and infrastructure sectors their rightful claims. While the
cost of supply is steadily increasing year after year, the government
prefers to extend subsidies to the various segments, instead of bridging
the gap between cost of supply and average tariff.

VIII. Support for Privatization

The current electricity sector reform programme has not yet reached its
logical conclusion. The introduction of private entities and competition
for market is still to be attempted. Regarding APERC’s efforts towards
making the distribution domain investor-friendly, the APERC have
recently enunciated the draft for the Long Term Tariff Principles, the
first of its kind of document in India. These principles will help the
investor in determining his revenue requirements over a period and
result in tightening of efficiencies so as to ensure that the customers are
benefited over the long run. These will be crucial in the privatization
process in AP. The Government of Andhra Pradesh should go in for
privatization in joint sector mode at least in one or two distribution
companies, which would demonstrate to all the stake holders,
especially to the consumers the benefits of privatization. It is necessary
to fulfil certain prerequisites by the government before any private
investor would be willing to take on the distribution business. All these
measures are required to be undertaken expeditiously to take reform to
its logical conclusion.

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Reforms in Delhi

Delhi, the state that includes the capital, New Delhi, used to have its power
supplied by the Delhi Vidyut Board (DVB). DVB, itself the reincarnation of
the Delhi Electric Supply Undertaking (DESU), was in the extreme position
of having very little generating assets, some 300 MW, relying on outside
(largely central) generators for its power (peak loads are over 3,000 MW).
Despite being an urban area, and hence, almost no agriculture, the theft
and losses were very high, estimated at 45+%.

While most other states underwent or are undergoing reforms in stages, Delhi
underwent reforms with a bang, though the initial reforms came under the
central government ERC Act of 1998, creating the Delhi ERC in 1999. The
Delhi Electricity Reform Ordinance was promulgated in October 2000 and
was replaced by the Delhi Electricity Reform Act, 2000. It’s worth noting that
the Delhi ERC is understaffed, in fact lacking 2 Commissioners (it only has
one Member, the Chairman). Subsequent reforms were undertaken in 2002,
when it unbundled its utility (into 3 zones) and privatized them at once (June
27, 2002).

Learning from the Orissa experience, the main metric for choosing companies
was not based on valuation, but on performance improvement goals. The
DISTCOs annual revenue requirements are calculated based on their
expenditure, performance (targets), and return on equity (16%). They pay the
Transco, a government company, a realistic lower amount, based on the
collection. Over time (5 years), this amount would match up to the full costs.
In the interim, the Transco will receive Rs, 3,250 crore as subsidy to cover its
costs to generators vis-à-vis the lower amount of money the DISTCOs would
be paying. One other feature is the retail tariffs are known to the DISTCOs in
advance, and were fixed by the ERC. The Delhi ERC also announced the total
losses in the 3 circles, averaging 50.7%!

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Details of the process of choosing the companies are given below, based on
the Distribution Policy Committee Report (Ministry of Power 2002) and
discussions with Government of India and DISTCOs officials.

• Valuation of assets: This will be based on “Business Valuation” Based

on reasonable assumptions of retail tariffs, efficiency improvements,
and expenses in the future, assets are valued such that the company can
become viable in a fixed period of time. The liabilities are also
considered this way, with some portion going to the successor
companies, some left with a holding company or refinanced, and some
covered through tariff increases.

• Mitigating uncertainty: Based on the annual revenue requirement

calculations and bulk supply tariff will be set such that the company
can make the required returns, assuming a performance target is met.
The difference in such a price and the cost to the TRANSCO will be
covered by the Delhi Government. Such support will effectively lower
the price for the DISTCOs, making them viable from day one.

• Criteria for selection of successful investor: A 5 year period, 2002-07

is the operating period for which bidders give their performance
improvement targets.

• Incentives for achieving higher efficiency gains: The benefits of

doing better than the targets will be equally shared between the
consumer and the DISTCOs, and underperformance will be borne
entirely by the DISTCOs.

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 • Baseline data: The Bulk Supply Tariff Order has been released by the
Regulatory Commission in response to the filing by DVB before
bidding closed.

• Treatment of receivables: Past dues will be transferred to the Holding

Company. If these are recovered, 80% will go to the Holding
Company, and 20% to the DISTCOs.

The stated losses (subsidy requirement) for the 5 year period (covered by
support to the TRANSCO) will be Rs. 3, 250 crore. These are reported to be
in the form of a loan, under terms to be worked out subsequently. It would be
important to consider various exit strategies, in case the TRANSCO is unable
to repay the loan. In comparison, just before the reforms, from 2.4 million
customers, and 19 billion kWh of sales, an annual revenue of 5,400 crore was
required, with a gap of 1,100 crore rupees. The bidding processing revealed
the issue of limited players, as initial interest was shown only by 6 parties.
Only Tatas and BSES submitted final bids, and only BSES submitted bids for
all the 3 zones. Tatas won the North West Delhi Distribution Company, while
BSES took the South West and Central East Companies.

The main risks they face are that they either fail to meet the loss reduction
performance targets, or they fail to collect from consumers. They state the
government has been quite supportive, including by passing an anti-theft law,
making electricity theft a cognizable offense. It also gives them power to
disconnect non-paying users, even government users. While the DISTCOs
mention they worry about the accuracy of data, fearing Orissa-like effects, the
reverse is true from the consumer and system perspective. Without accurate
benchmarking, the DISTCOs might have an incentive to petition the ERC that
the initial losses are actually higher than they truly are.

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BSES states that labour is a non-trivial issue, as the workforce was handed
down as part of the privatization process. Nonetheless, they say the bigger
cost is infrastructure upgrading, to improve operations, metering, and
collection. Some of the recent ERC orders they must comply with are the
installation of electronic (solid state) meters, and metering on all the
distribution transformers.

Structure of the Unbundled DVB

The primary objective to unbundle the DVB was to create functionally

independent generation, transmission or distribution entities to have focused
attention on performance. This was also expected to result in a better
benchmarking of the performance of each activity and lead to an easier
identification of problem areas. The DVB has therefore been unbundled in to

GENCO Owns the generating stations of DVB

TRANSCO Owns the transmission network of DVB and also acts as a bulk
buyer from generating stations and the bulk supplier to the
DISCOMS

DISCOMS Separate distribution companies, which own the distribution,

network and are responsible for retail supply of electricity to the
consumers of Delhi.

Taking in to consideration the size of the distribution area for a metropolis

like Delhi and the load pattern, level of T & D losses, average billing losses
and number of unauthorized connections, it was decided to divide DVB in to
three DISCOMS. The other states which are in the process of unbundling the
SEBs have also divided the SEB into two or more viable distribution
companies.

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The Reform Process

Government of NCT of Delhi has ushered in a new era of privatization of

distribution on 1st. July, 2002 by unbundling Delhi Vidyut Board. This was a
major policy decision arrived after bringing out a white paper on power
situation and the problems facing power supply in Delhi in 1999. After
extensive consultations, the idea of reform including privatization of power
sector in Delhi emerged as credible alternative to improve the dismal
functioning of power sector in Delhi. The process of privatization of
distribution business of electricity was completed in record period of three
years.

Privatization of Distribution

In order to facilitate privatization, the government of Delhi issued the policy

direction in exercise of the powers conferred under section 12 of Delhi
Electricity Reform Act, 2000 on 22.11.2001 further amended on 31/05/02
incorporating that:

i. The Aggregate Technical and Commercial Losses (AT&C losses) shall

form the basis for determination of tariff and computation of incentives
for better performance. The measure of overall efficiency of
distribution business is based on AT&C losses which is the difference
between units input and units realized.

ii. The reduction in AT&C losses in next 5 years will be determined

through competitive bidding.

iii. 51 per cent equity shares shall be offered at face value to the winning
bidder.

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iv. The retail tariffs for three distribution licensees shall be identical till
the end of 2006-07.

v. Till the end of 2006-07, tariffs shall be determined in such a way that
the distribution licensees earn, at least 16 per cent return on the issued
and paid up capital and free reserves.

vi. The government of Delhi will make available to the TRANSCO, an

amount of Rs. 2,600 crores (Subsequently increased to Rs. 3,450 Cr) as
loan, to be repaid in 13 years with a moratorium of 3 years. The
transmission company will use the loan to bridge the gap between its
revenue requirements and the bulk supply price it may receive from the
DISCOMS.
Financial Restructuring

The financial restructuring was needed to ensure that the balance sheet of
DVB’s successor entities carried liabilities which were serviceable and
sustainable.

• Analysis of Liabilities

As the latest audited annual accounts of DVB were not available,

which was one of the significant failures of DVB for years, the balance
sheet of DVB for the year 1994-95 was considered as the base for
determination of the existing liabilities of DVB and most of the
information given by the DVB in the absence of audited figures, was
obviously highly provisional and the conclusions drawn on the basis of
such information were highly subjective and debatable. The increase or
decrease in the various liabilities from 1994-95 till the time of
privatization was, therefore, estimated based on the data furnished by
DVB.

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• Power and Fuel Purchase Liability

DVB has not been able to pay for its power and fuel purchase dues
from the Badarpur Power Station (BTPS) and central PSUs and all
such dues of DVB, prior to its constitution in February 1997 were left
with the Government. These dues could then be converted into long
term bonds thereby reducing the upfront cash burden on the
government.

• Loans from Government

The loans provided to DESU prior to the formation of DVB in 1997

and interests thereof were being considered as payable by the
government for the purposes of this restructuring exercise. The loans
were in perpetuity, in accordance with provisions of the electricity
supply Act and only 50 per cent of the principal payment carried an
effective interest rate of about 5.75 per cent to 6 per cent. In the
financial restructuring exercise, the loans became repayable over a
period of time, with a moratorium for a few years. The conversion of a
part of the Government loans in to equity was advisable as this
provided a reasonable debt equity ratio to the successor entities of
DVB.

• Funding of Initial Losses of DISCOMS

In the initial years, the DISCOMS would in all likelihood suffer losses,
inter alia, due to high T & D losses. The DVB was not the only SEB
which was incurring losses and all the SEBs in view of their poor
physical, financial and commercial operations are expected to incur
losses in the initial years after reforms are initiated. Unless these losses
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are funded by the Government, it will be difficult to attract private
sector in the distribution business. The methods which could be used
for funding losses are tariff increases, subsidy from the state
government, rising of debt funds from the market, deferred payments
due to TRANSCO and special debt liability in the opening balance
sheet. Even after considering reasonable tariff increases, the
DISCOMS are likely to incur losses as large increase in tariffs,
immediately after reforms, would create strong public resentment,
which needs to be avoided. It was also necessary to recognise, the
payment of large amount of subsidy would be a significant burden on
the finances of Government, which are none too satisfactory. The debt
funds would have only helped the DISCOMs in wiping out cash losses.
The deferred payment terms for payments due to TRANSCO has been
used by Orissa in privatization of distribution. However, to prevent
TRANSCO from defaulting on its own power purchase commitments
to the generation companies, the government had to infuse debt
funds into TRANSCO equal to the amount on which moratorium
was being allowed to the DISCOMS. Although the above structure
takes care of the cash losses, the losses in the profit and loss account
are not affected by this structure. Under special debt liability in the
opening balance sheet of the DISCOMS, debt funds were to be raised
from the financial markets backed by Government guarantee to take
care of cash losses. The losses in the profit and loss account were taken
care of by creating a special debt liability in favour of Government in
the opening balance sheet of the DISCOMS; this special debt liability
shall be written off in the first three years. This appears to be a
preferred option.

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• Unique Bidding Selection

One unique criterion in the power sector reforms in Delhi when

compared to Orissa was that of selection of the bidders for
privatization was done on the basis of reduction of total Aggregate
Technical and Commercial (AT&C) losses rather than valuation of
the shares in the distribution company on the basis of assets of the
distribution. The government had taken a conscious decision in this
regard because this happens to be the primary variable for successful
implementation of reforms and also sustaining this reform in the long
run. Since the core issue was the commercial efficiency, instead of
transmission and distribution losses only, the new concept of
aggregate technical and commercial was introduced. The former is
the energy supplied and the energy actually billed and this is subject to
errors because of erroneous and false billing. In Delhi Power Sector
Reforms, the concept of AT&C losses namely the difference of
energy supplied and energy, for which payment has actually been
recovered, was used. This figure will always be higher than the T & D
losses but will be more accurate pointer to the malady which the
privatization process intended to eradicate. It may be noted that Delhi
approach of taking AT&C loss, as the base for the purpose of
efficiency monitoring appears to be a step better than the usual
practice of taking the T&D losses, as was the case in Orissa.

• Bidding for AT&C Losses Reduction

Another unique feature in the Power Sector Reforms in Delhi is that

the loss reduction targets were established through competitive
bidding. The bidders were required to bid on the basis of year wise
reduction of AT&C losses over a period of 5 years and whichever

100
 bid gave the highest net present value became the highest bidder.
In order to encourage and motivate the bidders, it was also laid down
that successful bidder can retain 50 per cent of the additional revenue
recovered over and above the minimum target fixed by the government
and the balance 50 per cent of any excess efficiency gain shall be
passed on to the consumers. Since, the government holds the 49 per
cent of the equity of the companies, effectively only about 25 per cent
of the additional revenue will accrue to the private sector and 75 per
cent to the government and consumer.

In Delhi, efficiency improvement targets for five years have been set in
advance during the bidding process, which also gives legitimacy to the
targets and the private companies are fully aware of the improvements
required to be carried by them well in advance. The Government of
Delhi have given the regulatory policy directions whereby the regulator
will set the tariffs for five years based on the efficiency improvements
bid. In Orissa, the distribution companies did not know what the
regulator would decide next year on efficiency improvements. The
Delhi Government has given loan assistance to the TRANSCO to
keep the bulk supply tariff at a reasonable level and this was
basically done to avoid a tariff shock to the consumers. In Orissa,
the entire burden was borne by the consumers.

• Determination of Opening Loss Level

In order to facilitate the bidders to compete effectively, the DERC

after careful analysis of various factors like energy input,
distribution and billing loss and collection efficiency determined
50.7 per cent for all DISCOMs as opening levels of AT&C loss,
although there was variance among the DISCOMs. The Delhi
privatization was structured to avoid the mistakes made in Orissa

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 reforms. It may be noted that Delhi approach of taking AT&C loss
as the base for efficiency monitoring, appears to be a better step
than the usual practice of taking the T&D losses which have not
been scientifically assessed. The investors were made to bid on the
loss reduction targets over the reopening losses determined by DERC
for first five years and on the efficiency, in sharp contrast to Orissa,
where the bidding was done on the value of the assets. During the
regulatory proceedings, the Government clarified that prior to the
bidding it shall stipulate the minimum loss reductions to be achieved
each year for the next five years, so as to make the sector self
sustaining within a period of five years. If the distribution company
achieves the loss reduction as per their bid, they would be able to
earn 16 per cent return on the issued and paid up capital and free
reserves till the end of 2006-07 subject to recovery of all expenses as
permitted by DERC. The incentive would be awarded only if the loss
reduction is higher than the level proposed by the investor.

LESSONS FROM ORISSA EXPERIENCE

It is obvious that some lessons are learnt from Orissa experience in

privatization. It is clear from Delhi privatization process that there was a
better recognition of the need for government support during the transition
period in the Delhi privatization which was totally absent in Orissa reforms.

1. Holding Company

The Delhi reforms have provided for creation of a Holding Company,

which will retain all the liabilities of DVB and also hold 49 per cent
share in the unbundled business, to facilitate the generation,
transmission and distribution companies to start with a clean balance
sheet, which is very essential to make reforms succeed.

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2. Baseline Data on Losses

The Orissa experience had highlighted the problem about lack of

realistic baseline data about one of the crucial factors of T&D losses.
In order to avoid any ambiguity about such data, Delhi adopted an
alternative approach of using AT&C (Aggregate Technical and
Commercial) losses, which is the difference between the unit inputs
and units realized (billed and collected) in which it has also included
the collection efficiency. The AT&C loss has formed the basis for
determination of tariffs and also for fixation of incentives for better
performance.

3. Balance Sheet Restructuring

In Delhi, a business valuation approach was adopted for valuing the

assets instead of revaluation of assets as in the case of Orissa to avoid
problems created due to over valuation of assets in terms of tariffs,
returns etc. The business value was arrived on the basis of future
earning potential assuming reasonable tariff increases and efficiency
improvements instead of on basis of depreciated replacement value. It
was assumed that the electricity business will become self sustaining
and will result in minimum tariff shock.

4. Bidding Process

There was a major difference in the criteria for bidder selection even
though Delhi also went through competitive bidding process. The
bidder was selected in Orissa on the basis of highest offer for
acquiring 51 per cent of the shares, the criteria for selection in Delhi
was based on maximum reduction in AT&C losses over a five year

103
 period and excess reduction, over the level mutually agreed, the
licensees would retain 50 per cent of the revenue thud recovered,
which would be shared between the joint venture partners and the
remaining 50 per cent shall be passed on to the consumers.

5. Government Support

The Government had withdrawn all subsidy support immediately after

privatization in Orissa, resulting in serious impact on DISCOMs and
there was also no clear data available about T&D losses in Orissa. In
order to overcome these problems, the Government of Delhi issued a
policy directive, containing the approach to loss reduction in five
years, retail tariff policy including returns on investments, subsidy
support etc. The loss reduction to be achieved over a five year
timeframe was specified in initial document itself to induce the bidder
to consider entry into business and AT&C losses reduction will be
transparently decided on the basis of competitive bidding and 51 per
cent equity shares shall be offered at face value. The AT&C loss will
be the basis for determination of tariffs and for computation of
incentives for better performance and the base level of AT&C losses
will be decided by the commission.

If actual AT&C loss reduction is less than the target for that year, the entire
shortfall in revenue because of the same shall be borne by the distribution
licensee. The tariffs till the end of 2006-07, subject to that all expenses shall
be permitted by the DERC, be determined in such a way that the distribution
licensees earn at least 16 per cent return on the issued and paid up capital and
free reserves subject to approval of SERC. The retail tariffs for the three
distribution licensees shall be identical till the end of 2006-07.

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The Government of NCT of Delhi will provide Rs. 3,450 crore as loan
(Initially Rs. 2,600 crores) during the transition period of five years to the
TRANSCO. The Government’s decision to provide a loan of Rs. 3,450 crores
to TRANSCO for five years, which would help to keep down the tariffs and
help the consumers, is an improvement over Orissa experiment. Similarly
incentives provided for better performance in respect of AT&C, is also a step
in the right direction.

The target of reduction in Aggregate Technical and Commercial (AT&C)

losses by 17.5 per cent in five years prima facie may appear to be very
lenient. However, after taking in to consideration the present magnitude of
losses and the failure of DVB to bring down the losses during the last several
years and these companies quoting for even lesser target than minimum
stipulation the Government of Delhi was left with no other option than to
agree for 17.5 per cent reduction.

Single Buyer Model

Another area of criticism has been the single buyer model adopted by Delhi,
which makes mandatory for all the DISCOMs to buy power through
TRANSCO and sell only through TRANSCO. It appears the present
arrangement of TRANSCO selling power to these companies is only an
interim arrangement and thereafter, the DISCOMs would have the
flexibility to buy power from anyone. While in the long run, it is desirable to
encourage competition among the buyers and sellers of power, presently this
arrangement would help these two companies to concentrate on
improvements in power distribution as both the companies will have their
hands full in managing the power distribution. The two private companies
would have to make special efforts to bring about improvements in customer
services, metering, billing, collection of revenue and control on theft.

105
The state Government should continue to support the private companies, till
the operations are stabilized and by legislating anti-theft laws, which would
go a long way in curbing T&D losses.

The DISCOMs can anvil financial support under the Accelerated Power
Development and Reforms Programme. The government has not yet enacted
Anti Theft Act, which it is hoped would be done sooner than later.

Improvements will be slow but steady

Keeping in mind the precarious state of the power sector in Delhi, both
TATAs and BSES have formulated a multi-pronged strategy to battle tough
times ahead by conducting energy audits, audits at the distribution
transformer level, cutting down AT&C losses, enhancing reliability,
improving collections and fostering employee efficiency. The private
companies are having massive programmes to install new meters and replace
the old meters in a time bound programme, as they attach considerable
importance to these from commercial point of view. Both the companies have
stepped up anti-theft drive. To enhance revenue stream, the billing and
collection system have been streamlined. As on line computerized billing
system has been put in place. To improve system reliability, the distribution
system including HT and LT network are being augmented and strengthened
repairs, replacements and life extensions of equipment is being done.
Maintenance programmes are given prominence. Massive programme for
installation/repair of capacitors is undertaken to reduce the reactive power so
as to improve the voltage. The DISCOMs have also started outsourcing
critical commercial activities like consumer survey route sequencing, meter
reading, billing etc. Intensive training programme of employee has been
undertaken. The results of all these initiatives have started showing in the
increased operational efficiency, in reduction of AT&C losses, improvements
in the revenue collections, decline in failure of transformers. While it is too

106
early to comment on the results of privatization, it is hoped that the overall
power situation will be better than what it had been during DVB period. It
needs to be realised that the problems of the power sector have been
accumulated over a period of 50 years. There are no easy solutions and instant
cure for Delhi’s growing power problems. The change of mindset, perception
and attitudes of the employees, bureaucracy, public, consumers, elected
representatives and the Government is an essential pre-requisite to make
privatization of power distribution a success. The successes of DISCOMs are
critical for the future application of the Delhi distribution model to other
states.

FUTURE COURSE OF ACTION

a) Need for Additional Generation Capacity

One of the major constraints faced in Delhi is its almost total dependence on
the generation from central units for its power supply, as its demand is far
more than the ramshackle power stations, within the capital, can cope with.
DVB has an installed capacity of 694 MW but normal generation is about 350
MW. Delhi’s power generation capacity has not been augmented. The thermal
plants are all of obsolete technology. Over-dependence on Northern grid has
also its limitations, due to competing demands on the system. The power from
all sources put together is always less than the demand at peak hours and the
problems get compounded during summer and winter, Delhi is forced to buy
power not only from Northern Grid but also from far flung areas. In contrast,
the relatively uninterrupted power supply in Mumbai is due to TATA and
BSES, who together have an installed capacity of 2,300 MW and which is
further supplemented by MSEB. This generation capacity is further
strengthened by 400 KV ring main sub-stations with islanding facilities, so
that whenever there are system disturbances either in MSEB grid and/or
western grid, Mumbai system isolates itself, as happened even on 1st of

107
August 2002 thereby providing bare minimum power supply, at least, to run
the essential services like Railways, transport, health and water supply.

The DVB was undoubtedly India’s largest urban power utility. The peak
demand for power is already in the horizon of 5,500 MW and energy
requirement will be over 20 billion units and peak demand is growing almost
at 10 per cent a year. The per capita consumption of power is almost three
times higher than the all India average. While demand is galloping, hardly any
new generation capacity has been added in the recent times.

Delhi heading towards a major catastrophe unless adequate dedicated

generation capacity of about 1,500 MW to 2,000 MW to Delhi is created, not
only by putting up projects in other states like Himachal Pradesh but also
purchasing surplus power from eastern region on a long term contract basis. If
there are environmental constraints in setting up plants in Delhi, the dedicated
power projects could be set up in other states and the power could be wheeled
on the existing network. Over-dependence on Northern Grid can lead to
serious problems in the long run. Though this is a long term strategy, it is
essential to take immediate effective steps through the private sector to
augment its generation capacity. There are already some private sector
proposals which should be finalised without further delay.

b) Augmentation of Transmission

There is also a need to establish 400 KV ring mains by establishing a

number of sub-stations and EHV transmission network and also to create
islanding facilities and to increase power generation substantially, as the
system is presently working on the threshold. Even a small snag, snowballs
into a major crisis.

108
The power crisis in Delhi is further compounded by the excessive dependence
on Northern Grid, as the constituent states themselves have not created
adequate generation capacity, leading to overdrawl beyond allocation and
have not taken adequate steps to maintain required voltage profile and also to
maintain grid discipline. This leaves no option to Delhi but to resort to
unscheduled load-shedding resulting in public outcry. In times of power
shortage in the region, Delhi also gets equally affected. In order to ensure
adequate availability and reliable supply to meet the growing demand for
power, it should be able to island itself in times of crisis in the Northern
Region and maintain un-interrupted supply of power at least to its essential
consumers such as Water Supply, Hospitals, and Railways, etc. Unless
generation and transmission capacity is augmented substantially, Delhi will
not realize completely the benefits of reforms in the sector and consumers will
continue to face blackouts, brown outs, load-shedding and shortages.

Conclusion

The Delhi privatization guarantees a 16 per cent return on equity, subject to

the licensees achieving their committed loss reduction target. These targets
were determined by a bidding process but, given the poor response, they were
finally determined by negotiations. The main implication of Delhi
privatization is that given the state of power sector, investors are unwilling to
take on any risk above the bare minimum, and the regulator is unwilling to
commit to any set of multi-year tariff principles. The government has
provided for a loan support of Rs. 3,450 crores since retail tariffs are not
expected to be adequate to enable the licensees to pay full cost of power and
also the 16 per cent return. However, since the regulator has not committed to
commit to the multi-year tariff principles, there is some uncertainty about
the full extent of the government exposure. In addition, there may be disputes
between the government and the licensee about the measurement of the true
level of AT&C losses and the licensees’ achievement of committed

109
reductions. In fact the opening level of AT&C losses, as determined by the
regulator, is itself based on certain assumptions and projections. Similarly the
liabilities of the DVB were not based on up-to-dated audited reports and a
conclusion on the basis of such information is highly subjective. It is quite
likely that the budgeted amount of Rs. 3,450 crores as transition support may
not be adequate and the matter needs to be closely monitored and additional
provisions made whenever needed.

Another apprehension about the reforms is that given the problems in the
sector and the lack of reliable data, the contracts with private companies are
likely to be severely incomplete and unenforceable which may result in
serious legal problems. Perhaps the transition phase reforms needs to be
preceded by a ‘pre transition’ no privatization phase during which the State
Electricity Boards undertakes fundamental risk mitigating actions.
Meaningful privatization is possible only in case durable progress is made by
undertaking close to 100 per cent metering, billing and collection, proper
determination of assets and liabilities of the successor companies is done;
disconnections of illegal connections and progressive reduction in subsidies /
or cross subsides in tariffs.

The Government of Delhi deserves all the credit for improving on the
experience from Orissa reforms and showing the way to other reforming
states.

The Electricity Act 2003 (Act No. 36 of 2003)

The Electricity Act 2003 (except section 121) has come in to force with effect
from 10th. June 2003 vide Notification No. SO.669 (E) dated 10th June 2003
issued by Ministry of Power, Govt. of India. The act aims to consolidate the
laws relating to generation, transmission, distribution trading and use of
electricity and generally for taking measures conducive to development of
Electricity industry, promoting competition therein, protecting interest of
110
consumers and supply of electricity to all areas, rationalization of electricity
tariff, ensuring transparent policies regarding subsidies, promotion of efficient
and environment benign policies, constitution of central electricity authority,
regulatory commissions and establishment of Appellate Tribunal and for
matters connected therewith or incidental thereto.

The Act 2003 has repealed the Indian Electricity Act. 1910, Electricity Supply
Act 1948 and the Electricity Regulatory Commission Act 1998, but has saved
certain provisions of the Indian Electricity Act and Electricity Supply Act as
contained in Section 185 of the Electricity Act 2003. The Electricity Act 2003
provides that the provisions of the enactment specified in the schedule (which
include OER Act 1995) which are not inconsistent with the provisions of the
Electricity Act. 2003 shall apply to the states in which enactments are
applicable.

Key Features of the Electricity Act 2003

1. Central government shall prepare National Electricity Policy and Tariff

Policy in consultation with state govt.s and Central Electricity
Authority (CEA). CEA shall prepare National Electricity Plan in
accordance with the National Electricity Policy.

2. Generation of Electricity has been permitted without obtaining a

license provided it complies with the technical standards for
connectivity to GRID. Hydro generation shall need the approval of the
state govt. concerned and clearance of CEA.

3. Captive generation freely permitted and the scope widened. A captive

shall have the right to open access for carrying electricity from captive
generating plant to the destination for its use subject to availability of

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 transmission facility. Captive power plant has been removed from the
ambit of license and other permissions.

4. Establishment of National Load Despatch Centre (NLDC) at the

national level for optimum scheduling of despatch of electricity among
regional load despatch centres. NLDC shall not engage in the business
of trading in Electricity and shall be operated by a Govt. Company or
any authority/corporation established under any central Act.

5. Regional Load Despatch Centre (RLDC) shall be operated by a

government company or any authority/corporation established under
central government act. The Central Transmission Utility (CTU) shall
operate the RLDC till such time it is operated by a Govt. Company etc.

6. The State Load Despatch Centre (SLDC) shall ensure integration

operation in the power sector in the state and shall be responsible for
optimum scheduling of despatch of electricity within the state. The
SLDC shall be operated by a Govt. Company or any
authority/corporation established under any state act. Till such time it
is operated by a govt. company etc. the State Transmission Utility
(STU) will operate the SLDC.

7. Transmission and Distribution of electricity and trading in electricity

shall require license from the appropriate commission.

8. Central transmission utility and state transmission utility at their

respective levels shall be responsible for planned and coordinated
development of transmission network.

9. The central transmission utility shall not engage in generation of

electricity or trading in electricity.

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10. Distribution License shall be free to undertake generation and
generating company would be free to take up distribution license.

11. For Rural Areas, stand alone systems for generation and distribution of
electricity shall be permitted without any license.

12. Appropriate Commission may grant license to two or more persons for
distribution of electricity within the same area.

13. Trading of Power is recognised as a distinctive activity with

Regulatory Commissions being authorized to fix ceilings and trading
margins, if necessary.
14. Central transmission utility and state transmission utility shall provide
the commission may specify non-discriminatory open access to its
transmission system on payment of transmission charges and a
surcharge as. The surcharge shall be utilised to meet the current level
of cross subsidy and shall be progressively reduced and eliminated.

15. The state commission shall introduce open access in phases and subject
to such conditions within one year. Such open access will be available
on payment of transmission charges and a surcharge and the surcharge
will be utilised to meet the current level of cross subsidy.

16. Transmission Licensee and distribution licensee have been permitted to

engage in any business for optimum utilization of its assets.

17. Tariff determination principles under the repealed laws/enactments

shall continue to apply for a period of one year or till the regulations
are framed under the Electricity Act 2003 whichever is earlier.

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18. Generation Tariff shall be subject to determination by the appropriate
commission.

19. Setting up of State Electricity Regulatory Commission is a mandatory

requirement.

20. Where state government requires grant of any subsidy to any consumer
or class of consumers, the amount to be compensated to the person
affected by the grant of subsidy. The subsidized tariff shall be
applicable on payment of the subsidy by the state government.

21. Metering of all electricity Supply have been made mandatory within
two years or within such extended period as may be allowed by the
commission to complete metering.

22. An Appellate Tribunal will be constituted to hear the appeals against

decision of SERCs & CERC.

23. Provisions relating to theft of Electricity have been made more

stringent. States will be required to set up Special courts to deal with
theft of electricity and line materials for speedy trial of offences.

24. Distribution Licenses permitted to undertake distribution of Electricity

in a specified area through franchisee where franchisee is not required
to have a license. The distribution license shall be responsible for
distribution of electricity in the said area of supply.

25. Distribution Licensees shall establish a forum for redressal of

grievances of the consumers. Any consumer aggrieved by non-
redressal of grievances may represent to an authority known as
Ombudsman to be appointed by the state commission.

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 26. The act provides re-organisation of State Electricity Board with an
objective of corporatising the generation, transmission, distribution and
trading functions.

Implementation of Montek Singh Ahluwalia Report

In pursuance of one of the resolutions passed in the Chief Ministers’

Conference presided over by the Hon’ble Prime Minister on 03.03.2001, the
Government of India constituted an Expert Group under the Chairmanship of
Shri Montek Singh Ahluwalia, Member (Energy), and Planning Commission
to:

(a) Recommend measures for one time settlement of outstanding dues of

SEBs to CPSUs.

(b)Suggest a strategy for capital restructuring of SEBs including the

provision of structural adjustment of loans so as to enable them to tide over
present financial crisis and make them operationally viable.

The Expert Group has submitted its report to the Ministry of Power on Part
(a) above in May 2001. As per the report, as on 28.02.2001, the SEBs owed
about Rs. 41,473 Crore to various CPSUs and Railways. This amount
consisted of Rs. 25,727 crore of principal payment and Rs. 15,746 Crore by
way of surcharge / interest on delayed payments. The Group deliberated on
whether the settlement should be attempted independently or as a part of the
reform process. They however felt that although both are interlinked, it would
be prohibitively difficult for the SEBs to reform if they have to carry the huge
financial burden of outstanding dues. The Group therefore recommended that
this financial liability should be taken over by their States and the CPSUs
should also share this burden by waiving off part of their debt.

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The main features of proposed scheme for one time Settlement are:

• 50% of the surcharge/interest on delayed payments should be waived

for the participating States.

• Remaining 50% of the surcharge/interest and the full principal amount

have to be securitised through bonds issued by State Governments.

• The bonds should be issued through the RBI at a taxfree interest rate of
8.5% per annum with terms such that entire principal is repaid between
6th and 15th years and with lock-in restrictions allowing release of
only 10% bonds each year in secondary market.

• Timely payment of current dues and opening of LC equal to105% of

average monthly billing for preceding 12 months.

• SEBs should accept reform based performance milestones such as

setting up of SERCs, issuance and implementation of tariff orders,
energy audit at 11 kV feeders, metering of distribution feeders and
improvement in revenue realisation.

• Scheme to be effective only after half of the States with Annual Billing
of over Rs.500 crores from CPSUs give their consent.

Incentives

• If SEBs do not default on their current dues and adhere to performance

milestones, CPSUs should pay them biannual cash incentives equal to
2% of value of bonds for first 4 years starting 01.04.2001

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 • If SEBs open and maintain LCs by Dec 2001, CPSUs should pay them
one time cash incentive equal to 2% of value of bonds.

Disincentives

• Graded reduction in supply of power/ coal from CPSUs for defaulters

on current payments.

• Where defaults exceed 90 days from the date of billing, GOI to recover
through adjustment against Central Plan Assistance and other
devolutions from the Centre.

• States withholding consent beyond 60 days of the scheme becoming

effective to be denied discretionary allocation as well as any assistance
under APDP.

The high level Empowered Group consisting of Chief Ministers, Deputy

Chairman, Planning Commission, Finance Minister and Power Minister,
which has been constituted to monitor and guide the reform process, has
approved the recommendations with the following modifications:

(a) Waiver of surcharge recommended by the Expert Group shall be increased

from 50 to 60%.

(b) Incentives for a period of 4 years @ 4% of the face value of the bonds for
achievement of performance milestones by the SEBs shall be increased to 6%
in the first year and 5% in the second year.

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Single Buyer vs. Multi Buyer Model in Distribution

The states such as Orissa (OPTCL), Andhra Pradesh (APTRANSCO),

Haryana (HVPNL), Rajasthan and Uttar Pradesh (UPPCL), who have
restructured the power industry, have adopted “Single Buyer Model”, wherein
the state transmission companies are the monopoly purchases of Power
and they sell power to distribution companies. The single buyer model has
a number of disadvantages, particularly in situations with low collection
efficiency and payment indiscipline.

Since generation companies (GENCOs) must sell their power to the

TRANSCO, the distribution companies can buy from the TRANSCO alone,
and the consumer also likewise has to buy from the same DISCOM. As all the
prices are determined on a ‘Cost Plus basis’ either through negotiation or by
the regulator, the consumer, etc.

World Bank Models on Structural Reforms in Power Sector

Ten distinct models of power structure reform can be found in the literature,
but most countries believe that four generic models are adequate to represent
the available structural options. These are shown in Figure 3. It should be
noted that these models should not be interpreted as rigid presentations of
reality but as a basis for conceptual analysis and discussion.

Model 1- This is an integrated monopoly with no competing generating or

distribution companies in an area. Customers buy from Monopoly
Company.

Model 2- Distribution is separated but generation, transmission remain

integrated. Distribution has no choice of supplier from whom to buy power.

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This is still a full monopoly model but it may be considered as a step
towards decentralization & eventual competition.

Model 3- In the purchasing agency model, competition to generate power

exists but all sales must be made to the designated purchasing agency. This
Agency then sells it to retailers or to its own customers, who have no choice
of supplier.

Model 4- This involves central transmission with open access for retail
sales. Competition exists in generation, with customers or retailers having a
choice of supplier, possibly buying and selling through the power pool.

The above models differ in a number of aspects. The degree of vertical

integration depends on the extent to which generation, transmission, and
distribution are managed together or separately. The relevant criterion for
restructuring decisions is the relative cost making contracts between separate
entities versus benefits of greater production efficiency through competition,
taking into account that small systems are not amenable to it. The degree of
concentration or fragmentation is defined by the number of enterprises
conducting the same activity within the same geographic or administrative
region. The size of the market would determine the advantages of horizontal
un-bundling. Typically, in large or federally organized countries, such as
India, China, or Brazil, a large number of local enterprises are operating. In a
small country, such as Georgia or Lithuania, excessive fragmentation would
add relatively large transaction costs.

The countries that the World Bank serves have adopted various models of
reform in their power sectors, each of which merits separate discussion and
analysis. The general conclusions from the World Bank's experience in sector
restructuring are as follows:

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o Generation is the first core power activity that can be separated and
made competitive. Decentralizing the sector by introducing additional
players such as IPPs is the first step toward making generation a
competitive activity.

o Successful implementation of structural reform requires both the

hardware of technological advances in the power system and the
software of workable contractual relationships.

o Separate distribution enterprises are encountered in many developing

countries and may indicate relatively easy transition to a more
unbundled and competitive system.

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Table 15: Comparative statement of sops extended by different
countries

CHINA INDIA

• 5-year tax holiday. • 5-year tax holiday.

• Half-rate tax for 5 more • Reduced duty for capital
years. equipment.
• Equity return restricted to • Equity return restricted to
12.5%. 16% (equity “sweeteners”
keyed to plant load factor.
• Purchaser obligations
guaranteed for initial “fast-
track” projects.

PAKISTAN PHILIPPINES

• No corporate tax; • Sales tax and customs-duty

reduced dividend tax. relief for capital equipment.
• Sales-tax and custom- • Government guarantee of
duty relief for capital purchaser obligations.
equipment. • Government guarantee for
• Government guarantee fuel supply.
for fuel supply.
• Ceiling bulk-purchase
price specified.

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122
Electricity Tariff

This chapter traces the changes in the legal provisions governing electricity
power tariffs and discusses the processes and methodologies adopted over
time for tariff setting till the formulation under Section 178 of the Electricity
Act, 2003, which may be called the Central Electricity Regulatory
Commission (Terms and Conditions of Tariff) Regulations, 2004.

The legal provisions for the regulation of tariffs of power utilities can be
traced back to the Indian Electricity Act 1910 (IE Act). However in keeping
with the perceptions of the times there was no attempt at being prescriptive by
specifying either the principles or the methodology to be followed for tariff
setting enjoining that tariffs must be non-discriminatory and allow a
reasonable return to the licensee.

The first attempt to closely regulate monopolistic power utilities by defining

the basis on which tariffs could be charged was made in the Electricity Supply
Act. 1948(E(S) Act). At the time there were two types of entities in the power
sector: Licensees under the IE Act and state electricity boards (SEBs) created
by the E(S) Act.

Schedule VI of the E(S) Act prescribed the methodology to be followed for

the determination of the tariffs of power utilities which were Licensees under
the IE Act. This is a detailed cost plus methodology where the rate of return is
fixed. Electricity Regulatory Commissions Act. 1998 (ERC Act) was the
predecessor to the newly formed Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulations, 2004.

The Central Electricity Regulatory Commission hereby makes the following

regulations, namely:

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Short Title & Commencement
1. These regulations may be called the Central Electricity Regulatory
Commission (Terms and Conditions of Tariff) Regulations, 2004.
These regulations shall come into force on 1.4.2004, and unless
reviewed earlier or extended by the Commission, shall remain in force
for a period of 5 years.

Scope & Extent of Application

1. Where tariff has been determined through transparent process of
bidding in accordance with the guidelines issued by the Central
Government, the Commission shall adopt such tariff in accordance with
the provisions of the Act.
2. These regulations shall apply in all other cases where tariff is to be
determined by the Commission based on capital cost.

Norms of operation to be ceiling norms

1. For removal of doubts, it is clarified that the norms of operation
specified under these regulations are the ceiling norms and this shall
not preclude the generating company or the transmission licensee, as
the case may be, and the beneficiaries from agreeing to improved
norms of operation and in case the improved norms are agreed to, such
improved norms shall be applicable for determination of tariff.

Tariff determination
• Tariff in respect of a generating station under these regulations shall be
determined stage-wise, unit-wise or for the whole generating station
and tariff for the transmission system shall be determined line-wise,
sub-station-wise and system-wise, as the case may be, and aggregated
to regional tariff.

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 • For the purpose of tariff, the capital cost of the project shall be broken
up into stages and by distinct units forming part of the project. Where
the stage-wise, unit-wise, line-wise or sub-station-wise break up of the
capital cost of the project is not available and in case of on-going
projects, the common facilities shall be apportioned on the basis of the
installed capacity of the units and lines or sub-stations. In relation to
multipurpose hydro electric projects, with irrigation, flood control and
power components, the capital cost chargeable to the power component
of the project only shall be considered for determination of tariff.

Explanation
For the purpose of this chapter, 'project' includes a generating station
and the transmission system.

Application for determination of tariff

• The generating company or the transmission licensee, as the case may

be, may make an application for fixation of tariff in respect of the
completed units of the generating station or the lines or sub-stations of
the transmission system.

• In case of the existing generating station or the existing transmission

system, the generating company or the transmission licensee, as the
case may be, shall make an application for determination of tariff as
per Appendix I to these regulations.

• In case of a generating station or the transmission system declared

under commercial operation on or after 1.4.2004, an application for
fixation of tariff shall be made in two stages, namely:

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 1. A generating company or a transmission licensee may make an
application as per Appendix I to these regulations, for
determination of provisional tariff in advance of the anticipated
date of completion of the project based on the capital
expenditure actually incurred up to the date of making of the
application or a date prior to making of the application, duly
audited and certified by the statutory auditors, and the
provisional tariff shall be charged from the date of commercial
operation of the respective unit of the generating station or the
line or sub-station of the transmission system;

2. A generating company or the transmission licensee shall make a

fresh application as per Appendix I to these regulations, for
determination of final tariff based on actual capital expenditure
incurred up to the date of commercial operation of the
generating station or the transmission system, duly audited and
certified by the statutory auditors.

Core Business
For the purpose of these regulations, core business means the regulated
activities of generation or transmission of electricity and does not
include any other business or activity, like consultancy,
telecommunication, of the generating company or the transmission
licensee.

Tax on Income
• Tax on the income streams of the generating company or the
transmission licensee, as the case may be, from its core business, shall
be computed as an expense and shall be recovered from the
beneficiaries.

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• Any under-recoveries or over-recoveries of tax on income shall be
adjusted every year on the basis of income-tax assessment under the
Income-Tax Act, 1961, as certified by the statutory auditors.

1. Provided that tax on any income stream other than the core
business shall not constitute a pass through component in tariff
and tax on such other income shall be payable by the generating
company or transmission licensee, as the case may be.

2. Provided further that the generating station-wise profit before

tax in the case of the generating company and the region-wise
profit before tax in case of the transmission licensee as
estimated for a year in advance shall constitute the basis for
distribution of the corporate tax liability to all the generating
stations and regions.

3. Provided further that the benefits of tax-holiday as applicable in

accordance with the provisions of the Income-Tax Act, 1961
shall be passed on to the beneficiaries.

4. Provided further that in the absence of any other equitable basis

the credit for carry forward losses and unabsorbed depreciation
shall be given in the proportion as provided in the second
proviso to this regulation.

5. Provided further that income-tax allocated to the thermal

generating station shall be charged to the beneficiaries in the
same proportion as annual fixed charges, the Income-tax
allocated to the hydro generating station shall be charged to the
beneficiaries in the same proportion as annual capacity charges

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 and in case of interstate transmission, the sharing of income-tax
shall be in the same proportion as annual transmission charges.

Tax Escrow Mechanism

• The beneficiaries shall maintain an interest bearing tax escrow

account in a scheduled bank, to which all amounts of interest shall
be credited.

• The tax liability shall be estimated two months before the

commencement of each Year and intimated to the beneficiaries.
The generating company or the transmission licensee shall
endeavor to minimize its liability on account of taxes recoverable
from the beneficiaries.

• The generating company or the transmission licensee shall be

authorised to withdraw the amounts for settling the income-tax
liability on presentation to the escrow holder, a certificate from
their statutory auditors that the amounts are immediately due and
payable to the taxing authority.

• The generating company or the transmission licensee shall pay into

the tax escrow account any refund received from the taxing
authority.

• The refunds, if any, shall not be paid back to the beneficiaries and
shall be adjusted in the escrow account. Any balance due or
returnable shall be rolled over to the next year.

• The escrow accounts shall be reflected in the books of accounts of

the beneficiaries as their bank account.
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Extra Rupee Liability

• Extra rupee liability towards interest payment and loan repayment

corresponding to the normative foreign debt or actual foreign debt, as
the case may be, in the relevant year shall be permissible provided it
directly arises out of Foreign Exchange Rate Variation and is not
attributable to the generating company or the transmission licensee or
its suppliers or contractors. Every generating company and the
transmission licensee shall recover Foreign Exchange Rate Variation
on a year to year basis as income or expense in the period in which it
arises and Foreign Exchange Rate Variation shall be adjusted on a year
to year basis.

Recovery of Income-tax and Foreign Exchange Rate Variation

• Recovery of Income-tax and Foreign Exchange Rate Variation shall be
done directly by the generating company or the transmission licensee,
as the case may be, from the beneficiaries without making any
application before the Commission.

Provided that in case of any objections by the beneficiaries to the amounts

claimed on account of income-tax or Foreign Exchange Rate Variation, the
generating company or the transmission licensee, as the case may be, may
make an appropriate application before the Commission for its decision.

Deviation from norms

Tariff for sale of electricity by a generating company may also be determined

in deviation of the norms specified in these regulations subject to the
conditions that:

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 • The overall per unit tariff of electricity over the entire life of the asset,
calculated on the basis of the norms in deviation does not exceed the
per unit tariff calculated on the basis of the norms specified in these
regulations; and

• Any such deviation shall come into effect only after approval by the
Commission.

In case of the existing generating stations, TPS-I and TPS-II (Stage I & II) of
Neyveli Lignite Corporation Ltd, whose tariff was initially determined by
following Net Fixed Assets approach based on mutual agreement between
Neyveli Lignite Corporation Ltd and the beneficiaries, tariff shall continue to
be determined by adopting Net Fixed Assets approach.

Power to Remove Difficulties

If any difficulty arises in giving effect to these regulations, the Commission

may, of its own motion or otherwise, by an order and after giving a reasonable
opportunity to those likely to be affected by such order, make such provisions,
not inconsistent with these regulations, as may appear to be necessary for
removing the difficulty.

Power to Relax

The Commission, for reasons to be recorded in writing, may vary any of the
provisions of these regulations on its own motion or on an application made
before it by an interested person.

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Determination of Tariff (under Electricity Act. 2003)

62. (i) The Appropriate Commission shall determine the tariff in accordance
with provisions of this Act for –
(a) Supply of electricity by a generating company to a distribution
licensee:

Provided that the Appropriate Commission may, in case of shortage of supply

of electricity, fix the minimum and maximum ceiling of tariff for sale or
purchase of electricity in pursuance of an agreement, entered into between a
generating company and a licensee or between licensees, for a period not
exceeding one year to ensure reasonable prices of electricity;
(b) Transmission of electricity;
(c) Wheeling of electricity;
(d) Retail sale of electricity.

Provided that in case of distribution of electricity in the same area by two or

more distribution licensees, the Appropriate Commission may, for promoting
competition among distribution licensees, fix only maximum ceiling of tariff
for retail sale of electricity.

ii. The Appropriate Commission may require a licensee or a generating

company to furnish separate details, as may be specified in respect of
generation, transmission and distribution for determination of tariff.

iii. The Appropriate Commission shall not, while determining the tariff
under this Act, show undue preference to any consumer of electricity but
may differentiate according to the consumer's load factor, power factor,
voltage, total consumption of electricity during any specified period or
the time at which the supply is required or the geographical position of

131
 any area, the nature of supply and the purpose for which the supply is
required.

iv. No tariff or part of any tariff may ordinarily be amended more frequently
than once in any financial year, except in respect of any changes
expressly permitted under the terms of any fuel surcharge formula as
may be specified.

v. The Commission may require a licensee or a generating company to

comply with such procedures as may be specified for calculating the
expected revenues from the tariff and charges which he or it is permitted
to recover.

vi. If any licensee or a generating company recovers a price or charge

exceeding the tariff determined under this section, the excess amount
shall be recoverable by the person who has paid such price or charge
along with interest equivalent to the bank rate without prejudice to any
other liability incurred by the licensee.

Determination of Tariff by Bidding Process

63. Notwithstanding anything contained in section 62, the Appropriate

Commission shall adopt the tariff if such tariff has been determined through
transparent process of bidding in accordance with the guidelines issued by the
Central Government.

Procedure for Tariff Order

64. (1) An application for determination of tariff under section 62 shall be
made by a generating company or licensee in such manner and accompanied
by such fee, as may be determined by regulations.

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(2) Every applicant shall publish the application, in such abridged form and
manner, as may be specified by the Appropriate Commission.

(3) The Appropriate Commission shall, within one hundred and twenty days
from receipt of an application under sub-section (1) and after considering all
suggestions and objections received from the public,-

Issue a tariff order accepting the application with such

modifications or such conditions as may be specified in
that order;

Reject the application for reasons to be recorded in

writing if such application is not in accordance with the
provisions of this Act and the rules and regulations made
there under or the provisions of any other law for the
time being in force:

Provided that an applicant shall be given a reasonable opportunity of being

heard before rejecting his application.

(4) The Appropriate Commission shall, within seven days of making the
order, send a copy of the order to the Appropriate Government, the Authority,
and the concerned licensees and to the person concerned.

(5) Notwithstanding anything contained in Part X, the tariff for any inter-State
supply, transmission or wheeling of electricity, as the case may be, involving
the territories of two States may, upon application made to it by the parties
intending to undertake such supply, transmission or wheeling, be determined
under this section by the State Commission having jurisdiction in respect of
the licensee who intends to distribute electricity and make payment therefore:

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(6) A tariff order shall, unless amended or revoked, shall continue to be in
force for such period as may be specified in the tariff order.

Provision of Subsidy by State Government

65. If the State Government requires the grant of any subsidy to any consumer
or class of consumers in the tariff determined by the State Commission under
section 62, the State Government shall, notwithstanding any direction which
may be given under section 108, pay, within in advance in the manner as may
be specified, by the State Commission the amount to compensate the person
affected by the grant of subsidy in the manner the State Commission may
direct, as a condition for the license or any other person concerned to
implement the subsidy provided for by the State Government:

Provided that no such direction of the State Government shall be operative if

the payment is not made in accordance with the provisions contained in this
section and the tariff fixed by State Commission shall be applicable from the
date of issue of orders by the Commission in this regard.

Development of Market

66. The Appropriate Commission shall endeavor to promote the development

of a market (including trading) in power in such manner as may be specified
and shall be guided by the National Electricity Policy referred to in section 3
in this regard.

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AVAILABILITY BASED TARIFF (ABT)

ABT has been under discussion since 1994 when M/s ECC, an ADB
consultant, first supported it. GOI constituted a National Task Force in
February 1995. It had ten meetings till end 1998 where all the related issues
were discussed. A draft notification was prepared for issue by government.
With effect from May 15, 1999 the jurisdiction was vested in the CERC.
Papers were sent to the Commission in June 1999 by the MoP. The
proceedings were held in the Commission from July 26 to 28, 1999. The ABT
order dated January 4, 2000 of the Commission departs significantly from the
draft notification as also from the prevailing tariff design.

Why ABT?

1. India plans to have an integrated National Grid. This will assist in meeting
demand with the least cost supply. Five Regional grids already exist. Some
linkages between Regions are also in place.

1. The five Regional grids work at vastly varying operational parameters

today. Frequency level is one such operational parameter. The target
frequency prescribed by the Indian Electricity Rules is 50 Hz
2. Integrated grid operations require the normalisation of frequency
across all five Regions. The alternative is to insulate each Regional
Grid by Back to Back HVDC links. This is an expensive option.
Normalisation of frequency requires proactive load management by
beneficiaries and despatch discipline by generators.
3. There is currently no formal system of financial incentives to promote
grid discipline.
4. The ABT provides this mechanism.

2. Chronic surpluses in the East and shortages in the South, have resulted in
sustained functioning of these grids at frequencies which are far beyond even
135
the normal band, liberally defined by the IEGC as frequency variation within
49.5 to 50.3 Hz

1. Continued functioning at non-standard frequency results in long-term

damages to both generation and end use equipment. This is a “hidden
cost” which is borne by the customer in the long term.
2. The ABT will induce corrections in the prevailing frequency to bring it
within the permissible band.

3. Frequent fluctuations in frequency caused by short-term variations in the

demand supply gap due to the tripping of load or outage of a generator or a
transmission line impose substantial costs on generators and consumers.

1. The ABT will address this problem by inducing grid discipline.

4. Economic efficiency dictates that least cost power should be despatched in

preference to more costly power (merit order despatch). This becomes
difficult without a two part tariff for all stations. States tend to compare the
total cost of central generators with the variable cost of their own stations,
since for them the fixed costs of state level stations are sunk costs. These
results in making central generation appear artificially more expensive than
state level stations even though on variable cost basis the former may be
cheaper.

1. The two-part tariff of the ABT by making the payment of fixed cost a
fixed liability of the states converts it into a sunk cost thereby levelling
the playing field between central generators and state level plants.

5. Currently beneficiaries are not liable for payment of the fixed cost
associated with the share of capacity allocated to them. If a beneficiary
decides not to draw any energy he can escape payment of the fixed charge,
which then gets paid by the person drawing energy. This is unfair since it

136
increases the cost of energy even for those beneficiaries who may be drawing
energy within their entitlements.

1. The two-part tariff of the ABT assures that each beneficiary will be
liable for payment of the fixed cost associated with its share of
allocated generation capacity.

6. Currently generators have a perverse financial incentive to go on generating

even when there may be no demand. This results in high frequency in the grid
as is endemic in the East

1. The ABT will discourage such behaviour by pricing generation outside

the schedule in relation to the prevailing frequency.

What Is ABT?

• It is a performance-based tariff for the supply of electricity by

generators owned and controlled by the central government.
• It is also a new system of scheduling and despatch, which requires
both generators and beneficiaries to commit to day-ahead schedules.
• It is a system of rewards and penalties seeking to enforce day ahead
pre-committed schedules, though variations are permitted if notified
One and one half hours in advance.
• The order emphasises prompt payment of dues. Non-payment of
prescribed charges will be liable for appropriate action under
sections 44 and 45 of the ERC Act.

It has three parts:

- A fixed charge (FC) payable every month by each beneficiary to the

generator for making capacity available for use. The FC is not the same for
each beneficiary. It varies with the share of a beneficiary in a generators
capacity. The FC, payable by each beneficiary, will also vary with the level of
availability achieved by a generator.
137
- In the case of thermal stations like those of NLC, where the fixed charge has
not already been defined separately by GOI notification, it will comprise
interest on loan, depreciation, O&M expenses, ROE, Income Tax and Interest
on working capital.

- In the case of hydro stations it will be the residual cost after deducting the
variable cost calculated as being 90% of the lowest variable cost of thermal
stations in a region.

- An energy charge (defined as per the prevailing operational cost norms) per
Kwh of energy supplied as per a pre-committed schedule of supply drawn
upon a daily basis.

- A charge for Unscheduled Interchange (UI charge) for the supply and
consumption of energy in variation from the pre-committed daily schedule.
This charge varies inversely with the system frequency prevailing at the time
of supply/consumption. Hence it reflects the marginal value of energy at the
time of supply.

How is ABT different from normal proceedings to determine generation

tariff?

1. The ABT proceeding has not attempted to consider most of the cost drivers
like ROE, Operational Costs, depreciation rate, composition of the Rate Base,
capital structure etc. Proceedings to redefine these norms are being held
separately. Hence the ABT proceedings have been concerned more with tariff
design rather than definition of tariff norms or determination of tariff levels.

2. Its incidence is a function not only of the behaviour of a generator but also
of the behaviour of a beneficiary. Disciplined beneficiaries and generators
stand to gain. Undisciplined beneficiaries and generators stand to lose.

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Broad features of ABT design

1. It implements the long held view that electricity tariffs should be two-
part comprising a fixed charge and a separate energy charge.

2. It increases the target availability level at which generators will be able

to recover their fixed costs and ROE from 62.79% deemed PLF at
present to 80% (85% after one year) for all thermal stations, 85% for
Hydro in the first year and 77% (82% after one year) for NLC.

3. Misdeclaration of availability entails severe penalties.

4. It rationalises the relationship between availability level and recovery

of fixed cost.

The draft notification provided for recovery of (annual fixed costs

minus ROE) at 30% availability and recovery of ROE on pro-rata basis
between 30% and 70% availability. This order provides for payment of
capacity charges between 0% and target availability (as indicated in
item 2 above) on pro-rata basis.

5. The draft notification had provided for payment of capacity charges for
prolonged outages. This order disallows such payments.

6. It delinks the earning of incentive from availability and links it instead

to the actual achievement of generation. Hence incentives will be
earned by generators only where there is a genuine demand for
additional energy generation unlike the prevailing situation, or the
proposed draft received from the GOI, under which it is earned purely
because the generator is available.

7. Draft notification linked incentives to equity. This order preserves the

status quo of one paise per Kwh per each 1% increase in PLF above
target availability.

139
8. It increases the minimum performance criterion for the earning of an
incentive from 68.5% deemed PLF at present to 80% (85% after one
year) for all thermal stations, 85% for Hydro and 77% (82% after one
year) for NLC.

9. It introduces severe financial penalties for grid indiscipline along with

significant rewards for behaviour, which enforces grid discipline for
both generators as well as beneficiaries.

10. The order permits market pricing for the trading of surplus energy by
beneficiaries and generators.

11. The order urges the GOI to allocate the unallocated capacity a month
in advance so that beneficiaries know their exact share in capacity in
advance and can take steps to trade surplus power.

12. It will be implemented in stages from April 1, 2000 starting from the
South. The new norm for incentive will however be applicable from
this date for all central stations. In the case of NPC, GOI to decide
applicability of the order.

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COMPARISON OF EXISTING TARIFF SYSTEM AND
AVAILABILITY BASED TARIFF

Sl. Description Existing Draft ABT ABT Order

No. of Item System Proposal
1. Capacity / Annual Fixed Fixed Capacity charge as
Fixed Charge Charge (AFC) charges per existing system
include : excluding
a) Interest on ROE i.e. all
loan other five
b)Depreciation items of the
c)O&M existing
d)Return on system.
Equity ROE
e) Income-Tax treated
f) Interest on separately
Working
Capital
2. Basis of Recovered at FC Pro-rata recovery of
recovery 62.79% excluding capacity charge for
deemed PLF. ROE i) NTPC stations:
50% AFC at recovered at Between 0 to 80%
0% PLF and 30% availability in the first
full recovery availability year and 0 to 85%
at 68.49% on pro-rata availability in the
deemed PLF. basis second year
between 0% ii) NLC Stations
and 30% Between 0 to 77%
availability.availability in the first
ROE year and 0 to 82%
recovered availability in the
on pro-rata second year
availability iii) NHPC Stations
between Between 0 to 85%
30% and availability in the first
70% year and availability
in the second year to
be announced by the
commission
separately.
3. Incentives Above 68.49% Incentive 1 paise/KWh/each
deemed PLF, beyond percentage increase in
incentives at 1 target PLF of 80%/ 85% in
paise/KWh for availability the first/ second year
each 1% of 70% is as for NLC and 85% in
increase in follows: the first year for
141
 PLF. 70% to NHPC.
85% - 0.4%
of equity
for each 1%
increase in
availability
beyond
85%.
4. Sharing of Based on Based on Based on allocated
fixed cost actual energy allocated capacity
drawls capacity
5. Recovery of Based on Based on Based on Scheduled
variable cost actual energy Scheduled Energy
drawls Energy
6. Deviations No penalties Varying Varying between 0 to
from for such between 0 420 paise/Kwh for
schedule – UI deviation to 360 the frequency range
charges paise/Kwh of 50.5 Hz to 49 Hz
for the
frequency
range of
50.5 Hz to
49 Hz
7. Norms for GOI Tariff GOI Tariff GOI Tariff
tariff notification notification notification till such
determination time Commission
finalises its views
8. Procedure for Not applicable Not Specified
payment of specified
capacity
charge if
ABT is
introduced in
the middle of
a financial
year
9. Prolonged Included in Provided Does not provide for
Outages item (2) above for payment payment of capacity
of adjusted charges
capacity
charges
10. Marketing of Not applicable Not Encouraged and will
surplus specified not require
energy commission’s
approval

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11. Splitting up Capacity Capacity Till such commission
of capacity charge charge notifies peak and off-
and energy covered covered peak energy rates for
charge for depreciation depreciation
hydro-stations,
hydro and interest on and interest
primary energy
stations. loan. Energy on loan.
charge would be
covered ROE, Energy taken as 90% of the
income tax, covered lowest variable
O&M and ROE, charge of the thermal
interest on income tax,
power station in the
working O&M and concerned region.
capital. interest on
The balance of total
working charges would be
capital. recovered as capacity
charges.
12. Payment of As per As per As per orders of the
dues to agreements agreements commission
generators
13. Applicability All central All central i) ABT
generating generating implementation is
stations stations staggered region wise
staggered ii) Fixed charge
region wise recovery and basis for
incentive payments
revised from 1st April,
2000. iii) GOI to
decide about ABT for
automatic power
stations.
14. PLF for Not applicable Not Till the introduction
incentives specified of ABT in other
during regions and after
interim 1.4.2000, the actual
period PLF for incentive
purposes for NTPC
shall be 80% instead
of deemed PLF of
68.49%. The PLF in
the first year for
incentive purposes for
NHPC shall be 85%.

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Open Access: Methods for Calculation of Cross-Subsidy Surcharge and
Assessment of the Financial Impacts on Utilities

Introduction

In order to promote competition in the electric power sector, the Electricity

Act 2003 (E. Act) mandates open access to the transmission and distribution
network for any supplier of electricity. With open access, upon approval by
the Electricity Regulatory Commission (ERC), competing suppliers will be
able to provide electricity to certain categories of consumers and thus bring
competition into generation and supply of electricity. A major complication in
the transition to competition is the loss of cross-subsidy revenues that were
being provided by the exiting consumer to fund the subsidized (below cost
provision of) supply to the majority of LT consumers.

The EAct has attempted to compensate the utilities by allowing State

Commissions to impose surcharges on those consumers leaving the licensee
and receiving power from competing suppliers. However, the wording of the
Act on these issues is not clear regarding the level of the surcharges and the
method of their calculation. For this reason, the EAct is subject to multiple
interpretations and there have been several suggestions for how these
surcharges are to be calculated.

Here we describe the recommendations made by various parties regarding the

method of calculation and level of the surcharges. Then we discuss our
concerns about these recommendations. Next, we assess the likely revenue
loss for licensees due to open access and the extent to which the various
recommended methods would compensate the utilities for the revenue loss.

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We’ve discussed the conflicting requirements for making open access
economically attractive and protecting the financial health of utilities. We
conclude with suggestions on other factors that need to be considered to make
the transition to competition a little smoother.

Recommendations by Various Parties on Mechanisms to Calculate the

Cross- Subsidy Surcharge

Electricity Act 2003

The EAct allows open access before cross-subsidies are eliminated through
the payment of a surcharge but requires that the subsidies be progressively
reduced in a manner determined by the State Commission. Clarifying the
purpose of the surcharge, the Act states that the surcharge is to “meet the
requirements of current level of cross subsidy within the area of supply of the
distribution licensee.” While the Act is silent on the method to be used to
calculate the cross-subsidy surcharge, it clearly states that the State
Commission will determine the cross-subsidy surcharge and the manner in
which it will be progressively reduced. However, the EAct requires that the
State Commissions be guided by the National Electricity Policy, National
Electricity Plan, and Tariff Policy which are to be notified by the Ministry of
Power (MoP). Thus these policies will also have an influence on the
calculation of the cross-subsidy surcharge to be decided by the State
Commissions.

First Draft of Tariff policy paper by MoP

MoP prepared a Preliminary Discussion Paper on Tariff Policy with the

assistance of CRISIL, which mentions that, the “Commission would decide
the surcharge such that the loss of cross-subsidy is shared between the
consumer and the incumbent distribution licensee.” This statement is an

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interpretation/ extension of the EAct, because the EAct does not mention any
sharing of the cross-subsidy but simply states “…such surcharge shall be
utilised to meet the requirements of current level of cross subsidy…”

Draft National Electricity Tariff Policy as recommended by the Task Force

The Report of the Task Force on Power Sector Investments and Reforms
dated February 2004 included a draft tariff policy in which it recommended
that the cross-subsidy surcharge for open access be computed based on the
Long Run Incremental Costs (LRIC).
In its recommendations, the Task Force said that the cross subsidy surcharge
should represent the difference between the actual tariffs and LRIC. The
Report went on to say that the appropriate Commission should conduct the
necessary studies to determine LRIC or have the studies carried out by the
licensees. It suggested that in the interim the costs of the most expensive
generating unit (based on both fixed and variable costs) be used as a proxy for
LRIC. In October 2004, the Ministry of Power (MoP) recommended to the
Planning Commission that it take note of these recommendations of the Task
Force while formulating policy on the cross-subsidy surcharge.

Other Recommendations

Sankar (2004) discusses two alternatives for determining the surcharge. He

looks at the cross-subsidy as either: (1) the HT tariff minus the average cost of
supply; or (2) the HT tariff minus the cost to serve the HT consumer class.
Using the example of AP, he estimates the cross-subsidy surcharge to be Rs
1.65 per kWh and Rs. 2.05 per kWh based on the two methods respectively.
He argues that simply using either of these approaches will result in a high
cross subsidy surcharge that would make open access meaningless and stall
reforms of the power sector. Mr. Sankar recommends that the National

146
Electricity Policy or the Tariff Policy should define the cross subsidy paid by
a consumer class as the difference between the tariff for that consumer class
and the average cost of supply. He further recommends that the surcharge be
only a fraction, say 50 percent, of the present level of cross-subsidy. He
considers it reasonable to fix the surcharge at a fraction of the cross-subsidy
because according to him the consumer opting for open access is taking a
greater risk than one that stays with the utility. Furthermore, he says that to
make open access meaningful, the cost of supply from open access including
the surcharge should be less than the grid tariff. As an alternative, Mr. Sankar
suggests that the marginal cost of power purchase be used as the cost to serve
in calculating the surcharge.

A Consultation Paper prepared by NCAER for CERC titled Introducing

Competition in Generation of Electricity, recommends that the surcharge be
subject to a ceiling determined by the following equation:

Max. Surcharge = Tariff for departing consumer – Marginal cost of supply

for the discom

“As an alternative formulation” the paper recommends that the surcharge not
be greater than 20 percent of the average price of power procured by the
DISTCOs in the preceding financial year. In most cases, the alternate
formulation would result in a much lower surcharge.

Concerns with Recommended Methods for Calculating the Cross-

Subsidy Surcharge

Issues with the Use of LRIC*

The Task Force Report does not give a reason for recommending that the
difference between the actual tariffs and LRIC (Long Run Incremental Cost)

147
be used for calculating the cross-subsidy surcharge. Clearly, the LRIC do not
represent the current cost to serve the existing customer, but could be seen as
a proxy for the costs that will be avoided by the utility.

Cross-subsidy revenues are equal to the difference between the revenue

generated by a customer and the cost to serve that customer. Cost to serve is
based on an allocation of total costs to different customer categories. In
contrast, LRIC are akin to marginal costs. By using LRIC as a proxy for cost
to serve, one is allocating the costs of new additions to a single consumer
category (HT consumers). But actually while calculating the cost to serve, the
cost of new additions is merged with existing costs so that the cost of capacity
additions are spread across all categories of consumers. Therefore, by using
LRIC as a proxy for cost to serve, one is overstating the cost to serve if LRIC
is greater than the average of the existing costs, and one is understating the
cost to serve if LRIC is less than the average existing costs. Usually LRIC is
higher than the existing costs so the cost to serve would be overstated
resulting in a smaller surcharge.

Furthermore, if HT load leaves the system much faster than the expected load
growth, then capacity additions will not be required for some time but instead
the utility may have to pay for existing fixed costs that cannot be avoided. In
that case, the avoided costs will be zero, and instead, there will be stranded
costs. Thus we see that for cases of rapid departure of HT load, the use of
LRIC (based on capacity additions) will significantly overstate the avoided
costs and understate the surcharge required*.
*- Long Run Incremental Cost
*- Another issue with the use of LRIC is that estimating LRIC can be difficult
because these are forward looking costs which are based on forecasts. There
can be great variations in the forecasts made by different parties and the
regulatory agency must decide whose forecast is the most reliable. This is
often not easy.

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Issues with the Use of Marginal Unit Cost (MUC)

We have several concerns with the use of MUC to calculate the surcharge.
First, MUC do not represent avoidable costs. Generally, the fixed costs of the
marginal unit are not avoidable. If the licensee’s load is reduced because of
the departure of some customers, at best the licensee will avoid the highest
variable cost of either its own plants or the plants from which it purchases
power. In those cases where the marginal unit for a utility may be an
unplanned purchase from a surplus area or the unallocated portion of a
Central Generating Station (CGS), the utility may be able to avoid both the
fixed and variable costs of the contract.

The second reason why it is inappropriate to use MUC to calculate the

surcharge is that this assumes that for any utility, there is a single generating
unit that is on the margin at all times, and that is not so. The generating unit
on the margin changes with the time of day and season. During peak periods,
peaking units with very high variable costs are on the margin while during
off-peak periods, baseload units with very low variable costs may be on the
margin, etc.. Thus generally the most expensive unit would be the one that
operates only at the times of the system peak (and hence would have a low
PLF) and applying that cost to all the 8760 hours3 of the year would lead to a
gross overstatement of the avoidable costs.

The third problem with the use of MUC to calculate the surcharge is that the
highest cost unit is not applicable to the entire decrement of load. The use of a
single unit (the highest cost unit) to represent avoidable costs for all the load
that would go out due to open access is likely to be incorrect. As an example,
consider that 1000MW of industrial load is expected to leave the licensee and
get electricity from alternative suppliers. If the capacity of the highest cost
generating resource is only 200 MW, then clearly it would be incorrect to

149
assume that the costs per kWh of the 200 MW units would be applicable to
the entire 1000 MW load block. The avoidable costs for the remaining 800
MW would be lower. Therefore, the size of the decrement of load for
calculating the avoidable costs must match the expected decrement in load
due to open access. The avoidable cost would then be the weighted average of
the costs of the generating units that would no longer be required.

These concerns with the use of MUC to calculate the surcharge are best
illustrated by calculating the surcharge for different states by strictly
following the recommendations for the use of MUC. For AP and
Maharashtra, the total costs (fixed plus variable) of the marginal generating
unit per kWh are higher than the tariff for HT industrial consumers.
Therefore, if the recommendations for the use of MUC are strictly followed,
we get a negative cross-subsidy surcharge. The main reason for this
anomalous result is that the marginal unit operates for a very short time in the
year and it is incorrect to apply its costs to a load decrement that covers most
of the hours of the year.

Issues with the Use of the Average Cost of Supply

If the average cost of supply is used to calculate the surcharge, then the
resulting revenues will not completely compensate the licensee for the loss of
cross-subsidizing revenues. This can be seen from the following calculation:

Cross-subsidizing revenues provided by HT consumers = HT tariff - Cost to

Serve HT consumers
If the average cost of supply is used to calculate the surcharge, then

Surcharge using average cost of supply = HT tariff – Average Cost of Supply

150
Therefore, the revenue deficit due to the use of average cost of supply is given
by the following equation:

Cross-subsidizing revenue deficit = Average cost of supply – Costs to Serve

HT Consumers

How large would be this deficit due to the use of average cost of supply
instead of cost to serve? We consider the case of AP, where the HT tariff is
4.11 Rs/kWh; the average cost of supply is 2.82Rs/kWh, and the cost to serve
HT consumers is 2.61 Rs/kWh. Using the equations given above, we see that
the revenue deficit would be Rs 0.21 per kWh. The total HT sales for
Category I and II consumers for the year are projected to be 7297 MU, so if
half the HT load opts for open access, then the revenue deficit will be Rs. 77
crores per year. If, for calculating the surcharge, the average cost of supply is
reduced by 50% as suggested, then the loss will be Rs. 312 crores per year.

HT Energy Audit: The Crucial Starting Point for Curbing Revenue Loss

Introduction

For the last two decades, the financial crisis besetting the Indian power sector
has been an issue of great concern for the planners and experts. In 1990s, the
discussion on this crisis was focused on the large subsidies for agricultural
consumers and the rapid growth in agricultural power consumption. It is
worth noting that this preoccupation with agricultural tariff and subsidy
persisted in spite of efforts on the part of some researchers to point out
another crucial causative factor. These researchers had been pointing out that
excessive transmission and distribution (T&D) losses, hidden under the garb
of agricultural consumption, had been a major cause for the poor financial
health of utilities (Roy 1996, Reddy and Sumithra 1997, Dixit and Sant 1997).
However, most experts and leaders of the sector continued with their

151
preoccupation with the agricultural subsidy without serious investigation into
this crucial factor.

In the last few years, especially after establishment of the independent state
electricity regulatory commissions (SERCs), many state utilities are revising
their T&D loss estimates from the earlier lower figures of around 18-20% to
anything in the range of 35% to 50%. With this, it is now being widely
accepted that reduction in T&D losses to a reasonable level is essential for
restoring financial viability of the utilities*.

* A calculation for Maharashtra state utility indicates that financial loss due to
excessive T&D loss (defined as that above 25%) is about Rs 2,500 crores p.a.
And, this is more than the agricultural subsidy that is claimed to be\ Rs. 2,100
crores p.a.

However, the belated acceptance of excessive T&D losses has resulted in

considerable delay in action to reduce these losses, which is proving
extremely costly. Nonetheless, it is a welcome sign that the issue of T&D
losses is coming into limelight now and different approaches are being
suggested as prescriptions to address the issue.

This section highlights the large swings that have been occurring in the
estimation of T&D losses in various states as well as the prevailing
uncertainty in estimation of even transmission losses and HT-level losses.
Based on experiences from the states such as Haryana, Maharashtra and
Andhra Pradesh, the third section highlights unwillingness on the part of
utilities to carry out effective metering even at the HT level. The fourth
section points out that commercial loss even at the HT-level might be
significant in terms of revenue lost per customer as well as of the total
revenue loss. The fifth section discusses various advantages of focusing on
HT-level energy audit for increase in utilities revenue. The sixth section
argues that the approaches of “100% Metering” and “Total Energy Audit”

152
(including LT energy audit) though essential, would, at best, yield
significant benefits only in the long term. The last section presents the
conclusions of this analysis.

1. Swings in the Estimates of T& D Losses

The first step in the efforts for reducing excessive T&D losses is to properly
estimate T&D losses. The next and probably more important step in these
efforts is to identify various links or geographical areas in the network that
have excessive losses. It is possible that losses in some of these areas or links
could be easier to curb as compared to losses in other links/areas.
Identification of such links / areas makes it possible to focus initial efforts for
reduction in T & D losses on these areas or links. The next two sub-sections
demonstrate that, though SERCs and
Chart 5: T& D Loss determination between four states

Figure highlights changes in the estimated T&D losses in various states. The state utilities
have attempted a more realistic estimation of T&D losses during the regulatory process. In
states such as Maharashtra and Haryana, the upward revision of loss estimates has been
much higher than the RC targeted loss reduction. The bar sequence for Karnataka has been
changed as Karnataka utility did two substantial revisions in the loss estimate before the
KERC—s first tariff order.

153
Utilities are making efforts to identify such links / areas of high losses; there
is still significant uncertainty and differences over the real level of total as
well as Transmission and HT losses.

2. T&D Loss Estimation

Analysis of regulatory orders by SERCs from different states indicate that,

even two to three years after establishment of the SERCs and the reforms
process, there is still ambiguity over the real level of T&D losses. Figure 1
shows changes in the estimate of T&D losses in the four states.
State after state has revised the figures for T&D losses upward in the last few
years. This has happened in some typical steps. First, as a prelude to the
setting up of the SERCs, the state utilities typically increased the loss
estimates from the historical low values to a more realistic level.
Subsequently, SERCs ordered reduction in T&D losses, usually by around by
5-7 percentages point. As against this target of lowering T&D losses the
utilities have come back to SERCs with further revised estimates of losses,
which are typically 5 to 10 percentage points more than their earlier estimates.
This resulted in SERCs (as in the case of Maharashtra & Haryana) approving
higher loss levels in subsequent orders. The Maharashtra ERC revised
approved loss levels from 27% to 36%, whereas the Haryana ERC revised
approved loss levels from 25% to 41%*.

*Though the MERC order does not explicitly state the approved loss level, it
is back calculated based on the loss level projected by MSEB and additional
revenue from commercial loss reduction as directed by MERC.

For explaining these upward changes in the T&D loss estimates, the utilities
cite some typical reasons such as (a) increased (and hence ’better—) sample
of agricultural consumers used for estimation of their average hours of
consumption and (b) changes in assumed usage level (i.e. load factor) of the

154
un-metered domestic or commercial consumers. Additionally, the utilities
have argued that it is impossible to reduce T&D losses to the levels envisaged
and desired by the SERCs in a period of four to five years. The state utility in
Delhi (viz., Delhi Vidyut Board) has produced evidence of international
experience in support of this argument. Some utilities have also argued that,
in order to achieve the significant reduction in T&D losses, they will have to
police the entire state to curb the rampart power theft. Unfortunately, none of
the utilities in the country, whether private or public, has been able to reduce
the T&D losses to the level mandated by the SERCs.

3. Estimation of Transmission and HT Losses

Measurement or even estimation of T&D loss in the LT (low voltage /

tension) system is a difficult task, as the LT network connects millions of
small consumers spread across the country and even into remote and
inaccessible areas. However, unlike the LT system, the transmission or high-
tension (HT, i.e., 11 kV and above) network connects only to a few thousand
large consumers. Hence, it is much easier to monitor the HT network. Due to
the large volume of electricity flows in the HT network, monitoring and
protection systems are already in place in the HT network. For example, at
least by design, HT sub-stations are provided with proper metering system to
measure feeder-wise incoming and outgoing energy flows.

As a result, one would expect that making correct measurement (or at least
estimation) of losses in the HT system would be easier and less prone to large
swings.

Unfortunately, most Indian utilities fall short even on this count. Let us
review the situation in this regard in the three- considered to be relatively
better managed- states of Maharashtra, Karnataka and Andhra Pradesh.

155
Maharashtra

In its tariff proposal presented before the SERC in March 2000, Maharashtra
State Electricity Board (or MSEB) claimed that losses in its Extra HT (EHT)
network for the three previous years had been in the range of 3.8 % to 4.2%
(MSEB 2000). These estimates were based on the ’load-flow studies—
carried out by MSEB. As against this, MSEB, in its tariff proposal submitted
in August 2001, claimed that average EHT losses for the preceding six
months were 6.7% (starting with 8.4% and coming down to 4.8% in the last
month). This implied an upward revision by 2.7 %! (MSEB 2001). This
recent estimate seems to be based on the meter readings, but MSEB has not
provided estimate of technical losses (i.e., results of load-flow study) for this
period.

Karnataka

Karnataka Power Transmission Corporation Limited (KPTCL), the Karnataka

utility, had estimated transmission losses for the three consecutive years
(1999 to 2001) as 15.6%, 16.47% and 15.17%. Against this, the Karnataka
Electricity Regulatory Commission (KERC) pointed out that the studies
conducted by two consultants (viz. PRDC, Bangalore and MECON),
indicated transmission losses (up to 33 kV) to be around 10% (KERC 2000).
The estimates by the consultants were based on load-flow studies and on
meter readings, wherever available. Thus, here again, there is a large
difference of over 5 percent points in the estimation of just the transmission
losses.

Andhra Pradesh

The case of Andhra Pradesh (AP) is more revealing. In the first tariff proposal
before the Andhra Pradesh Electricity Regulatory Commission (APERC), the
state utility had claimed the transmission losses to be 4.6%. But, in the second

156
tariff proposal, the utility claimed transmission (up to 132 kV level) loss level
to be 8.7%! The utility explained this upward revision in transmission losses
by saying that the earlier estimates had been based on load-flow studies,
whereas the revised losses were based on actual meter readings. As per the
utility—s claim, metered data in the period of the four months showed actual
transmission losses at the level of 9.6%, and after making certain adjustments
for ”metering accuracy and meter reading cycle time‘ etc. the utility estimated
the annual loss level to be at 8.7%. During the process of the review of the
‘Revenue Requirement’ APERC asked the utility to carry out a load-flow
study. Surprisingly, the utility was prompt in carrying out the load-flow study
and came out with an estimate of technical transmission losses to be 8.7%!
(APERC 2001). It is not a surprise, however, that there are serious lacunae in
the calculations in the load-flow study submitted by the utility.
To summarize, the above discussion indicates that even after a few years of
regulatory process, accurate estimation of ETH or HT losses is proving to be a
difficult task. To overcome this shortcoming, several SERCs have initiated
detailed technical studies with the help of external consultants to clearly
establish the technical losses at transmission / HT level. As discussed later,
estimation of technical losses at the HT level (through load-flow studies)
coupled with calculation of actual losses on the basis of energy audit would
lead to identification of commercial losses.

3. Unwillingness of Utilities for Effective HT Metering

Realizing the importance of proper energy audit for accurate estimation of

T&D losses and reduction in the same, several SERCs have directed the
utilities to undertake ”Total Energy Audit‘ and “100% Metering”. But, the
emerging evidence clearly demonstrate that the utilities are unable, rather
unwilling, to undertake “Energy Audit‘or”100% Metering’ even at the HT
level.

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Maharashtra

Maharashtra Electricity Regulatory Commission (or MERC), in its first tariff

order dated 5th May 2000, directed MSEB to install the ’Time-of-Day— (or
TOD) meters for all industrial HT consumers by September 2000 and for all
the remaining HT consumers by December 2000. It also directed MSEB to
furnish quarterly reports giving the number of these meters and data obtained
from the same. But, even six months after the target date, MSEB was able to
provide TOD meters only to half of the approximately 10,000 HT consumers.
MSEB—s performance has been equally awful in dealing with the task of
energy audit of its express feeders. Since 1994-95, MSEB has been claiming
that it is carrying out regular energy audit of selected urban areas as well as of
the Express Feeders (GoM, 1996). MSEB reiterated this claim in its tariff
proposal submitted in March 2000. It repeated this claim again in the proposal
submitted in August 2001.

However, this time, MSEB could actually make available the data compiled
from energy meters installed on about 220 ‘Express Feeders’ for the period of
six months. Out of the total 1320 data points (i.e., 6 months multiplied by 220
feeders), nearly 45% of these data points indicate loss figures that are either
less than -0.5% or greater than +5%! (Prayas 2001). This is striking because,
usually, the technical losses on such type of feeders should lie in the range of
1% to 2%. This implies that about half of the data points are indicating either
ineffective metering, commercial losses, or excessive technical losses. This is
a clear indication of MSEB—s failure to carry out effective metering even for
these 220 ’Express Feeders—. It is worthwhile to note that the energy
supplied through these 220 ‘Express Feeders’ account for nearly 20% of
MSEB’s yearly revenue (considering average HT industrial tariff of Rs
4.2/unit).

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Andhra Pradesh

The case of AP is more serious. In its tariff order dated 27 May 2000, APERC
directed the utility to install high-accuracy (i.e., the 0.2% accuracy class)
meters at all interface points (where the ownership of power changes from
one utility to other, i.e., from either generation to TRANSCO or from
TRANSCO to DISCO) and file a compliance report within one month, i.e., by
June 2000. Ten months later, in the subsequent tariff order dated 24th March
2001, APERC mentioned that the utility could implement this directive only
for 3% of the total interface points. Moreover, this order also reported that the
utility is demanding another full year to implement the directive! There is no
other way to term this delay as ridiculous, when one realizes that, in order to
comply with this directive, the utility had to install, in all, only 460 meters.

Haryana

The status of HT-level metering seems even more serious in the case of
Haryana. Haryana Electricity Regulatory Commission (HERC), in its tariff
order dated 26th November 1999, categorically mentioned that all interface
metering (where the ownership of power changes) should be completed latest
by 31st March 2000, i.e., within the period of four months. It went to the
extent of mentioning that “All metering would be completed by 31 March
2000 for all purposes including transmission and bulk supply tariff
application by the licensee. The Commission would not like to be presented
again with the plea of nonmetering for any purposes whatsoever after 31
March 2000” (emphasis original).

The utility failed to comply with this directive but went ahead and filed
another tariff revision application. In its subsequent tariff order in December
2000, HERC said, The Commission reiterates that this work should be given
high priority and no slippages beyond the targeted completion date of July
2001 will be allowed“(emphasis original) (p. 56, para 5.1.2.2). One would
expect that the utility would have followed this simple directive at least by the
159
extended target date. But the scene repeated after few months. The subsequent
tariff order by HERC dated 6th August 2001 (Annex 3) also mentioned that,
till the date, the utility had failed to introduce interface meters as directed and
has, in fact, requested waiver of this directive! In the case of Haryana, the
total number of meters to be installed under this directive was about 300. This
failure of utility forced the SERC to estimate transmission losses on the basis
of data from other agencies such as regional electricity board and power grid.

To summarize, it is serious that utilities are taking SERCs for granted by not
implementing even such simple but crucial directives. Moreover, it goes
without saying, that the suggested prescription of T&D loss reduction through
‘100% Metering’ approach would be a non-starter if the utilities are unwilling
and / or unable to carry out metering and data-gathering tasks even at the
small number of locations, despite the full-knowledge of the high-stakes
involved in the energy flowing through these points.

4. Indication of Significant Commercial Losses at HT Level

The inability, rather unwillingness, of the utilities to install proper metering

even at the HT-level raises strong suspicion that all may not be well at the HT
level. Further analyses indicate possibilities of substantial commercial losses
even at the HT level.

Andhra Pradesh

As mentioned earlier, the transmission losses in AP as per the metered data

(for a period of four months) were 9.6% (APERC 2001). The utility applied
some corrections and arrived at the estimate of the annual losses of 8.7%
based on the meter data. The utility justified this loss-level as the technical
losses using a load-flow study. This study found the peak power losses to be
9.66%. The utility then used an assumed figure of 90% for the ’Load Factor—
and multiplied the peak power losses with the assumed Load Factor to arrive

160
at the estimate of technical losses as 8.7%. This calculation for technical
losses is flawed because the ’Load Factor— (i.e., average load divided by
peak load) for the utility was about 70% and not 90%. Using correct load
factor indicates technical losses of 6.7% i.e. around 2% less than losses
indicated by metered data. The APERC has recently engaged the CPRI
(Central Power Research Institute) for estimation of technical transmission
losses.

Maharashtra

In case of MSEB, indication of the possibility of substantial commercial loss

at the HT level emerges from the analysis of the energy audit data of the
Express Feeders supplied by MSEB, which is mentioned earlier. Out of the
220 Express Feeders, nearly 40% of the feeders show consistently
problematic readings. These include either no reading or the reading showing
losses outside the range of (- 0.5%) to (+5 %) for four or more months out of
the six-month period! (Prayas 2001). Such a large number of
consistently problematic readings on a very small number of high-stake
feeders also points to the possibility of substantial leakage at the HT level.

Madhya Pradesh

The tariff proposal put up by Madhya Pradesh Electricity Board (for FY

2001-02) before the SERC clearly mentions that, as per the study carried out
by M/s Descon Consultants, commercial losses attributed to the HT industries
is estimated at 5.4% (of energy available for sale at the bus-bar).

Unfortunately, no details about the methodology or sampling used in this

study were available. Table 1 below is reproduced from the MPEB tariff
application.

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Table 16: Estimated Break-up of T& D losses in M.P

Energy Input (MU) 27,000

T&D Losses (as the percentage of Generation) 43.2%

Technical Losses 15.3%

Total Commercial Losses 27.9%

HT Industry 5.4%

LT Industry 6.5%

Household 13.0%

LT Commercial 3.0%

Total Commercial Losses 27.9%

Source: Consultants study as quoted in MPEB Tariff Application

(2001 – 02)(MPEB – 2001)

To summarize, the recent data coming out in the regulatory process

demonstrate that it would not be improper to conclude that in most utilities,
revenue loss due to commercial losses at the HT level would be significant.

5. HT Energy Audit: Key Staring Requirement

The above two sections clearly demonstrate that: (i) the state utilities are
unwilling to establish proper metering even at the HT level, and (ii) there is a
strong evidence to indicate that all losses at HT-level may not be technical
and may include substantial commercial losses. This needs to be viewed in
combination with the facts that in most states, (i) HT consumption is in the
range of 20% - 30% of total sales, and (ii) HT sales account for nearly 50% -
60% of the total revenue. If we take into consideration all these facts it is clear
that even a small commercial loss in the HT-section has significant impact on

162
revenue of the utilities. With the HT tariff being twice that of the LT tariff and
the number of HT consumers being less than 0.1% of the LT consumers; it is
obvious that the first point of attack has to be the HT sector. As such, the first
priority in the efforts towards T&D loss reduction should be to establish an
effective metering and audit regime at the HT level to curb revenue loss at
this level.

Efforts of reducing commercial losses at the HT level can take different

forms; starting from proper vigilance and inspection by utility staff (and /or
outside agency) to instituting a rigorous energy audit to identify losses in
various feeders. But, depending simply on administrative measures such as
vigilance squads has proved to be ineffective in the current utility setup. More
direct measures, which could hold utility and its staff accountable, need to be
adopted. Rigorous energy audit is one such measure. Such an audit should
aim at establishing the energy balance right from the points of generation /
power purchase to points where energy is transformed to LT level. In
addition, the audit system should be capable of
(i) detecting malpractices on a routine and consistent basis;
(ii) being implemented in a time bound manner; and
(iii) evolving concrete and indisputable performance indicators
for the utility staff
The energy balance can be depicted in the equation form as follows:

Energy Loss (HT level) =Energy generated (net) (A) + Energy Purchased (B)
- Energy Consumed by HT consumers (C) - Energy transformed to LT (i.e.
440 V) (D)

In the above equation, A and B are metered points and these data are readily
available with all utilities. Part D, i.e., energy transformed to LT side is
difficult to measure and may involve sizable investment as well as number of
metering points. For example, in the case of Maharashtra, accurate

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measurement of Part D would imply metering of 180,000 distribution
transformers (DT) on LT side. This implies an investment of around Rs 150
crore (about 1.5% of utility revenue) for metering. In addition to HT energy
audit, this approach will allow us to zoom onto the DT level losses and,
hence, would be far effective in localizing high theft points. But its
implementation - in terms of installation of meters, proper maintenance,
reading, and data analysis in a routine and consistent manner - could take
substantial time. Hence, as an intermediate option, some approximations
could be considered. These are discussed below.

The first such approximation could be to restrict the audit only up to 33 kV

level (i.e., instead of measuring energy transformed to 440 V, energy
transformed to 11 kV or 22 kV should be considered). Since energy fed into
all the 11 / 22 kV feeders is now measured or expected to be measured soon
(as per the MoP’s August 2001 report), calculating such an energy balance up
to 33 kV is simple. It only involves maintenance and reading of all meters on
the 11 / 22 kV feeders (in the substations). In state such as Maharashtra, this
reduces the meter reading points to around 5,500 outgoing feeders and
existing meters of HT consumer. But this would cover over 20% of the total
energy fed into the system and 25-30% of revenue. The 11/22 kV express
feeders, i.e., feeders supplying to only HT consumers, could be readily
brought into this audit, expanding the coverage a little more. In the
subsequent phase, efforts could be made to include all 11 kV or 22 kV feeders
supplying to at least one HT consumer. Tackling these mixed feeders, i.e.,
feeders supplying to HT consumers as well as having DTs (i.e. 11/22 kV to
440 V) could be somewhat tricky. Depending on the configuration of each
such feeder, different options will have to be adopted. Some possible options
would include supplying HT consumers through a separate feeder (as was
being attempted in some states as part of the system improvement program) or
installing check meters for a group of HT consumers. Installing meters on LT
side of DTs could be considered, where the number of DTs on the feeder is

164
less. As a last resort, one could install a check meter for each HT consumer on
such mixed feeders. Investment required for such additional metering need
not be a deterrent for its implementation. For example, Maharashtra has
around 10,000 HT consumers, which give revenue of around Rs. 6,000 crores
p.a. Assuming additional metering at all of these 10,000 points (check meters
for each consumer) at a cost of Rs. 50,000 per metering point, the one time
investment would be Rs. 50 crores. This ONE TIME investment would be
less than 0.5% of the utility’s yearly revenue (or 1% of HT revenue). Such
check meters can help identify the problematic consumers / areas, where
difference in check meter and consumer meter readings falls outside the range
+/- 1% or either of the meter reading is unavailable. This can also become a
concrete performance indicator for the staff.

Depending on the state of the HT metering and capabilities of the utility, the
manner and the speed of the action-plan may vary. However, there is no
barrier to achieving the minimum target of ‘Energy Audit’ up to the 33 kV in
a short time of say, one year. This audit should give an energy balance right
from the generation (or power purchase) points up to the HT consumers.
Difference in such audited loss figures and the estimated technical losses
(based on the load-flow study) could be a concrete indicator of commercial
losses.

Such an approach involving tight and complete energy audit at the HT level is
desirable for several reasons discussed below.
Relative Ease of Implementation

As discussed above, effective energy audit at the HT-level requires

installation and reading of only a few thousand meters, unlike the audit of LT
system.

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Low Investment and High Returns

Since HT tariff is significantly higher than LT tariff, reduction in HT

commercial losses would be much more valuable. Such high returns coupled
with the relatively low-levels of investment and managerial inputs required to
institute HT-level energy audit (compared to the LT energy audit or 100%
metering approach), imply quicker and higher benefits. This is essential
considering the current precarious financial situation of utilities. A ’back-of-
the-envelope— calculation for MSEB indicates that HT energy audit can pay
back the investment (of around Rs. 50 Cr.) in just half a year, if theft of only
238 MU (= 0.5% of bus bar energy or about 2% of the HT consumption) is
curbed.

“A No-Regrets” Strategy

Effective metering at the HT level is also essential for implementing ‘Total

Energy Audit’ and theft (identification and) reduction through “100%
Metering approach”. This is because at times meters indicating input energy
to a division / zone are malfunctioning or readings are misreported, resulting
in higher transmission /HT losses and lower losses at division / zone level. To
address this issue it is essential to have equal emphasis on correct
measurement of transmission and HT losses and reduction in the same. Such
HT energy audit is also essential for reforms involving unbundling of utilities
or even for implementing concepts such as profit centers in existing SEBs.
Further, if utility is unable to effectively carry out even the HT energy audit –
which requires much less managerial and administrative efforts (compared to
‘Total Energy Audit’ and ‘100% Metering’ approaches) - then the very
expectation of T&D loss reduction to a reasonable level will need serious
rethinking.

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6. The “100% Metering” Approach: A Long- term Solution

The approaches of “100% Metering” and “Total Energy Audit” are essential
for achieving several objectives such as:
a. tariff regime based on the principle of “pay as per-use”
b. better targeting of subsidy,
c. identification of some of the 11/ 22 kV mixed feeders that have
excessive technical or commercial loss, and, finally
d. establishing accountability up to the level of linesmen of the
utility.

Hence, it is inescapable to carry out the “Total Energy Audit” as well as

‘100% Metering’.

But, it needs to be considered that this requires not only large investments but
also immense efforts involved in installation and regular reading of millions
of meters (in each state) as well as in billing equally large number of
consumers. In the case of millions of “single bulb houses” innovative
approaches such as load limiters and efficient bulbs would be far more
prudent than blanket metering in the medium term.

The second consideration in making effective use of “100% Metering” relates

to the billing systems of SEBs. Many utilities are yet to install the system of
computerized billing and systematic numbering of each consumer (linking the
consumer to a pole / DT or a feeder). Further, well-designed software to
capture and analyse these data will have to be put in place and used by a large
number of sub division level staff!

Another aspect relates to integrity of the audit. Unless the billed energy is
traced back to the supplied energy up to the point at which energy is fed into
the system, the utility of the whole exercise could be greatly reduced. The

167
whole exercise can be rendered ineffective by tampering (or making
dysfunctional or not reading) just a few key meters.

These will certainly act as major hurdles in implementing and effective use of
“100% Metering” towards the goal of complete LT level energy audit.

Before we commit to ‘100% Metering’ as the sole answer, it is worth doing a

reality check. Metering and billing performance of utilities is not very
encouraging even in the case of categories of customers that already fall in the
‘100% metered’ bracket (e.g., domestic, commercial, and industrial). In
Orissa, most of the LT consumption is not metered. In UP, consumption of
44% of metered consumers (that include domestic, commercial, and even
small industrial consumers) is “assessed” and not measured. During the first
tariff hearing of MSEB, it was revealed that about half of the bills issued to
residential and commercial consumers were not based of metered
consumption despite these consumers had been metered since the time of
connection.

Considering these factors, despite large investment and immense efforts,

approaches of ‘100% Metering’ and “Total Energy Audit” are unlikely to
yield significant results in most states within a time frame of three to five
years. Hence, we cannot ignore the HT audit and it has to be treated as the
starting point for proper identification of high loss area, for curbing theft and
more importantly the revenue loss.

Conclusion

The emphasis by SERCs and the Ministry of Power on reduction of excessive

T&D losses is a welcome development. Considering that many power utilities
are almost bankrupt, it is essential to give higher priority to measures that can
lead to increased revenue within a short time with limited investments, and

168
with limited managerial efforts. This understanding coupled with the recent
evidence of poor HT-level metering and possibilities of significant
commercial losses at the HT level, necessitates that the approach of stringent
HT-level energy audit be made the foremost priority. This crucial as well as
urgent measure should not be put on the backburner in our zeal to ensure
“100% Metering” and “Total Energy Audit” at the LT level.

Many SERCs have directed utilities to undertake HT energy audit in

successive tariff orders. Considering the importance and relative ease of HT-
level energy audit, the SERCs need to be far stricter in dealing with the
failures of utilities in complying with their directives in this regard. This is
essential for maintaining the sanctity of the directives by SERCs. For
example, the SERCs should direct utilities to institute effective HT-level
energy audit within a reasonable period and should reject any tariff proposal
after that period, if it is not accompanied by proper results of the HT-level
energy audit. Unless the SERCs adopt such unyielding stand on
implementation of such crucial, urgent, and relatively ‘easy-to-implement’
measures, the entire regulatory process would soon be rendered ineffective.
On the other hand, such unyielding stand on the part of SERCs would also
create pressure on the utility’s top brass to make those responsible for HT
energy audit more accountable. SERCs should also direct utilities to publish
results of such energy audit (along with names of concerned officers) through
newspapers as well as on the Internet so as to facilitate public scrutiny of
utility’s performance.

In order to facilitate HT energy audit and to overcome the financial

difficulties associated with procurement of meters, the SERCs may choose to
charge a special component in tariff, which should be devoted exclusively to
meeting expenses relating to the HT-level energy audit. Consumers should be
willing to share this small additional burden (of the order of 1 or 2 paise per
unit) to ensure that utility is made accountable. Such an approach would also

169
help in ensuring more stringent public scrutiny of performance of utilities on
this account.

Simply carrying out stringent HT level energy audit and curbing HT theft
would, by no means, be sufficient to make utilities financially viable.
Reduction of high technical losses, LT level theft, and other efficiency
improvement measures are also essential. But curbing HT theft with iron hand
would, on one hand, give the utilities much needed cash and, on the other
hand, would give a clear signal to corrupt utility staff and consumers that the
party is over. Such a signal is also critical for the success of measures such as
“Total Energy Audit” and “100% metering”.

170
Reforms and Restructuring Initiatives in Orissa’s Power Sector

In 1994, the government of Orissa initiated power sector reforms and its
restructuring. The reform programme resulted in the vertical unbundling of
the state owned integrated utility, corporatisation of resultant entities and
constitution of an autonomous regulatory commission for power sector
regulation in the state. One of the key features of the reform programme
was the privatization of distribution activity. To make the process successful
and obtain more revenues, there was need for the distribution entities to
change the existing culture and approach to management. The state
government undertook a process of organizational strengthening to develop
appropriate organizational structure, systems and business process suitable
to the new environment.

Encouraged by the Government of India, assisted by the World Bank, and

supported with grants from the Government of U.K (DFID), Orissa took the
initiatives and earned the reputation of being the first state to reform its
electricity industry. The Orissa Electricity Reform Act, setting out the basic
framework of the reform, enacted in 1995 came in to force from 1 April 1996.
The principal objectives of the reform, as set out in the preamble to the Act
and the policy papers of the Government of Orissa, were the following:

a. Restructuring of the electricity industry for rationalization of

generation, transmission, distribution and supply of electricity.

b. Development of the industry in an efficient, economic and competitive

manner.

c. To provide for avenues for participation in the industry of private

entrepreneurs, attract private investment and reduce the need for
government funding of the electricity sector.

171
 d. To improve the quality of the service to the consumer.

e. To enhance operational efficiency and reduce losses.

f. To provide for a transport mechanism for development and regulation

of the industry, including tariff fixation and dispute settlement, through
an independent statutory body, the Orissa Electricity Regulatory
Commission (OERC).

g. To contribute to the economic growth of the state by ensuring superior

electricity supply, and

h. To create opportunities for increasingly rewarding employment for

technical personnel and provide a stable environment for career
development in the electricity sector.
Conceptualization of the reform and road map for its implementation had
been drawn up after elaborate exercise in association with the World Bank
and with active involvement of a large number of consultants including
several foreign consulting firms of high international repute.

FIRST PHASE OF REFORM:

All the major steps in the restructuring process have since been taken as
envisaged under the reform scheme:

• OSEB was restructured and corporatised in to Grid Corporation of

Orissa (GRIDCO) and Orissa Hydro Power Corporation (OHPC) in
April 1996.

• The Orissa Electricity Regulatory Commission (OERC) was

established in August 1996.

172
 • Orissa Power Generation Corporation (OPGC) was privatized with
divestment of 49% stake and transfer of management control to a
private operator, AES in January 1999.

• Four distribution companies (DISTCOs), incorporated as wholly

owned subsidiaries of GRIDCO, were privatized with transfer of 51%
stake to private operators: three of these, namely, NESCO, WESCO
and SOUTHCO were acquired by BSES in April 1999 and the fourth,
viz. CESCO by AES in September 1999.

In brief we can summarize that power sector reform comprised of

Restructuring OSEB, Privatization, Competition, Regulation and above all
reforms in tariff structure.

Since the existing legal provisions were not adequate to provide necessary
managerial and financial autonomy to the power sector, it was necessary to
draft the Orissa Electricity Reform Bill, 1995 with provision to establish an
independent and transparent regulatory commission and thereby attract
private investment in to the state power sector. The assets and personnel were
also transferred to the newly created entities such as the GRIDCO and OHPC
with effect from the first of April 1996 on provisional basis. The transfer
became absolute with effect from 1st April 1997.

GRIDCO disinvested 51% of its equity holding to private investors with

strong financial standing and technical capabilities. 10% of the equity has
been reserved for the employees of GRIDCO- which would entitle them to
direct monetary and welfare benefits. GRIDCO retains 39% of the holdings in
the DISTCOs.

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Chart 6: Relationship between different party

Background of OSEB

Established in 1961, OSEB was the main body responsible for power sector
development in the state. OSEB was vested with the responsibility of public
power supply in the entire state as well as for related state level regulation.
OSEB obtained the required power for distribution either from its own
generating stations or by purchasing from other generating utilities. By using
its transmission and distribution network, it applied power to the end
consumers.

OSEB was owned by the Government of Orissa and was governed by the
provisions of The Electricity (Supply) Act. 1948. The 1948 Act explicitly
required the SEBs to operate and adjust their tariffs to achieve a minimum
return after interest of 3 percent on net fixed assets in operation. According to
the provisions of Electricity (Supply) Act, 1948, state governments were
required to provide subsidies to help the SEBs meet their minimum return
requirements by compensating for the low tariffs charged for residential and
agricultural consumers.

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Performance of OSEB

The performance of OSEB in terms of Plant Load Factor (PLF) and

Transmission & Distribution losses had been quite poor vis a vis other SEBs
during the period 1991-94. During this period, Orissa also had a considerable
power deficit which was estimated to be in excess of 10 percent, higher than
the all-India average of 8 percent.

The Transmission and Distribution losses though stated to be around 24

percent by OSEB were reported to be much higher. A clear indication of large
transmission and distribution losses was made in the Annual Administration
Report of the GRIDCO which listed such losses as high as 49.47%.

In 1993-94, the ratio of customers served to the employees of OSEB was 29,
whereas the all India average was around 80 (Comparison of performance of
Electricity Boards and Electricity payments, Planning Commission,
Government of India, 1994). The billing and collection of OSEB had been
poor because a large portion of the billing was not done on the basis metre
reading but on average consumption or on load factors, which resulted in
lower collection revenues. Figures available for 1996-97 indicated that only
12.19% of the total bills were based on metre reading.

Lack of appropriate controls and poor accounting of sales revenues had

affected the revenue collection. Figures available for 1998 indicated that in
some of the revenue divisions, the percentage of billings collected was as low
as 17%. Unmetered supply to a large number of consumers and theft of power
resulted in non-technical losses being as high as 20-25 per cent.
(There are two types of power losses during transmission and distribution: technical and non-
technical losses. Technical loss is the energy lost in the wires and equipment in a distribution
system for technical reasons like resistance. Non-technical loss or commercial loss occurs due to
theft, non-metering or defective / tampered metering of consumers, and inefficient billing and
revenue collection systems)

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In spite of an annual average growth of about 19% in sales revenue, OSEB
had not been able to earn the statutory rate of return of 3 percent on net fixed
assets without subsidy from the Government of Orissa because of its very low
level of tariffs. In spite of the sales revenue not being able to meet the
operating costs, there was no tariff increase from 1990 to 1992.

Table 17: Achievement of OSEB during 35 years

Sl. Area of 1961- 1974-75 1984- 1994-95 1995-96 1999-
No Achievement 62 85 2000
.
1. Installed 9.897 547.675 1134 1731.93 1731.93 2498.88
Capacity(MW)
2. Transmission & 2839.6 33945.2 83414 116715 118286 120625
Distribution 7 1
Lines(KM)
3. Total Energy 641.43 2335.07 4348 7851 9244.93 11130
Input(MU)
4. Energy Sold 556.44 1995.12 3566 6471.14 4560.36 6286.49
(MU)
5. % Loss of 13.2 14.5 17.9 17.6 50.4 43.52
Energy Sold
6. Energy - - - 4536.33 4560.36 6286.49
Billed(MU)
7. % Loss to - - - 42.22 50.4 43.52
Energy Billed
8. Revenue 2.23 23.31 116.09 725.11 912.14 1547
Earned (Cr.)
9. Consumers 31013 234977 71670 123035 127384 160055
Served (no.s) 6 4 4 1
10. Villages 118 11525 23762 33131 32088 35190
Electrified(No.s
)
11. Assets in 4.91 133 498.3 1073.14 1022.85 -
Use(Cr.)
12. Employees 4737 18224 33000 34450 34732 28309
(No.s)
13. Per capita 31.8 73.3 137 248 292.5 352
Consumption
(Kwh/Yr.)

176
Orissa Achievement in Distribution Sector

Second Phase of Reform

Privatization of Distribution Functions:

In pursuant to the Orissa Electricity Reform (Transfer of Assets, liabilities,

proceedings & personnel of GRIDCO to distribution companies) Rules, 1998,
the government of Orissa transferred the distribution assets and properties
along with personnel of GRIDCO to 4 distribution companies namely
CESCO, NESCO, WESCO, and SOUTHCO continued to function as
affiliates of GRIDCO up to 31.03.1999 and thereafter functioned under the
distribution and retail supply license obtained from OERC.

Objectives of Privatization of Distribution Function:

A. Operational Improvements :
(i) Improve quality of service to consumers
(ii) Improve operational efficiencies and reduce losses.

B. Financial Benefits :
(i) Attract private investment to the distribution business
(ii) Reduce the need for government funding of the electricity
sector
(iii) Contribute to increased economic growth in Orissa.

C. Employee Considerations :
(i) Create opportunities for secure and increasingly rewarding
employment for the qualified personnel
(ii) Provide a stable environment for employees

D. Sale of all 4 Zones to promote competition

177
In keeping with the objectives of power sector reform and the commitments
given to the World Bank by the state government, the distribution function
was required to be privatized. After considerations of various options
available for privatization, the corporation decided to adopt the best mode of
Joint sector/ Joint venture route. The sequence agreed was that the four
distribution zones which were functioning under the corporation will be
converted into four distribution companies as its wholly owned subsidiary.

The privatization process was accomplished in three stages e.g. Qualification

of companies/consortia, RFP and Lodgement of bids and negotiation and
completion. 51 companies/consortia initially participated in the ICB but 13 of
them furnishing SOQs. 11 companies were pre-qualified by GRIDCO board,
out of which 4 companies did not participate in the bidding process because
of reasons e.g. Asian Economic Crisis, Pokhran-II blast and unviable and
small businesses and regulatory risks. 4 more companies did not participate in
the bidding process. Out of the remaining bidders, the following 03 bidders
were found to be technically qualified like BSES, Singaporepower-Grasim
and TEC-Viridian. BSES was selected for WESCO, NESCO and SOUTHCO
and the management was handed over with effect from 01.04.99. As TEC-
Viridian failed to honour their offer, the earnest money guarantee of Rupees 5
crores was invoked. Dispute raised by TEC-Viridian is pending in arbitration.
AES-Jyoti structure, the pre-qualified bidder was selected for CESCO through
a process of negotiation and the management was handed over with effect
from 01.09.99. Thus through a process of international competitive bidding,
GRIDCO offered 51% stake to private sector investors keeping a share
holding of 39% with it and 10% share for Employees Welfare Trust.

It may be mentioned here that no asset sale has taken place. Assets have been
assigned to respective companies. Only the business has been sold with a

178
premium although all the 4(Four) companies are loss making and bore a part
of the loans and liabilities.

The new structure of the electricity sector in Orissa is as follows:

1. There are independent generation sources like NTPC, OHPC, OPGC,

IPPs and CPPs.

2. GRIDCO purchases power under PPAs from the independent

generators and provides bulk supplies to privatized distribution
companies at a bulk supply price. This means GRIDCO acts as a
Transmission Company between the generators and the distribution
companies.

3. Privatized Distribution Companies have come into existence viz.

WESCO, NESCO, SOUTHCO and CESCO. These privatized
distribution companies cater to the needs of customers.

RESTRUCTURING OF GRIDCO

GRIDCO presently undertakes –

1. The Transmission and Bulk supply activities in the state of Orissa.

2. Sale of energy outside the state of Orissa.
3. The SLD (State Load Despatch) Functions.

Under the provisions of the Electricity Act, 2003, trading in electricity has
been recognised as a distinct activity which can only be undertaken with a
license to be granted by the appropriate commission. Trading has been
defined under the new act as purchase of electricity for resale thereof and,
therefore, the bulk supply of the electricity becomes a licensed activity being

179
covered under trading. Transmission of electricity has also been recognised as
an independent activity to be carried on under a license from the appropriate
commission.

GRIDCO in addition to its transmission functions as a State transmission

Utility is also operating as SLDC (State Load Despatch Centre). Under the
Electricity Act, 2003, the SLDC shall be operated by a govt. company or
under any state act, as may be notified by the respective state government.
Provided that until a Government Company or any authority or corporation is
notified by the state government, GRIDCO being the State Transmission
Utility (STU), shall operate as SLDC.

In view of the aforesaid statutory requirement, it has become necessary to

take steps for separating the Trading Functions of the GRIDCO from the
Transmission and SLDC functions.

The matter is now under consideration and the following course of action is
being contemplated.

1. GRIDCO will continue to undertake bulk supply and trading functions

and will transfer the transmission functions together with the SLDC
and State Transmission Utility Functions to another new Company
(Transferee Company).

2. A public limited company under the companies act, 1956 as a wholly

owned undertaking of state government shall be incorporated for
vesting and transfer or transmission/ STU and SLDC undertaking of
GRIDCO along with its personnel.

3. There shall be a transfer of Transmission and SLDC functions of

GRIDCO for vesting with the newly incorporated company. The

180
 transmission and SLDC undertakings shall comprise all properties,
rights, liabilities, etc., pertaining to Transmission/STU function and
SLDC functions along with personnel and the transfer shall be affected
through a Statutory Transfer Scheme to be notified by Govt. of Orissa
u/s 39 read with section 131 of the Electricity Act, 2003. The said
transfer Scheme shall be effective from 01.04.2004 so that the newly
incorporated (Transferee Company) starts functioning w.e.f
01.04.2004.

4. State Govt. is to issue a notification declaring the new company

(Transferee Company) as the State Transmission utility (in super
session of earlier of earlier notification declaring GRIDCO as STU),
which may form a part of Transfer Scheme to be issued by the state
government and the transfer scheme shall provide that the
Transmission company as the State Transmission utility (STU) will
also operate the State Load Despatch Centre until further orders of the
state government.

5. The new company (Transferee Company) to be incorporated may be

named as any one of the following subjects to the same being available
from the Registrar of Companies, India:

(A) Power Transmission Corporation of India Ltd. (TRANSCO)

(B) Orissa Power Transmission Corporation Ltd. (OPTCL)*
(C) Power Grid Corporation of Orissa Ltd. (PGCOL)

6. GRIDCO shall obtain a license from CERC for interstate trading of

power on or before 9th. June 2004. GRIDCO shall continue with the
business of bulk supply/inter-state trading with its license obtained
from OERC but shall apply to OERC for deletion of transmission
function from license.

181
Chart 7: GRIDCO STRUCTURE

182
Sequence of Events of Reforms

The blueprint and milestones for the reforms were drawn up via the World
Bank’s Staff Appraisal Report (SAR), and the reform experiment was ready
by 1995. The process was as follows:

1993 Chief Minister announces power reforms plans.

1994 Planning for reforms continues.

1995 Regulatory Reforms Bill passes in the state legislature.

1996 Orissa Electricity Reform Act took effect on April 1, 1996. OSEB was
divided into the Orissa Hydro Power Corporation (OHPC) for all hydel
capacity and GRIDCO. GRIDCO inherited the transmission and distribution
infrastructure, as well as the liabilities of the SEB. The already existing Orissa
Power Generation Corporation (for thermal power) continued, but future
generation capacity was to come from IPPs. Orissa Electricity Regulatory
Commission (OERC) was also established.

No budgetary support was envisaged for any of the bodies, except the
regulatory body. But, to help out the enterprises, their accumulated losses
were to be written off, their assets revalued, and their liabilities readjusted.
Based on the recommendations of various consultants, a depreciated
replacement model was chosen to revalue the assets of OHPC and GRIDCO.

The assets of GRIDCO increased from a book value of Rs. 1,183 Crore to Rs.
2,395.8crore. There were also various liabilities, including to NTPC, and
these were converted to a term loan of Rs. 1,148.9crore, plus some significant
short-term liabilities (Mahalingam 1997). The total capacity was 2,120 MW
within these units.

183
1997 OERC issues first tariff orders.

1998 4 Distribution zones were established as separate corporations (still

PSUs) out of GRIDCO. Even then, GRIDCO remained the single-buyer of
power to sell to the 4 DISTCOs. 1999 The 4 DISTCOs were also privatized,
with a release of 51% of the equity in each held by GRIDCO. 39% would
remain with the state government, and 10% would be held by employees. The
central zone went to AES Transpower, the US multinational, and the other
zones went to BSES. Workforce allocation and severance were long, drawn
out processes according to most reports. To facilitate the sale, GRIDCO
accepts deferred payments, which affects it cash flow position significantly
later on. Orissa Government divests 49% of its stake in OPGC, via
competitive bidding. AES wins with a Rs. 6.03 billion bid, giving it operating
control of 2x 210 MW thermal plants in Ib Valley. These plants were
commissioned in 1994 and 1996, at an investment of Rs. 11.35 billion (Iyer
2000). Not the entire bid was towards assets; fresh capital was also invested
(8%, equal to Rs. 1.03 billion).

2000 GRIDCO’s financials worsen, and debt levels of the companies rise.

2001 Government constitutes Kanungo Committee to examine the reforms

process, AES withdraws from the central zone distribution. Government
appoints an administrator for this zone. His appointment is stayed by the
courts. BSES states it is not interested in taking up the central zone.

2002 The performance of 3 of the 4 zones worsens compared to the previous

year (Southern, with BSES, is the exception).

That reforms are not straightforward, nor can private operator easily succeed
is illustrated by the attempt in September 1996 to hand over one section of
distribution (the central zone, which included cities like Cuttack and

184
Bhubaneswar) to BSES for operation, under a management contract. After the
first 6 month review found negative performance, the management contract
was terminated in April 1997. In response, BSES stated it was not given
enough time to effect change, disputed the baseline numbers, and said that it
never really had control over the staff (Mahalingam 1997), a concern for any
reform mechanism based on outsourcing.

Also, AES came into distribution somewhat reluctantly (Mahalingam 1998).

It was originally in the state as a power generator (IPP), with the 500 MW
(250 x 2) Ib Valley Project. However, during the privatization process, BSES
was the only eligible bidder for the 4 zones, after Tatas withdrew from the
central zone (Prayas 2001). But, to ensure they didn’t get all the zones, AES
was persuaded to take over the central zone.

BENEFITS OF REFORMS

1. TTPS (Talcher Thermal power Station) after taken over by NTPC is

now operating at a PLF of 75.1% whereas from its inception it never
operated beyond 30%.

2. OPGC being exclusively in charge of Thermal Generation has been

consistently maintaining high PLF of 70 to 80% - a performance level
comparable to NTPC.

3. Disinvestment of 49% of Government share has unlocked a substantial

amount of funds which could be utilized for power development.

4. OHPC being exclusively in charge of Hydro Power Stations could give

undivided attention and bring back the two units at Burla to operation
after renovation.

185
 5. Each year Government was to give a subsidy of Rs. 340 Crore. This
has been stopped since 01.04.96.

6. OHPC & OPGC, which are exclusively looking after hydro and
thermal generation of power respectively, are now profit making
corporations of the state.

7. In a sharp turn around now Power Sector is not loss making (See
table).

Table 18: Accounting P\L

1996-97 1997-98 1998-99 1999- 2000-01 2002-03

2000
OPGC 104.6 66.15 112.8 124.39 109.88 132.22
OHPC 69.85 77.79 55.21 50.38 -27.44 -3.89
GRIDCO -294.99 -319.11 -578.61 13.73 -86.44 22.14
Total -120.55 -175.17 -410.6 188.5 -3.73 150.47

Table 19: Cash P\L

1996-97 1997-98 1998-99 1999- 2000-01 2002-03

2000
OPGC 144.96 147.31 195.68 208.97 194.68 215.91
OHPC 114.26 122.06 99.93 100.19 65.92 92.69
GRIDCO -162.03 -177.45 -428.7 86.85 -4.91 112.44
TOTAL 97.18 91.92 -133.09 396.01 255.69 421.04
Though the above mentioned outcomes are some positive aspects of the
reforms but all was not well in the years that followed and some of the
negative outcomes are discussed in the following paragraph.

The reforms were supposed to improve the power position in Orissa, but peak
shortages continue. The finances of the companies have worsened to some
extent, and the losses continue to mount (financial as well as technical).
GRIDCO failed to pay generators what it owes, citing failure of receiving
payments from the DISTCOs. Had they received their money, the generators

186
(OHPC and OPGC) have a book profit of Rs. 768 crores between April 1,
1996 and March 31, 2001 (OERC 2002).

The WB-SAR (Staff Appraisal Report) based report called for a number of
milestones, details on which can be found in Prayas (2001). Most of these
were based on structural changes, like setting up the distribution zones,
having OERC issue tariff orders, etc. However, some of these had negative
operational effects as well. The goal of 16% return for OHPC along with its
valuation hiked the costs to GRIDCO significantly, by hundreds of percent.
This is an indication that reforms process, as profitable companies come up
along the power sector (generation, transmission, and distribution), this will
raise the average cost of power compared to today’s loss-making utility.

One casualty of the reforms process was rural electrification. Private

companies were not interested in such loss-making operations. The
agricultural demand for power went down from a low 6% in 1992-93 to a
very low 3% in 1999-00 (Kanungo Committee 2001). But yet, the finances
didn’t improve. This highlights the importance of mechanisms to ensure
rural/underserved areas are catered to. Either specific targets must be set and
met, or an outside entity should be entrusted with such a role. Rural
cooperatives might be one solution for such consumers. The noted
environmentalist Ashok Khosla points out that if communities treat electricity
as a shared resource, they would manage it better, as they have done
historically for things like a shared water supply (personal communication).

What Went Wrong

The main problem with the operations of the sector was relating to cash flows.
OERC limited the increase in tariffs (citing that not all costs could just be
passed on to the consumers – e.g., for bad performance – unlike the pre-
reform days). This created losses for the DISTCOs, who also had deferred

187
payment agreements with GRIDCO. GRIDCO, owned by the Govt. of Orissa,
was caught between the increasingly expensive generators and non-paying
DISTCOs, who were unable to improve performance as expected. While the
exact numbers have varied over time, some details are as follows (Prayas
2001): GRIDCO was owed over 7.7 billion rupees by the 4 DISTCOs as of
March 31, 2000. Of this, CESCO (the central zone operated and majority-
owned by AES) owed Rs. 1.6 billion. But, GRIDCO owed OPGC, of which
AES owned 49%, some Rs. 1.8 billion. AES shut down a power plant for a
week in protest, and the crisis escalated with the Govt. threatening prison time
for its officers (under the Essential Services Act). The compromise solution
involved the government promising to pay its dues in 15 days.
After the reforms, GRIDCO’s and DISTCOs finances went down because of a
number of factors (Prayas 2001; OERC 2002):

• The bulk of the liabilities went to GRIDCO, Rs. 16 billion vs. 6 billion for
all the DISTCOMs.

• Assets of GRIDCO were revalued upwards, to help match the increase in

liabilities. This had operating implications, like the increase in depreciation
costs.

• OHPC’s tariffs were increased to meet the 16% returns. Overnight, the tariff
went from Rs. 0.1 to Rs 0.49/kWh in 1996. Even central station’s power was
expensive, and GRIDCO had to off take such power.

• There were unrealistic T&D losses estimated during the unbundling process.
This stresses the importance of accurate baseline information, and realistic
performance targets. The forecast for T&D reduction from 39.5% in 1996-97
to 22.7% 2000-01 wasn’t achieved. Even the initial assessment of 39.5% for
1996- 97 was grossly incorrect. A later audit showed this to be 49.4%.
• Tariff increases were lower than in the WB-SAR.

188
• There was no budgetary support via subsidies.

• The growth of load, especially profitable load, did not materialize. The WB-
SAR called for 7,009 million kWh for railways plus industrial high tension
(bulk) supply, while the actual sale in 2000-01 was 2,760 million kWh. This
affected not only the cross-subsidy potential, but the T&D losses as well.

• Poor collection rates from consumers. DISTCOs achieved only 75 and 76%
collection in 1999-2000 and 2000-01, respectively.

In addition to these issues, we find several other factors at play. Not enough
was invested in this sector towards the reforms. Less than half the money just
from World Bank was spent, making the total fraction utilized based on the
billion dollar estimate even lower (Kanungo Committee 2001). Critics will
point out that a significant fraction went to consultants, 306.422 crores (but
the bulk of this came from DFID funds, and none came from consumers).
There was also a cyclone that hit just after privatization, before proper
insurance was in place, causing not only a financial loss, but a major
operational challenge.

The AES episode created a lot of controversy, with their reporting

Government interference and lack of law and order, but the Kanungo
Committee Report (2001) counters a lot of difficulties were caused by AES
practices. They created a new management cadre, which caused a lot of
resentment within CESCO, the Central DISTCOs. In addition, they came in to
CESCO expecting to take up an additional 2% in OPGC, giving them 51%.
When that didn’t materialize, that triggered their desire to sell their state in
CESCO in 2001.

189
However, the biggest reasons for the poor performance appear to be the false
assumptions and expectations of the players, and the limited support provided
by the government, either for subsidies or to the companies who had liquidity
issues in addition to solvency issues. Money coming in from outside sources
was often diverted to state budget needs, and there remained significant
institutional lethargy and morass in the sector. The government failed to pay
its own dues for power, some Rs. 1.5 billion.

Some of the lessons from the Orissa experience, other than the obvious ones
include (IDFC 2000):
• Incomplete separation of transmission and distribution can cause problems.

• Regulators should give a clear picture of their tariff philosophy, rate base,
valuation methods, likely profile of prices and expected performance levels.
• There should be a structured, time-bound financial support mechanism, with
a fixed schedule for tapering off coupled with improvements in operating
parameters and collection.

• The single buyer model is necessarily not the best, and the Transco might be
better as just a wires company.

• Determining who gets priority claims over revenues is important. Do not

escrow the revenues from the distribution zones for meeting TRANSCO
needs, like was done in Orissa.

• Don’t tinker with valuations, especially just before privatization. This can
have a serious impact on tariffs, as Schedule VI of the Supply Act 1948 is
based on assets (and newer methods allow for 16% returns on equity).

190
Transfer of Assets
The restructuring was done in two steps through the instrumentality of
transfer scheme framed under the Orissa Electricity Reform Act, 1995. Under
the first transfer scheme (effective from April 1, 1996) the assets, liabilities,
proceedings and personnel of erstwhile OSEB were transferred to OHPC (for
hydel generation) and GRIDCO (Transmission & Distribution). The second
transfer scheme (effective from November, 1998) further transferred the
distribution related assets, liabilities, proceedings and personnel of GRIDCO
to four wholly owned companies of GRIDCO.
Table 20: Details of Revaluation
Details of Revaluation done in
Transfer Scheme dated April 1, Rs. in Crores
1996

Book Value of T&D Asset 1103.2

Interest and expense capitalised 97.5
Total 1201.0
Uplift in Value of Assets 1120.0
Total 2320.7
Depreciation 363.0
Net Fixed Assets of GRIDCO as on 1957.7
April 1, 1996
Total Revaluation
Uplift In Assets 1120.0
Further Adjustment 74.0
Total 1194.0
Adjustment
Subsidy due to OSEB 301.2
Electricity charges receivable from 39.2
Government
Reduction in O&M stock 50.6
Total (A) 391.0
Fresh Equity to State Govt. 253.0
Zero Coupon Bond to State Govt. 400.0
Bonds issued to Pension Fund 150.0
Total (B) 803.0
Total (A+B) 1194.0

191
RESTRUCTURING EXERCISE INVOLVED CERTAIN MEASURES,
WHICH CAST A HEAVY STRAIN ON THE FINANCES OF GRIDCO

Under the transfer Scheme of April’96, the state government took over the
Transmission and Distribution assets of OSEB (book value plus capitalized
expenses and interest at 1200 Cr.) and reinvested them in GRIDCO after
upvaluing by an additional Rs. 1194 cr. (additional 134%). Against this
upvalued amount of 1194 Cr, the state Govt. adjusted subsidies and electricity
charges payable to OSEB/GRIDCO totalling Rs.340 Cr. In addition GRIDCO
issued Rs. 253 Cr. Worth of shares and Rs. 400 Cr. Worth zero coupon bonds
to the state govt. This left GRIDCO with a serious cash shortage right from
day one and compelled it to default it to generating companies and other
suppliers. In addition Rs. 1146 Cr. of loan and liabilities were also assigned to
GRIDCO.

The upvaluation exercise was prompted by considerations including the need

to have a capital base capable of absorbing substantial debt funds needed for
the up gradation of the T&D system and the requirement of having a self
financing ratio of 20% and an adequate debt-equity ratio as per World Bank
conditions. It was also felt that the assets should be valued on the basis of
their business potential and replacement value, not their book value. The
revaluation exercise also enabled the cash strapped state govt. to “Adjust”
dues totalling Rs. 340 Cr. Payable to OSEB/GRIDCO against the
upvalued amount.

The impact of revaluation on the distribution companies has been lower than
that to GRIDCO as they were allocated only project specific liabilities
totalling Rs. 630 Cr. for all four distribution companies put together, while
GRIDCO retained in their books liabilities (including accumulated losses)
totalling about Rs. 1950 Cr. While the assets were upvalued, there was no
such upvaluation of the liabilities. Besides, as stated earlier, the distribution

192
 companies were assigned only project related liabilities. The only component
of asset upvaluation which has a bearing on tariff depreciation, which stood at
Rs. 81.69 Cr. in FY96 on the eve of the upvaluation and was pegged at Rs.
128.02 Cr. for FY98 by OERC in their tariff order effective from April 1,
1997.

The difference of Rs. 46.33 Cr. (Rs. 128.02 Cr. – Rs. 81.69 Cr.) in the
depreciation (which also included depreciation of assets created during FY97)
formed only 3.2% of GRIDCO’s total revenue requirements of Rs. 1451 Cr.
allowed by OERC. Hence the impact of upvaluation on distribution tariff has
been estimated to be only about 2.5%. Further, it must be emphasized that it is
not the upvaluation exercise per-se that resulted in GRIDCO’s cash crunch;
the cause is rather the “adjustment” of the totality of its receivables from the
state government (about Rs. 340 Cr.) right from inception.

Table 21: Debt Equity Comparison

Rs. In lakhs
As 1.4.1996 1.4.1997 1.4.1998 1.4.1999 1.4.2000 1.4.2001 1.4.2002 1.4.2003
on
Audited Audited Audited Audited Audited Audited Provisional Provisional
Equity 32620 34369 38423 45795 48786 48817 49106 49298

Debt 122145 127488 146068 240252 255477 291736 354990 420793

Ratio* 3.74 3.71 3.80 5.25 5.24 5.98 7.23 8.54

Equity 32620 34369 38423 45795 48786 48817 49106 49298

Power
Purchase 37,057 60,235 89,967 75,937 1,06,505 1,04,693 78,809 89,152
Liability
Power 159202 187723 236035 316188 361982 396429 433799 509945
Bills
Ratio* 4.88 5.46 6.14 6.90 7.42 8.12 8.83 10.34

*- Debt Equity Ratio.

193
 Table 22: PROFIT / (LOSS) COMPARISON OVER THE YEARS
Rs. in Lakhs

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Audited Audited Audited Audited Audited R Audited Audited Audited Audited Audited Provisional Provisional
Profit/
(LOSS) 2577 2594 2998 2490 2694 E (29,499) (31,912) (57,862) (1,373) (8,524) 2,214 (67,622)
After
subsidy
F
Revenue
subsidy 7627 11100 22603 16098 25762 O 1138 531 529 0 0 0 0
Received
R
Profit/
(LOSS) (5050) (8506) (19605) (13608) (23068) M (30637) (32443) (58391) 1373 (8524) 2214 (67622)
before
subsidy

Note: Till FY-1995-96 the performance is of erstwhile OSEB and subsequent years of GRIDCO.
FY 1996-97 to 1998-99 includes performance of Transmission and distribution business and FY 1999-00 onwards include only Transmission
business after privatization of distribution business.
The huge loss in 2002-03 is due the unprecedented hydrology failure and consequent additional burden towards purchase of high cost EREB
thermal power.
Table 23: DETAILS OF LOANS
Rs. In
lakhs
As on 1.4.1996 1.4.1997 1.4.1998 1.4.1999 1.4.2000 1.4.2001 1.4.2002 1.4.2

Govt.
Loans
State govt.
cash loan 200 200 15371 16871 16871 16871 1687
Central
govt. 1126 1126 1126 1126 1126 1126 1126 1126
Zero
coupon 40000 40000 40000 40000 40000 40000 40000 4000
Bonds
IBRD 0 3363 8572 14913 38111 30992 3876
Sub-Total 41126 41326 44688 65069 72910 96108 88989 9676
Financial
Institutions
LIC 14356 14066 14066 14066 14066 14066 14066 1406
REC 25018 27070 29559 36767 42877 42784 41099 3691
PFC/ADB 13680 19460 21570 26696 30816 31899 30092 4354
Sub-Total 53055 60596 65195 77529 87759 88749 85257 9452
Bonds &
others
Pension 15000 15000 15000 15000 15000 15000 15000 1500
Fund Bonds
Public 10991 8564 6584 5202 4377 3854 3476 2403
Bonds
Power
Bonds/loan - - 10948 66756 66756 77637 46256 9755
syndication
GoO Bonds - - - - - - 110288 1102
to NTPC
Others
(ICICI, 1973 2002 3653 10696 8675 10388 5724 4260
SPA etc.)
Sub Total 27964 25566 36185 97654 94808 106879 180744 2295
Total 122145 127488 146068 240252 255477 291736 354990 4207
The Loan outstanding figure given above does not include the overdue interest.
The IBRD loan has been considered as 70% loan and 30% grants from FY 2001-02
onwards.
Table 24: STATEMENT OF POWER PURCHASE, SALE, T& D LOSS
BILLING COLLECTION ETC

YEAR Energy Energy % of Cost of Amount Amount Collection

Purchase( Sale T&D power Billed Collected as
MU) (MU) Loss (Rs. (Rs. (Rs Cr.) % of
Cr.) Cr.) Billing
1995-96 9244.93 4560.36 50.67% 652.61 908.27 821.53 90.45%
(T&D)
1996-97 9650.00 5088.94 47.26% 982.71 1145.95 963.26 84.06%
(T&D)
1997-98 10324.30 5439.51 47.31% 1199.83 1357.55 1111.89 81.90%
(T&D)
1998-99 10630.59 5359.41 49.59% 1240.62 1374.64 1108.36 80.63%
(T&D)
1999-2000 9996.52 5603.24 43.95% 1230.30 1454.36 1097.85 75.49%
(Distribution)
1999-2000 11197.40 10645.70 4.93% 1165.60 1411.63 1113.79 78.90%
(Transmission)
1999-2000 11197.40 6252.16 44.16% 1165.60 1585.75 1268.00 79.96%
(T&D)
2000-01 10863.67 6080.42 44.03% 1412.53 1652.78 1276.27 77.22%
(Distribution)
2000-01 12400.03 11758.43 5.17% 1399.72 1607.63 1108.13 68.93%
(Transmission)
2000-01 12400.03 6974.76 43.75% 1399.72 1793.00 1459.66 81.41%
( T&D)
2001-02 10992.42 5773.21 47.48% 1519.13 1751.56 1300.12 74.23%
(Distribution)
2001-02 12435.14 11866.63 4.57% 1204.11 1719.32 1126.47 65.52%
(Transmission)
2001-02 12435.14 6645.21 46.56% 1204.11 1933.19 1461.22 75.59%
(T&D)
2002-03 11363.18 6731.78 40.76% 1475.64 1968.58 1607.72 81.67%
(Distribution)
2002-03 11889.39 11410.54 4.03% 1624.60 1486.79 1225.30 82.41%
(Transmission)
2002-03 11889.39 6779.14 42.98% 1624.60 1979.73 1617.73 81.70%
(T&D)

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 Table 25: Sources & Application of Funds
Sources of Funds
Rupees in Million Equivalent
US$ (Million)
Internal Resources 9,816 222
Grant
ODA grant towards State 2,260 63
govt. equity to GRIDCO
ODA grant transferred to 1,265 34
GRIDCO as GoO grant
Loans
World bank 14,419 350
State Government 960 26
ADB 2,025 57
Other Sources 10,605 246
Total of Loans 28,008 678
Grand Total 41,348 997

Application of Funds
Item Rupees (Million) US$ Million
Capital investment 35,370 840
Interest during 2,060 49
construction
Reform Expenses 2,754 74
Repair and maintenance 400 12
expenditure from ODA
grant
Increase in maintenance 765 22
inventory
Total Investment 41,348 997
Source: World Bank Staff Appraisal Report

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Table 26: EXPENDITURE INCURRED ON CONSULTANCY
SERVICES

Sl. Project Agency Amount Rupees

No. In in Funding
million Crore@ Agency
PS Rs.
65/PS

A Pre-reform KPMG led 41.000 GoO

Consultancy consortium
1 Reform Credit Switz Fast 16.194 105.261 DFID
Boston Grant
(CSFB)
2 PMU Merz McLilan 7.605 49.433 DFID
Seaboard Grant
International
3 ISP Price Waterhouse 4.668 30.342 DFID
Coopers Grant
4 RIAP Price Waterhouse 7.884 51.246 DFID
Coopers Grant
5 Training Price Waterhouse 0.150 0.975 DFID
Centre Coopers Grant
6 BEINA Price Waterhouse 0.018 0.117 DFID
Social Coopers Grant
Study
7 RIAP Price Waterhouse 0.600 3.900 DFID
Extension Coopers Grant
8 TRISP Price Waterhouse 3.715 24.148 DFID
Package Coopers Grant

B TOTAL 40.834 265.421 DFID

Grant

Total amount 306.421

spent on
consultancy

198
Kanungo Committee’s Findings and Recommendations

Encouraged by the Government of India, assisted by the World Bank, and

supported with grants from the government of U.K. (DFID), Orissa took the
initiatives and became the first state to reform its electricity industry. The
Orissa Electricity Reforms Act, setting out the basic frame work of the
reform, enacted in 1995 came in to force from 1st. April 1996. The principal
objectives of the reforms had been discussed earlier but out of so many only
three (03) objectives were achieved namely:

(a) Restructuring of the Electricity Industry for rationalization of

generation, transmission, distribution and supply of electricity.

(b) To provide avenues for participation in the industry of private

entrepreneurs, attract private investment and reduce the need for
government funding of the electricity sector.

(c) To provide a transparent mechanism for development and regulation

of the industry, including tariff fixation and dispute settlement,
through an independent, statutory body; the Orissa Electricity
Regulatory Commission.

The other expectations were yet to be realised.

The OERC has done pioneering work in our country in the establishment of a
regulatory mechanism for the electricity industry. The reform Act, which has
given the commission a wide mandate, requires it to act effectively and
independently. The OERC’s working in the last few years, has not been free
from problems. To avoid these, the following recommendations have been
made.

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1. To ensure that commission is fully functional at all times, the
government must appoint commissioners promptly. Action for filling
up vacancies should start early so that recommendations of the
selection committee are available to government at least two weeks
before the vacancy occurs. In the event an appointment or selection is
stayed by court, prompt action should be taken to have it vacated by
moving a higher court or a larger bench. Further nobody should be
considered for appointment unless there’s a clear possibility of his/her
serving for five years. To attract persons of ability, integrity, and
standing, wide publicity should be given while inviting nominations
for commissioners.

2. Budgetary allocation for the commission should be adequate.

Ordinarily, the government should not apply any budgetary cuts as
long as the amount proposed by the commission is within the limit of
license fees received. Accounting regulation for the commission should
be settled forthwith and budgeted outlays placed in a banking account
at the disposal of the commission for incurring expenditure in
accordance with the accounting regulation, without further reference to
the government.

3. The commission should institute regular systems of monitoring to

ensure that the prescribed standards of performance are actually
adhered to in the industry.

4. The government and the commission should have purposeful

interaction on a wide range of issues of monitoring, problem solving,
planning and development of the state’s power sector. For exchange of
information and discussion on administrative matters of mutual
interest, the government should interact with commission’s secretary.
There should also be system of meeting with the commissioners, at

200
 least once a year, taken at an appropriately high level to discuss and
settle matters involving important issues of policy.

5. The reforms were conceptualized under the guidance of the World

Bank and the road map for implementation was set out in its SAR
(Staff Appraisal Report). The assumption in the SAR of growth in the
demand for power in the state was highly ambitious, in terms of totals
and compositions. The demand for industrial power (EHT Supply),
which subsidizes domestic demand (LT supply), was grossly under
realized while domestic and commercial demand with high losses grew
fast. T & D losses, which were excessively high and were targeted for
substantial reduction, could not be brought down. Billing and
collection efficiency under the privatized distribution companies were
(DISTCOs) far from improving, actually worsened and theft of
electricity continued unabated.

6. The reform scheme was further vitiated by sharp, upvaluation of assets

at the time of transfer to utilities. This led to a steep increase in the cost
of power. Unrealistic assumptions that GRIDCO would become profit-
earning from 1999/98 led to the abrupt withdrawal of subsidy by the
state government from 1996/97. There has been considerable increase
in the average tariff at a cumulative rate of 15.5% annually over the
last nine years without any perceptible improvement in customer
service. The cross subsidy has also been brought down, particularly in
the post reform period, thereby casting a heavier burden on domestic
consumers.

7. Unabated increase in tariffs without a perceptible increase in techno-

commercial losses or improvement in customer service has led to
growing public discontent against the reforms. This situation has
worsened because of spiralling increase in costs and deteriorating

201
 health of the utilities. The DISTCOs & GRIDCO have been rendered
utterly unviable as a result of their inability to reduce T&D losses,
control rampant misuse, and theft of electricity and contain costs.
DISTCOs are unable to pay salaries to their employees without
defaulting on payment to GRIDCO towards the purchase of power.
GRIDCO also is unable to recover costs and is incurring heavy debts to
finance losses year after year. In this situation, the generating
companies are also facing inadequate cash realisation. The situation
has become so critical that the private sector partner in one of the
DISTCOs, AES, has abandoned the management of CESCO, which is
now being managed by a CEO appointed by regulatory authority. It is
recommended that the CEO of CESCO should be for full time.

8. The key to the revival of the sector lies in improving the efficiency and
bringing down the costs. By efficiency improvement not only can
customer services be geared up but T&D losses, currently at an
unacceptably high level, can also be brought down substantially. The
reform scheme sought to address the problem of T&D losses through
(a) capital investment to strengthen the T&D system so as to reduce
technical losses, and (b) privatisation of distribution to bring in better
management skills and practices for enforcement of accountability to
reduce commercial loss. Neither of these two has succeeded so far.

9. Large capital investments have been made but not a single project has
been completed despite considerable time overruns. The delays in most
cases for want of forest clearance, land availability or right of way.
Since none of the projects has been commissioned, no benefit has been
realized from the investments worth more than 6000 million rupees out
of funds borrowed from the World Bank carrying heavy debt-servicing
liabilities. Efforts need to be intensified to complete and commission
the ongoing works. No new work should be contracted until the

202
 majority of the ongoing works is completed. With the commissioning
of these works, there should be a significant improvement in system
reliability and reduction of technical losses, which would benefit
impact on cost reduction.

10. As far as massive commercial losses are concerned, the results

achieved over the last five years are insignificant. The T&D losses,
which were 46.94% in the 1995/96 as shown by the audit, are now
46.63% as reported by the utilities themselves. The loss is more
staggering in the LT segment at 68%. The DISTCOs, in their
projections, have proposed very little reduction. The rate of loss
reduction that needs to be attempted and achieved in the next five years
must not be less than an average of five percent which, in our view, is
well within reach. Attainment of the goal would, however, call for
determined, comprehensive and relentless effort. The following are
some suggestion in this regard:

(A) A concerted drive to remove illegal connections (such as hooking)

and effective measures to convert them in to regular connections
followed up by systematic billing and collection of energy charges.

(B) Should the DISTCOs wish police force escort for carrying out
special drives to prevent unauthorized use of electricity, over and
above the comfort of the chief secretary’s circular to DMs and SPs
asking for prompt intervention in the event of violence by antisocial
elements, the government should make available to the companies
the requisite support on payment of costs.

(C) Hundred percent consumers metering within a year and immediate

metering at the low voltage terminals of the step-down transformers
should be provided so that supplies in to HT & LT systems can be

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 quantified for purpose of proper energy accounting, which is
practically missing.

11. A major cause of sharp increase in the cost of power was steep
upvaluation of assets at the time of transfer to GRIDCO. It called for
substantially higher provision for the depreciation as well as return on
capital. Neither these could be met because of short fall in revenue. In
these circumstances it would be worth while in keeping the revaluation
in abeyance till the system is brought to balance. In fact there’s a case
setting aside the revaluation of OHPC, which is expected to be
profitable in the years to come. In addition to this, state government
may agree to allow a moratorium on debt servicing to the state except
the amounts in respect of loans from the World Bank, which the state
government would need to pay to the centre. After applying these
correctives and also taking credit for T&D loss reduction at an average
rate of five percent per year, the revenue gap at the existing retail tariff
would show a decline but would still be substantial. The unavoidable
revenue gaps would need to be financed from the sources other than
debt. Since the state governments are themselves passing through
severe financial stress, it may not be realistic to ask them to make a
sacrifice over and above what has been suggested already.

12. An exercise has been carried out to estimate the annual shortfall on a
cash flow basis without tariff hike but assuming that collection
efficiency of the DISTCOs would progressively improve from the
present level of 76% to reach 95% by the year 2005/06 instead of
ending up with a collection efficiency of 84% proposed by them. With
a tariff hike of 18% in 2005, the entire cash deficit would disappear
and the year 2005/06 would witness both an operational profit as well
as marginal cash surplus. The sector as a whole would turn around in
2005/06. The consumers could be called upon to pay higher tariffs at

204
 that stage because by then the utilities are expected to have shown
evidence of their concern for and efficiency in T & D loss reduction
and improvement of customer service; not otherwise.

13. To bring the reforms back on the rails, the World Bank and the DFID
who helped Orissa initially, and hopefully have retained their interest
in the reform, should come forward with a suitable package to fill the
revenue gap in the intervening years. Without this interim financing
(estimated at 32400 million rupees), there seems hardly any prospect of
the reform coming to fruition. The Government of India should not
only persuade them to do so but also extend a helping hand in sharing
the responsibility of interim financing of the revenue gap.

14. Once decision is taken on interim financing and its apportionment, the
DISTCOs and GRIDCO may be pinned down to specific performance
parameters by desegregating the proposed T&D loss reduction
DISTCO-wise.

15. In the prevailing run down state of GRIDCO and DISTCOs, no durable
rehabilitation is possible without interim financing of unavoidable
losses. However it needs to be emphasized that no amount of support
from outside would succeed unless the utilities conduct themselves
with greater sense of responsibility. Privatization was seen as a means
to improve the performance of DISTCOs. The private sector partners
need to bear in mind their crucial role, which cannot be performed
satisfactorily unless they face the task as a challenge and an
opportunity and take the industry forward in the true spirit of
partnership and for mutual benefit.

16. The private promoters of DISTCOs neither brought superior

management skills nor did they arrange financial support even by way

205
 of working capital for companies, which were in dire need of capital,
working capital in particular. Instead of using the good offices of
BSES to secure working capital in terms of clause 8.1 of the
shareholders agreement for the three DISTCOs under their
management, the DISTCOs have persistently defaulted in payment to
GRIDCO towards purchase of power. The outstanding overdue of
GRIDCO as on 30 September 2001 against these three DISTCOs is
6807.2 million rupees including bonds issued by them in lieu of cash
payments. So far as the other distribution company CESCO is
concerned, the situation is worse. AES, the private partner, never
fulfilled its commitment to bring working capital. They were allowed
to pile up unpaid power purchase bills amounting to 4030 million
rupees by the time they walked away in August 2001. Now that the
AES have abandoned CESCO, GRIDCO seems to be left with hardly
any other option except exploring a legal remedy. As far as BSES-
managed DISTCOs are concerned, the attitude of deliberate default in
payment to GRIDCO must end. The BSES should make all efforts to
bring in working capital in terms of the shareholders agreement.

17. The system of escrow put in place to secure regular payments to

GRIDCO towards power purchase has not worked. With the package
of financial relief recommended by us along with enforcement of the
provisions of the shareholders agreement, the escrow mechanism
should be made to work and strictly enforced. (Escrow-In the event of
non-payment by the SEB, IPP shall have recourse to L/C and revenues
shall be accumulated in the escrow account. In case funds in escrow
account are insufficient, IPP may invoke State Govt. guarantee)

18. There is an urgent need to develop trust and goodwill between the
employees and the management. The vital role of the employees and
their associations in building up the industry needs to be taken more

206
 seriously. While firm action against known miscreants is necessary to
enforce discipline and accountability this cannot be done without
skillful handling of situations and willingness to mitigate genuine
grievances. A specific matter in this connection relates to pensionary
benefits. Employees apparently have found that the pension scheme
preferred by them, and also adopted by the companies, has turned out
to be disadvantageous, particularly for those who came over from the
government in a higher age group. In a matter like this neither the
present employers nor the government should take any rigid stand. The
effort should be to find a solution, which may not even be difficult to
reach. Likewise, there is an apprehension the liabilities of
government/GRIDCO towards the Pension Trust may not have
assessed correctly. This is a matter of actuarial calculation, which may
affect the viability of the pension funds, so there should be no
reluctance to take a fresh look at the estimates.

19. Orissa is richly endowed with natural resources, and now has the
additional advantage of the surplus power. This combination needs to
be exploited to accelerate industrialization of the state through
vigorous marketing of power by offering more competitive rates. By
selling surplus power to industries, even at tariffs lower than prescribed
by the OERC, not only would the state benefit from industrialization,
but the DISTCOs themselves would also stand to gain as long as they
recovered costs at the margin. The tariffs fixed by the OERC should be
treated as the ceiling in each category, and utilities should have the
freedom to supply power at lower rates in exercise of their commercial
judgement.

20. With restructuring and privatization, there’s a much greater need now
for rigorous enforcement of safety norms in the electricity industry.
However, care needs to be taken to see that there’s no mindless

207
 expansion of the Electrical Inspectorate. Services of chartered
engineers, under a strict system of empanelment and penalty in the
event of misconduct, may be utilised for the purpose of supplementing
human resources of a slim, well structured inspectorate.

21. The services of local consultants as well as highly rated consulting

firms of international repute were used extensively in the preparation
of blueprint of reform, and to assist the utilities in developing internal
systems of operation management, financial control, technical services,
contract management, project implementation, etc. The cost incurred
so far is a staggering 3060 million rupees. However, judging by the
fate of reforms and the state of the utilities it is clear that the utilities,
for whose benefit the consultants were engaged, did not assimilate
much of their advice. Instead of developing an inner strength with the
assistance of consultants, they tended to be excessively dependent on
them leading to a near-atrophy of organisational strength. We suggest
that this practice, which weakens organisation rather than
strengthening them and demotivates employees instead of improving
their skill and confidence, should end as soon as possible.

22. Close attention should be given to strengthening the managerial

competence of GRIDCO, which is not only financially sick but also
organisationally very weak. The following recommendations are made
in this connection.

• The senior management of GRIDCO should be selected on the

basis of merit and must be appointed for a fixed term of three to
five years.

• The SLDC (State Load Dispatch Centre) and its commercial

counterpart, the energy billing centre, should be provided with the

208
 necessary staff whose skills should be substantially honed and
upgraded by regular training.
• GRIDCO’s PMU (Project Management Unit) should take over the
responsibility of all capital works irrespective of the source of
funding. It should also monitor capital works executed by the
distribution companies in addition to managing and monitoring.

23. The entire power sector needs top management of a high calibre just as
it requires an efficient work force motivated to further the interest of
the industry. The task before the management is daunting.
Appointments to the boards of directors of all the utilities need to be
reviewed to ensure that professionals including administrators with
competence, vision and commitment may enrich the utilities at the top.
The prevailing system of part time appointments to key positions in the
sector, including the chief executive officer of the OHPC should end.
The chief executive officers of the DISTCOs should be stationed at
their respective head quarters.

24. The committee did not get the evidence of any innovative practice
introduced in the management of the privatized DISTCOs. However, in
some of the DISTCO areas, an experiment is in progress to involve
village communities in streamlining power supply in rural areas. While
the results seem to be encouraging, the exercise currently being
conducted by consultants can succeed in the long run and over large
areas only if the programme is implemented by DISTCO official
themselves.

25. It is recognised that regulatory commission need to lay down norms for
tariff determination, which would enable the utilities to have a clear
idea of the range in which tariffs may move over a reasonable period.
A multi-year tariff regime is therefore, being advocated by experts.

209
 The OERC has also laid down norms in certain areas though much
more needs to be done. But no purposeful result can be achieved in the
matter of multi-year tariffs unless there is a reasonable financial
balance. Serious efforts are required to provide financial balance to the
sector before multi-year tariffs can become a reality.

26. Another idea often advocated by experts is multi-buyer model of

power trading. Here again attainment of financial balance is an
essential pre-requisite to provide a basis for competition through
various models of multi-buyers system as distinct from the single-
buyer model adopted by Orissa as well as other states who have
embarked on reform. In the prevailing situation of near bankruptcy of
GRIDCO and disarray in the functioning of DISTCOs, the sector
should be spared any further trauma. Meanwhile, GRIDCO needs to
strengthen itself to develop ability and skill to handle the power trading
function which calls for, among other things, prompt exercise of
commercial judgement. Urgent attention should be paid to develop this
within the organisation. It would be of advantage to develop within
GRIDCO a well functioning trading unit which may eventually be
turned in to an independent trading organisation as a step towards
bringing in a competitive regime that would provide the consumer the
opportunity to choose the source of this power supply.

27. Rural electrification seems to have unintentionally become the worst

casualty of the reform process. With the restructuring of OSEB, and
privatization of DISTCOs, the rural electrification wing of OSEB was
disbanded and it was left to the DISTCOs to carry on with whatever
schemes were in the pipeline. Since the activity is commercially not
attractive, the DISTCOs cannot be expected to be very enthusiastic
about rural electrification. The interest of DISTCOs has further
slackened because even the modest rural electrification work done by

210
them has not been paid for in spite of the fact that an amount of Rs. 23
Crore of capital subsidy due was certified by OERC several months
ago. No fresh scheme of rural electrification seems to have been posed
for funding support of agencies like REC, nor any scheme drawn up
for the purpose. Another regrettable feature is the utter lack of concern
for productive use of electricity for rural development through
agriculture pumping. In terms of agricultural demand for power among
states, Orissa is practically at the bottom. What is worse is that
agricultural demand for power in the state has gone down from a
meagre 6% in 1992-93 to a dismal 3% in 1999-00, compared with
national average of 30%. No single department of the state government
is entrusted with the administrative responsibility to plan, promote and
monitor growth and press for rural electrification for development of
irrigation pumping which is vital rural development. Under a high
priority national plan, all villages are required to be electrified by
March 2007. For a state like Orissa, with a 40% of the population from
weaker sections of scheduled castes and scheduled tribes living in
remote areas, the leeway to be made is large. Kutir Jyoti program
needs to be pursued with vigour. It must however be ensured that the
benefits of subsidised electricity supply under this program flow to the
targeted beneficiaries the goal is unlikely to be reached unless
determined efforts are made and an effective machinery is put in place
for planning, execution and monitoring of rural electrification projects.
The vacuum caused by abolition of the rural electrification wing of the
OSEB needs to be filled up and an alternative system created. The
following recommendations are made in this connection:

a) A Rural Engineering Planning Organisation (REPO)

should be set up under the Government to provide
focus and direction to this vital programme, to prepare

211
 specific schemes, pose them to funding agencies and
over-see utilization of the funds procured.
b) REPO should have under it four Rural Electrification
Planning Units (REPU), each corresponding to a
DISTCO with which it would need to work in close
coordination. These units would draw up, detailed
schemes of rural electrification.
c) Prioritisation of villages for electrification should be
done by REPUs in consultation with the collector of the
concerned district.
d) Execution of the works would be the responsibility of
the concerned DISTCOs.
e) REPUs would need to monitor the execution and report
completion of schemes and the expenditures incurred
thereon to the Collector of the district and the State
REPO.
f) On the basis of the Collectors’ certificates of
satisfactory completion, the state Government should
promptly settle subsidy payments admissible to
DISTCOs.
g) Government would need to provide DISTCOs with
capital subsidy; revenue requirements would, in normal
course, be considered by OERC as a part of tariff
exercise.

28. Our recommendation would help rehabilitate the utilities, bring

stability and promote growth of the power sector only if these are
implemented as a package and implementation is managed and
monitored closely. The reform adopted by Orissa may have been
flawed, but mid-course corrections could have been managed rather
than its success taken for granted. The committee’s recommendations

212
 towards putting back the reform on rails would succeed only if the
need for reform management is recognised and a system is put in place
by the government for regular monitoring, co-ordination and mid-
course correction. It is interesting to know that of all the major
parameters of reform laid down in the SAR; one of the few that proved
realistic was tariff. Retail tariff has been fairly close to the SAR
assumption in the first two years and substantially higher since 1998-
99. Thus, consumers have not failed to provide support; they have
made ample sacrifice in search of better quality of service which has
eluded them so far.

29. Power sector would succeed if the utilities bring in efficiency, cut
costs, reduce losses and ensure greater consumer satisfaction. It would
also require strong enforcement to ensure that consumers of electricity
pay for its use. All sections of the society, particularly those, who are
in a position to influence public opinion, have the responsibility to
provide the requisite support. Revival of the power sector would
depend to a large extent on how fast a consensus is built in this vital
area.

30. The state’s power sector is now on the brink of the crisis. It is high
time all agencies namely, the state government, the central
government, the world bank and the DFID, got together and took a
holistic view on what can be done by each to rescue the reform. If the
electricity reform fails in Orissa, it would have its inevitable adverse
impact on reform all over the country. What have taken place in the
electricity industry of Orissa is only restructuring, privatization and
establishment of a Regulatory Mechanism. The real reform, which
brings in its wake benefits to consumers, strength to the industry and
growth for the economy has yet to come.

213
 Turnaround of GRIDCO / OPTCL - A Case Study

All the major steps in the restructuring process have since been taken as
envisaged under the reform scheme:

• OSEB was restructured and corporatised in to Grid Corporation of

Orissa (GRIDCO) and Orissa Hydro Power Corporation (OHPC) in
April 1996.

• The Orissa Electricity Regulatory Commission (OERC) was

established in August 1996.

• Orissa Power Generation Corporation (OPGC) was privatized with

divestment of 49% stake and transfer of management control to a
private operator, AES in January 1999.

• Four distribution companies (DISTCOs), incorporated as wholly

owned subsidiaries of GRIDCO, were privatized with transfer of 51%
stake to private operators: three of these, namely, NESCO, WESCO
and SOUTHCO were acquired by BSES in April 1999 and the fourth,
viz. CESCO by AES in September 1999.

GRIDCO disinvested 51% of its equity holding to private investors with

strong financial standing & technical capabilities. 10% of the equity has been
reserved for the employees of GRIDCO- that would entitle them to direct
monetary and welfare benefits. GRIDCO retains 39% of the holdings in the
DISTCOs.

214
Transfer of Assets

The restructuring was done in two steps through the instrumentality of

transfer scheme framed under the Orissa Electricity Reform Act, 1995. Under
the first transfer scheme (effective from April 1, 1996) the assets, liabilities,
proceedings and personnel of erstwhile OSEB were transferred to OHPC (for
hydel generation) and GRIDCO (Transmission and Distribution). The second
transfer scheme (effective from November, 1998) further transferred the
distribution related assets, liabilities, proceedings and personnel of GRIDCO
to four wholly owned companies of GRIDCO.

RESTRUCTURING EXERCISE INVOLVED CERTAIN MEASURES,

WHICH CAST A HEAVY STRAIN ON THE FINANCES OF GRIDCO

Under the Transfer Scheme of April’96, the state government took over the
Transmission and Distribution assets of OSEB (book value plus capitalized
expenses and interest at 1200 Cr.) and reinvested them in GRIDCO after
upvaluing by an additional Rs. 1194 cr. (additional 134%). Against this
upvalued amount of 1194 Cr, the state Govt. adjusted subsidies and electricity
charges payable to OSEB/GRIDCO totalling Rs.340 Cr. In addition GRIDCO
issued Rs. 253 Cr. Worth of shares and Rs. 400 Cr. Worth zero-coupon bonds
to the state govt. This left GRIDCO with a serious cash shortage right from
day one and compelled it to default it to generating companies and other
suppliers. In addition Rs. 1146 Cr. of loan and liabilities were also assigned to
GRIDCO.

The upvaluation exercise was prompted by considerations including the need

to have a capital base capable of absorbing substantial debt funds needed for
the up gradation of the T&D system and the requirement of having a self
financing ratio of 20% and an adequate debt-equity ratio as per World Bank
conditions. It was also felt that the assets should be valued on the basis of

215
their business potential and replacement value, not their book value. The
revaluation exercise also enabled the cash strapped state govt. to “Adjust”
dues totalling Rs. 340 Cr. Payable to OSEB/GRIDCO against the
upvalued amount.
Table 27: Revaluation of Assets

Details of Revaluation done in

Transfer Scheme dated April 1, Rs. in Crores
1996

Book Value of T&D Asset 1103.2

Interest and expense capitalised 97.5
Total 1201.0
Uplift in Value of Assets 1120.0
Total 2320.7
Depreciation 363.0
Net Fixed Assets of GRIDCO as 1957.7
on April 1, 1996
Total Revaluation
Uplift In Assets 1120.0
Further Adjustment 74.0
Total 1194.0
Adjustment
Subsidy due to OSEB 301.2
Electricity charges receivable from 39.2
Government
Reduction in O&M stock 50.6
Total (A) 391.0
Fresh Equity to State Govt. 253.0
Zero Coupon Bond to State Govt. 400.0
Bonds issued to Pension Fund 150.0
Total (B) 803.0
Total (A+B) 1194.0
Source-Price Water House Coopers

216
The impact of revaluation on the distribution companies has been lower than
that to GRIDCO as they were allocated only project specific liabilities
totalling Rs. 630 Cr. for all four distribution companies put together, while
GRIDCO retained in their books liabilities (including accumulated losses)
totalling about Rs. 1950 Cr. While the assets were upvalued, there was no
such upvaluation of the liabilities. Besides, as stated earlier, the distribution
companies were assigned only project related liabilities. The only component
of asset upvaluation which has a bearing on tariff depreciation, which stood at
Rs. 81.69 Cr. in FY96 on the eve of the upvaluation and was pegged at Rs.
128.02 Cr. for FY98 by OERC in their tariff order effective from April 1,
1997.

The difference of Rs. 46.33 Cr. (Rs. 128.02 Cr. – Rs. 81.69 Cr.) in the
depreciation (which also included depreciation of assets created during FY97)
formed only 3.2% of GRIDCO’s total revenue requirements of Rs. 1451 Cr.
allowed by OERC. Hence the impact of upvaluation on distribution tariff has
been estimated to be only about 2.5%. Further, it must be emphasized that it is
not the upvaluation exercise per-se that resulted in GRIDCO’s cash crunch;
the cause is rather the “adjustment” of the totality of its receivables from the
state government (about Rs. 340 Cr.) right from inception.

Privatization of Distribution Functions:

In pursuant to the Orissa Electricity Reform (Transfer of Assets, liabilities,
proceedings & personnel of GRIDCO to distribution companies) Rules, 1998,
the government of Orissa transferred the distribution assets and properties
along with personnel of GRIDCO to 4 distribution companies namely
CESCO, NESCO, WESCO, and SOUTHCO continued to function as
affiliates of GRIDCO up to 31.03.1999 and thereafter functioned under the
distribution & retail supply license obtained from OERC.

217
Objectives of Privatization of Distribution Function:
A. Operational Improvements:
(i) Improve quality of service to consumers
(ii) Improve operational efficiencies & reduce losses.
B. Financial Benefits:
(iii) Attract private investment in to the distribution business
(iv) Reduce the need for government funding of the electricity
sector
(v) Contribute to increased economic growth in Orissa.
C. Employee Considerations:
(vi) Create opportunities for secure & increasingly rewarding
employment for the qualified personnel
(vii) Provide a stable environment for employees
D. Sale of all 4 Zones to promote competition

In keeping with the objectives of power sector reform and the commitments
given to the World Bank by the state government, the distribution function
was required to be privatized. After considerations of various options
available for privatization, the corporation decided to adopt the best mode of
Joint sector/ Joint venture route. The sequence agreed was that the four
distribution zones which were functioning under the corporation will be
converted in to four distribution companies as its wholly owned subsidiary.

In spite of these pragmatic reform programmes, GRIDCO’s financials

worsened in the year 2000 and debt level of the company rose to the all time
high. Then state government did intervene and constituted a high power
committee lead by Mr. Sobhan Kanungo (I.A.S), to examine the fault lines
and asked the committee to suggest the measures to put the GRIDCO back on
track. After adhering to committee norms, improvements in all sectors are

218
visible now with increase in earnings and total turn around, with the GRIDCO
posted a net profit in FY 2004-05. The highlights of the results as follows:

1. GRIDCO started trading of its surplus power with the utilities/SEBs

through the Power Trading Corporation of India Ltd. (PTC) by
entering into an Agreement signed on 03.07.2003. The trading was
started with effect from 05.07.2003 initially for an average of 100 MW
@ Rs.2.60/unit for the evening peak @ Rs.2.00/unit for the off-peak
(18 hours) a day. The average rate was Rs.2.15/ unit Further, GRIDCO
has also entered into an agreement with NTPC Vidyut Vyapar Nigam
Ltd. (NVVNL), a wholly owned subsidiary of NTPC on 24.09.2003 for
an average of 100 MW trading. Trading of power with NVVNL was
started with effect from 01.10.2003.

During November, 2004 the peak export is 557 MW, off-peak export is
427 MW and the average export is 460MW.

Peak Trading 550 MW

Off peak Trading 430 MW
Average Trading 460 MW

2. T & D losses, which were excessively high and were targeted for
substantial reduction, could be brought down gradually. Billing and
collection efficiency under the privatized distribution companies
(DISTCOs) started improving, theft cases of electricity started falling
and due to the introduction of one time settlement of theft and irregular
connection cases, many new customers were created over the years and
receivable collection started increasing.

Steps taken in this regard to reduce T&D losses are through (a) capital
investment to strengthen the T&D system so as to reduce technical

219
 losses, and (b) privatisation of distribution to bring in better
management skills and practices for enforcement of accountability to
reduce commercial loss (D) Hundred percent consumers metering
within a year and immediate metering at the low voltage terminals of
the step-down transformers were provided so that supplies in to HT &
LT systems can be quantified for purpose of proper energy accounting.

Year 1999- 2000-01 2001-02 2002- 2003-04 2004-05

2000 03
% of 44.16% 43.75% 46.56% 42.98% 40.14% 38.93%
T&D
Loss
Collection 79.96% 81.41% 75.59% 81.70% 83.25% 88.68%
as % of
Billing

3. An exercise was carried out to estimate the annual shortfall on a cash

flow basis without tariff hike but assuming that collection efficiency of
the DISTCOs would progressively improve from the present level of
76%(2001-02) to reach 95% by the year 2005/06 instead of ending up
with a collection efficiency of 84% proposed by them. Already 2004-
05 witnessed a collection efficiency of 90%.

With a tariff hike of 18% in 2005, the entire cash deficit would
disappear and the year 2005/06 would witness both an operational
profit as well as marginal cash surplus. The sector as a whole would
turn around in 2005/06, which includes the distribution companies
also.

The consumers could be called upon to pay higher tariffs at that stage
because by then the utilities are expected to have shown evidence of
their concern for and efficiency in T & D loss reduction and
improvement of customer service; not otherwise.

220
4. To bring the reforms back on the rails, the World Bank and the DFID
who helped Orissa initially came forward with a suitable package to
fill the revenue gap in the intervening years. Without this interim
financing (estimated at 32400 million rupees), this gradual turnaround
in GRIDCO’s fiscals were unlikely and hardly there was any prospect
of the reform coming to fruition.

5. The system of escrow put in place to secure regular payments to

GRIDCO towards power purchase has not worked initially. With the
package of financial relief recommended along with enforcement of
the provisions of the shareholders agreement, the escrow mechanism
has started working and has been strictly enforced.

6. The services of local consultants as well as highly rated consulting

firms of international repute were used extensively in the preparation
of blueprint of reform, and to assist the utilities in developing internal
systems of operation management, financial control, technical services,
contract management, project implementation, etc. The cost incurred
so far is a staggering 3060 million rupees. Judging by the fate of
reforms and the state of the utilities it is clear that the utilities, for
whose benefit the consultants were engaged, did not assimilate much
of their advice or it did not reach to the bottom line managers. These
services of the consultants, which weakened the organisation rather
strengthening them, were stopped and government appointed efficient
bureaucrat in-charge of GRIDCO, which made turnaround a reality and
it has been decided to keep the tenure of CMD, GRIDCO fixed for 03
years, prior to which they should not be disturbed on normal course.
Chief executive officers of the DISTCOs are now stationed at their
respective head quarters.

221
7. To ensure that commission (OERC) is fully functional at all times, the
government started appointing commissioners promptly because
OERC has done pioneering work in our country in the establishment of
a regulatory mechanism for the electricity industry. Commission
started instituting regular systems of monitoring to ensure that the
prescribed standards of performance are actually adhered to in the
industry.

8. The government and the commission started interacting on a wide

range of issues of monitoring, problem solving, planning and
development of the state’s power sector. For exchange of information
and discussion on administrative matters of mutual interest, the
government evolved a mechanism to interact with commission’s
secretary.

222
Comparison of Financial Performance – Orissa Vis-à-vis
Andhra Pradesh

Table 28: Financial Result Analysis of Andhra Pradesh

Particulars 2003 – 04 2004 - 05

1. Total Income 2468.37 2416.40

2. Total Expenditure 2481.77 2422.47

3. Profit / (Loss) before Tax 13.40 6.07

4. Provision for Income Tax ---------- 0.45

5. Profit / (Loss) after Tax (13.40) (6.52)

6. Net prior period credits / (Charges) 19.38 9.13

7. SURPLUS / (DEFICIT) 5.98 2.61

• % increase in Profit : 129.01%

• % increase in Income : 2.15%
• % increase in Revenue : 5.84%
• % increase in Sales : 11.98%
• % reduction in Distribution Loss : 1.21%
• % reduction in distribution Transformer Failure: 0.82%

223
Table 29: Financial Result Analysis of Orissa

Particulars 2002 – 03 2003 - 04

1. Total Income 1686.33 2809.74

2. Total Expenditure 1865.43 1921.62

3. Profit / (Loss) before Tax (179.70) 888.12

4. Provision for Income Tax ------------------ ------------------

5. Profit / (Loss) after Taxation, (59.80) 41.11

contingency & Resv.

• % increase in Profit : 231.18%

• % increase in Income : 66.61%
• % increase in Sales : 31.11%
• % reduction in Distribution Loss : 3.24%
• % reduction in distribution Transformer Failure: 1.17%

224
 SOCIO ECONOMIC IMPACT ASSESSMENT OF POWER SECTOR
REFORMS: A MICRO LEVEL ANALYSIS

V.1 Introduction

5.1 Aggregative analysis as presented in the previous chapters gives a

macro perspective of the different aspects of power sector reform in Orissa
and its impact. However, the analysis of aggregated data may not serve to
bring out the subtle nuances of reform and its impact at the user level, the
spatial variations and ground-level perceptions. Accordingly, the present
chapter proposes to develop a general micro level perspective about the effect
of reform on different user categories on the basis of various impact
parameters. The data collected from the users is both factual and perception-
based.

5.2 These disaggregated data are collected from different sources and from
different districts of the state of Orissa. The sources are:

a) households,
b) commercial and small industrial establishments,
c) principal informants including key power sector
functionaries, high-level officials of the Government of
Orissa and user group representatives and
d) the Focus Group Discussions (FGDs) in the selected sites.

The instruments 1 of data collection consist of a structured questionnaire for

households, FGD dairies, an open ended checklist for commercial and small
industrial users, a list of issues in connection with the power sector for being
discussed with the principal informants and also informal discussions. After
pilot testing of the instruments and rigorous training of the investigators for
administering them, the actual field investigation was conducted over a period
of 4-5 weeks in the months of November – December in 2003. The senior

225
members of the study team conducted some of the FGDs and principal
informant interviews themselves in two installments.

V.2 Micro Level Data Sources: Sampling Framework

5.3 The study on Socio-economic Impact of Power Sector Reform was

conducted in eight selected districts of Orissa, with 2 districts sampled from
each of the 4 geographical zones (North, South, East and West) of the State.
Figure-5.1 gives the design of the sampling frame. A total of 2112
households from 32 selected villages (falling in 16 sample blocks) and 8
selected urban centres were surveyed to elicit users’ perceptions on different
aspects of power sector reform.

226
 Design of the Sampling Frame for Collection of Primary Data
Nandapur (LE)
Khurda (HD)
Bajapur (HE)

Khurda (HD) Chhutaraipur (LE)

Chilika (LD)
Nairi (HE)

Eastern Zone
Bhubaneshwar (Town / City) Bhubaneshwar

Sanagarh (LE)
O Ranapur (HD)
Gopalpur (HE)

Nayagarh (LD) Patanda (LE)

Gania (LD)
Kishor Prasad (HE)
R
Nayagarh (Town / City) Nayagarh

Mahul Chappal (LE)

I Bamra (HD)
P Pathhar (HE)

Sambalpur (HD) Balaranga (LE)

Maneshwar (LD)
Bargoan (HE)
Western Zone

S Sambalpur (Town / City) Sambalpur

Salgadia (LE)
Banarpal (HD)
S Santuri (HE)

Angul (LD) Lunahandi (LE)

Athamallick (LD)
Kundanali (HE)

A Angul (Town / City) Angul

Rajpur (LE)
Digapahandi (HD)
Padmanavapur (HE)
Ganjam (HD)
Lunghuri (LE)
Ganjam (LD)
Southern Zone

Damodarpur (HE)
S
Berhampur (Town / City) Berhampur

Badagatiguda (LE)
Bissam Cuttack (HD)
T Chatikana (HE)

Rayagada (LD) Dangasorda (LE)

Chandrapur (LD)
Chandrapure (HE)
A Rayagada (Town / City) Rayagada

Somapur (LE)
Chandabali (HD)
T Baligan (HE)

Bhadark (HD) Malitira (LE)

Banta (LD)
Purusandha (HE)
Northern Zone

E Bhadark (Town / City) Bhadark

Machhala (LE)
Ghasipura (HD)
Deogaon (HE)

Keonjhar (LD) Khandara (LE)

Joda (LD)
Lalahari Basti (HE)

Keonjhar (Town / City) Keonjhar

Note : LD = Less Developed Block & LE = Less Electrified Village

: HD = Highly Developed Block & HE = Highly Electrified Village

227
V.3 Analysis of Household Data

5.4 This section analyzes the information gathered from responding

households* using electricity on different aspects of power sector reform that
are closely linked to the stated objectives of:
increasing access to electricity,
improving the quality of power supply,
enhancing billing and collection efficiency in the distribution of
power, and
generating a system for better supplier-consumer interface that
includes quality customer care.

We have discussed the household level data in respect of all the

indicators for the pre reform and reform periods and for rural/urban areas. The
study conducted by Xavier Institute of management (1996) is supposed to be
used as the benchmark (baseline) in order to have a comparative perspective
of pre and post reform periods. But for all the indicators used in the present
study, we are not able to use Xavier institute’s study due to the following
reasons: (i) the sample size for the domestic consumers of the Xavier study
was 288 while in the present study it is 2112; (ii) the analysis of rural and
urban area separately as well as by social groups was not made in respect of
all the indicators in the Xavier study. Therefore, wherever possible, we have
used the Xavier’s study as benchmark, otherwise, we have used CMDR’s
field survey data for the pre reform period.

Profile of Sample Households

5.5 Of the 2112 sample households, rural households constitute 52 %

(1107) and the rest are situated in urban areas. A little more than half (52 %)
of the total sample households belong to the socially less privileged categories
(Scheduled Castes, Scheduled Tribes, Other Backward Castes), hereinafter to
be referred to as the ‘Less privileged class’. While more than 70 % of the

*
On an average, the extent of non-response on different aspects ranges between 2 and 20 % of the
total sample size.

228
rural households belong to less privileged castes, about 67 % of the urban
households belong to the privileged category. The sex ratio (number of
females per 1000 males) in rural areas is 826 while the same is 859 in urban
areas. The sex ratio among upper caste is in favour of females in both rural
and urban areas. Expectedly, the urban literacy rate comes out much higher
than the rural literacy rate, particularly for education at the secondary level
and beyond 2. Thus, while for the rural sample the literacy rate at secondary
level and beyond is estimated to be about 47% of the total number of persons
in the sample, the same is close to 60% for all persons in the urban sample.
Across the different caste groups it is found that the less privileged categories
are always behind the privileged category as one move towards higher and
higher levels of education. Irrespective of the social category, female literacy
rate at all levels of education is always behind the corresponding male literacy
rate.

Access to Electricity

5.6 “Kutir Jyoti” Scheme: The government of Orissa has a special scheme
named ‘Kutir Jyoti’ that is intended to improve the access to and use of
electricity among the rural SC, ST and OBC households living below poverty
line (BPL). The survey data relating to the sample households shows a
significant number of forward caste households (about 14%) coming under
this scheme (Chart-5.1). This gives an impression that, like any other scheme
for the rural poor, the benefits of this scheme are also enjoyed by the
privileged category. About 29 % SC and 39 % ST households are covered
under ‘Kutir Jyoti’ scheme. The relatively low targeting of the scheme among
the sample households may also be due to the high illiteracy rate of the SC
and ST population and their ignorance of the schemes meant for their welfare.

2
The focus on secondary level of education and beyond it is based on the assumption that awareness
about power sector reform is likely to be more crystallized at this level.

229
 Chart 5.1: Composition of Kutir Jyoti Households

Forward
Caste SC
OBC 14% 29%
19%
ST
38%

5.7 Access to Electricity by Sample Households: From Table-5.1 it is

found that 85 % of the total sample households got their connection before the
reform in the power sector. There is no difference between the average
connected load of the households between pre reform and reform period. The
average distance from the nearest electric pole to domestic connection was 20
meters (distance) in the pre reform period while the same comes out as 28
meters during the reform period. The amount spent in getting connection is
found to be nearly double in the reform period than that during pre reform
period. As per the rules, the domestic consumers are expected to get
connection within 30 days of their application. During the pre reform period
(XIMB,1996) only 29 % of the total domestic consumers got connection
within 30 days while during the reform period (CMDR study) it is reported
that the average number of days to get connection is 21 days which seems to
be an achievement of the reform process.

230
 Table 5.1: Indicators of Access to Electricity by Sample
Households
Pre-
reform Reform
Information on period period
Percentage of sample households that
85.0 15.0
received connection
Connected Load (in kwh) 1.4 1.4
Distance from the pole (in meters) 19.9 27.6
Amount spent in connection (in Rs) 854.7 1521.9
Time taken for getting connection in
- 21
days (CMDR study)
XAVIER study: % of HH got
29 -
connection in <30 days

Metering of Electricity Use

5.8 Metered Connections: The reform aims at achieving 100 percent

metering of the use of electricity. In the sample taken up for study, about 17
% of rural households and 2 % of urban households revealed that they did not
have meters in the pre reform period (Table 5.2). During the reform period
about 10 percent of the households did not have meters (CMDR study, 2003)
while 19 percent households did not have meters during the pre reform period
(Xavier study, 1996). On the whole, the reform objective of 100% meter
connections to the households is yet to be achieved.

5.9 Functioning of meters: About 25 % meters were not in working

condition in the pre reform period, while the same declines to 3 % for the
reform period (Table 5.2). It thus seems that significant achievement in
respect of repairing and replacing the non-working meters has been
observed. This possibly reflects a greater emphasis of the DISCOMs not only
installation of meters but making them effectively functional.

231
5.10 Frequency of Meter Reading: The irregularity in meter reading has
declined from 26 % (Xavier study) in the pre reform period to about 8 %
(CMDR study) in the reform period. There is a significant improvement in
the frequency of meter reading (every 2 months) in rural areas during the
reform period (as reported by 74% of sample households in reform period
compared to 48 % in the pre reform period). Similarly, for the urban areas the
monthly reading of meter is reported to be more frequent during the reform
period by 66% of urban households, compared to 44 % in the pre reform
period (Table 5.2).

5.11 Complaints about Meters: More than 80 % of the rural households and
more than 90 % in urban areas did not lodge any complaint in case of non
working of the meters in the pre reform period. In comparison, during the
reform period this increased to 98 % and 96 %, respectively, of households in
rural and urban areas. It is significant to note that the proportion of
households going for lodging any complaint in case of defective meters
declined sharply (from 18 percent to 2 percent) during the reform period,
particularly in rural areas (Table 5.2). It is possible that there is less cause
for complaint as far as the working of meters is concerned in the reform
period and this is definitely an indicator of improving system efficiency in
energy accounting by the DISCOMs. There is an alternative viewpoint on
this aspect of metering and it is based on the widely reported dissatisfaction
about the customer care services of the DISCOMs. Thus, if the public
perception is that complaints lodged by them are less likely to receive
timely and satisfactory attention, there would be a clear disinclination to
access the existing grievance redressal system. However, the latter
viewpoint seems unlikely considering that the next two indicators relating to
customer care (for meter related problems) give a positive impression of
the reform impact.

232
5.12 Time taken for Repairing of Meters: As per the norm, in case of non-
working of meters, the concerned DISTCOM is required to attend to it within a
maximum period of 22 days from the day of complaint lodged by the consumer
household. For the sample households it is found that the number of days taken in
correcting/repairing the meter has been reduced on an average from 29 days in the
pre reform period to 17 days in the reform period in rural areas while the
corresponding decline in urban areas has been from 25 to 15 days. It seems that
reform has been successful in this respect, irrespective of whether the consumer
is from rural or urban area (Table 5.2). This again is an indicator of greater
responsiveness of the DISCOMs in attending to consumer complaints as far as
the grievance relates to the functioning of meters. 5.13 Payment for Repairing
the Meters: As per rules, if the officially supplied meter goes out of order due
to some inherent defect, it will be replaced/repaired without any charge from
the consumers. But if the consumer damages the same, a penalty has to be paid
by the consumer. It is observed that in the pre reform period the payment
made by the consumers, on an average, towards repairing/replacing the meter
was higher when compared to the amount of payment made during reform
period (Table 5.2). This is possibly an indirect corroboration of the idea that
perhaps during the pre reform period more meters were damaged by the
households (either by tampering or any other way) for which they had to pay
very high price towards repairing/replacing the meters. During the reform
period the payment made by the households has significantly reduced. It is
likely that the vigilance system instituted by the DISCOMs in the reform period has
been largely effective in reducing the incidence of tampering/damage of the meters
by domestic consumers in both rural and urban areas.

233
 Table 5.2: Metering of Households in Rural and Urban areas

Rural Urban Total

Indicators related to metering
Pre-Reform Reform Pre-Reform Reform Pre-Reform Reform
1. Meter Connection
CMDR Study (2003)
Metered 83 84.2 97.6 97.9
Un metered 17 15.8 2.4 2.1 9.5
Total 100 100 100 100
Xavier Study (un metered households - 1996) NA 19
2. Working of Meters
CMDR Study
Working 87.2 95.3 96.1 97.7
Not Working 12.8 4.7 3.9 2.3 3.2
Total 100 100 100 100
Xavier Study (meters not working) NA NA 25
3. Frequency in Meter Reading
CMDR Study (2003)
Irregular 18.6 13.5 6.6 4.5 7.7
Monthly 30.3 9.5 44.3 66.2
Every 2 months 47.9 74.3 48.9 29.3
More than 2 months 3.2 2.7 0.2 -
Total 100 100 100 100
Xavier Study (Irregular Meter
Reading)- 1996 NA NA 26
4. Complaint lodged by consumers in case of meter not working
CMDR Study (2003)
Lodged 17.7 2.4 5.1 4.3
Not lodged 82.3 97.6 94.9 95.6
Total 100 100 100 100
Xavier Study (1996) Not available
5. Time taken for repairing the meter
(in days) 29 17 25 15
6. Payment made by the consumers
to repair the meter (in Rs.) 63.77 9.15 85.68 18.64
Figures in % of Responding Households

234
Uses of Electricity

5.14 Type of Use: The domestic consumers use electricity largely for the
purposes of lighting, cooking, washing, entertainment, refrigeration,
education, health and hygiene, etc. For the sample households it is observed
that during the reform period there has been a definite shift in the pattern of
use of electricity in case of both rural and urban area consumer households.
While the traditional use of electrical appliances for lighting and cooking
purposes appears to have declined (possibly due to greater economy of use
and better availability of alternative sources of energy, such as LPG), there is
relatively greater reporting of the application of electricity for non-
conventional purposes like domestic chores, education, entertainment,
health and hygiene among both rural and urban area consumers, and
more so in the case of the latter (Table5.3).

Table 5.3: Uses of Electricity by Households in Rural and Urban Areas

Figures in % of total sample households
Rural Urban
Type of Use Pre
Pre Reform Reform Reform Reform
Period Period Period Period
Lighting 39.97 32.54 28.99 17.36
Cooking 13.09 6.1 10.88 5.76
Washing Cloth 0.46 0.56 3.37 6.76
Entertainment 16.32 20.04 16.67 15.61
*Other domestic chores 28.35 35.21 30.8 39.34
**Any other use 1.81 5.55 9.29 15.17
Total 100 100 100 100
* Electrical Appliances, e.g: Grinder, Iron, Fan, Refrigerator etc.
**Education, Health & Hygiene, Income Generating activities

5.15 Economy in Use: It is assumed that reform would induce economy in

the use of electricity through the rationalization of electricity tariffs. From the
field survey data it is found that more than 90 % (not shown in the table) of
the sample households (rural and urban) have reported practicing economy in
the use of electricity at their home in both pre reform and reform periods. It is
found that the women members of the household are in general more
conscious about the economy in use of electricity. Compared to about 60 %

235
women in the rural areas and 70 % women in the urban areas that are found in
the pre reform period to be more conscious about economy measures in the
use of electricity, these percentages has increased significantly in the reform
period as more than 70 % women in rural and 80 - 90 % women in urban
areas are found to be practicing economy measures (Table 5.4). This
gender aspect about the consumers’ response to the power sector reform
needs to be noted as this brings out the crucial role that women can play in
matters of socio economic importance to the family and the economy as a
whole.

Table 5.4: Economy in use of electricity by members of the household

Figures in % of total sample households
Rural Urban

Members of the Pre Reform Pre Reform

Household Period Reform Period Period Reform Period
Women 62.72 70.55 73.31 89.78
Men 27.65 22.78 20.75 7.3
Old People 1.75 1.67 1.82 0.73
Children 3.61 0.56 1.09 0.73
Every one 4.27 4.44 3.03 1.46
Total 100 100 100 100

5.16 Reasons for economy in use: The information gathered from the
households reveals that when asked to prioritize the reasons for practicing
economy measures in the use of electricity, 70 to more than 80 % of the
sample households give minimization of the electricity bill as the most
important factor. This evidence of a price impact is in accordance with the
expectation from reform. Energy saving gets the second priority among the
reasons stated by the households (Table 5.5). Chart 5.2 and 5.3 provide a
clearer picture of the reasons for the economy in use of electricity.

236
Table 5.5: Reasons for Economy in Use by Households in reform period and
Figures in % of responding households

Reasons Rural Urban

To minimize the bill 76.7 86.9
Installation of china meters 1.7 0.7
Energy saving 21.7 12.4

Reasons for Economy in use of Electricity

Chart 5.2 Chart 5.2 A

Rural Urban

22
12
1
2

77
87

To minimize the bill Installatio n o f China meters

Energy saving To minimize the bill Installation of China meters Energy saving

237
Electricity Tariff

5.17 Change in Cost/Tariff of Electricity: The overwhelming majority of

household consumers in rural as well as urban areas perceives that price of
power has increased in the reform period. This is to be expected considering
the frequent hikes in tariff carried out in the reform period. What is
interesting, however, is that about 11 % rural and 4 % urban households
perceive a decrease in the price of power in the reform period (Table-5.6). It
is likely that these households are referring to the real price of electricity,
which after adjusting for the inflation rate during the period, is likely to
have come out as lower for the reform period in the perceptions of some
of the consumers. This is a possibility that also came out strongly in some of
the discussions with key informants from different user groups as well as
from the OERC functionaries.

Table 5.6: Perceived changes in electricity tariff in reform period

Perceived Change in Electricity

Rural Urban
Tariff

Increased 88.5 95.9

Decreased 11.5 4.1

Total 100.0 100.0

Figures in % of responding households

5.18 Collusion: An attempt has been made on the basis of the reported
information to relate the extent of use of electricity by a household
with the amount of payment for the same. It is assumed that the
number of power points in the households is a more accurate indicator
of actual/potential consumption of electricity than the units billed,
since there is a chance that tampering of meters by the consuming
household contaminates the latter figure. The expectation is that

238
 households with 15 ampere points would be at the high end of
domestic users and accordingly would be paying on an average higher
electricity charges. It is rather interesting to notice that the rural
households using 15 ampere points reported on an average lesser
amounts of electricity charges than the households using 5 ampere
points (not shown in Table). While it is possible that the high end
users in the rural domestic segment are more economical in their
actual use of electricity, nevertheless the possibility of collusion,
either in meter reading or in billing, cannot be entirely ruled out.
Box-5.1 gives the case of one of the sample villages where such
collusive activity still exists despite reform.

Box 5.1: Collusion: Who will stop?

In one of the sample villages it was found during the household survey that the
meters of most of the houses are stopped for 3/4th of the month and it is operated
only towards that part of the month when the meter reader is expected to visit. On
enquiry it was found that the lineman of the erstwhile OSEB used to help the
villagers to do the tampering by taking some monetary or non-monetary benefits
(example: free rental house for the line man in exchange for providing free
electricity to the owner). Over time, most of the households have learnt to do the
tampering by themselves. The meter reader takes down the deflated reading as the
correct reading and the households clear the grossly underestimated dues in time.

Billing/Payment for the use of electricity

5.19 Frequency of Billing: Though there has been significant improvement

in the billing procedure in the reform period, still 2 to 5 % of the rural sample
households reported about no billing (Table-5.7). There is a significant shift
in the billing system from bi-monthly in the pre reform period to monthly in
the reform period in urban areas. The billing system in rural areas has largely
remained bi monthly in both pre reform and reform periods, but more so in
the latter period.

239
Table 5.7: Billing frequency as reported by the households
Figures in % of responding households
Rural Urban Total
Billing Frequency Pre-reform Reform Pre-reform Reform Pre-reform Reform
(Xavier (CMDR (Xavier (CMDR (Xavier (CMDR
Study) Study) Study) Study) Study) Study)
No Billing 2.86 5.1 Nil 2.3 1.4 1.3
Monthly 16.4 14.1 26.4 68.5 21.5 43.4
Bimonthly 40.0 72.4 46.6 24.1 43.4 45.1
More than
Bimonthly 40.7 8.4 27.0 5.1 33.7 10.2
Total 100.0 100 100.0 100 100.0 100.0

5.20 Regularity in Billing: One of the basic objectives of reform is to reduce

the irregularity in the billing. There is a significant achievement of the reform
process in this respect as the irregularity has declined from 50 per cent in the
pre reform period to 11 per cent during the reform period (Table 5.8). Across
rural and urban areas it was found that the irregularity in billing had declined
significantly in urban areas while it remained more or less constant in rural
areas over the years.

Table 5.8: Irregularity in Billing (% of households)

Research Studies Region Pre-reform Reform
Rural 18.2 17.0
CMDR Study
Urban 21.3 9.7
(2003)
Total - 11.2
Xavier Study
Total 50.3
(1996)

240
5.21 Billing efficiency and consumer perceptions: In order to determine
the efficiency in the reform period billing system, the perceptions of the
people on 5 indicators were collected: correctness in billing, clarity in
billing, ease of payment, timely complaint redressal and satisfactory
solution of the complaint. Table-5.9 gives the extent of incidence of the
perceptions among the households according to 3 possibilities: ‘improved’,
‘deteriorated’ and ‘no change’. The perceptions of people are found to be the
most favourable regarding the payment procedure of the bill. Nearly 74 %
rural and 88 % urban households feel that there has been greater ease of
payment in the reform period. Correctness and clarity in billing comes next
in the ranking and get equal rank in both rural and urban areas, with the
backing of a little more than half of the sample households in both areas.
However, almost 2/3rd (72 %) of the sample households in rural areas
reported that they do not get satisfactory solution to their complaints. In
comparison, about 44 percent of the urban households reported their
satisfaction from the solution to their complaint. It is worth noting that only a
small minority (about 12%) of urban consumers feel that there has been
deterioration with regards to getting a satisfactory solution to their billing
complaints. What comes out as certain is that customer care and grievance
redressal by the DISCOMs in case of complaints related to billing are
perceived to be the least satisfactory by the majority of households in rural
areas. This may be contrasted with the earlier discussion of people’s largely
favourable perceptions about the DISCOMs’ handling of metering-related
complaints. It appears that the reform period system for customer care and
grievance redressal is yet to be developed properly for the different areas of
interface between the consumers and suppliers, particularly in the rural
areas.

241
 Table 5.9: Billing efficiency in rural and urban areas
Figures in % of responding households
Indicators of billing
No
efficiency Improved Rank Deteriorated Rank Rank
change
Rural
Correctness 51.87 2 17.4 3 30.73 4
Clarity 51.43 3 16.52 4 32.05 3
Ease in payment 73.75 1 5.16 5 21.09 5
Timely Complaint 27.97 4 25.55 2 46.47 2
Satisfactory solution 12.79 5 71.64 1 15.57 1
Urban
Correctness 66.55 2 14.83 2 18.92 3
Clarity 66.26 3 14.84 1 18.61 4
Ease in payment 87.67 1 3.84 5 8.49 5
Timely Complaint 49.59 4 10.84 4 39.57 2
Satisfactory solution 43.97 5 11.76 3 44.27 1

5.22 Non-payment of bills and disconnection of electricity: Under the new

system it is expected that if there were no payment of the bills, the electricity
connection would be withdrawn. From the field survey it is found that there is
not much difference between rural and urban areas in respect of disconnection
of power due to non-payment of bills. About 9 % of the rural households and
7 % of the households in urban areas reported that their connection was
withdrawn due to non-payment of bills. It seems that the households have
become conscious about the payment of bills in the reform period.

Problems in the Supply of Power

5.23 Power supply and consumers’ perceptions: The problems related

to power supply may be classified as technical and non-technical. The
technical problems are mainly power failures, voltage fluctuation, scheduled
and unscheduled power cuts. The non-technical problems are mainly related
to metering, billing, theft of power, etc. A comparative assessment of rural
and urban consumers’ perceptions indicates that the overall situation of
power supply in urban areas is better than in rural areas during the

242
reform period. More than 80 % to about 90 % of the urban households feel
favorably about the power supply scenario in the reform period, while a
similar sentiment finds expression from 55 % to slightly more than 60 % of
the rural consumers (Table 5.10).

Table 5.10: Consumer perceptions on power supply in the reform period

Figures in % of responding households
Rural Urban
Problems of power supply I D NC I D NC
Power Failure 59 17 24 82 8 10
Voltage Fluctuation 55 11 34 83 7 11
Un-notified Power cut 61 14 25 90 4 6
Frequent power cut 56 17 27 88 5 7
I=Improved, D=deteriorated, NC= No change

5.23 Power Failure: Power failure is different from power cut. Power
failure occurs due to the problems that are beyond the control of the
supply authorities, e.g. natural calamities (cyclone, flood etc.), over
loading from excess consumption of electricity, theft of electricity, etc.
During the reform period, as judged from the sample households
reporting its incidence, power failure of greater hourly duration
appears to have declined in both rural and urban areas (Table-5.11).
This improvement is more marked in case of the urban areas sampled.
Significantly, about 45% of the urban consumers say that they do not
suffer from power failure at all as against 5% in the pre-reform period
(Xavier Study). Only 13 % consumers in rural areas do not suffer from
power failure during reform period while the same was zero percent
(Xavier Study) during pre-reform period. Though the power supply
situation has improved during the reform period to a great extent,
the incidence of improvement is found to be higher in urban areas
than in the rural areas.

243
 Table 5.11: Duration of Power Failure in pre-reform and reform periods
(Figures in % of sample households reporting for different durations of power failure)
Rural Urban
Duration of power
failure Pre Reform Reform Pre Reform
Period period Period Reform period
CMDR Study, 2003
< 1 hour 18.3 30.4 36.1 35.5
1 - 3 hours 35.4 26.5 32.5 10.5
> 3 hours 46.3 30.5 16.2 9.2
No Power Failure - 12.6 - 44.8
Xavier Study, 1996
No Power Failure 0 5

5.25 Power theft, breakdown of transformers, etc: The major contributing

factors for power failure, as gathered from the consumers themselves, are
frequent theft of power, overloading and poor maintenance of transformers,
falling of trees, etc in rural areas and over loading, theft in urban areas,
besides frequent natural calamities common to the state. Despite the serious
steps taken by the DISCOMs to control the misuse (theft) of power, still
the practice appears to continue on a significant scale in both rural and
urban areas of the State (Box 5.2). The field survey conducted by CMDR
generated a lot of anecdotal evidence about incidents relating to theft of
conductors, the practice of hooking and breakdown of distribution
transformers during both the pre-reform and reform periods. By and large, the
respondents were of the opinion that there has been a significant decline in the
number of incidents involving theft/misuse of power. This general perception
gathered from the field survey matches with the trends observed in the data
obtained from secondary sources. Table-5.11a presents the data relating to the
number of hooking cases detected, length of conductor stolen, number of
transformers burnt, etc. as provided by the DISCOMs to the OERC.

244
Table-5.11a: Performance of DISTCOMs in checking theft/misuse of power in Orissa during
the reform period
Performance Indicators 2000-01 2001-02 2002-03 2003-04
Number of transformers burnt 6341 6741 4936 4501
Cost involved (Rs. Crores) 17.85 18.95 13.96 4.75
Length of conductor stolen (Km) 1659.29 1760.26 968.05 423.61
Cost involved (Rs. Crores) 4.071 4.351 1.406 0.563
Number of hooks detected 83484 68192 309324 126383
Number of hooks repeated out of hooks detected 0 0 21701 156
Number of connections regularised 29345 75097 109479 54090
Number of disconnections made 77277 86572 216860 406702
Source: OERC's Review of Performance of DISTCOMs based on data submitted by the
companies to the Commission

Box 5.2: THEFT OF POWER IN THE CAPITAL!

About 40-50 unauthorized temporarily constructed houses in the premises of an

apex institution in the capital city of Orissa are found to have taken electrical
connection through ‘hooking’ from the main lines of electricity provided to the staff
quarters. Since the last 10 to 15 years, these households have been using power not only
for lighting purposes but also for TV, cooking heaters, electrical grinders and other
appliances, etc. Some of them have temporary shops in which they use electricity. The
authorities of the Institution have attempted several times to disconnect the illegal
connections of the employees but failed. Whenever the authority has taken any initiative
towards disconnection, these people have resorted to threatening the authority and
other bullying tactic. Consequently, the practice of theft continues and its effect is felt by
the consumers residing in the staff quarters who suffer from poor quality of power
supply due to over loading. The financial burden of the institution also increases. There
is a main meter for the institution for the payment of electricity cost and the illegal users
are using the electricity (free of cost) at the cost of the institution.

The theft of power is still continuing almost everywhere which has been stated
by various key informants i.e. Sarapanch (Nayagarh), Sarapanch (Khurda), Councillor
(Bhadrak Municipality), Field Officer (Gramyabank, Khurda), Executive
officer(Keonjhar,NESCO), Advocate (Bar Association,Nayagarh), OIC Town Police

5.26 Power cut: Power cut is made deliberately by the authorities when
there is a shortage of supplies or need for repair and maintenance of
transformers, etc. As perceived by the sample households, there appears to
have occurred a marked decline in the duration of power cuts during
summer as well as rest of the year in the reform period for both rural

245
and urban areas. This has been a significant achievement of reform and is
commonly acknowledged. For the reform period, the most common duration
of power cut during summer as well as rest of the year is 1 to 3 hours daily in
rural areas and less than 1 hour in urban areas (Table-5.12).

Table 5.12: Duration of power cut during pre reform and reform periods
(Figures in % of sample households reporting for different durations of power cut)
< 1 Hour 1-3 Hour > 3 Hour Not at all Total
Season Pre Pre Pre Pre Pre
Reform Reform Reform Reform Reform Reform Reform Reform Reform Reform
Period Period Period Period Period Period Period Period Period Period
Summer
Rural 29.2 27.1 39.1 37.3 28.2 21.1 3.5 14.4 100 100
Urban 42.9 39.1 34.0 27.6 18.0 8.2 5.1 25.0 100 100
Total 32.2 35.7 37.1 33.2 23.6 14.2 7.1 16.9 100 100
Rest of the Year
Rural 16.0 24.4 51.5 39.6 25.4 18.9 7.1 17.1 100 100
Urban 38.3 35.7 33.9 20.3 16.8 8.0 11.0 36 100 100
Total 25.4 32.5 44.2 29.1 20.5 14.2 9.9 24.2 100 100

5.27 The most common duration of power cut is summarized in Table-5.12a

which provides the perception of consumers in the pre reform (Xavier study)
and reform scenario (CMDR study). The duration of power cut was on an
average 1 – 3 hours per day in the pre reform period throughout the year,
while it has improved significantly in the urban areas in the reform period.

Table 5.12a: Most common duration (hours per day) of power cuts during
summer as well as rest of year
Research studies Rural Urban

CMDR Study (2003) 1 - 3 hours Less than 1 hour

Xavier Study (1996) 1 - 3 hours 1 - 3 hours

5.28 Alternative sources of power: It is interesting to observe that rural

consumers are increasingly using emergency light during power failures and
power cuts, though the lantern continues to be the source of lighting for
majority of the rural households (Table-5.13). This again is perhaps indicative

246
of a trend that speaks of growing consumer preferences for better quality of
lighting and therefore betters quality of life, even in the rural areas of Orissa.

Table 5.13: Alternative sources of lighting used by consumers during

Power Cut/ Power Failure
(Figures in % of responding households)
Rural Urban Total
Alternative sources Pre Pre Pre
Reform Reform Reform Reform Reform Reform
Period Period Period Period Period Period
Emergency Light 4.0 12.2 34.6 39.5 19.3 23.8
Lantern 65.9 49.8 30.2 29.7 48.0 41.3
Gas Light 3.1 1.1 10.7 9.7 6.9 4.7
Any other (candle, battery etc) 27 36.8 24.5 21 25.8 30.2
Total 100 100 100 100 100 100
5.29 Voltage Problem: According to the consumer perceptions gathered from
the field survey, the voltage situation in urban areas comes out much better
compared to the position in rural areas during the reform period. Compared to
the 73% of households from the urban sample that report receiving adequate
power supply with normal voltage, it is found that only about half (50.41%)
of the rural households report of receiving normal voltage. The corresponding
percentages of responses were 30% and 34% for rural and urban areas
respectively (XIMB, 1996). Even then, the fact that about 36 % of the
rural households have reported that they suffer from very low voltage
should serve as a cause for concern. In comparison, slightly more than 10 %
of the urban consumers have reported about the low voltage problem.

Table 5.14: Consumer perceptions on voltage quality in reform period

% of households reporting problems related to voltage

Indicators of quality
voltage quality CMDR Study (2003) Xavier Study (1996)
Rural Urban Rural Urban
Low 35.7 12.3 51 42
High 2.5 1.5 <1 <1
Fluctuating 11.4 13.1 15 - 20 20 - 30
Normal 50.4 72.7 30 34
Total 100.0 100.0
Figures in % of responding households

247
5.30 Difficulties caused on account of Voltage Problem: Comparatively a
greater proportion (51.4%) of urban consumers than those in rural
areas (37.1%) reported the absence of any type of voltage-related
difficulties in the reform period (Table 5.15). While looking at the
various types of difficulties reported by the consumers on account of
voltage fluctuation, the pattern comes out to be similar in both rural
and urban areas, with the majority complaint being linked to low
voltage in the evening time. The damage to electrical appliances due to
high voltage problem declined significantly from 23 percent in the pre-
reform period to 6 percent during the reform period both in rural and
urban areas. This of course is a healthy sign of the reform process.

Table 5.15: Difficulties reported due to voltage problem in the reform period
Figures in % of responding households
Type of difficulty reported by the household Rural Urban Total
CMDR Study (2003)
Tube lights not working in the evening 42.2 32.0 33.2
Electrical appliances not working at night 11.9 9.1 10.9
Damage to electrical appliances 6.9 5.2 5.9
Accidents caused by high voltage 1.9 2.3 2.1
No problem 37.1 51.4 47.9
Total 100 100 100
Xavier Study (1996)
Damage caused to electrical appliances NA NA 22.9

5.31 Management of voltage problem: It seems that the non-use of

electrical equipment in times of voltage fluctuation is the most
common strategy among the rural and urban consumers. However,
during the reform period the use of stabilizer has been reduced to a
large extent and the proportion of consumers not using any type of
protective measure has increased, particularly in rural areas. This gives
a clear impression that there has occurred significant
improvement in the voltage profile during the reform period
(Table 5.16).

248
 Table 5.16: Protective measures by households in case of voltage problem
Figures in % of responding households
Rural Urban Total
Pre
Items Reform Reform
Pre Pre Period Period
Reform Reform Reform Reform (Xavier (CMDR
Period Period Period Period Study) Study)
Use of Stabilizer 42.2 12.9 27.6 18.6 24 16.0
Use of Capacitor 1.4 1.3 1.6 2.9 NA 1.9
Use of alternative sources of energy 3.4 5.5 6.0 2.4 1 4.3
Non-use of equipment 48.2 48.2 46.6 55.4 19 51.1
No protective measure 4.8 32.0 18.1 20.6 56 26.7
Total 100.0 100.0 100.0 100.0 100.0 100.0

5.32 Electrical accidents: Information about electrical accidents during the

reform period is obtained from the OERC, which has been continuously
monitoring the performance of DISCOMs. Table-5.16a gives the data about
electrical accidents, both fatal and non-fatal, throughout the state. It is a
matter of concern that there is a significantly higher incidence of fatal
electrical accidents to humans in 2003-04 as compared to the previous year.

Table-5.16a: Incidence of Electrical Accidents in Orissa during 2002-03 & 2003-04

Electrical CESCO NESCO SOUTHCO WESCO ALL ORISSA
accidents 02-03 03-04 02-03 03-04 02-03 03-04 02-03 03-04 02-03 03-04
Human 12 29 7 5 18 18 11 12 48 64
Fatal
Animal 10 11 4 6 12 15 14 13 40 45
Non- Human 6 18 1 2 16 13 10 13 33 46
Fatal Animal 21 - 0 3 1 1 0 1 22 5
Source: OERC, Bhubaneswar

249
V.4 Socio economic Impact of Power Sector Reform: Impact on
Education

Direct impacts

5.33 Study hour duration: The supply of electricity nowadays affects to a

great extent the education of children. If the supply of electricity is interrupted
frequently, particularly during the study hours of children (early morning and
evening) and during examination days, it tends to have a significantly adverse
impact on the education of children. This may be considered as a direct
impact of power sector reform on education. So far as the effect of power
supply on the duration of children’s study hours is concerned, the
majority perception points to an improvement in the current situation
over the pre reform period situation. The perceived improvement
appears to be quite independent of the social status of the sample
households and is relatively more widespread in urban areas than in
rural areas. Table 5.17 provides this information. At the same time, it needs
to be kept in mind that a significant proportion (25 to 36 %) of households
feels that there is still no perceptible change in the situation relating to the
quality of power supply during study hours as compared to the earlier pre
reform years.

5.34 Access to information and e-education: The supply of power to an

area brings with it the potential to increase consumers’ access to e-education
and e-information. This helps in particular the children to increase their
educational standard to great extent. The overwhelming majority of rural
households sampled perceive no change in the situation relating to access
to computer and Internet in the reform period (Table-5.17). On the other
hand, a significant % of urban households, particularly from the
privileged category, do feel that there has been improved access to e-
education in the reform period.

250
Indirect Impacts

5.35 Educational performance of children: In a general way, the standard

of educational performance of children is likely to be closely linked with the
duration of study hour. If the study hour is affected on account of poor power
supply, the performance level is likely to deteriorate. The power sector reform
in this case affects education indirectly. A majority of sample households
(over 60 % in rural areas and about 50 % in urban areas) failed to
perceive any type of impact on the educational performance of their
children resulting from the changed power supply situation in the reform
period. However, the urban bias of the reform impact appears again in
the form of a relatively greater percentage of urban households opining
that compared to the pre-reform period the reform-period educational
performance of children has improved.

5.36 Attendance of evening classes (Girl/female children): Generally

students attend the evening classes (either tutorial or coaching, dance, music,
etc) because the regular schooling hours is during the daytime. In a situation
of regular and frequent interruptions in power supply during evening hours,
parents would naturally hesitate to send their children to such classes. It is
found that irrespective of the social category, majority of the parents in
urban areas (more than 50% to 76 %) do perceive the current situation
conducive for allowing their daughters to attend evening classes. This
feeling is found to be much less spread in rural areas. Also a significant
proportion of less privileged caste households particularly in rural areas does
not feel any change in the attendance of evening classes by girl children
during the reform process. However, it should be kept in mind that there
might be limited opportunities for children in rural Orissa to avail themselves
of facilities offered by evening classes.

251
Table-5.17: Consumer perceptions about reform’s impact on education of
children
Figures in % of responding households
Rural Urban
Less
Impact Indicators Privileged Privileged Less Privileged
Privileged
I D NC I D NC I D NC I D NC
Duration of Study
Hours (early
47 18 36 47 17 36 58 13 28 58 17 25
morning & evening
hours)
Access to
information and e-
education (TV, 10 0 90 4 0 96 45 5 50 32 8 60
Computer &
Internet)
Educational
performance of 28 9 63 26 14 60 37 13 49 35 15 50
children
Conduciveness of
situation for girls to
35 16 49 26 23 52 76 1 23 51 3 46
attend evening
classes
Note: (i) I = Improved; D = Deteriorated; NC = No Change
(ii) Figures may not add up horizontally to 100 for different social categories
because of rounding up

V.5 Socio Economic Impact of Power Sector Reform: Impact on

Health

Direct impact

5.37 Diagnostic tests: Electricity has a crucial role to play in the

provisioning of health care services. The machines/equipment used for
different types of diagnostic tests and operations depend largely on
continuous and uninterrupted power supply, which is a basic objective of
power sector reform. More than 50 % households in rural and more than
80 % in urban areas are reported to have perceived that there is an
improvement in the situation relating to the timely conduct of diagnostic
tests of different types in the reform period (Table 5.18).

5.38 Health care of children and sick: Not only different diagnostic tests
but the health care of children and sick persons in the households are also

252
affected by the quality of power supply. (For instance, the sick persons, old
persons and persons with hypertension etc require continuous fans and AC
during summer, which require un-interrupted power supply.) It is found that
about 50 to 57 % of households in the total sample perceive that there has
been improvement in the health care status in households due to
improvement in power supply in the reform period. At the same time,
more than 40 % of the households do not feel any change in the situation.
Across social categories, it is observed that a relatively larger percentage of
privileged group households give a favorable opinion about the impact of
reform.

Indirect Impact

5.39 Health status of women: Women in general, and working women and
rural women in particular, get very little time to take care of their own health.
The use of electrical appliances in domestic chores is expected to reduce
drudgery and improve the health status of women along with the overall
quality of life enjoyed by them. Since the use of such appliances is linked to
the quality of power supply, the issue of the impact of reform in the power
sector again becomes relevant. Barring the urban households belonging to the
privileged category, the majority perception in all other categories is that there
has been no change in the health status of female members in the household
during the reform period. Nevertheless, it is encouraging to note that close
to one-third of sample households cutting across social categories as well
as the rural-urban division provides the perception that points to a likely
positive impact of reform on health status of women.

253
Table-5.18: Consumer perceptions about reform’s impact on health services
and health care in households (Figures in % of responding households)
Rural Urban
Less
Privileged Privileged Less Privileged
Impact Indicators Privileged
N N N
I D I D I D I D NC
C C C
Timely conduct of
53 8 39 50 7 43 87 1 12 71 2 27
diagnostic tests
Health care of
children and sick in 53 4 43 49 4 46 57 2 41 51 4 45
households
Health status of
women members in 34 19 47 32 13 54 42 20 38 37 17 46
households
Note: (i) I = Improved; D = Deteriorated; NC = No Change
V.6 Socio Economic Impact of Power Sector Reform: Impact on
Women

Direct impact

5.40 Time saved from domestic work: About 45 % (less privileged) to 50 %

(privileged) of the households in rural and 52 % (less privileged) to 63 %
(privileged) households in urban areas are reported to have perceived that
their time used for domestic work has reduced during the reform period as
compared to the pre reform period (Table 5.19). It appears that the reduced
drudgery of work burden for women in the reform period has a larger
incidence among urban households and those belonging to the privileged
social category.

5.41 Leisure time: About 55 to 67 % households in rural and 66 to 69 %

households in urban areas have reported that their leisure time has increased
during the reform period as compared to 10 years back. The availability of
leisure time appears to be more among women belonging to the
privileged category households in urban areas than that in rural areas
and women in less privileged households.

254
Indirect impact

5.42 Productive utilization of extra time: It is observed that 90 % to 93 %

of rural households and 66 % to 73 % urban households are not able to
productively utilize the extra time gained on account of reduced work
burden on the domestic front. It is possible that there may be a dearth
of opportunities for women to use their time gained for productive
activities, particularly in the rural areas (Table 5.19).

Table-5.19: Consumer perceptions about reform’s impact on women

(Figures in % of responding households)
Rural Urban
Less
Privileged Privileged Less Privileged
Impact Indicators Privileged
N N N
I D I D I D I D NC
C C C
Time spent for
20 50 30 24 45 31 16 63 21 18 52 30
domestic work
Leisure time 57 12 31 55 13 32 69 15 16 66 16 18
Time used for skill
9 1 90 6 1 93 32 2 66 26 1 73
building
Time used for
11 1 88 10 1 89 16 4 80 15 4 81
income generation
Safety and security
20 17 63 18 23 59 32 33 35 35 28 37
of women
Note: (i) I = Improved; D = Deteriorated; NC = No Change
(ii) Figures may not add up horizontally to 100 for different social categories
because of rounding up
5.43 Safety and Security: More than 50 % (59 to 63 %) of households in
rural areas and 35-40 % households in urban areas reported that there is no
change in so far as the security of women is concerned during reform period.
In fact, among the urban households sampled, the opinion about insecurity of
women is almost equally divided as to whether there has been improvement,
deterioration or no change in the situation in the reform period.

255
V.7 Impact of power sector reform on livelihood

5.44 Employment: Improved power supply in the reform period is

supposed to generate rural employment in the cottage, tiny and small-scale
industries, such as flour mills, rice mills, textile units, appliqué and other craft
centres, tailoring units, etc that are located in villages and their vicinity. In
both rural and urban areas, households belonging to the privileged category
generate a majority (> 50 %) opinion that there has been increased
employment of male workers in the cottage and small-scale industry sector
during the reform period (Table-5.20). The same opinion comes from the
perceptions of a significant percentage of the sample households belonging to
the less privileged category in both rural and urban areas.

Table 5.20: Employment in cottage, tiny and small scale industries

Less Privileged Privileged
I D NC I D NC

Rural
Male 45.8 5.6 48.6 52.3 5.5 42.2
Female 23.4 7.3 69.3 33.2 8.0 58.7
Total 35.0 6.5 58.5 43.4 5.1 51.5

Urban
Male 49.8 2.1 48.0 60.4 2.1 37.5
Female 43.3 5.5 51.2 54.2 4.4 41.4
Total 44.2 4.2 51.6 56.5 3.2 40.3
I=Increased, D-Decreased, NC-No Change
V.8. Impact of Power Sector Reform on Consumption Pattern of the
households

5.45 In view of the hike in tariff, it is expected that there may be a change in
the consumption pattern of the household and due to this change, there is
possibility of foregoing some of the family expenditures The majority of the
perceptions in respect of this aspect indicates that there is an increase in the
household spending on consumption but no expenditure is postponed due to
the hiked rate of tariff of electricity (Table 5.21). This provides a clear idea

256
that in view of the improved power supply the consumers are willing to pay
for electricity uses without distorting their consumption pattern.

V.9 Impact of Power Sector Reform on Agriculture

5.46 Agricultural productivity: The majority of rural households surveyed

(nearly 85 %) perceived no change in the productivity of agriculture during
the reform period as compared to its pre reform position. Considering the very
low consumption of electricity in agriculture in Orissa, it is almost a foregone
conclusion that there is very limited scope for power sector reform to make its
impact significantly felt on the productivity level.

5.47 Cold storage facility: Has the better power supply scenario in the
reform period induced addition to cold storage facility for agricultural
produce? The rural households surveyed almost near unanimous in their
opinion that there has been no change in the availability of cold storage
facility in the reform period. However, a small minority of 17 % of the
privileged urban households felt that there has been a reform-period
improvement in the storage situation in urban areas.

257
Summary statement of the perceptions of HHs on impact indicators

5.48 The perception of households (HHs) on impact indicators discussed

above are summarized in Table 5.21in amore descriptive way.
Table 5.21 Summary statement of the perceptions of HHs on impact indicators
Majority Perception
Rural Urban
Impact Indicators Less Less
Privileged Privileged
Privileged Privileged
Category Category
Category Category
Impact on Education
Power Supply during Study Hours I I I I
Access to Information and E-education NC NC I NC
Average Per
Performance Level of Children NC NC I I
Attendance of evening classes by girls NC NC I I
Impact on Health
Timely Conduct of Diagnostic Tests I I I I
Health care of sick and children I I I I
Health status of Women I NC I I
Impact on Women
Time saving by women from Domestic work I I I I
Leisure time available to women I I I I
Skill-building and income generating activities NC NC NC NC
Safety and Security of women NC NC NC NC
Impact on Consumption Pattern
Family Consumption expenditure I I I I
Foregone or postponement of family
expenditure NC NC NC NC
Impact on agriculture
Impact on productivity of agriculture NC NC - -
Impact on storage NC NC - -
Impact on Employment
Employment in cottage, tiny and small scale
industries
Male Employment I NC I I
Female Employment NC NC I NC
Total NC NC I NC
Impact on Income Generation
Participation of family members in income
generating activities
Male Employment I I NC I
Female Employment I I I I
I = Improved, NC = No Change,
D=Deteriorated

258
V.10 Consumers’ Willingness to Pay at a Hiked Rate

5.49 Willingness to Pay: The present tariff rate seems to put financial
burden on the consumers to such an extent that about 73 % rural and 51 %
urban households of the total sample are not willing to pay any extra rate for
electricity over and above the present tariff. However, it is interesting to note
that with a rise in the level of education consumer’s willingness to pay
increases. It seems higher level of education and urbanization enhance the
willingness of the consumers to pay more towards electricity charges if they
are assured of better and regular supply of electricity. This can be seen from
Table 5.22.

Table 5.22: Consumer’s Willingness to Pay for Electricity at a

Hiked Rate of Tariff by Levels of Education
Levels of Education % of Households revealing willingness to pay
Nothing 5 % more 10 % more
Rural
Illiterate 86.97 8.76 4.27
Below Matriculation 73.91 19.04 7.05
Above Matriculation 58.95 24.53 16.52
Total 73.28 16.98 9.74
Urban
Illiterate 62.83 28.26 8.91
Below Matriculation 51.62 31.48 16.90
Above Matriculation 33.94 27.90 38.16
Total 51.46 26.78 21.76

V.11 Analysis of data from Commercial & Industrial (small-scale)

consumers

5.50 Sample profile: The survey of commercial and industrial units for the
present impact assessment study covered a total number of 212 units
belonging to the small-scale segment of the commercial and industrial
category of electricity consumers in Orissa. The number of units sampled in a
survey area was largely determined by the presence of such units in that
259
particular area and the variety. Selection of the sample units was largely
purposive with a view to capture as much as possible the different types of
commercial and industrial activities present in a location. For the 8 districts
sampled, with the exception of the Khurda district, each district has about 20
to 30 sample units belonging to the commercial and small-scale industrial
consumer categories. The size of the sample (62) for Khurda district is
relatively large because the State capital with a large number of commercial
enterprises falls in this district. Table-5.23 gives the district wise distribution
of the sample units along with their metering status.

Table 5.23: District wise status of Metering of sample units belonging to

commercial and industrial category
Units with
No. of No. of Total
Working Meters
Districts metered Unmetered sample
as % of Total
units units units
Metered Units
Keonjhar 18 100 9 27
Bhadrak 25 100 2 27
Sambalpur 21 100 3 24
Angul 18 100 2 20
Khurda 60 100 2 62
Nayagarh 19 100 1 20
Raydgada 20 100 0 20
Ganjam 22 100 0 22
Total 203 100 19 222

5.51 Supply of electricity: There appears to be significant regional variation

in the power supply position as far as its adequate availability to the
productive units under consideration is concerned. Almost one third of
the sample units seem to have problems with the adequate availability
of electricity for their productive purposes (Table-5.24). The
percentage of units reporting inadequate supply of electricity is as high
as 71% for Keonjhar district.

260
Table 5.24: District wise status of Supply of Electricity to commercial and industrial users

Units
reporting Units reporting
adequate inadequate
Districts
supply of supply of
electricity (% electricity (% to
Total Units to total) total)
Keonjhar 24 29.2 70.8
Bhadrak 27 55.6 44.4
Sambalpur 21 61.9 38.1
Angul 20 85.0 15.0
Khurda 61 91.8 8.2
Nayagarh 20 75.0 25.0
Raydgada 20 65.0 35.0
Ganjam 19 68.4 31.6
212 70.3 29.7

5.52 Impact of reform on productivity/efficiency/profitability: So far as the

impact of reform on the productivity, efficiency and profitability of the
commercial and industrial consumers is concerned, most of the sample units
reported that the promised benefit of power sector reform relating to adequate
supply of quality power is yet to reach them in a significant way. They
complain that power problems like irregularity in power supply and poor
quality of voltage still exist and continue to affect adversely the functioning of
the units. The problem is particularly severe during summer time. District
wise, the units located in the northern region (Keonjhar and Bhadrak) come
out as the worst sufferers of continuing power sector problems. At the same
time, however, there appears to be a growing realization among the sampled
units that the situation may be turning for the better.

It is significant and a cause for concern that in contrast to the generally

favourable perception of household consumers regarding the reform-
period power supply situation and also in contradiction with the
improved power supply scenario brought out by macro performance

261
indicators, there is a general feeling of discontent among the commercial
and industrial category of users about the adequate availability of quality
power, particularly among units located in the relatively backward
districts of the State.

5.53 Alternative sources of power and associated cost: Table-5.24

presents the other-than-electricity sources of power used by different
categories (connected load wise) of commercial and industrial units and the
average cost per month associated with such use. In the case of diesel
generators, larger units are seen to have a relatively lesser need to use them as
compared to the units with small loads, since the average hours of use of such
generators per month decline as one moves from units with small loads to the
more power-intensive units. This appears to be a case of the regressive
impact of power sector reform on commercial and industrial users. The
average monthly cost on this source of power is higher for larger units, but
one cannot rule out the possibility that when estimated relative to their
respective turnovers, the financial burden on the smaller units would be
disproportionately higher. Taking all units using diesel generators together,
the average monthly cost comes to Rs.5614, which is a significant amount.
For units using gas as the alternative power source, the average monthly cost
is considerably lower (Rs.745).

262
Table 5.24 a: Alternative Sources of Power / Stand by Facilities and the
associated cost for commercial and industrial users of different capacity size
(KW terms)

Capacity wise User Category

Type of Alternatives >1 KW TO >5 KW TO Above
<=1 KW Total
<=5 KW <=10 KW 10 KW
No.of Units 7 9 7 17 40
Diesel Avg Cost (Rs. Per
Generator month) 3078 2650 8597 6789 5614
Avg Hrs per Month 61 55 31 39 45
No.of Units 28 18 3 0 49
Avg Cost (Rs. Per
Gas
month) 369 1290 733 0 745
Avg Hrs per Month 38.2 41.7 72.7 0 42.3
No.of Units 0 0 0 2 2
Avg Cost (Rs. Per
Solar
month) 0 0 0 335 335
Avg Hrs per Month 0 0 0 7.5 7.5
No.of Units 25 14 3 2 44
Avg Cost (Rs. Per
Others
month) 757 2005 1133 500 1141
Avg Hrs per Month 40.0 46.3 8.7 7.0 37.1
No.of Units 100 59 28 34 222
Avg Cost (Rs. Per
Total
month) 867 1773 5060 5421 2268
Avg Hrs per Month 42.2 45.6 37.8 31.2 40.9

5.54 Customer care and grievance redressal: With the exception of the
units coming under CESCO, the majority of the consumer units served by the
other 3 DISCOMs complain of poor customer care and un-satisfactory
solution to grievances. Again, the units coming under NESCO turn out to be
the worst sufferers. Most of the complaints of the industrial units relate to the
improper functioning of meters and the incorrect reading of meters.

263
 CONCLUSION

SUMMARY
In the first two chapters of my thesis, I have discussed the theoretical
framework of reforms and its necessity for timely adoption. The main aim of
this thesis is to bring out an ideal framework for all those state utilities
aspiring to unbundle their vertically integrated utility. The earlier Electricity
Act. 1909 failed to deliver the results in terms of their financial viability.
Power sector investment has always been dependent on budgetary support and
external borrowings. Electricity Act. 2003 was enacted with a view to de-
regularizing the vertically integrated utilities, opening the field of generation
and distribution to private players and introduction of power trading system.

To achieve a robust GDP growth of 8 per cent per annum, the growth rate of
power sector is prescribed to grow over 10 per cent per annum. Initiatives
were taken in the chief minister’s conference on Common Minimum National
Action Plan for Power (CMNPP) convened by Prime Minister in 1996 which
ushered in the comprehensive reforms program for power sector including
reforms in distribution sector. The results were visible in the Ninth Plan (1997
– 02) with an addition of 19,015 MW from the preceding plan period. The
reform policy also allowed private sector to set up companies with 100%
foreign participation and with a maximum 4:1 debt equity ratio. The return on
foreign equity was protected in foreign currency and a number of tax
concessions were extended to woo the investors.

I have analyzed the growth of power sector in detail. The way the power
sector has performed in the past several years across several plan periods has
been supplemented with necessary tables and graphs. In spite of many
rewarding initiatives the participation from the private players has been
considerably low as compared to public sector participation. One of the
reasons may be attributed to the lack of comprehensive fuel supply agreement

264
(FSA). The IPPs insist that the penalty for supply interruptions should cover
the loss of revenue (Fixed cost component of tariff) attributable to the default
in fuel supply. Penalty could be on the basis of the additional cost incurred in
procuring fuel from alternate sources but railways contend that it should be on
the value of the fuel not on supplied.

In the subsequent chapter, I have discussed the success of global players in

power sector reforms which includes nations falling in European Union, USA
and Latin American countries and few other successful reform programs
which acted as the precursor to India’s reforms initiatives. During my course
of research the California power crisis happened and I’ve discussed it at
length. In India, Orissa became the pioneer state to adopt the reform program
way back in 1996 which had set a mile stone in the field of power generation
and distribution. Other states like Andhra Pradesh and Delhi soon started the
calibrated reforms initiatives after examining the fault line in the Orissa
model of power sector reforms. During my analysis I found to conclude that
the reform processes which were extremely successful abroad is not viable
because of several underlying reasons like: High AT&C losses, concentric
area development, ability to pay, willingness to pay and above all the
excessive political interference from the successive state governments. Power
has always been subsidised by several state governments but government fails
to make the payment to the state run SEBs.

Chapter IV deals with the enactment of a new Electricity Act. 2003 and
implementation of Montek Singh Ahluwalia Report recommended the ways
and means for one time settlement of outstanding dues of SEBs to CPSUs.
The World Bank’s model on structural reforms in power sector has been
discussed in detail. It is the prerogative of the different state governments to
adopt the most suitable one as per their viability and need. This chapter also
traces the changes in the legal provisions governing electricity power tariffs
and discusses the processes and methodologies adopted over time for tariff
setting till the formulation under Section 178 of the Electricity Act, 2003,

265
which may be called the Central Electricity Regulatory Commission (Terms
and Conditions of Tariff) Regulations, 2004. A broad comparison has been
made over the existing tariff structure vis-a-vis availability based tariff
(ABT). An in-depth analysis has been made to find out the mechanism of
calculation of cross-subsidy put forth by different agencies working in this
area. The financial crisis besetting the Indian power sector has always been an
issue of great concern for the planners and experts but evolving an audit i.e.
Energy audit mechanism was never introduced to the system because it may
lead to some path breaking findings such as excessive estimation of T&D
losses, High Transmission (11KV & above) losses, unwillingness of utilities
for effective metering, indication of significant commercial losses in HT
level, etc.

Chapter V deals with the appraisal of Orissa’s reforms experience and its
failure to become a financially profitable organization as against predicted by
consultants who drew up this pragmatic reform model against a staggering
Rs.306.422 crores as consultancy fees from Britain's Department for
International Development (DFID). Consultants includes KPMG – Pre-reform
Consultancy, Credit Suisse First Boston – privatization consultancy, Merz
McLellan & Seaboard International – Project management consultancy, Price
Waterhouse Coopers – other consultancy, has raised many unanswered
questions on the efficacy and practicability of their consultancy. A detailed
study has been made after examining its fault lines, and suggestions have
been placed to improve its performance. During the course of my research,
GRIDCO witnessed its turnaround in the A.Y 2003 – 04 and predictions are
strong that complete turnaround after writing off previous losses will be
possible in the year 2008 – 09. A complete case study has been prepared in
this regard and it has received appreciation from several quarters after its
publication in the Journal of Power Professionals “HORIZON”, Oct – Dec,
2005 Vol. 7 No.1. An attempt has been made to compare the financial
performance of Orissa with Andhra Pradesh, though AP started its reforms

266
process much later than the state of Orissa. Orissa has become a model state
among its counterparts as far as power sector reform is concerned and its
successful turnaround under Mr. Suresh Chandra Mahapatra, IAS the then
CMD of GRIDCO has again reaffirmed the faith in a person with dedication
towards duty and transparent functioning.

In the concluding chapter “Socio economic impact assessment of power

sector reforms – An impact analysis” an attempt has been made to develop a
general micro level perspective about the effect of reform on different user
categories on the basis of various impact parameters. The data collected from
the users is both factual and perception-based. The instrument of data
collection consists of a structured questionnaire for households, Focus Group
Discussion dairies, an open ended checklist for commercial and small
industrial users, a list of issues in connection with the power sector for being
discussed with the principal informants and also informal discussions. The
study on Socio economic Impact of Power Sector Reform was conducted in
eight selected districts of Orissa, with 2 districts sampled from each of the 4
geographical zones (North, South, East and West) of the State. The summary
of findings has been quite convincing which leaves scope for further study.
One cannot generalize from this specific focused research. There are only
tentative formulations and proposals for further investigation. These areas of
potential research have been illustrated after careful consideration.

In the course of my research there have been many changes in the regulatory
aspect and it has been done with a singular objective of facilitating the
reforms process. I’ve a strong belief that with the growth of power, India will
become resurgent India and the coming decade will be the decade for growth
of “Power” in India.

267
FINDINGS

1. The central government started spending more money on power in

comparison to previous years and a substantial hike in central outlay in
ninth plan can be seen.
2. Actual capacity addition fell seriously short of target in both Eighth
and Ninth Plan.
3. Private sector participation in capacity addition was worse among these
three. In eighth plan actual capacity addition almost 50% of the target
set but in ninth plan it was even less than 30% of the target set.
4. Capacity addition of hydro power in state sector was steadily
increasing and phenomenal rise can be observed in ninth plan.
5. Actual capacity addition fell seriously short of target both in Eighth
and Ninth Plan periods.
6. Establishment of Central Electricity Regulatory Commission (CERC)
and the State Electricity Regulatory Commission (SERC) in each state
in time bound manner.
7. Rationalization of retail tariff, under which no sector shall pay less
than 50 per cent of the average cost of supply and tariffs for agriculture
should not be less than fifty paise per unit and should be increased to
50 per cent of the average cost in not more than three years.
8. Finalization of National Energy Policy.
9. Gradual private participation in distribution has already taken place,
initially in one or two viable geographical areas were covered both
urban and rural areas and extends to other parts of state gradually.
10. Restructuring & corporatisation of SEBs and make them function on
commercial basis.
11. Improvement in plant load factor (PLF).
12. Compulsory metering of all sub-stations and all major feeders, all new
connections and all connections including agricultural connections has
metered by the year 2002 as per the proposal.
13. Compulsory energy audit for all consumers.
268
 14. Evolvement of a national policy on hydro power development
15. Encouragement for co-generation and captive generation.

The above findings were possible because of the success of international

experience in distribution reforms, namely UK, USA, and Latin American
countries like Chile, Argentina, Peru, Columbia, EU Nations and Australia.
Their reform programs were based on country’s governmental structure,
demographics, socio-economic and political environments and resource
availability. But it was amply clear those countries undertaken restructuring
the electric utilities was for:
• Improving the efficiency,
• Reducing tariff
• To provide better quality of service to consumers, through
competition and consumers would gain from efficiency gains in
generation, transmission and distribution.
Restructuring also led to the removal of certain problems like load shedding,
blackouts, and high degree of T&D losses, which includes theft of energy, etc.

Basing on these experiences and taking world bank model for structural
reforms on power sector India appears to be relying on the single buyer model
for now (making the role of TRANSCO special – monopoly seller to
DISTCOs, and monopsony buyer from the GENCOs). While there is
recognition of the pros and cons of a single-buyer model, the government
hopes this is a transitional solution, leading to open access to the wires
(Deepak Parekh Expert Committee on State Specific Reforms 2002). Instead
of the transmission companies, privatizing the handful of DISCOMs per state
appears to be the thrust of the government as of now. The states kicked off
their reform process notably among them were Andhra Pradesh, Delhi &
Orissa.

269
In Andhra Pradesh the unbundling of the sector was primarily aimed to
increase operational efficiencies and to allow these entities to function
independently and put them in decision taking mode. More than 90% of the
employees were allotted to the company of their choice. The new power
generation projects would be mainly developed by the Independent Power
Producers (IPPs) selected through International Competitive Bidding (ICB)
and joint venture companies of APGENCO with private parties, other states
or central undertakings. The achievements of Andhra Pradesh reforms
because of the fact that Andhra Pradesh has taken up full-fledged energy
auditing of 114 towns and the T&D loss levels in these towns have been
brought down to less than 10 per cent. CRISIL Rated Andhra Pradesh as
the Best Utility in Implementing Reform program in a calibrated way.

In Delhi the main metric for choosing companies was not based on valuation,
but on performance improvement goals. The DISTCOs annual revenue
requirements are calculated based on their expenditure, performance (targets),
and return on equity (16%). The process of choosing the companies were
• Valuation of assets
• Mitigating uncertainty
• Criteria for selection of successful investor
• Incentives for achieving higher efficiency gains
• Baseline data
• Treatment of receivables

It is clear from Delhi privatization process that there was a better recognition
of the need for government support during the transition period in the Delhi
privatization which was totally absent in Orissa reforms.

Encouraged by the Government of India, assisted by the World Bank, and

supported with grants from the Government of U.K (DFID), Orissa took the
initiatives and earned the reputation of being the first state to reform its

270
electricity industry. Though the purpose of the reform was pious but because
of the under mentioned reasons, it failed to make any impact operationally
and financially as well, namely

• Incomplete separation of transmission and distribution caused

problems.

• Regulators should have given a clear picture of their tariff philosophy,

rate base, valuation methods, likely profile of prices and expected
performance levels.

• There should have been a structured, time-bound financial support

mechanism, with a fixed schedule for tapering off coupled with
improvements in operating parameters and collection.

• The single buyer model is necessarily not the best, and the Transco
might be better as just a wires company.

• Determining who gets priority claims over revenues is important. Do

not escrow the revenues from the distribution zones for meeting
TRANSCO needs, like was done in Orissa.

• Tinkering with the valuations, especially just before privatization has

caused heavy damage. This can have a serious impact on tariffs, as
Schedule VI of the Supply Act 1948 is based on assets (and newer
methods allow for 16% returns on equity).

However, the main reason for the poor performance appear to be the false
assumptions and expectations of the players, and the limited support provided
by the government, either for subsidies or to the companies who had liquidity

271
issues in addition to solvency issues. After examining the fault lines carefully
few steps were taken to improve the financials of new utility. It includes:-

• GRIDCO started trading of its surplus power with the utilities/SEBs

through the Power Trading Corporation of India Ltd. (PTC) by
entering into an Agreement signed on 03.07.2003.

• Billing and collection efficiency under the privatized distribution

companies (DISCOMs) started improving.

• To bring the reforms back on the rails, the World Bank and the DFID
who helped Orissa initially came forward with a suitable package to fill
the revenue gap in the intervening years.

• These services of the consultants, which weakened the organisation

rather strengthening them, were stopped and government appointed
efficient, dynamic bureaucrat in-charge of GRIDCO / OPTCL, which
made turnaround a reality & it has been decided to keep the tenure of
CMD fixed for 03 years.

• To ensure that commission (OERC) is fully functional at all times, the

government started appointing commissioners promptly because
OERC has done pioneering work in our country in the establishment of
a regulatory mechanism for the electricity industry.

• The government and the commission started interacting on a wide

range of issues of monitoring, problem solving, planning and
development of the state’s power sector.

272
SUMMARY OF THE MAIN FINDINGS OF SOCIO ECONOMIC
IMPACT ASSESSMENT OF POWER SECTOR REFORMS

1. Use of electricity: During the reform period there appears to

have occurred a significant change in the pattern of use of electricity
since, compared to the pre-reform period, more households particularly
in the urban areas report its application in non-conventional uses like
domestic chores other than cooking, education, health and hygiene,
entertainment, etc in addition to the extensive use of modern electrical
appliances. More than 80 % of the households have reported about the
economy in the use of electricity at their homes and more than 70 %
women in the rural and 80 –90 % women in urban areas are found to
be practicing economy measures in the use of electricity. It is possible
that on account of the economy in use, the average monthly
expenditure on electricity by households in both rural and urban areas
is less in reform period than in pre reform period despite the fact that
there has been a significant rise in electricity tariff in the reform period.

2. Access and metering: The inclusion of forward caste

consumers among the sample households in the ‘Kutir Jyoti’ scheme
points to relatively poor targeting. Though the objective of 100 %
metering of user households is yet to be achieved in rural areas, there is
significant achievement in repairing and replacing of non-working
meters in the rural areas in the reform period. Evidence of improved
system efficiency in the reform period is contained in the less time
taken for households to get connections, significant decline in the
irregularity in meter reading, less time taken for repairing of meters
and the reduced incidence of tampering/damage of meters. The finding
that there is a sharp increase in the proportion of households’ not
lodging metering-related complaints during the reform period,
particularly in rural areas, is more likely explained in terms of

273
 improved system efficiency in energy accounting by the DISCOMs at
the domestic users end.

3. Billing efficiency: Irregularity in billing has been eliminated

significantly; still it needs to be brought down to a tolerable level,
particularly in the rural areas. There is an overall increase in billing
efficiency, specifically in terms of more correct billing, better clarity in
billing and greater ease in payment procedure during the reform period
as compared to the pre-reform period. However, in terms of customer
care, the system set up by the DISCOMs is yet to provide satisfaction to
the majority of consumers in the rural areas. The overall improvement in
the efficiency in billing system seems to be relatively more pronounced
in urban areas than in rural areas.

4. Supply of power: According to the information gathered

from consumers, the overall power supply situation in urban areas
appears to have improved significantly during the reform period. The
rural consumers suffer from longer duration (more than 3 hours) of
power failure on an average while urban consumers suffer from power
failure for less than one hour. There is a marked decline in the
frequency of power cuts during summer as well as the rest of the year
during the reform period. The most common duration of power cut
during summer is 1 to 3 hours daily while it is less than 1 hour duration
during rest of the year in both rural and urban areas in the reform period.
Despite the various steps undertaken in the reform period to control the
misuse (theft) of power, still the practice appears to continue quite
extensively in both rural and urban areas, possibly in collusion with the
field functionaries of the DISCOMs.

274
5. Voltage quality: Slightly more than half (50.41%) of the
households in rural areas while more than 2/3 rd (72.74%) households in
urban areas have reported that they get adequate power supply with
normal voltage. In rural areas about 36 % of the households have
reported that they suffer from very low voltage. The damage to electrical
appliances and accidents due to voltage problem seems to be negligible
in both rural and urban areas, which of course seems to be a healthy sign
of the reform process. During the reform period the use of stabilizers has
been reduced to a large extent and the proportion of consumers not using
any protective measure for voltage problem has increased which gives a
clear impression that there has been a lot of improvement in the quality
of voltage during the reform period.

6. Impact on education: It appears that on account of the

improvement in power supply the duration of the study hours has
increased in both rural and urban areas, but in a more pronounced
manner in the latter areas. There is significant improvement in the
access to computer and internet in the urban areas in the reform period.
No perceptible change is observed in the educational performance of
children in rural and urban households. Due to less frequent power cuts
in the evenings there seems to be greater confidence among the urban
parents, irrespective of their social status, to allow their daughters to
attend evening classes.

7. Impact on health: More than 50 % rural more than 80 % urban

households reported that there is an improvement in the timely conduct
of diagnostic tests of different types in the reform period. Largely it is
found that the privileged urban area households are in a relatively
favourable position to avail of the benefits of improved health care
services due to better quality power supply in the reform period. There
appears to be a significantly perceptible positive impact of reform on the

275
health care of the sick, old persons and children in the sample
households. A significant proportion of households perceived that the
health status of women has improved in the reform period on account of
reduced drudgery.

8. Impact on women: The women members of urban households

are found to save more time than their rural counterparts by the greater
use of electrical appliances in domestic chores. By and large, the leisure
time gained by the women members of rural and urban households has
not been productively utilized possibly due to the lack of opportunities
for women. About one-third of urban households and a quarter of
households in rural areas have reported that the insecurity of women has
increased during the reform period.

9. Impact on agriculture, employment and consumption

pattern: There is no perceptible impact of power sector reform either
directly on agricultural productivity or indirectly in terms of the
provisioning of storage services for agricultural produce, as reported by
the overwhelming majority of rural households. In both rural and urban
areas, households belonging to the privileged category generate a
majority (> 50 %) opinion that there has been increased employment of
male workers in the cottage and small-scale industry sector during the
reform period. Majority of the households expressed that their
consumption expenditure is not distorted due to increased cost of
electricity.

10. Awareness about reform: About 76 % of the rural consumers

and 95 % of the urban consumers are aware of the reform measures.
Regarding the sources of information about the reform it is found that
largely news papers (as stated by 56 % consumers) in urban area and
radio (as mentioned by 46 % consumers) in rural areas have played
important role in creating awareness about reform measures among the
consumers.

276
 11. Willingness to pay: The present tariff rate seems to put
financial burden on the consumers to such an extent that about 73 % in
rural and 51 % in urban area consumers are not willing to pay any extra
rate for electricity over and above the present tariff. However, it would
be interesting to note that higher level of education and urbanization
enhance the willingness of the consumers to pay more towards electricity
charges if they are assured of better and regular supply of electricity.

SUGGESTIONS

1. The poor performance of the existing power generation facility is to be

dealt, hence forthwith. The national average has almost reached 75% plant
load factor (PLF). Gradually it should be increased to 85% PLF and
continuous benchmarking should be done in this regard and this type of
exercise needs to be continued.

2. There are a large number of states where a considerable amount of work

needs to be done to set up rural electricity infrastructure and government
intervention in a big way might be necessary.

3. Orissa was the first state which started the exercises of reforming its power
sector in early nineties. It is therefore very essential to draw upon the
experiences of this initiative.

4. Distribution is the cutting edge of the power industry and it needs to be set
right. Unless the electricity market allows itself to be put under competitive
pressure, performance improvement to the desired level might be difficult to
achieve.

277
5. To meet the resource requirements of expansion, we have to devise the
policies and programmes and revive this sector in a manner that it attracts
investments and also generate surplus to fund growth.

6. The political willingness is required from the government to further its

development. The political bosses must desist themselves from announcing
populist policies relating to power. Any subsidy or free power extended to
any sections of population will have severe pressure on the ailing state
finances and ultimately the growth will be hindered. There is a need for
continued political support for reforms.

7. The private power producers must be encouraged to operate in their area of

preference. The option of producing power from Atomic energy must be
pursued with great vigor.

278
SCOPE FOR FURTHER RESEARCH

1. Single Buyer vs. Multi Buyer Model in Distribution

The state owned Single Buyer is often reluctant to take unpopular action
against delinquent distributor, who either overdraws power or most
importantly does not honour the payment schedule for the power purchased
by it. It affects the commercial viability of the transmission and distribution
company, which may not pay enough attention to disconnect power supply of
the defaulting consumers across the board vitiating the very purpose for
encouraging competition and privatization. The single buyer model retains the
role of the government in the power sector instead of distancing it. So the
research on Multi Buyer Model would be an ideal one at this juncture.

2. Scope of Foreign Direct Investment in Power Sector

There has been an insignificant inflow of FDI in power sector. The time when
power sector growth was required, then corresponding liberalized policies
were announced, yet the response is not so encouraging. The different areas
where it has failed to attract the FDI must be analyzed and a comprehensive
roadmap needs to be prepared to woo the investors. So a comprehensive
research needs to be carried out to suggest the ways and means to encourage
the participation of private players in the power sector by the way of FDI.

279
 THE SCHEDULE
ENACTMENTS
(See sub-Section (3) of Section 185)

1. The Orissa Electricity Reform Act, 1995 (Orissa Act no. 2 of 1996)

2. The Haryana Electricity Reform Act, 1997 (Haryana Act no. 10 of

1998)

3. The Andhra Pradesh Electricity Reform Act, 1998 (Andhra Pradesh

Act no. 30 of 1998)

4. The Uttar Pradesh Electricity Reform Act, 1999 (Uttar Pradesh Act
no. 24 of 1999)

5. The Karnataka Electricity Reform Act, 1999 (Karnataka Act no. 25

of 1999)

6. The Rajasthan Electricity Reform Act, 1999 (Rajasthan Act no. 23

of 1999)

7. The Delhi Electricity Reforms Act, 2000 (Delhi Act No.2 of 2001)

8. The Madhya Pradesh Vidyut Sudhar Adhiniyam, 2000 (Madhya

Pradesh Act No. 4 of 2001)

280
 ABBREVIATIONS

ABT – Availability Based Tariff

AP – Annual Plan (or the state of Andhra Pradesh)
ARR – Annual Revenue Requirement
APDP - Accelerated Power Development Programme
BBMB - Bhakra Beas Management Board
BHEL – Bharat Heavy Electricals Limited
BJP – Bharatiya Janata Party (Ruling party in the present Indian Government
– in a coalition)
CCEA - Cabinet Committee on Economic Affairs
CEA - Central Electricity Authority
CPP - Captive Power Plant
CPRI - Central Power Research Institute
CPSU - Central Public Sector Undertaking
CWC - Central Water Commission
CCGT – Combined cycle gas turbine
CERC – Central Electricity Regulatory Commission
CM – Chief Minister
CRORE (or cr.) – 10,000,000 (4.8 crore rupees ≈ 1 million US$ today)
DISCOM / DISTCO – Distribution Company
DPR - Detailed Project Report
DSM - Demand Side Management
DVB - Delhi Vidyut Board
DFID – Department for International Development (UK)
DPC – Dabhol Power Company
EPRI – Electric Power Research Institute (US)
EHV – Extra High Voltage
EIA – Environment Impact Assessment
ERC – Electricity Regulatory Commission (Includes variants like CERC,
SERC, OERC, etc.)

281
FDI – Foreign Direct Investment
GOI – Government of India
HVDC – High Voltage Direct Current
ICICI – Industrial Credit and Investment Corporation of India
IDBI – Industrial Development Bank of India
IGCC – Integrated Gasification Combined Cycle
IREDA – Indian Renewable Energy Development Agency
IIM – Indian Institute of Management
IAS – Indian Administrative Services
IPP – Independent Power Producer
KWh – Kilowatt –hour
LC – Letter of Credit
LT – Low Tension
MIS – Management of Information Systems
MoU – Memorandum of Understanding
MW – Megawatt
MNES – Ministry for Non-conventional Energy Sources
MoEF – Ministry of Environment and Forests
MU – Million Units
NTPC – National Thermal Power Corporation
NHPC – National Hydroelectric Power Corporation Ltd.
NIC – National Informatics Centre
NPC – National Productivity Council
NPTI – National Power Training Institute
NREB – Northern Region Electricity Board
NRLDC – Northern Region Load Despatch Centre
PIB – Public Investment Board
PMGY – Prime Minister Gramodaya Yojna
PSEB – Punjab State Electricity Board
PLF – Plant Load Factor
PPA – Power Purchase Agreement

282
Ps/kWh – Paise per kilowatt-hour (100 paise = 1 Rupee)
PSU – Public Sector Unit
RE – Revised Estimate
RLDC – Regional Load Dispatch Center
RoE – Return on Equity
RoR – Rate of Return
R&M – Renovation and Modernisation
RBI – Reserve Bank of India
REB – Regional Electricity Board
REC – Rural Electrification Corporation Ltd.
RIDF – Rural Infrastructure Development Fund
SEB – State Electricity Board
SERC – State Electricity Regulatory Commission
SBI Caps – State Bank of India Capitals Ltd.
SEZ – Special Economic Zone
TERI – Tata Energy Research Institute
T&D – Transmission & Distribution
TIFAC – Technology Information Forecasting and Assessment Council
UPPCL - Uttar Pradesh Power Corporation Ltd.
WB-SAR – World Bank - Staff Appraisal Report
WAN – Wide Area Network
WAPCOS – Water and Power Consultants

283
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