Power Sector Reform: A New Way of Corporate Governance (A Case Study of Orissa)

A Thesis Submitted to the Utkal University in Partial Fulfillment of the Requirement for the Degree of DOCTOR OF PHILOSOPHY IN BUSINESS ADMINISTRATION By MR. PRIYABRATA PATNAIK Registration No. 12-Business Admn. (2002-03) Under The Supervision of DR. BIDHU BHUSAN MISHRA P.G. Department of Business Administration

UTKAL UNIVERSITY Bhubaneswar 2010

Power Sector Reform: A New Way of Corporate Governance (A Case Study of Orissa)

A Thesis Submitted to the Utkal University in Partial Fulfillment of the Requirement for the Degree of DOCTOR OF PHILOSOPHY IN BUSINESS ADMINISTRATION By MR. PRIYABRATA PATNAIK Registration No. 12-Busi.Admn. 2002-03 Under The Supervision of DR. BIDHU BHUSAN MISHRA P.G. Department of Business Administration

DECLARATION

I hereby declare that this thesis entitled Power Sector Reform: A New Way of Corporate Governance (A Case Study of Orissa) submitted to the Utkal University in fulfillment of the requirements for the award of the Degree of Doctor of Philosophy in Business Administration is a bonafide record of original Research work done by me under the supervision and guidance of Professor (Dr.) Bidhu Bhusan Mishra and the thesis has not been submitted to any other University or Institution for the award of any degree or diploma.

(Priyabrata Patnaik) Registration No. 12-Business Admn. (2002-03)

Dr. Bidhu Bhusan Mishra P.G. Department of Business Administration Utkal University, Bhubaneswar

RESEARCH AREA CERTIFICATE

This is to certify that the thesis titled Power Sector Reform: A New Way of Corporate Governance (A Case Study of Orissa) submitted to the Utkal University, Bhubaneswar in fulfillment of the requirements for the award of the Degree of Doctor of Philosophy belongs to the area of Business Administration. This is a bonafide record of original research work done by Mr. Priyabrata Patnaik, under my supervision and guidance and this thesis has not been submitted to any other University or Institution for the award of any degree.

Dr. Bidhu Bhusan Mishra

5

ACKNOWLEDGEMENT
Undertaking Research Work after about two decades of executive jobs is in all measures an arduous work. I express my profound gratitude to my supervisor Prof. (Dr.) Bidhu Bhusan Mishra without whose benign guidance the present work would have not been possible. He has been source of constant inspiration to me in finishing this work. I cannot express my gratitude in words to my father Prof. (Dr.) Gorachand Patnaik and my mother Mrs. Anjali Patnaik whose blessing have always been with me throughout this work. I convey my heartfelt gratitude to my father-in-law Prof.(Dr.) Nityananda Swain and my mother-in-law Dr. Prativa Sen for constantly encouraging me to complete this present work in time. It is needless to mention about my wife Dr. Meeras contribution in each and every step of this research work for which she has willingly extended her cooperation. The two blossoms my children Tutul and Mitul need special thanks for sparing their demand of time on me during the preparation of Thesis. It is my pleasure to acknowledge the contribution of Computer Asst. of Orissa Electricity Regulatory Commission Mr. Radhakanta Samal who has painstakingly typed this Thesis neatly and adhering to the time schedule.

Priyabrata Patnaik
6

Table of Contents
Chapters Declaration Research Area Certificate Acknowledgement List of Tables List of Graphs
Abbreviation 1. Introduction 1.1 Constitutional Provision for Electricity 1.2 Backdrop of Power Sector Reforms 1.3 What is Reform? 1.4 Corporate Governance and its Relationship with Power Sector Reform 1.5 Review of Literatures 1.6 Objective of the Research 1.7 Hypotheses 1.8 Research Design 1.8.1 Characteristics of Qualitative and Quantitative Research 1.8.2 Qualitative Research Design and Strategies 1.8.2.1 Data Collection and Field works strategies 1.8.2.2 Analysis of Strategies 1.8.3 Types of Qualitative Research 1.8.3.1 Phenomenology 1.8.3.2 Phenomenological Methods 1.8.3.3 Ethnography 1.8.3.4 Grounded Theory 1.8.3.5 Case Study 1.9 Research Methodology adopted in the present study 1.10 Scope 1.11 Limitation of the Study 1.12 Organization of the Study/ Chapterization 2. Overview of Power Sector and Imperative of Reform in Orissa State Electricity Board 2.1 Sectoral Overview 2.2 Relationship between Electricity and GDP 2.3 Electricity Sector in India 2.4 Orissa State Electricity Board and its State of Affairs 2.5 Reform and Restructure of Power Sector in Orissa 7

Page No. i ii iii x xii xiii

1- 25

26 - 51

3.

Imperative of Reforms Process of Reform Privatisation of Distribution Business Central Electricity Supply Company of Orissa Ltd (CESCO) and creation of CESU 2.10 Transfer of Assets 2.11 Sovan Kanungo Committee Report 2.12 Restructuring of GRIDCO 2.13 Chronological events of Power Sector in Orissa 2.14 Summary of the Chapter Corporate Governance and Literature Review 3.1 Historical perspective 3.2 Definition of Corporate Governance 3.3 International Development of Corporate Governance 3.3.1 Cadbury Report: The Financial aspects of Corporate Governance (1992) 3.3.2 Hampel Report (1998) 3.3.3 Blue Ribbon Report (1999) 3.3.4 King Committee on Corporate Governance (2002) 3.3.5 Sarbanes Oxley Act (2002) 3.3.6 Salient features of Sarbanes Oxley Act 3.3.7 The combined code on Corporate Governance (2003) 3.3.8 Higgs Report (2003) 3.3.9 ASX Corporate Governance Council Report (2003) 3.3.10 OECD Principles of Corporate Governance (2004) 3.4 Development of Corporate Governance in India 3.4.1 CII Code on Corporate Governance (1998) 3.4.2 Kumar Mangalam Birla Committee on Corporate Governance (1999) 3.4.3 Recommendation of the Naresh Chandra Committee Report on Corporate Audit and Governance (2002) 3.4.4 Narayan Murthy Committee Report: Report of the SEBI Committee on Corporate Governance (2003) 3.4.5 Clause 49 (2004) SEBI 3.5 Recent Development for Unlisted Public Sector Undertakings (PSUs) 3.6 Models of Corporate Governance 3.6.1 Model-I 3.6.2 Model-II 8

2.6 2.7 2.8 2.9

52 - 89

3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24 3.25 4.

3.6.3 Model III 3.6.4 Model IV Corporate Governance, accountability and enterprise Indian Model for public enterprises Some peculiarities in the Indian Corporate Governance Corporate Governance abuses and the general scenes Corporate Financial Reporting Concept Role of Board in Corporate Governance Board is not an Organ of Action The Role of Board Committees Evaluation of the Board Boards Effectiveness Whistle Blower Protection Corporate Governance Mechanism and Public Sector Disinvestment, Privatization & Restructuring of Public Sector Units Corporate Social Responsibility: The third Pillar of sustainable development Corporate Governance Rating (CGR) Corporate Governance in some prominent power companies of the country Satyam Episode-Failure of Corporate Governance Should code of Corporate Governance be made mandatory or voluntary Review of Literature on Power Sector Reform Summary of the Chapter 90 - 131

Regulatory Governance in Orissa 4.1 Goals of Regulation 4.2 Different Approaches to Regulation 4.2.1 Incentive Regulation 4.2.2 Price Cap Regulation 4.2.3 Yardstick regulation 4.2.4 Profit sharing, banded rate-of-return and menus 4.3 Different Regulatory Models 4.4 Electricity Distribution Business Regulations in Practice 4.5 International Experience in Regulatory Governance 4.6 Reform Models adopted in different Countries 4.6.1 The US Reform Model 4.6.2 The U.K. Reform Model 9

4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16

4.17

Latin American Reform Models Australian Reform Model Inter-Country Comparison of Regulatory Model Reform Philosophy Multi-Sector Versus Sectoral Regulatory Institutions Phases in the Power Sector Governance in India Historical Background of Legislative Initiatives Corporate Governance in new Regulatory Framework Salient features of Electricity Act, 2003 Role of OERC under Electricity Act2003 Constitution of OERC Organization Chart of Orissa Electricity Regulatory Commission Application of Best Practice Regulation in OERC 4.16.1 Transparency 4.16.2 Accountability 4.16.3 Predictability 4.16.4 Consistency 4.16.5 Consultation 4.16.6 Independence 4.16.6.1 Exploitation or Misuse of Policy Directives 4.16.6.2 Behind the Scene Process that Subvert Procedure 4.16.6.3 Flouting of Procedure and Law 4.16.6.4 Institutional Capacity 4.16.6.5 Regulatory Capture through Privatization 4.16.7 Flexibility 4.16.8 Communication 4.16.9 Effectiveness and Efficiency Code of Ethics for Regulator 4.17.1 Preamble of Code of ethics report of TERI 4.17.2 The role of the Commission Chairperson 4.17.3 Responsibilities of Commission Members 4.17.4 Guidelines on acceptance of gifts 4.17.5 Handling conflicts of interests 4.17.6 Personal liability of Commission members 4.17.7 Delegation 4.17.8 Transparency and responsiveness 4.17.9 Interaction with the media 4.17.10 Political activity 4.17.11 Annual Report and Accounts 10

4.6.3 4.6.4 4.6.5

4.18 4.19 5.

Survey on Code of Ethics Summary of the chapter

Regulatory Financial Appraisal-A new way of 132 - 182 financial Governance 5.1 Tariff Setting in Orissa 5.1.1 Sales Forecasts 5.1.2 Distribution Loss 5.1.3 Power Purchase 5.1.4 O&M Expenses 5.1.5 Administrative and General Expenses 5.1.6 Revenue from Sale of Power 5.1.7 Regulatory Asset 5.1.8 Provision for Bad and Doubtful Debts 5.2 AT&C Loss and Distribution Loss 5.3 Balance sheet Analysis 5.4 Profit and Loss Account of Power Sector of Orissa as a whole 5.5 What Is Availability Based Tariff (ABT)? 5.6 Electricity Tariff 5.7 Cross Subsidy in Tariff 5.8 Subsidy by the Government 5.9 Franchisee Operation in Distribution 5.9.1 Benefits of Franchisee System 5.9.2 Different models of Franchisee 5.10 Competition in Power Sector and Open Access 5.11 Comparison of Orissa Reforms Model with Delhi Reforms Model 5.12 Summary of the chapter Impact of Reform and Analysis of Beneficiary Survey Quality of Consumer Service 6.1.1 International Experience in Quality of Service 6.1.2 Orissa experience in Standard of Performance 6.1.3 System Reliability Indices used by Regulators 6.1.4 Comparison of Standard of Performance Regulations of different States 6.1.5 Overall Standards of Performance in Orissa 6.1.6 Re-look at the Prioritisation of Performance Indices 6.1.7 Grievance Redressal Fora in Orissa Electricity Ombudsman Scheme in Orissa Energy Audit and Power Theft Consumer Satisfaction Survey Power supply related findings 6.5.1 Quality of Consumer Service Related Findings 11 183 - 217

6. 6.1

6.2 6.3 6.4 6.5

6.5.2

6.6 6.7 6.8 7.

Impact of Reform on productivity / efficiency /profitability 6.5.3 Alternative sources of power and associated cost 6.5.4 Gist of finding of beneficiary survey Impact of Reform on Poor of Orissa A complete fiasco Power Surplus a myth in Orissa Summary of the chapter
CONCLUSION

218-224

7.1 7.2 7.3 8. 9.

Major Findings Suggestion / Recommendation Scope for Further Research 225-227 227-231

Annexure

Bibliography

12

List of Tables
Table No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Title of Table Power Sector Performance: Gaps between Targets and Realities on Key Indicators in a sampling of regions and Countries Comparison of Characteristics of Qualitative and Quantitative Research Characteristic of four Qualitative Research Approaches Per capita electricity consumption in India by region in kWH(kilowatt hours)/Year Revenue Account of OSEB/GRIDCO T&D Loss in OSEB before Reform Planning Commission Report on T&D Loss Performance of Orissa State Electricity Board/GRIDCO Sales Over the Years in OSEB Revenue Over the Years in OSEB Comparison of SEBs Before Reform License area of DISCOMs Share Holding Pattern of DISCOMs Details of Revaluation done in Transfer Scheme dated 1st April 1996 Chronological events of Power Sector in Orissa Regulatory principles and practices in some European Countries Inter-Country Comparison of Regulatory Model Reform Philosophy Background of Members/Chairpersons since its inception (OERC) AT&C Loss Approved by the Commission Billing and Collection from Govt. Departments and PSUs Nos. of objections received in response to tariff application of DISCOMs of Orissa Consumer Strength of Orissa Sales to Consumer voltage-wise Distribution Loss Power Purchase Cost of DISCOMs Power purchased by DISCOMs Employee Cost of DISCOMs Asset of DISCOMs Repair and Maintenance Expenses of DISCOMs A&G Cost of DISCOMs Revenue from sale of power of DISCOMs Collection Efficiency of DISCOMs Regulatory Gap Approved by Commission in different years Provision for Bad & Doubtful Debts (Actual) Income and Expenditure Statement of CESU/CESCO Income and Expenditure Statement of NESCO Income and Expenditure Statement of WESCO Income and Expenditure Statement of SOUTHCO Computation of AT &C Loss 13 Page No. 4 8 11 29 33 34 34 35 35 35 38 42 42 43 48 94 99 100 106 113 118 121 132 133 135 135 135 136 138 138 140 141 142 143 144 145 146 147 148 151

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Distribution Loss at LT Level Balance Sheet of CESU Balance Sheet of NESCO Balance Sheet of WESCO Balance Sheet of SOUTHCO Comparison of Percentage composition of common size Balance Sheet of DISCOMs Accounting Profit and Loss Account of Power Sector of Orissa as a Whole Comparison of Different Tariff Models UI Rate Tariff Rise vis-a-vis Inflation (Wholesale Price Index) Calculation of Convergence Index
Collection of Electricity Duty from 1994-95 to 2009-10

154 156 158 159 161 162 163 165 166 167 170 171 175 177 177 177 178 186 187 189 190 192 194 194 197 198 199 199 200 201 202 203 204 205 206 207 208 211 213 213

Key performance Indicators in the Area of Franchisee Operation Surcharge as per Tariff policy for FY 2009-10 at HT Surcharge as per Tariff policy for FY 2009-10 at EHT Surcharge Paise per Unit at EHT & HT (80% Load Factor) Comparison between Orissa and Delhi Model Payment of Compensation for Violation of Guaranteed Standards of Performance Comparison of SOP Regulations Overall Standard of Performance of Electricity Distribution Companies Phasing of Standard of Performance Comparison of Constitution of Grievance Redressal Fora of some States Comparison of features of Grievance Redressal Fora of different States Metering Position in Orissa as on 31.03.2009 Supply Voltage Quality (% of respondents) Interruption Level (% of respondents) Fault related Service (% of respondents) Metering Status (% of respondents) Suppliers of Meters (% of respondents) Prior Intimation Power Shutdown (% of respondents) Billing Related Service (% of respondents) Grievance Redressal (% of respondents) Attitude of Staff (% of respondents) Justification of Tariff (% of respondents) Improvement of Consumer service (% of respondents) Is Privatization good for consumer and Utility (% of respondents) Alternative Sources of Power / Stand by Facilities and the associated cost for commercial and industrial users of different capacity size (KW terms) Share of rural and urban population in Orissa Percentage of Village Electrification The level of electrification 14

List of Graphs
Graph No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Title of Graphs Per Capita Electricity Consumption Per Capita Electricity Consumption of various countries Power sector outlay in percentage against overall outlay Plan-wise power sector expenditure against overall expenditure Installed Generation capacity in MW Electricity sales to different consumers voltage-wise Rise in Power Purchase cost vrs. Units purchased by DISCOMs Employee cost per unit of sale R&M cost per unit of sale of electricity A&G cost per unit of electricity sold Revenue Realized (Paise/Unit) Actual Bad Debts as percentage of Billing Performance of CESU Performance of NESCO Performance of WESCO Performance of SOUTHCO AT&C Loss (%) of DISCOMs UI received during 2007-08 Year-wise UI charge received by GRIDCO WPI vrs. Tariff Rise Comparative tariff of Industrial consumers across the States Convergence Index (CI) Supply Voltage (All Orissa) Interruption Level (All Orissa) Fault Related Service (All Orissa) Metering Status (All Orissa) Supplier of Meters (All Orissa) Prior Intimation of Power Shutdown (All Orissa) Billing Related Service (All Orissa) Grievance Redressal (All Orissa) Awareness about GRF (All Orissa) Attitude of Staff (All Orissa) Justification of Tariff (All Orissa) Improvement of Consumer service (All Orissa) Is Privatization good for consumer and Utility (All Orissa) Awareness about OERC (All Orissa) Relationship between State Domestic Product and Household Electrified Indian States with more than 10% of village un-electrified Indian States with more than 25% of household without access to electricity Percentage Growth of Kutir Jyoti Consumers vrs. other non-poor domestic consumers Per capita poor vrs. non-poor (Domestic) electricity consumption Electricity Availability vrs. Demand 15 Page No. 28 28 30 30 31 134 136 137 139 141 142 144 154 155 155 156 156 166 167 168 168 170 197 198 198 199 200 201 202 203 204 204 205 206 206 207 210 211 211 214 214 215

Abbreviations of the Terms used in this Thesis

ABT Availability based tariff A&G expenses Administrative and General Expenses ARR-Annual Revenue Requirement AT&C Aggregate Technical and Commercial Loss CAIDI - Consumer Average Interruption Duration Index CEA Central Electricity Authority CESU Central Electricity Supply Utility of Orissa DISCOMs Distribution Companies such as CESU, WESCO, NESCO and SOUTHCO GRIDCO GRID Corporation of Orissa Ltd. (Now GRIDCO Ltd.) DT Distribution Transformer IBDF - Input Based Distribution Franchisee IBDFI - Input Based Distribution Franchisee with Investment KWh Killo-Watt Hour (A unit of electrical energy) LF- Load Factor (A measure to ascertain the percentage of use of Electrical Load) Licensee The Distribution Company LTTS-Long Term Tariff Strategy MU Million Uuits NESCO North Eastern Electricity Supply Company of Orissa Ltd. OERC - Orissa Electricity Regulatory Commission OHPC Orissa Hydro Power Corporation (Fully owned by GoO) OPGC Orissa Power Generation Corporation (49% AES and 51% GoO) OPTCL Orissa Power Transmission Corporation Limited OSEB Orissa State Electricity Board RBDF - Revenue Based Distribution Franchisee R&M Repair and Maintenance ROE Return on Equity SAIDI - System Average Interruption Duration Index SAIFI - System Average Interruption Frequency Index SBM - Spot Billing Machine SERC State Electricity Regulatory Commission SHG - Self Help Group SOP Standard of Performance SOUTHCO Southern Electricity Supply Company of Orissa Ltd. STU State Transmission Utility T&D Transmission & Distribution UI Unscheduled Interchange (Part of ABT) WESCO Western Electricity Supply Company of Orissa Ltd.

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CHAPTER-1

Introduction
In recent times nothing has attracted the more attention of the corporate world than the Corporate Governance. Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for economic health of corporate and the welfare of the society in general. According to one of the earliest definition of Corporate Governance given by noble laureate Milton Friedman it is to conduct the business in accordance with owner or shareholders desires which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and social customs. Rahul Bajaj, the Chairman of the National Task Force on Corporate Governance appointed by CII said that it dealt with laws, practices and implicit rules that determine a companys ability to take managerial decision vis--vis its claimant in particular such as its share holders, the creditors, the state and employee in general. Thus, it is a system through which a company makes decision concerning its constituents. The first development in streamlining Corporate Governance in the World started with Cadbury Report in the year 1992 which is considered as the Magna Carta of Corporate Governance. Thereafter several committees have been set up in international level to investigate the status of Governance in different companies and suggest remedial measures. Following the Corporate Governance scandals such as Enron and Word Com the Sarbanes Oxley Act was enacted in US in the year 2002 which brought about fundamental changes in virtually every area of Corporate Governance. In India,the first step in streamlining Corporate Governance started with publication of CII Code on Corporate Governance in the year 1998. Subsequently Kumar Mangalam Birla Committee Report (1999), Naresh Chandra Committee Report (2002) and Narayan Murthy Committee Report (2003) on Corporate Governance were published. The market regulator SEBI considered the recommendation of the Birla Committee in January 2000 and decided to implement the recommendations through the medium of listing agreement entered into by the stock exchanges with the listed companies. The stock exchanges have included the directions on Corporate Governance as Clause 49 of the listing agreements. As the State owns all of overwhelming large part of the equity of the PSUs and the Government representing the State appoints, controls and directs their Boards, it seems that latter cannot go way ward as in the case of private sector companies and therefore there is little problem of Corporate Governance. This however is a nave view because even in case of PSUs their Boards must focus on sound Corporate Governance practices, business and technological restructuring with a view to enhancing enterprise values and intrinsic (share holder) value (Disinvestment Commission, February 1997 P.28). The Indian experience in this context is quite pertinent. Most of the public sector units in India were entirely owned and controlled by the state. Corporate Governance in them was in fact akin to State Governance. The PSUs have been working under a system of three-tier managements. At the top was the administrative ministry including minister(s) and the 17

higher bureaucracy following it came Boards of Directors consisting of at least two Secretaries of the Government of India (from the administrative and finance ministry), part time members, if any, from among fellow political activists of ruling party and professionals from industry and trade. These members have had little direct financial stake in the Governed Company resulting in weak belongingness. Next came the Chief Executive Officers and functional Directors appointed by the Government who work in the pleasure of the Government. Therefore, they were not free from the influence of their masters in bureaucracy and politics. On the whole public sector management was under complete capture of the Government. The public sectors were being used as extension of the Government to fulfill their wishes. Power sector in India has its own peculiarities. The companies which are engaged in generation, transmission and distribution of electricity are not only governed under Companies Act, 1956 but also under specific legislation in this sector. In 1948, the Electricity (Supply) Act was passed to facilitate the establishment of regional coordination in the development of electricity transcending the geographical limit of local bodies. It provided for rationalization of the production and supply of electricity and generation for taking measures conducive to the electrical development of the provinces of India. It enabled the creation of SEB (State Electricity Boards) in each state for promoting the coordinated development of generation, supply and distribution. 1.1 Constitutional Provision for Electricity Electricity was entirely under the provision of the states as per the Government of India Act 1935 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. Ambedkars 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. 1.2 Backdrop of Power Sector Reforms Developing countries need 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.

18

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) 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 had kept electricity tariffs well below the cost of supply, combined with weak collection efforts by utilities, had drained government budget resources instead of contributing positively. It had thus been common for World Bank borrowers to request financing of new plant at the same time as they maintained existing plant availabilities of less than 50 percent. A final problem for the power sector was on the institutional side, where governments had controlled their power utilities as if they were departments of the state and had used this control to pursue populist politics and social policies that were 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 sectors reluctance to invest in such poor risk ventures, are leading to further deterioration in the performance of electric utilities. 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 Commission 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. 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 19

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 Transmission and distribution losses. Even 12 years after the establishment of the SERCs and the reforms process, there is still ambiguity over the real level of T&D losses. Table- 1 Power Sector Performance: Gaps between Targets and Realities on Key Indicators in a sampling of regions and Countries INDICATOR TARGET REALITY REGION / 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 (days) 30-45 462 Nigeria Financial Performance 8-12% -19.8% India Return on assets >25% 0% Jordan Self-financing ratio Note: SSA Sub- Saharan Africa 1.3 What is Reform? Power sector reform consists of process of changes along four different but interdependent 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. b. c. That the government cannot relinquish such as the roles of setting general policy & strategy, and sector regulation and supervision. 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. 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 governments 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 20

sector. In any case the day to day, management of the enterprises, even if fully state owned, should be exercised by commercially viable principles. 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. b. c. d. e. f. increase efficiency in generation through competition. Or through regulation based on efficient enterprises and energy use, conservation and other measures. maintain service reliability by setting strict rules to limit unreasonable interruptions of supply and variations from technical standards ( e.g. voltage and frequency levels) increase the security of supply in terms of numbers of suppliers and types of energy resources improve environmental protection by establishing clear rules in the construction & operation of energy facilities, coupled with enforcement mechanisms and the requisite penalties or incentives attract capital, domestic or foreign, by establishing clear and stable Rules of the Game that relieves governments burden of funding the sector develop competition in the supply of electricity services to customers, where viable, a means for increasing the economic efficiency of the sector.

1.4

Corporate Governance and its Relationship with Power Sector Reform The unbundling of a monolithic agency called State Electricity Board calls for a complete overhaul of Corporate Governance. The Creation of State Electricity Regulatory Commission also makes the Governance in the reformed era completely different from that of pre-reform time. Disinvestment in the power utilities has taken place due to withdrawal of Government stake in them. Therefore, power sector Governance is completely different from other corporate entities. After reform it must be understood that power utilities are operating in deregulated environment free from Government control and at the same time they have to comply with Corporate Governance norms similar to other companies.

1.5

Review of Literatures Several research papers have been studied to ascertain the status of research in this field. Industry and Energy Department, World Bank (1996) in its research paper Power Sector Reforms in Developing Countries and Role of World bank 21

discusses the experience of the Bank with the sector and the main drivers for sector reform and the expected benefits of reform. 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? reviews this process in 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. Sankar, T.L (2002), Advisorenergy, 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 in this sector. Several other research papers by P Abraham (2003), Rahul Tongia (2003), Ranganathan, V and D, Rao Narasimha (2004) of IIMB have been studied to find out the objective and the scope of present research. 1.6 Objective of the Research The present work aims to highlight the new Corporate Governance structure after reform, its characteristic and impact on the stakeholders particularly on the consumers that commenced in Orissa since 1995-96 to till date. It also analyzes different key business parameters and its trend after the initiation of reform. The present work systematically studies the experience of ORISSA, which adopted reforms process first in the country 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. As 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. Therefore, in this backdrop, the objective of the project would be to study the impact of reforms in the Corporate Governance of the power sector of Orissa and its outcomes particularly in consumer service, quality of supply, tariff and financial viability. 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 review the working of State Electricity Regulatory Commission as a part of Regulatory Governance. To ascertain the provision of quality power on demand to all consumers. To study the different elements which determines the tariff structure and to measure the trend in different cost components that goes into the tariff after reform. . To measure the cross subsidy component in the tariff structure. To check the extent of progress made in rural electrification. . To asses the viability of franchisee model in distribution business.

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1.7

To systematically analyze the reasons for Orissas failure to become a financially viable model. 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 provision at the distribution end. To suggest alternatives to increase the cash flow without tariff hike.

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 cross subsidy in tariff has reduced over the years. 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, proper regulatory Governance and protection of the consumers interest. To study the performance standard in consumer services To study the franchisee operation as viable distribution model To study how far power sector reform has brought in competition in this sector To study if the impact of reform has been good for the poor.

1.8

Research Design Qualitative research was one of the first forms of social studies, which regained its popularity in 1970s after loosing ground to quantative science for two decades such as 1950s and 1960s during which quantitative science reached its peak of popularity (The Quantitative Revolution). The phrase 'qualitative research' was until the 1970s used only to refer to a discipline of anthropology or sociology, and terms like were used instead. During the 1970s and 1980s qualitative research began to be used in other disciplines, and became a significant type of research in the fields of education studies, social work studies, information studies, management studies, psychology, communication studies, and many other fields. Qualitative research occurred in the consumer products industry during this period, with researchers investigating new consumer products and product positioning/advertising opportunities. The earliest consumer research pioneers including Gene Reilly of The Gene Reilly Group in Darien, CT, Jerry Schoenfeld of Gerald Schoenfeld & Partners in Tarrytown, NY and Martin Calle of Calle & Company, Greenwich, CT, also Peter Cooper in London, England, and Hugh Mackay in Mission, Australia. There continued to be disagreement about the proper place of qualitative versus quantitative research. In the late 1980s and 1990s after a spate of criticisms from the quantitative side, new methods of qualitative research evolved, to address the perceived problems with reliability and imprecise modes of data analysis. During this same decade, there was a slowdown in traditional media 23

advertising spending, so there was heightened interest in making research related to advertising more effective. In the last thirty years the acceptance of qualitative research by journal publishers and editors has been growing. Prior to that time many mainstream journals were prone to publish research articles based upon the natural sciences and which featured quantitative analysis Qualitative research is a generic term for investigative methodologies described as ethnographic, naturalistic, anthropological, field, or participant observer research. It emphasizes the importance of looking at variables in the natural setting in which they are found. Interaction between variables is important. Detailed data is gathered through open ended questions that provide direct quotations. The interviewer is an integral part of the investigation (Jacob, 1988). This differs from quantitative research which attempts to gather data by objective methods to provide information about relations, comparisons, and predictions and attempts to remove the investigator from the investigation (Smith, 1983). 1.8.1 Characteristics of Qualitative and Quantitative Research

Table -2 Comparison of Characteristics of Qualitative and Quantitative Research Point of Comparisons Qualitative Research Quantitative Research Focus of research Quality (nature, essence) Quantity (how much, how many) Philosophical roots Phenomenology, symbolic Positivism, logical interaction empiricism Associated phrases Fieldwork, ethnographic, Experimental, empirical, naturalistic, grounded, statistical subjective Goal of investigation Understanding, description, Prediction, control, discovery, hypothesis description, confirmation, generating hypothesis testing Design characteristics Flexible, evolving, Predetermined, structured emergent Setting Natural, familiar Unfamiliar, artificial Sample Small, non-random, Large, random, theoretical representative Data collection Researcher as primary Inanimate instruments instrument, interviews, (scales, tests, surveys, observations questionnaires, computers) Mode of analysis Inductive (by researcher) Deductive (by statistical methods) Findings Comprehensive, holistic, Precise, narrow, reductionist expansive Merriam, S.B. (1988). Case study research in education: A qualitative approach. San Francisco: Jossey-Bass, p. 18. 24

In simplified terms Qualitative research means a non-numerical data collection or explanation based on the attributes of the graph or source of data. For example, if some body is asked to explain in qualitative terms a thermal image displayed in multiple colours, then he would explain the colour differences rather than the heat's numerical value. In qualitative research cases can be selected purposefully, according to whether or not they typify certain characteristics or contextual locations. Secondly, the role or position of the researcher is given greater critical attention. This is because in qualitative research the possibility of the researcher taking a 'neutral' or transcendental position is seen as more problematic in practical and/or philosophical terms. Hence qualitative researchers are often exhorted to reflect on their role in the research process and make this clear in the analysis. Thirdly, while qualitative data analysis can take a wide variety of forms it tends to differ from quantitative research in the focus on language, signs and meaning as well as approaches to analysis that are holistic and contextual, rather than reductionist and isolationist. Nevertheless, systematic and transparent approaches to analysis are almost always regarded as essential for rigor. For example, many qualitative methods require researchers to carefully code data and discern and document themes in a consistent and reliable way. Perhaps the most traditional division in the way qualitative and quantitative research have been used in the social sciences is for qualitative methods to be used for exploratory (i.e., hypothesis-generating) purposes or explaining puzzling quantitative results, while quantitative methods are used to test hypotheses. This is because establishing content validity - do measures measure what a researchers thinks they measure? - is seen as one of the strengths of qualitative research. While quantitative methods are seen as providing more representative, reliable and precise measures through focused hypotheses, measurement tools and applied mathematics in contrast, qualitative data is usually difficult to graph or display in mathematical terms. Qualitative research is often used for policy and program evaluation research since it can answer certain important questions more efficiently and effectively than quantitative approaches. This is particularly the case for understanding how and why certain outcomes were achieved (not just what was achieved) but also answering important questions about relevance, unintended effects and impact of programs such as: Were expectations reasonable? Did processes operate as expected? Were key players able to carry out their duties? Were there any unintended effects of the program? Qualitative approaches have the advantage of allowing for more diversity in responses as well as the capacity to adapt to new developments or issues during the research process itself. While qualitative research can be expensive and time-consuming to conduct, many fields of research employ qualitative techniques that have been specifically developed to provide more succinct, cost-efficient and timely results.

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M Q Patton has described 12 major charateristics of qualitative research which are presented below: 1.8.2 Qualitative Research Design Strategies Neutralistic Inquiry Studying real world situation as they unfold naturally; nonmanipulative and noncontrolling. Emergent Design Flxibility- Openness to adapting inquiry as understanding deepens and/or situation to change; the researcher avoides getting locked into rigid designs that eliminates responsiveness and pursues new paths of discovery as they emerge. Purposeful sampling Cases for study (e.g. people, organization, communities, events) are selected because they are information rich and elluninative. 1.8.2.1 Data Collection and Fieldwork Strategies Qualitative Data Observation that yield detailed, thick description; inquiry in depth; interviews that capture direct quotation about peoples personal perspective and experiences; case studies; careful document review. Personal Experience and Engagment The researcher has direct contact with and gets close to the people, situation and phenomenon under study. Empathic Neutrality and Mindfulness An empathic stance in interviewing seeks vicarious understanding without judgement (neutrality) by showing openness, sensitivity, respect etc; in observation it means being fully present (mindfullness). Dynamic systems Attention to process; assumes change as ongoing whether focus is on an individual, an organization a community or an entire culture; therefore, mindfull of an attentive to system and situation dynamics.

1.8.2.2

Analysis of Strategies Unique case orientation Assumes that each case is special and unique; the first level of analysis is being true to, respecting and capturing the details of the individual cases being studied. Inductive Analysis and creative synthesis Immersion in the details and specifics of the data to discover important patterns, themes and interrelationships. Holistic Perspective The whole phenomenon under study is understood as a complex system i.e. more than the sum of its parts. Context sensitivity Places finding in a social, historical and temporal context; careful about, even dubious of, the possibility or meaningfullness of generalization across time and space; emphasizes instead careful comparative case analyses and 26

extrapolating patterns for possible transferability and adaptation in new settings. Voice, Perspective and Reflexivity The qualitative analyst owns and is reflective about his or her own voice and perspective; a credible voice conveys authenticity and trustworthiness; complete objectivity being impossible and pure subjectivity undermining credibility, the researchers focus becomes balanced understanding and depicting the world authentically in all its complexity while being self analytical, politically aware and reflexive in consciousness.

1.8.3

Types of Qualitative Research A qualitative "approach" is a general way of thinking about conducting qualitative research. It describes, either explicitly or implicitly, the purpose of the qualitative research, the role of the researcher(s), the stages of research, and the method of data analysis. There are four major types of qualitative research. They are as follows: Phenomenology Ethnography Grounded Theory Case Study

Table-3 Characteristic of four Qualitative Research Approaches Dimension Phenomenology Ethnography Grounded Theory Case Study Research To describe one To describe the To inductively To describe one Purpose or more cultural generate a or more cases inindividual characteristics grounded theory depth and experience of a of a group of describing and address the phenomenon people and to explaining a research (e.g. the describe cultural phenomenon. questions and experience of scenes. issues. the death of a loved one). Disciplinary Philosophy Anthropology Sociology. Multidisciplinary origin roots, including business, law, social sciences, medicine and education. Primary In-depth Participant Interviews with 20- Multiple data interviews with observation over 30 people. methods are used collection up to 10-15 an extended Observations are (e.g. interviews, method people. period of time also frequently observations, (e.g. one month used. documents). to a year). 27

Dimension Data analysis approach

Narrative report focus

Phenomenology Ethnography Interviews with informants. List significant Holistic statements, description and determine search for meaning of cultural themes statements and in data. identify the essence of the phenomenon. Rich description Rich description of the essential of context and or invariant cultural themes. structures (i.e. the common characteristics, or essence) of the experience. Phenomenology-

Grounded Theory

Case Study

Begin with open Holistic coding, then axial description and coding and end search for with selective themes shedding coding. light on the case. May also include cross-case analysis. Description of topic Rich description and people being of the context studied. End with a and operation of presentation of the the case or cases. grounded theory. Discussion of May also list themes, issues propositions. and implications.

1.8.3.1

Phenomenology (i.e., the descriptive study of how individuals experience a phenomenon) is sometimes considered a philosophical perspective as well as an approach to qualitative methodology. It has a long history in several social research disciplines including psychology, sociology and social work. Phenomenology is a school of thought that emphasizes a focus on people's subjective experiences and interpretations of the world. That is, the phenomenologist wants to understand how the world appears to others. Qualitative research examines life experiences (ie, the lived experience) in an effort to understand and give them meaning. This usually is done by systematically collecting and analyzing narrative materials using methods that ensure credibility of both the data and the results. Phenomenology is one of many types of qualitative research that examines the lived experiences of humans. Phenomenological researchers hope to gain understanding of the essential "truths" (ie, essences) of the lived experience. Examples of phenomenological research include exploring the lived experiences of women undergoing breast biopsy or the lived experiences of family members waiting for a loved one undergoing major surgery. 1.8.3.2 Phenomenological Methods Many methods have been used in phenomenological research. Frequently, inductive or qualitative methods involve transcribing material (usually interview transcripts), coding data into themes, and drawing conclusions 28

regarding the phenomena based on these themes. It is incumbent upon researchers to seek methods that fit with the philosophy and methodology of their research question and to chose methods congruent with the research topic and assumptions. As qualitative researchers, phenomenologists must follow an organized approach to answering their research question. First, the researcher must develop the question. Next, he or she must devise a sampling plan to ensure the appropriate subjects are available and willing to answer questions. Information or data can be obtained by observations, interviews, or written descriptions. Data then are analyzed using a process of coding and categorizing the information. Finally, the findings are confirmed by others to ensure the credibility of the conclusions. This can be depicted in following steps. The foundational question in phenomenology: What is the meaning, structure, and essence of the lived experience of this phenomenon by an individual or by many individuals? The researcher tries to gain access to individuals' life-worlds, which is their world of experience; it is where consciousness exists. Conducting in-depth interviews is a common method for gaining access to individuals' life- worlds. The researcher, next, searches for the invariant structures of individuals' experiences (also called the essences of their experience). Phenomenological researchers often search for commonalities across individuals (rather than only focusing on what is unique to a single individual). For example, what are the essences of peoples' experience of the death of a loved one? Here is another example: What are the essences of peoples' experiences of an uncaring nurse? After analyzing phenomenological research data, researcher writes a report that provides rich description and a "vicarious experience" of being there for the reader of the report. There are two good examples. See if you get the feeling the patients had when they described caring and non-caring nurses.

1.8.3.3

Ethnography The ethnographic approach to qualitative research comes largely from the field of anthropology. The emphasis in ethnography is on studying an entire culture. Originally, the idea of a culture was tied to the notion of ethnicity and geographic location (e.g., the culture of the Trobriand Islands), but it has been broadened to include virtually any group or

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organization. That is, we can study the "culture" of a business or defined group (e.g., a Rotary club). Ethnography is an extremely broad area with a great variety of practitioners and methods. However, the most common ethnographic approach is participant observation as a part of field research. The ethnographer becomes immersed in the culture as an active participant and records extensive field notes. As in grounded theory, there is no preset limiting of what will be observed and no real ending point in an ethnographic study. The foundational question in ethnography is: What are the cultural characteristics of this group of people or of this cultural scene? Because ethnography originates in the discipline of Anthropology, the concept of culture is of central importance. Culture is the system of shared beliefs, values, practices, language, norms, rituals, and material things that group members use to understand their world. One can study micro cultures (e.g., such as the culture in a classroom) as well as macro cultures (e.g., such as the United States of America culture).

There are two additional or specialized types of ethnography. Ethnology (the comparative study of cultural groups). Ethnohistory (the study of the cultural past of a group of people). An ethnohistory is often done in the early stages of a standard ethnography in order to get a sense of the group's cultural history. Here are some more concepts that are commonly used by ethnographers: Ethnocentrism (i.e., judging others based on your cultural standards). You must avoid this problem if you are to be a successful ethnographer! Emic perspective (i.e., the insider's perspective) and emic terms (i.e., specialized words used by people in a group). Etic perspective (i.e., the external, social scientific view) and etic terms (i.e., outsider's words or specialized words used by social scientists). Going native (i.e., identifying so completely with the group being studied that you are unable to be objective). Holism (i.e., the idea that the whole is greater than the sum of its parts; it involves describing the group as a whole unit, in addition to its parts and their interrelationships). The final ethnography (i.e., the report) should provide a rich and holistic description of the culture of the group under study. 30

1.8.3.4

Grounded Theory Grounded theory (i.e., the development of inductive, "bottom-up," theory that is "grounded" directly in the empirical data) is a qualitative research approach that was originally developed by Glaser and Strauss in the 1960s. The self-defined purpose of grounded theory is to develop theory about phenomena of interest. But this is not just abstract theorizing they're talking about. Instead the theory needs to be grounded or rooted in observation -- hence the term. Grounded theory is a complex iterative process. The research begins with the raising of generative questions which help to guide the research but are not intended to be either static or confining. As the researcher begins to gather data, core theoretical concept(s) are identified. Tentative linkages are developed between the theoretical core concepts and the data. This early phase of the research tends to be very open and can take months. Later on the researcher is more engaged in verification and summary. The effort tends to evolve toward one core category that is central. The foundational question in grounded theory is: What theory or explanation emerges from an analysis of the data collected about this phenomenon? It is usually used to generate theory (theories tell us "How" and "Why" something operates as it does; theories provide explanations). Grounded theory can also be used to test or elaborate upon previously grounded theories, as long as the approach continues to be one of constantly grounding any changes in the new data.

Four important characteristics of a grounded theory are Fit (i.e., Does the theory correspond to real-world data?), Understanding (i.e., Is the theory clear and understandable?), Generality (i.e., Is the theory abstract enough to move beyond the specifics in the original research study?), Control (i.e., Can the theory be applied to produce real-world results?). Data collection and analysis continue throughout the study. When collecting and analyzing the researcher needs theoretical sensitivity (i.e., being sensitive about what data are important in developing the grounded theory). Data analysis often follows three steps: 1. Open coding (i.e., reading transcripts line-by-line and identifying and coding the concepts found in the data).

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2. 3.

Axial coding (i.e., organizing the concepts and making them more abstract). Selective coding (i.e., focusing on the main ideas, developing the story, and finalizing the grounded theory).

The grounded theory process is "complete" when theoretical saturation occurs (i.e., when no new concepts are emerging from the data and the theory is well validated). The final report should include a detailed and clear description of the grounded theory. 1.8.3.5 Case Study The fourth method of qualitative research is Case studies. Case studies are detailed investigations of individuals, groups, institutions or other social units. The researcher conducting a case study attempts to analyze the variables relevant to the subject under study (Polit and Hungler, 1983). The principle difference between case studies and other research studies is that the focus of attention is the individual case and not the whole population of cases. Most studies search for what is common and pervasive. However, in the case study, the focus may not be on generalization but on understanding the particulars of that case in its complexity. A case study focuses on a bounded system, usually under natural conditions, so that the system can be understood in its own habitat (Stake, 1988). Stake (1994) identifies three types of case studies: Intrinsic - aimed at understanding a particular case because the case itself is of interest (e.g. how one person managed a stroke). A case may be of interest because it has particular features or because it is ordinary. Instrumental - aimed at providing insight into an issue or problem or to refine a theory. In this instance, understanding the complexities of the case is secondary to understanding something else (e.g. case study of 'Sally' provides insights into the problems with healthcare in the US). Collective - a number of cases are studied jointly in order to understand a phenomenon, population or general condition. Often referred to as a multiple-case study (e.g. 15 primary care practices are studied as single but conjoined cases in order to understand how obesity is discussed in this setting). Case study research excels at bringing us to an understanding of a complex issue or object and can extend experience or add strength to what is already known through previous research. Case studies emphasize detailed contextual analysis of a limited number of events or conditions and their relationships. Researchers have used the case study research 32

method for many years across a variety of disciplines. Social scientists, in particular, have made wide use of this qualitative research method to examine contemporary real-life situations and provide the basis for the application of ideas and extension of methods. Researcher Robert K. Yin defines the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 1984, p. 23). Critics of the case study method believe that the study of a small number of cases can offer no grounds for establishing reliability or generality of findings. Others feel that the intense exposure to study of the case biases the findings. Some dismiss case study research as useful only as an exploratory tool. Yet researchers continue to use the case study research method with success in carefully planned and crafted studies of real-life situations, issues, and problems. Reports on case studies from many disciplines are widely available in the literature. Many well-known case study researchers such as Robert E. Stake, Helen Simons, and Robert K. Yin have written about case study research and suggested techniques for organizing and conducting the research successfully. This introduction to case study research draws upon their work and proposes six steps that should be used:

Determine and define the research questions Select the cases and determine data gathering and analysis techniques Prepare to collect the data Collect data in the field Evaluate and analyze the data Prepare the report

Step 1: Determine and Define the Research Questions The first step in case study research is to establish a firm research focus to which the researcher can refer over the course of study of a complex phenomenon or object. The researcher establishes the focus of the study by forming questions about the situation or problem to be studied and determining a purpose for the study. The research object in a case study is often a program, an entity, a person, or a group of people. Each object is likely to be intricately connected to political, social, historical, and personal issues, providing wide ranging possibilities for questions and adding complexity to the case study. The researcher investigates the object of the case study in depth using a variety of data gathering methods

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to produce evidence that leads to understanding of the case and answers the research questions. Case study research generally answers one or more questions which begin with "how" or "why." The questions are targeted to a limited number of events or conditions and their inter-relationships. To assist in targeting and formulating the questions, researchers conduct a literature review. This review establishes what research has been previously conducted and leads to refined, insightful questions about the problem. Careful definition of the questions at the start pinpoints where to look for evidence and helps determine the methods of analysis to be used in the study. The literature review, definition of the purpose of the case study, and early determination of the potential audience for the final report guide how the study will be designed, conducted, and publicly reported. Step 2: Select the Cases and Determine Data Gathering and Analysis Techniques During the design phase of case study research, the researcher determines what approaches to use in selecting single or multiple real-life cases to examine in depth and which instruments and data gathering approaches to use. When using multiple cases, each case is treated as a single case. Each cases conclusions can then be used as information contributing to the whole study, but each case remains a single case. Exemplary case studies carefully select cases and carefully examine the choices available from among many research tools available in order to increase the validity of the study. Careful discrimination at the point of selection also helps erect boundaries around the case. The researcher must determine whether to study cases which are unique in some way or cases which are considered typical and may also select cases to represent a variety of geographic regions, a variety of size parameters, or other parameters. A useful step in the selection process is to repeatedly refer back to the purpose of the study in order to focus attention on where to look for cases and evidence that will satisfy the purpose of the study and answer the research questions posed. Selecting multiple or single cases is a key element, but a case study can include more than one unit of embedded analysis. For example, a case study may involve study of a single industry and a firm participating in that industry. This type of case study involves two levels of analysis and increases the complexity and amount of data to be gathered and analyzed. A key strength of the case study method involves using multiple sources and techniques in the data gathering process. The researcher determines in advance what evidence to gather and what analysis techniques to use with the data to answer the research questions. Data gathered is normally 34

largely qualitative, but it may also be quantitative. Tools to collect data can include surveys, interviews, documentation review, observation, and even the collection of physical artifacts. The researcher must use the designated data gathering tools systematically and properly in collecting the evidence. Throughout the design phase, researchers must ensure that the study is well constructed to ensure construct validity, internal validity, external validity, and reliability. Construct validity requires the researcher to use the correct measures for the concepts being studied. Internal validity (especially important with explanatory or causal studies) demonstrates that certain conditions lead to other conditions and requires the use of multiple pieces of evidence from multiple sources to uncover convergent lines of inquiry. The researcher strives to establish a chain of evidence forward and backward. External validity reflects whether or not findings are generalizable beyond the immediate case or cases; the more variations in places, people, and procedures a case study can withstand and still yield the same findings, the more external validity. Techniques such as cross-case examination and within-case examination along with literature review helps ensure external validity. Reliability refers to the stability, accuracy, and precision of measurement. Exemplary case study design ensures that the procedures used are well documented and can be repeated with the same results over and over again. Step 3. Preparation for Collection of the Data Because case study research generates a large amount of data from multiple sources, systematic organization of the data is important to prevent the researcher from becoming overwhelmed by the amount of data and to prevent the researcher from losing sight of the original research purpose and questions. Advance preparation assists in handling large amounts of data in a documented and systematic fashion. Researchers prepare databases to assist with categorizing, sorting, storing, and retrieving data for analysis. Exemplary case studies prepare good training programs for investigators, establish clear protocols and procedures in advance of investigator field work, and conduct a pilot study in advance of moving into the field in order to remove obvious barriers and problems. The investigator training program covers the basic concepts of the study, terminology, processes, and methods, and teaches investigators how to properly apply the techniques being used in the study. The program also trains investigators to understand how the gathering of data using multiple techniques strengthens the study by providing opportunities for triangulation during the analysis phase of the study. The program covers protocols for case study research, including time deadlines, formats for narrative reporting 35

and field notes, guidelines for collection of documents, and guidelines for field procedures to be used. Investigators need to be good listeners who can hear exactly the words being used by those interviewed. Qualifications for investigators also include being able to ask good questions and interpret answers. Good investigators review documents looking for facts, but also read between the lines and pursue collaborative evidence elsewhere when that seems appropriate. Investigators need to be flexible in real-life situations and not feel threatened by unexpected change, missed appointments, or lack of office space. Investigators need to understand the purpose of the study and grasp the issues and must be open to contrary findings. Investigators must also be aware that they are going into the world of real human beings who may be threatened or unsure of what the case study will bring. After investigators are trained, the final advance preparation step is to select a pilot site and conduct a pilot test using each data gathering method so that problematic areas can be uncovered and corrected. Researchers need to anticipate key problems and events, identify key people, prepare letters of introduction, establish rules for confidentiality, and actively seek opportunities to revisit and revise the research design in order to address and add to the original set of research questions. Step 4. Collect Data in the Field The researcher must collect and store multiple sources of evidence comprehensively and systematically, in formats that can be referenced and sorted so that converging lines of inquiry and patterns can be uncovered. Researchers carefully observe the object of the case study and identify causal factors associated with the observed phenomenon. Renegotiation of arrangements with the objects of the study or addition of questions to interviews may be necessary as the study progresses. Case study research is flexible, but when changes are made, they are documented systematically. Exemplary case studies use field notes and databases to categorize and reference data so that it is readily available for subsequent reinterpretation. Field notes record feelings and intuitive hunches, pose questions, and document the work in progress. They record testimonies, stories, and illustrations which can be used in later reports. They may warn of impending bias because of the detailed exposure of the client to special attention, or give an early signal that a pattern is emerging. They assist in determining whether or not the inquiry needs to be reformulated or redefined based on what is being observed. Field notes should be kept separate from the data being collected and stored for analysis.

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Maintaining the relationship between the issue and the evidence is mandatory. The researcher may enter some data into a database and physically store other data, but the researcher documents, classifies, and cross-references all evidence so that it can be efficiently recalled for sorting and examination over the course of the study. Step 5. Evaluate and Analyze the Data The researcher examines raw data using many interpretations in order to find linkages between the research object and the outcomes with reference to the original research questions. Throughout the evaluation and analysis process, the researcher remains open to new opportunities and insights. The case study method, with its use of multiple data collection methods and analysis techniques, provides researchers with opportunities to triangulate data in order to strengthen the research findings and conclusions. The tactics used in analysis force researchers to move beyond initial impressions to improve the likelihood of accurate and reliable findings. Exemplary case studies will deliberately sort the data in many different ways to expose or create new insights and will deliberately look for conflicting data to disconfirm the analysis. Researchers categorize, tabulate, and recombine data to address the initial propositions or purpose of the study, and conduct cross-checks of facts and discrepancies in accounts. Focused, short, repeat interviews may be necessary to gather additional data to verify key observations or check a fact. Specific techniques include placing information into arrays, creating matrices of categories, creating flow charts or other displays, and tabulating frequency of events. Researchers use the quantitative data that has been collected to corroborate and support the qualitative data which is most useful for understanding the rationale or theory underlying relationships. Another technique is to use multiple investigators to gain the advantage provided when a variety of perspectives and insights examine the data and the patterns. When the multiple observations converge, confidence in the findings increases. Conflicting perceptions, on the other hand, cause the researchers to pry more deeply. Another technique, the cross-case search for patterns, keeps investigators from reaching premature conclusions by requiring that investigators look at the data in many different ways. Cross-case analysis divides the data by type across all cases investigated. One researcher then examines the data of that type thoroughly. When a pattern from one data type is corroborated by the evidence from another, the finding is stronger. When evidence conflicts, deeper probing of the differences is necessary to identify the cause or source of conflict. In all cases, the researcher treats 37

the evidence fairly to produce analytic conclusions answering the original "how" and "why" research questions. Step 6. Prepare the report Exemplary case studies report the data in a way that transforms a complex issue into one that can be understood, allowing the reader to question and examine the study and reach an understanding independent of the researcher. The goal of the written report is to portray a complex problem in a way that conveys a vicarious experience to the reader. Case studies present data in very publicly accessible ways and may lead the reader to apply the experience in his or her own real-life situation. Researchers pay particular attention to displaying sufficient evidence to gain the readers confidence that all avenues have been explored, clearly communicating the boundaries of the case, and giving special attention to conflicting propositions. Techniques for composing the report can include handling each case as a separate chapter or treating the case as a chronological recounting. Some researchers report the case study as a story. During the report preparation process, researchers critically examine the document looking for ways the report is incomplete. The researcher uses representative audience groups to review and comment on the draft document. Based on the comments, the researcher rewrites and makes revisions. Some case study researchers suggest that the document review audience include a journalist and some suggest that the documents should be reviewed by the participants in the study. This paper explains how to use the case study method and then applies the method to an example case study project designed to examine how one set of users, non-profit organizations, make use of an electronic community network. The study examines the issue of whether or not the electronic community network is beneficial in some way to non-profit organizations and what those benefits might be. 1.9 Research Methodology Adopted in the Present Study The present study is carried out by using some primary data and rest on secondary statistical data. The primary data has been obtained through face to face interview and circulating structured questionnaire. The secondary data has primarily been obtained from Power Management Institute, NTPC Ltd., different Tariff Orders of Orissa Electricity Regulatory Commission (OERC), Published Regulation of OERC, Audited Financial Report of Utilities, Newspaper reports, University Library - University of Delhi, Corporate Office-GRIDCO/OPTCL. Apart from this, several published journal viz. TERI, Energy Watch, Powerline, ADB Review and

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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.

1.10

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 90s. 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 Act, 2003. The present study particularly focuses on new way of Corporate Governance due to reform process and its impact on the power sector in Orissa. It also empirically studies the various functional reforms carried out by different governments in India and abroad. It covers time series and cross section analysis on trend scenario.

1.11

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

1.12

Organization of the Study/ Chapterization The total work has been presented through the following chapters I. Introduction II. Overview of Power Sector and Imperative of Reform in Orissa State Electricity Board III. Corporate Governance and Literature Review IV. Regulatory Governance in Orissa V. Regulatory Financial Appraisal-A new way of financial Governance VI. Impact of Reform and Analysis of Beneficiary survey VII. Findings and Conclusion 39

References: 1. 2. Ahluwalia, M. S. (2001). Report of the Expert Group (on) Settlement Of SEB Dues. New Delhi, Ministry of Power. Ahluwalia, S. S. and G. Bhatiani (2000). Tariff Setting in the Electric Power Sector - Base paper on Indian Case Study. TERI Conference on Regulation in Infrastructure Services, New Delhi. Baijal, P. (1999). "Restructuring Power Sector in India." Economic and Political Weekly. Baijal, P. (1999). "Restructuring Power Sector in India." Economic and Political Weekly. Dixit, S., G. Sant, et al. (1998). "Regulation in the WB-Orissa Model: Cure Worse Than Disease." Economic and Political Weekly XXXIII (17). Dubash, N. K. and S. C. Rajan (2001). The Politics of Power Sector Reform in India. Washington, DC, World Resources Institute. Morris, S., Ed. (2002). Indian Infrastructure Report 2002: Governance Issues for Commercialization. Ahmedabad, 3iNetwork. Mahalingam, S. (1997). Unbundling Trouble. Frontline. Mahalingam, S. (2001). A worrisome tariff order. Frontline. Malhotra,Anil K., and Ranjit Lamech. 1994."Power Sector Experience in Asia." Paper No. 8. World Bank, Asia Technical Department, Washington, D.C. Nellis, John. 1994. "Is Privatization Necessary?" FPD Note 7. World Bank, Finance and Private Sector Development Vice Presidency, Washington, D.C. Prayas (2008). India Power Sector Reforms Update, Issue 1. Pune, Prayas. Rajan, A. T. (2000). "Power sector reform in Orissa: an ex-post analysis of the causal factors." Energy Policy Denzin, Norman K. & Lincoln, Yvonna S. (Eds.). (2005). The Sage Handbook of Qualitative Research (3rd ed.). Thousand Oaks, CA: Sage. ISBN 0-7619-2757-3 Loseke, Donileen R. & Cahil, Spencer E. (2007). Publishing qualitative manuscripts: Lessons learned. In C. Seale, G. Gobo, J. F. Gubrium, & D. Silverman (Eds.), Qualitative Research Practice: Concise Paperback Edition, pp. 491-506. London: Sage. ISBN 978-1-7619-4776-9 Lindlof, T. R., & Taylor, B. C. (2002) Qualitative communication research methods: Second edition. Thousand Oaks, CA: Sage Publications, Inc. ISBN 07619-2493-0 Becker, Howard S., The epistemology of qualitative research. University of Chicago Press, 1996. 53-71. [from Ethnography and human development : context and meaning in social inquiry / edited by Richard Jessor, Anne Colby, and Richard A. Shweder

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

16.

17.

40

18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

Flyvbjerg, B. (2006). "Five Misunderstandings About Case Study Research." Qualitative Inquiry, vol. 12, no. 2, April 2006, pp. 219-245. Holliday, A. R. (2007). Doing and Writing Qualitative Research, 2nd Edition. London: Sage Publications M Q Patton, Qualitative Research and Evaluation Methods, Third Edition.pp.40-41, copyright 2002 by Sage Publications. Inc. http://www.socialresearchmethods.net Merriam, S.B. (1988). Case study research in education: A qualitative approach. San Francisco: Jossey-Bass, p. 18. Hamel, J. (with Dufour, S., & Fortin, D.). (1993). Case study methods. Newbury Park, CA: Sage. Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 14(4), 352-550. Emory, C. W., & Cooper, D. R. (1991). Business research methods. (4th ed.). Boston, MA: Irvin. Miles, M. B., & Huberman, A. M. (1984). Qualitative data analysis: A sourcebook of new methods. Beverly Hills, CA: Sage. Soy, Susan K. (1997). The case study as a research method. Unpublished paper, University of Texas at Austin.

41

CHAPTER2

Overview of Power Sector and Imperative of Reform in Orissa State Electricity Board
Electricity is an essential requirement for all facets of our life and it has been recognized as a basic human need. It is the key to accelerating economic growth, generation of employment, elimination of poverty and human development. Before Indias independence, its electricity sector was decentralized. Electricity was generated and supplied locally by private entrepreneurs, enterprising municipalities and provincial governments. The Tata hydroelectric project in Khandala supplied power to Bombay while Metur Dam on the Cauvery supplied power to Madras presidency. However, the emphasis was on supply to large urban concentration and there was little coordination or cooperation between different suppliers. The Indian Electricity Act, 1910 left the granting of all licenses in the hands of the local government, laying down some rules regarding safety. It was a comprehensive piece of legislation to regulate the generation, supply and use of electricity and dealt with licensing, regulation and safety giving considerable authority to the provincial Government. In 1948, the Electricity (Supply) Act was passed to facilitate the establishment of regional coordination in the development of electricity transcending the geographical limit of local bodies. It provided for rationalization of the production and supply of electricity and generation for taking measures conducive to the electrical development of the provinces of India. It enabled the creation of SEB (State Electricity Boards) in each state for promoting the coordinated development of generation, supply and distribution. The CEA (Central Electricity Authority) was created to develop a national power policy and coordinate electricity planning across India. The Industrial Policy resolution 1956 reserved generation and distribution of electricity almost exclusively for the states, letting existing private licensees, however to continue. Amendment in 1976 enabled generation companies to be set up by Central and State Government, resulting in the establishment of NTPC (National Thermal Power Corporation), NHPC (National Hydro Power Corporation, WAPCOS (Water and Power Consultancy Services, the consulting firm) etc. Regional Electricity Board (REBs) comprising part time members were constituted in 1964 to promote regional coordination and operation of power supply by a 1964 office order of Government of India (Inserted into the Electricity Supply Act in 1991 by an amendment). REBs had as members, the Chairmen of the SEBs while members of SEBs ran the technical committees. By an amendment in 1991, of Electricity (Supply) Act 1948, generation was opened to private investment, including foreign investment. RLDCs (Regional Load Despatch Centers) were also established at the same time to operate the power system in a region, ensure regional grid security and integrate with power system of other regions and areas. Tariff in cases of inter-regional movements and transmission charges were to be determined by the Central Government on the advice of CEA. The Electricity Regulatory Commission (ERC) Act, 1998, enabled the creation of ERCs at the centre and in the 42

States. Central Electricity Regulatory Commission (CERC)s primary function were to regulate tariffs of (PSUs) generating electricity, tariff of power generated and supplied inter-state, inter-state tariffs for transmission services and issue of licenses to private investors in inter-state transmission. The SERCs (State Electricity Regulatory Commission) determined tariff to be charged to customers and supervising functioning of intra-state transmission including the operation of the SLDC (State Load Dispatch Center). Then came Electricity Act, 2003 which made unbundling of the SEBs compulsory into distinct generating, transmitting and distributing companies. Load dispatch at State and Central Level were required to be under Separate Government companies or authorities. Electricity Trading was recognized as a separate activity. Trading license for inter-state trading and intra-state trading can be issued by CERC and SERCs respectively. For hearing appeal against CERC and SERCs judgments Appellate Tribunal for Electricity (ATE) was established at National level. Open access to the transmission and distribution system by consumers was provided in the same Electricity Act, 2003. The Act mandated Central Government to issue National Tariff Policy, Electricity Plan and Rural Electrification Policy etc. 2.1 Sectoral Overview Electricity generation in India began under British rule with a demonstration of electric lighting in Calcutta on July, 24, 1879. In 1897, the Government of Bengal granted an exclusive 21 year license for electricity to illuminate and power the area of Kolkata to the Calcutta Electricity Supply Company (CESC) Ltd. which was registered in London. CESC Commissioned the first power station in 1899 and sold power at one rupee per kwh the tariff set at parity with electricity in London at that time (CESC Ltd. 2001). Bombay was the second city to be electrified and soon number of private companies built urban power supply system across India under franchisee that allowed for reasonable rates of return and included regulatory oversight to prevent monopolistic abuse. Generating capacity in India during 1950 was 1712 MW which has increased manifold to 1,49,391.91 MW today. Out of this installed capacity state sector, central sector and private sector accounts for 52.5%, 34.0% and 13.5.% respectively. Per capita Electricity consumption of India at present is 704 kwh/year which was meager 15kwh/year during 1950. It is expected that per capita consumption will grow to 1000 kwh/year by the year 2012.

43

Graph - 1
Per Capita Electricity Consumption
800 700 600 500 400 300 200 100 0 704 631 408 Series2 238 15.6 1950 34.8 1960 83.5 130.5

Units/Year

1970

1980

1990

2001

2006

2008

Year

(As per UN methodology: Per Capita Consumption equal to Gross Electrical Energy Availabiulity/Population) If we see the world scenario India lags very much in per capita consumption of electricity. When world average per capita consumption is 2326 unit India has meager 631units which can be seen from the figure below: Graph - 2
Per Capita Electricity Consumption 2005-06

17321

11221

7698

kWh

7114

8201

13636

6234

Series1

Canada

Ger man y

France

Australia

Countries

Japan

44

India

UK

USA

631

This comparison shows the economic under development of India. In India 55% households have access to electricity, balance 45% households are to be electrified. About 84% of 587000 villages have been electrified and balance is to be electrified by 2012. Table - 4 Per capita electricity consumption in India by region in kWH (kilowatt -hours)/Year Northern Western Southern Eastern 115 150 195 188 192 201 192 332.21 N.E./India 50/178 89/253 99/336 104/334 103/349 117/360 103/355 201/631

1985-86 173 259 186 1990-91 249 367 272 1995-96 308 513 377 1996-97 306 522 366 1997-98 313 538 400 1998-99 324 557 406 1999-00 318 535 400 2005-06 602.5 916.28 757.79 (Source: Ministry of Power Govt of India)

From the above table it can be seen that although most of thermal and hydel power houses are situated in Eastern and North Eastern part of the country the per capita consumption is less in these area due to poor economic development. 2.2 Relationship between Electricity and GDP These elasticities are for generation capacity which is the metric of greatest use of planners. Elasticity for actual power supply would be different because, in recent years, generation output has grown more rapidly than capacity, leading to slightly higher elasticity for power supplied versus GDP. Elasticity (Electricity capacity Vrs. GDP) First plan Second plan Third plan Fourth plan Fifth plan Sixth plan Seventh plan Eighth plan Ninth plan Tenth plan 1951-1956 1956-1961 1961-1966 1969-1974 1974-1979 1980-1985 1985-1990 1992-1997 1997-2002 2002-2007 3.14 3.38 5.04 1.85 1.88 1.39 1.50 0.97 0.75 0.80

(Calculated and complied from data from the planning Commission and Ministry of Finance (Economic Survey)).

45

As observed in nearly all advancing economies the elasticity between electricity capacity and GDP has declined as Indian incomes have risen and services (which are less energy intensive than manufacturing) have occupied a larger share of GDP. 2.3 Electricity Sector in India Plan wise power sector outlay as (%) of overall outlay and plan wise power sector expenditure as % of over all expenditure are depicted in the tables below: Graph - 3

30 25 Percentage 20 15

Power Sector Outlay in % against overall 28.3

Series1
18.9 20.13 18.57 15.39 12.6 19.04 18.33 14.49 18.2

10 5 0 I II

8.89

III IV V VI VII VIII IX

Plan

X XI

Graph - 4
Plan wise Power Sector Expenditure(%)against overall expenditure
20 18 16 14 12 10 8 6 4 2 0 I 18.58 18.77 18.74 14.6 17.33 15.79 13.6

Percentage

13.27 9.68

Series1

II

III

IV

Plan

VI

VII

VIII

IX

(Source: Planning Commission approach paper on 11th Five year plan) 46

Out of total installed capacity of 149391.91MW today, State sector accounts for 51% as shown in the table below: Graph - 5

24305.25, 16%

Installed Generation Capacity in MW

76115.67, 51% 48970.99, 33%

State Sector Central Sector Private Sector

(Source: Ministry of Power,GoI) The estimated commercial losses of SEBs (State Electricity Boards) without subsidy during 2001-02 are 33177 crore rupees as compared to 11305 crore rupees during the year 1996-97. The commercial losses with subsidy payable by State Government for these years are 24837 crore rupees and 4674.31 crore rupees respectively. The average tariff charged to consumers had increased from 165.30 paise in 1996-97 to 239.85 paise in 2001-02. The gap between average cost of supply and average tariff has increased from 50 paise per kwh (kilo-watt hours) in 1996-97 to 110 paise per kwh in 2001-02. Cost recovery had declined precipitously because tariff had not kept pace with costs. The 1948 Electricity (Supply) Act modeled on a similar British law from 1926, led to the creation of the State Electricity Boards (SEB) that were responsible for all new generation, transmission and distribution. As in Brazil and Mexico where state-owned enterprises were initially created to invest in new power supply, the SEBs also gradually assumed the existing privately owned services. Indias constitution which took force on January 26,1950 created a federal form of government and Electricity was placed in the concurrent list, constitutionally assigned to both the Central and State Government. In practice, especially under the dominating Governments of Nehru and his successors, Central authority overrode the States. Consistent with their socialist ideology, Indias new leaders established multitudes of State Owned Enterprises (SOEs) to occupy the commanding heights of the economy. The intension was to advance employment and other social imperatives while ensuring that profits were invested back into growth and development not squandered by elite. Legally, the SEBs were autonomous bodies and free to set 47

their own tariffs. The regulatory over sight that was enshrined with the early licenses under British rule made the SEBs, an extension of the state, which were assumed to be free of monopoly instincts. The dark side of this arrangement, however, was the complete interference by the State Government in management and operation. By statute the SEBs were required to generate a profit with mandated 3% minimum return on net asset value (NAV). Through a flawed accounting system that could be adjusted to deliver almost any result, the States were able to just cover the statutory returns for many years. In practice, however, the SEBs internal accrual were insufficient for growth, and they sought assistance from the State in the form of grants, subsidies, soft loans etc. To assist the states, the Central Government sought to augment their role by establishing a number of publicly owned companies like DVC, NTPC & NHPC that generated and transmitted power to more than one state. These were created in 1960s, 1970s & 1980s a period of increased nationalization and control driven by Prime Minister Indira Gandhi. 2.4 Orissa State Electricity Board and its State of Affairs Orissa is situated on the Eastern Coast of India. The Eastern border is 400 km long along the Bay of Bengal. As per 2001 census population of the State is around 36.80 million. Orissa covers an area of 155,707sq.km. Before independence, Electricity Distribution in the State was limited to some limited pockets. Private companies were in charge of distribution. They were using diesel generating sets for their business. After independence, State Government made lot of efforts for power development. As per Electricity (Supply) Act, 1948, Orissa State Electricity Board (OSEB) was constituted in 1961. It remained in charge of Generation, Transmission and Distribution of Electricity throughout the State. First hydroelectric power station was commissioned in Hirakud Dam over river Mahanadi in 1963-64. The first thermal power station was commissioned in 1969 at Talcher. All private Distribution companies were taken over by OSEB and it had monopoly in all three divisions such as Generation, Transmission and Distribution of Electricity in the State. After establishment of central sector power Generators such as NTPC after 1975, OSEB had been getting its share of power as central sector allocation from these Generators. The financial transaction of the OSEB could be broadly put under the following three groups. (a) Revenue receipt and expenditure (b) Capital receipt and expenditure (c) Net revenue and appropriation account Revenue receipt of OSEB consisted of income from sale of power, fees, penalties, sale of scrap and salvaged stores and subsidy from State Government towards rural 48

electrification. Rural electrification was a non-remunerative business for State Electricity Board. OSEB carried out rural electrification as a part of Governments developmental program. For this State Government had been providing subsidy to State Electricity Board. Lack of efficiency in expenditure policy led to increasing gap in the resources and finally compelled an Electricity board to resort to pushing the rate of electricity tariff and duties. Expenditure of OSEB can be analyzed under two accounts such as Revenue Accounts and Capital Accounts. Revenue accounts of OSEB included expenditure like power purchase, O&M expense, employee expense and depreciation etc as shown in the table below. Table - 5 Revenue Account of OSEB/GRIDCO (Rs in Crs)
Sl. No. 1 2 3 4 5 6 7 8 9 10 Particulars Revenue from sale of power Subsidy and other income Total Revenue Cost of power Repair& Maintenance Employee and other cost Depreciation Interest Total expenses Profit/ (Loss) 1992-93 (Actual) 419.5 133.73 553.23 181.37 43.48 156.69 51.65 94.1 527.29 25.94 1993-94 (Actual) 573.37 256.48 829.85 296.39 45.74 320.43 52.46 84.85 799.87 29.98 1994-95 (Actual) 725.11 194.45 919.56 354.94 48.19 346.57 57.06 87.9 894.66 24.9 1995-96 (Actual) 912.14 292.97 1205.11 659.64 45.86 315.84 81.69 75.14 1178.17 26.94 1996-97 (Actual) 1153.36 56.33 1209.69 982.71 43.02 280.19 132.96 65.8 1504.68 (-294.99) 1997-98 (Actual) 1399.87 57.16 1457.03 1199.83 58.54 339.82 141.66 48.12 1787.97 (-319.16) 1998-99 (Actual) 1419.99 138.94 1558.93 1174.46 69.01 272.58 129.48 147.61 1793.14 (-259.69)

(Source: Annual Administrative Reports of OSEB for Relevant Years) Major source of capital receipts of the then OSEB had been various types of loans received from State/Central Government and other public sector institution like Rural Electrification Corporation, LIC, commercial banks and so on. Assets of OSEB were treated as loan from the State Government. Capital structure of OSEB did not allow an element of share capital. Thus the very financial structure of OSEB was loaded up by the interest charge that was to be paid by the Board. The revenue surplus generated on revenue account went fully to meet the interest charges. As far as the State Government was concerned it was highly tolerant and indulgent in the face of continuous defaults in payment of interest on its loan. Quite often the accumulated arrears were treated as further loans. Capital expenditure of OSEB included construction of new transmission lines and sub stations, rural electrification, repayment of loans, service connection, and creation of power generation asset etc. Under Section 59 of the Electricity (Supply) Act, 1948, the Board was required to fix its tariff in such a way that after meeting all expenses properly chargeable to revenues and after taking into account subsidies from Government, it should have a 49

surplus of at least 3% of the value of the net fixed capital of the Board in service at the beginning of the year. Till 1970s, State Government was able to make the requisite subventions to the Board but things started changing for the worse. The progressively increasing burden of subsidy could not be met by the Government and the unpaid amount due to OSEB went up to Rs.334 crore by 1994. Clearly, the Government was unable to meet its statutory obligation under the Electricity (Supply) Act 1948. Another matter of serious concern was the growth transmission and distribution (T&D) losses which had a crippling impact on the finances of the Board. Statistics put out by the Board and even the Central electricity Authority/Planning Commission reported Orissas T&D losses in the region of 23% over a number of years. But, these figures did not take into account the losses taking place owing to non-billing, non-collection and theft of electricity. The under statement of T&D losses was not unique to Orissa. The audited accounts of OSEB, however had been pointing out a different set of figures depicted in the following table. Table 6 T&D Loss in OSEB before Reform Generation/ Sales (MU) as per Purchase (MU) revenue return 6444.018 3525.103 7331.146 4047.539 7100.414 3904.078 7826.412 4573.428 8493.397 4536.332 9762.238 5178.894

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Loss (%) 45.30 44.80 45.01 41.57 46.59 46.94

The Planning Commission in its power and Energy Division Annual report of April 2000 on the working of State Electricity Boards and Electricity Departments reported that while T&D losses for the country as a whole varied between 19.8% in 1992-93 and 24.5% in 1996-97, in the case of Orissa, the losses were as under: Table 7 Planning Commission Report on T&D Loss Year T&D Loss (%) 1992-93 23.5 1993-94 23.4 1994-95 23.8 1995-96 46.9 1996-97 50.4 A foot note to the report explains that sudden jump is due to the realistic assessment of T&D losses in the power system after restructuring of OSEB. Similar position can be observed in case of Haryana and Andhra Pradesh who also opted for power sector reforms. 50

Table - 8 Performance of Orissa State Electricity Board/GRIDCO (Pre-privatisation period) Area of Achievement 1974-75 1984-85 1994-95 1995-96 1999-00 Installed Capacity (MW) 574.675 1134 1731.93 1731.93 2498.88 Transmission and distribution 33945.2 83414 116715 118286 120625 lines (ckt km) 1 Total energy input (MU) 2335.07 4348 7851 9244.93 11130 Energy sold (MU) 1995.12 3566 6471.14 4560.36 6286.49 Percentage loss to energy sold 14.5 17.9 17.6 50.4 43.52 Energy billed (MU) 4536.33 4560.36 6286.49 Percentage loss to Energy billed 42.22 50.4 43.52 Revenue earned (Rs. in Crore) 23.31 116.09 725.11 912.14 1547 Consumers served (Nos.) 234977 716.706 1230354 1273844 1600551 Villages electrified (Nos.) 11525 23762 33131 32088 35190 Assets in use (Rs. in Crore) 133 498.3 1073.14 1022.85 Employees (Nos.) 18224 33000 34450 34732 28309 Per Capita consumption 73.3 137 248 292.5 352 (kWh/Year) Table - 9 Sales Over the Years in OSEB 1974-75 1984-85 1994-95 MU % MU % MU % 48.8 2.4 355 11.1 2024 32.53 44 2.2 94 2.9 305.5 4.909 1426.6 71.5 2420 75.5 2940.2 47.25 54 2.7 157.4 4.9 167 2.684 56.8 2.8 177.3 5.5 681 10.92 364.9 18.3 105.2 1.691 1995.1 100 3203.7 100 6222.9 100

Category Domestic Commercial Industrial Railway Traction Misc. Outside State Total

1999-2000 MU % 2053 32.43 405 6.4 2372 37.47 175 2.76 674 10.65 651 10.28 6330 100

Table - 10 Revenue Over the Years in OSEB 1974-75 1984-85 1994-95 1999-2000 Category Rs. in % Rs. in % Rs. in % Rs. in % Lakh Lakh Lakh Lakh Domestic 127 6.9 1241 7.5 8264 11.45 32700 21.14 Commercial 124 6.7 686 4.1 4194 5.811 14400 9.32 Industrial 1119 60.4 12125 73.0 47941 66.42 72000 46.54 Railway Traction 66 3.6 1266 7.6 3371 4.47 6600 4.25 Misc. 71 3.8 1289 7.8 6809 9.434 16100 10.42 Outside State 345 18.6 1599 2.215 12900 8.33 Total 1852 100 16607 100 72178 100 154700 100 Source: IIPA Study on impact of Restructuring of SEBs(Vol-III) 51

Another nagging problem was growing power shortages. These started being felt from the mid 1980s and by the early 1990s, the shortages had become acute; the peak shortage shooting up from 24% in 1991-92 to 37% in 1993-94 exceeding national average. Government of Orissa had to issue statutory notification regulating the supply, distribution and consumption of electricity by consumer groups. Rotational area load shedding for consumers was irritatingly common. The worsening situation compelled industries who could access funds, to go in for captive generating plants; those who could not, suffered irreparable losses. It was only with addition of capacity at Orissa Power Generation Corporation (OPGC) from August 1994 that restriction ceased to be imposed. The poor performance of OSEBs only Thermal Power Station at Talcher (TTPS) was another distressing feature. The plant suffered from mismanagement. It had a work force far in excess of requirement, high auxiliary consumption and extremely poor plant load factor (PLF). With generation projects being executed under the Government and growing emphasis on village electrification, by far the major part of the investment in the power sector went into those areas starving the transmission and sub-transmission segments. A review of investments in the power sector disclosed that as much as 88% of the total investment was being made in the generation and rural electrification segments leaving meager 12% for transmission and system improvement. Almost all EHT lines and sub-station were loaded fully without any standby capacity. As a result, supply had to be curtailed or shut down even for routine maintenance. Preventive maintenance had often to be deferred for this reason. Technical losses, particularly in the HT and LT distribution segments grew and reached the unacceptably high level of 23% by 1994-95. Over the years, tariff set by OSEB (as indeed practically all other Boards in the country) got progressively skewed, with industries bearing a disproportionately heavy burden of costs. The beneficiaries were the LT group of consumers who met only a significantly lower portion of the cost. Despite the pattern of cross-subsidy which was heavily weighted against industry, the overall tariff did not cover the entire cost. For example in 1992-93, OSEB tariff covered only 78% of the cost and in 1993-94, it worsened to 71%. The cadre of engineers with OSEB was all along held by the Government of Orissa, the only State where the Board did not have its own cadre of engineers. Coupled with financial strain there was virtually no effort towards innovation. Energy audit to identify areas of large T&D loss, streamlining meter-reading, billing and collection procedures were neglected. The expansion of the LT network permitting easy theft of electricity, compounded the problem. There was no system of timely writing off of bad debt and receivables came to be as high as 190 days average revenue.

52

A number of steps had been taken by the Government over the years to strengthen OSEBs revenue collection and theft reduction. Theft in line material had assumed alarming proportion and this led to the enactment of the Orissa Electric Supply line Material (unlawful possession) Act 1988. A dedicated magisterial court was established to expeditiously dispose of electricity theft cases and a special police organization was set up for this purpose, headed by a very senior police officer. None of these steps, however, produced the desired result. Under the above background, Govt. of Orissa thought of reforming the whole power sector of the State. 2.5 Reform and Restructure of Power Sector in Orissa Orissa was the first State in the country to initiate reform its electricity sector in a big way. For this purpose, the State received encouragement from the Government of India. The Orissa electricity Reform Act came into force on 1st April, 1996. The principal objectives of the reform were as under: (a) Restructuring of the electricity industry by bringing improvements in generation, transmission, distribution and supply functions of the electricity. (b) Development of the industry in an efficient, economical and competitive manner. (c) To provide avenues for participation of private parties and reduce dependence on Government funding in the electricity sector. (d) To improve quality of service to the consumer. (e) To enhance operational efficiency and reduce losses. (f) To provide for a transparent mechanism for development and regulation of the industry, including tariff fixation and settlement of disputes through an independent statutory body i.e the Orissa Electricity Regulatory Commission (OERC). (g) To contribute to economic growth of the State by ensuring better quality of electricity supply and (h) To create opportunities for increasingly rewarding employment for technical personnel and provide a stable environment for carrier development in the electricity sector. The reform process was conceptualized and the road map for its implementation was drawn up after an elaborate exercise by taking support of reputed National and International consulting firms. 2.6 Imperative of Reforms Reform became imperative since the power sector in the State had become unsustainable due to various factors as mentioned below: (a) (b) Vertically integrated monolithic structure of Orissa State Electricity Board (OSEB) which did not engender either efficiency or effectiveness; Lack of commercial orientation 53

(c) (d) (e) (f) (g) (h) (i)

(j) (k) (l) (m)

Adverse capital structure High Transmission and Distribution losses both technical and commercial Non-remunerative tariff Downward trend in industrial consumption and increase in domestic and agricultural consumption which entailed a high level of cross-subsidy Inadequate investment in generation, transmission and distribution sectors Widening demand-supply Gap Inadequate maintenance of the existing generating stations and transmission and distribution network resulting in low plant load factor (PLF) of generating stations and poor reliability of transmission and distribution network Poor billing and collection Poor quality of the service to the consumers Manpower related problem and Misuse of section 78A of the Electricity (Supply) Act 1948 which stipulated that Government should provide policy directives to the State Electricity Boards (SEB).

Under the provision of the Electricity (Supply) Act 1948, the State Government had to ensure three percent rate of return on net fixed assets. OSEB was not able to achieve the same. The subsidy burden on the State Government increased from Rs.14.00 crore on 1989-90 to Rs.257.62 crore in 1995-96 (the last year of OSEB). Although OSEB was incurring heavy losses, huge investments were necessary for creation of additional generating capacity to bridge the demand and supply gap. The State Government was not in a position to provide the requisite resources to meet the current as well as future demands of the power sector in the State. Again gap between peak demand and supply had reached almost 45% by 1993-94. Though, the consumers strength increased to more than ten lakhs, the overall financial performance deteriorated. Table below shows the comparative position of OSEB for 1994-95. Table -11 Comparison of SEBs Before Reform
OSEB KEB WBSEB MSEB TNEB RSEB PSEB Return on Net Fixed Assets (%) -16.4 -11.83 -12.79 4.74 -0.08 -16.2 -13.3 Non-Tech. Loss (%) 27 Debtors in Sales Months 7.6 6.1 7.0 4.6 1.6 4.2 1.83 Tariff as % of Cost 82.8 87.8 80.3 99.6 97.2 71.6 74.0 PLF (%) 34.9 53.1 37.8 56.5 48.3 51.4 52.9 Customers per Employee 38 153 53 93 99 80 60

Source: Annual Report of the respective SEBs.

54

2.7

Process of Reform The reform process started with the enactment of the Orissa Electricity Reform Act, 1995. The Act was designed to address the fundamental issues responsible for the poor performance of the power sector in the State. The new legislation was aimed at restructuring the electricity industry, taking measures conducive to increasing the efficiency of generation, transmission and distribution of electricity, opening avenues for private participation, and establishing a Regulatory Commission. The Act allowed for transfer of the assets, liabilities, staff and statutory obligation of the OSEB to successor companies. The pictorial representation of unbundling is given below:
Talcher Thermal sold to NTPC

1995

O.S.E.B. Assets taken over byGoO 1996

OERC 1996 1998 2005-06

OPGC (AES)
49%

OHPC

GRIDCO

Minority Interest & Management Divested CESU Now under a scheme

1999 Privatised

1998 Distribution Corporatised WESCO (BSES) Now REL SOUTHCO (BSES) Now REL
SLDC Wires Co (OPTCL) (OPTCL) Trading (GRIDCO)

NESCO (BSES) Now REL

(Pictorial representation of reform stages) Electricity business was divided into three separate activities: Generation, Transmission and Distribution. The following steps, as envisaged under the reform and restructuring process were taken. (1) OSEB was restructured and corporatised in Grid Corporation of Orissa (GRIDCO) and Orissa Hydro Power Corporation (OHPC) w.e.f. 1st April, 1996. The transmission and distribution business were, transferred to GRIDCO. All the hydel power stations of OSEB were transferred to OHPC. Talcher Thermal Power Station (TTPS) of OSEB was transferred to NTPC. NTPC paid a total of Rs.356 crore towards acquisition of assets with book value of Rs.139 crore. Orissa Power Generation Corporation (OPGC) was privatized with disinvestment of 49% stake and the management control was transferred to a private sector company M/s AES in January 1999. Government got about Rs.603.2 crore against the face value of Rs.240.21 crore of the thermal power station (420 MW).

(2) (3)

55

(4)

Orissa Electricity Regulatory Commission was established in April 1996 and became functional from 1st August, 1996.

One of the alternatives considered towards achieving the objectives of power sector reforms was private sector participation in the electricity distribution segment. To ensure that privatization leads to efficiency gains, GRIDCO had to bring changes in the internal environment variables like management, labour relations and communication and reporting. Towards this end, GRIDCO initiated a comprehensive programme known as ISP or institutional strengthening programme. Three important steps under ISP were as follows: (a) Introduction of commercial function at the field level: OSEB was managed principally by engineers, and it was standard practice for the engineers to undertake commercial, administration and other nonengineering jobs. The management thus had a strong technical bias. One of the major organizational changes introduced during the ISP was therefore to bifurcate the field level activities into commercial and engineering. The commercial function comprised of revenue management, accounting and customer management. The engineering function comprised of system operation, repairs and maintenance and other technical activities. Introduction of profit centre accounting: GRIDCO was divided into cost centres and profit centres. Transmission divisions were treated as cost centres and distribution divisions as profit centers. Each distribution division was managed by a Divisional Manager (Executive Engineer) who reported to the Circle Manager (Superintending Engineer). Each divisional manager was required to attend the monthly performance review meeting chaired by the CMD (Chairman-cum-Managing Director) of GRIDCO. During these meetings, a detailed discussion on billing, distribution losses, collection and other related matters used to take place and an action plan used to be prepared. This was a successful intervention during the preprivatisation period, which helped in the following: Stressed the commercial aspect of the utility business Developed inter-relationship between technical and finance executives. Enabled the divisional managers to understand the financial implications of the various activities undertaken.] Involved the field personnel in various managerial decision and Established an authentic database for important business parameters like billing, collection, T&D loss etc through a well developed management accounting system.

(b)

(c)

Introduction of Revenue Improvement Action Programme (RIAP): This programme focused on the reduction of non-technical losses and concomitant improvement on the financial position of GRIDCO. One of the 56

major contributions of RIAP was the quantification of the actual T&D losses. On the basis of field studies, the magnitude of non-technical loss and causes of the different types of losses were established. The energy lost and energy billed in the year 1996-97 are given below: Energy billed Non-technical loss Technical loss 54% 28% 18%

This finding of high T&D losses against the reported 22% figure in various forums and published sources was an eye opener to both the shareholders and the management. Efforts were made to reduce the non-technical losses by managing the revenue cycle efficiently, by understanding each of the following activities and identifying and addressing problem areas. Energy Delivery Meter Reading Bill Preparation Bill Distribution Collection Credit Control

In the process, even before the privatization, GRIDCO improved its performance in the following areas (a) regularization of unauthorized connections (b) increase in bills based on actual meter reading (c) increase in billing as a percentage of input (d) increase in collection as a percentage of billing and (e) improvement in customer relationship. However, RIAP could not be extended to all the divisions of GRIDCO. As a result, the financial and operational performance of most of the divisions could not be improved. 2.8 Privatisation of Distribution Business Since the weakest link in the industry value-chain is the distribution of power to the ultimate consumer, Government decided to transfers this task to private players. The process started with so called Management contract system before moving on to Divestment. In October 1996, GRIDCO entered into management contract with BSES, one of the leading private players of the industry. Under the contract which was known as DOA (Distribution Operation Agreement) BSES was given the management of one of the four zones (Central zone) in consideration of a fee plus incentives based upon measurable improvements in collection and metering. The experiment, however, failed and GRIDCO revoked the contract in May, 1997. This propelled the Government of Orissa later to take the step of divesting its shares in all the four distribution zones of GRIDCO. Following were salient features of privatization process. The distribution zones were corporatised, which gave birth to Western Electricity Supply Company of Orissa (NESCO), Southern electricity 57

Supply Company of Orissa (SOUTHCO) and Central Electricity Supply Company of Orissa (CESCO).These Distribution Utilities covered the following revenue districts of Orissa Table -12 License area of DISCOMs Licensed Areas (Districts) Puri, Khurda, Nayagarh, Cuttack, Denkanal, Jagatsinghpur, Angul, Kendrapara. Mayurbhanj, Keonjhar, Bhadrak, Balasore and major part of Jajpur. Ganjam, Gajapati, Kandhamal, Boudh, Rayagada, Koraput, Nawarangpur and Malkangiri. Sambalpur, Sundargarh, Bolangir, Bargarh, Deogarh, Nuapara, Kalahandi, Sonepur and Jharsuguda.

Name of DISTCO CESU NESCO SOUTHCO WESCO

Privatization process ended by transferring WESCO, NESCO, SOUTHCO to BSES and CESCO to AES and Jyoti Structures Limited. Shareholding pattern of the distribution companies after divestment stands as follows: Private Companies 51% GRIDCO 39% Employee Trust 10% Private companies purchased 51% of share capital of the distribution companies at premium as follows: Table 13 Share Holding Pattern of DISCOMs Sold at Value of 51% share Company capital (Cr.) premium (Cr.) CESCO 37.08 42 SOUTHCO 19.2 28.30 WESCO+NESCO 58.42 88.20

Hence against Rs.115 crore of 51% equity GRIDCO received Rs.159 crore. From 01.04.1999 M/s BSES (Reliance Energy) took over management of WESCO, NESCO & SOUTHCO. From 01.09.1999 M/s AES took over management function of CESCO.

2.9

Central Electricity Supply Company of Orissa Ltd (CESCO) and creation of CESU While AES was acquiring CESCO, it was assured that GRIDCO would allow CESCO cash accommodation upto Rs.174 crore. This amount, along with interest was to be repaid after 1st September, 2002. There was a dispute between M/s AES 58

and the State Government over financing the required working capital over and above this amount. AES provided letter of comfort to GRIDCO promising assistance to the CESCO management in raising funds for working capital, which never happened. GRIDCO took CESCO to court for violation of escrow arrangement as, instead of paying fully for the bulk supply bill, CESCO was diverting part of the money for payment of salaries. OERC intervened and directed CESCO to do its job of distribution properly. In July, 2001, AES sought GRIDCOs permission to sell its stake in CESCO to a third party or to GRIDCO. However, this was against the shareholders agreement which provided for a lockin-period of five years ending on 31st March, 2004. CESCOs over dues to GRIDCO on power purchase head had reached Rs.577 crore including the initial cash accommodation of Rs.174 crore. AES Management abandoned its responsibility from CESCO and disappeared. OERC appointed an Administrator to run CESCO. Subsequently, under Section 19 of Electricity Act, 2003 OERC revoked the license of CESCO w.e.f. 01.04.2005. After revocation Commission initiated the process for sale of utility of the licensee u/s 20 of the said Act. But, Commissions effort did not fructify. As a result OERC decided to formulate a scheme u/s 22 of the Electricity Act, 2003 for operation and management of Central Electricity Supply Utility (CESU). A management board nominated by OERC was constituted consisting experts in power sector and Government nominee which came into effect from 08.09.2006 with renaming of CESCO as CESU under the said scheme. 2.10 Transfer of Assets Restructuring was done in two steps through the instrumentality of Transfer Schemes framed under the Orissa Electricity Reform Act, 1995. Under the first Transfer Scheme (effective from 1st April, 1996) the assets, liabilities, proceedings and personnel of the 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. Table - 14 Details of Revaluation done in Transfer Scheme dated 1st April 1996 (Rs. Crore) Book value of T&D assets 1103.2 Interest and expense capitalized 97.5 1200.7 Total Uplift in value of assets 1120.0 2320.7 Total Depreciation 363.0 Net fixed assets of GRIDCO as on 1st April 1996 1957.7 Total Revaluation Uplift in assets 1120.0 59

Further adjustment 74.0 Total 1194.0 Adjustment Subsidy due to OSEB 301.2 Electricity charges receivable from Government 39.2 Reduction in O&M stock 50.6 Total (A) 391.0 Fresh equity to State Government 253.0 Zero coupon bond to State Government 400.0 Bonds issued to Pension fund 150.0 Total (B) 803.0 Total (A+B) 1194.0 Source: IIPA Study on impact of Restructuring of SEBs(Vol-III) Restructuring exercise involved certain measures, which cast a heavy strain on the finances of GRIDCO. Under the Transfer Scheme of April 1996, the State Government took over the transmission and distribution assets of OSEB (book value plus capitalized expenses and interest at Rs.1200 crore) and re vested them in GRIDCO after up valuing by an additional Rs.1194 crore, the State Government adjusted the subsidies and electricity charges payable to OSEB/GRIDCO totaling Rs.340 crore. In addition, GRIDCO issued Rs.253 crore worth of shares and Rs.400 crore worth zero coupon bonds to the State Government. This left GRIDCO with a serious cash shortage right from day one and compelled it to default to the generating companies and other suppliers. In addition, Rs.1146 crore of loan and liabilities were also assigned to GRIDCO. The up valuation exercise was prompted by considerations including the need to have a capital base capable of absorbing substantial debt funds needed for the upgradation of the T&D system and the requirement of having a self-financing ratio of 20% and an adequate debt-equity ratio as per the conditions of FIs. 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 Government to adjust dues totaling Rs.340 crore payable to OSEB/ GRIDCO against the up-valued amount. The impact of revaluation of assets on the DISCOMs has been lower than that on GRIDCO as they were allocated only project specified liabilities totaling Rs.630 crore for all four DISCOMs put together, while GRIDCO retained in its books liabilities (including accumulated losses) totaling about Rs.1950 crore. While the assets were up valued, there was no such up valuation of the liabilities. Besides, as stated earlier, the DISCOMs were assigned only project related liabilities. The only component of the assets up valuation, which has a bearing on tariff is depreciation, which stood at Rs.81.69 crore in 1996-97 on the eve of the up valuation and was pegged at Rs.128.02 crore for 1998-99 by OERC in their tariff order effective from 1st April, 1997. 60

2.11

Sovan Kanungo Committee Report After about five years of reform in the year 2001 Govt.of Orissa noticed that there has not been tangible improvement in the quality of service or any reduction in distribution loss. In contrast there has been tariff hike every successive year. The privatized DISCOMs even to failed to invest any money in the improvement of the Sector which was one of the imperatives of the reform. The Govt. then appointed a high power committee called Sovan Kanungo Committee to suggest Mid-Term Correction in power sector reform in Orissa. The Committee made number of recommendation some of which were accepted by the Government. The important recommendations accepted by the Government are as follows: The effect of up-valuation of assets of OHPC and GRIDCO would be kept in abeyance form the financial year 2001-02 prospectively till 2005-06 or the sector turns around. Whichever is earlier to avoid re-determination of tariff for first years and also re-determination of assets of various DISCOMs For tariff determination depreciation would be calculated at pre-1992 norms notified by Govt. of India. Moratorium on debt servicing by GRIDCO and OHPC to the State Govt. would be allowed from the FY 2001-02 till 2005-06 except loans from World Bank to the extent State Govt. is required to pay to the Govt. of India. GRIDCO and OHPC shall not be entitled to any return on equity (RoE) till the sector become viable on cash basis. OERC would consider Multi Year Tariff schedule which would help the utility like generator, GRIDCO and DISCOMs to embark upon Long-Term Business Plan. World Bank Loan would be passed on by State Government to GRIDCO and DISCOMs as 70% loan @ of 13% interest per annum and balance 30% would be as grant. Tax free bonds @ 8.5% interest would be guaranteed by Government of Orissa for PFC/REC loan. Govt. would exempt water cess on the volume of water used by OHPC for generation of electricity. There shall be 5% overall reduction of distribution losses every year form FY 2002-03 to 2005-06 benchmarking starting distribution loss of 42.21% in FY 2001-02. Collection efficiency of revenue to be calculated as 85% for FY 2001-02 reaching to 95% in 2005-06. Another major recommendation of the Kanungo Committee is infusion of Rs.3240 Cr. into the sector by the Government which has never happened.

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2.12

Restructuring of GRIDCO After privatization (1999) GRIDCO was carrying out the following activities. (i) (ii) (iii) Transmission and Bulk Supply activities in the State Sale of Electricity outside the state and State Load Despatch functions.

Prior to enactment of the Electricity Act, 2003, GRIDCO was undertaking the unified business of transmission and bulk supply of electricity in the state based on the license granted by OERC. GRIDCO was also undertaking the functions of State Load Despatch Centre (SLDC) and was notified as the State Transmission Utility (STU) under the provisions of the Electricity Act, 2003. The Electricity Act, 2003 has recognized trading in electricity as a distinct licensed activity that can only be undertaken by a licensee to be granted by the appropriate Commission. The Act specifically prohibits the STU/transmission licensees from engaging in trading of electricity. GRIDCO, being an STU, was not permitted to engage itself in trading in electricity i.e. purchase of electricity for resale and was required to segregate its activities in a manner that the entity (which will undertake transmission, STU and SLDC functions) will not undertake the activities of trading and bulk supply of electricity. Keeping in view the statutory requirement of the Electricity Act, 2003 for separation of trading and transmission functions into two separate entities, the State Government on 27th March, 2004, incorporated the Orissa Power Transmission Corporation Ltd. (OPTCL) as a wholly owned undertaking of the State Government to take over the transmission, STU and State Load Despatch (SLDC) functions of GRIDCO. Central Sector Generation

OHPC

IPP

CGP

Trader

GRIDCO
OPTCL

CESU

NESCO

WESCO

SOUTHCO

(Pictorial representation of power flow in Orissa Power Sector) 62

Then on 9th June, 2005, State Government transferred transmission undertaking assets, liabilities, properties, personnel including the assets of SLDC and sub-LDCs and vested them with OPTCL. OPTCL has also been declared as the State Transmission Utility (STU) and is also discharging the functions of SLDC. GRIDCO continues to undertake bulk supply and trading functions. GRIDCO now purchases power from different generators such as Central Sector Generators, OHPC Independent Power Producer (IPP), Captive Power Generators (CGP) and supplies it to four distribution licensees of the State through OPTCL transmission lines. GRIDCO has very peculiar financial position. It carries arrear power purchase dues payable to generator with it which distribution companies failed to repay. This power purchase liability stands at Rs.2033 crore at the beginning of the financial year 2007-08. Inclusive of this power purchase liability GRIDCO has a total loan outstanding of Rs.2247 crore. Although this huge liability is due to the distribution business of unbundled GRIDCO and subsequently privatized distribution companies, GRIDCO has failed to transfer this amount to them due to changed scenario of restructured sector. Seeing no other ways an arrear power purchase due has been securitized by GRIDCO by issuance of Bonds worth Rs.2033 crore to Generators. The service liability of this bond and other loan liabilities are passed through the Annual Revenue Requirement (ARR) of GRIDCO which is recovered by Bulk Supply Price (BSP) charged to distribution companies. The total receivables from distribution companies which include arrear bulk supply price (BSP) and other loan liabilities stands at Rs.2289 crore. This approximately matches with loan liabilities of GRIDCO. After divestment of transmission and SLDC activities from GRIDCO in the year 2005 its legal existence has become controversial. As per section 14 of Electricity Act, 2003 there are three types licensees such as transmission licensee, distribution licensee and trading licensee. Before enactment of the Electricity Act, 2003, GRIDCO was Transmission and Bulk Supply Licensee under the Orissa Electricity Reform Act 1995. As such, GRIDCO had entered into long-term power purchase Agreement (PPAs) with generating companies namely NTPC, OPGC and OHPC etc. Under this said agreement GRIDCO was obliged to sell power on priority basis to DISCOMs of Orissa up to their full requirement and the DISCOMs were obliged to buy power only from GRIDCO. This arrangement was what is known as single buyer model of power procurement for DISCOMs of Orissa. The arrangement was convenient because GRIDCO was also the transmission licensee. But, after assignment transmission activity to OPTCL, GRIDCOs position has become somewhat debatable. GRIDCOs activity is now similar to that of a trader. As per proviso Section 14 of Electricity Act, 2003 GRIDCO is a deemed trader. But, OERC does not fix trading margin for GRIDCO because if trading margin as fixed by Central Electricity Regulatory Commission (4 paise/unit) is made applicable then earning of GRIDCO will be very less and will be insufficient to service its liabilities inherited due to past legacy. OERC holds that under the single buyer model the procurement price of DISCOMs coincides 63

with the selling price of GRIDCO. As per Section 86(1)(b) of Electricity Act, 2003 OERC is empowered to regulate the electricity purchase and procurement process of distribution licensees. Hence, under the light of above discussion the position of GRIDCO as bulk supplier of electricity is justifiable. The pictorial representation of the power sector of the State of Orissa is given below: CORPORATE STRUCTURE OF THE ELECTRICITY SECTOR IN ORISSA
Independent Generation Sources Central Sector (GOI-owned) GOO-owned Privatised Distribution Companies

NTPC
WESCO Customers

OHPC OPGC IPPs CGPs GRIDCO

GOO Trading company

GOO- Owned, 49% Privatised Private Sector

NESCO

Customers

SOUTHCO OPTCL- Transmission Company under GoO From 01.04.2005 SLDC (Financially Autonomous) From 01.04.2009

Customers

Private/Public Sector

CESU

Customers

Orissa and Delhi are the two States in India to have completed Privatisation of Distribution

2.13

Chronological events of Power Sector in Orissa

Table 15 Chronological events of Power Sector in Orissa Orissa State Electricity Board (OSEB) was formed. Govt. of Orissa, OSEB and World Bank discussed the possible solution to Orissa Power Sector problems. Govt. of Orissa and OSEB agreed upon a Power Sector Reform Programme. The programme envisages substantial privatisation and separation of the power utilities from Govt. control. The Legislature of Orissa passes the Orissa Electricity Reform Act, 1995. The Orissa Electricity Reform Act, 1995 was assented by the President of India. The State Govt. Notified 1st April, 1996 as the date on which the Orissa Electricity Reform Act, 1995 shall come into force.

31.03.1961 April 1992 Nov. 1993 Nov. 1995 03.01.1996 March 1996

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01.04.1996 July 1996 19.11.1997

January 1999 01.04.1999 01.09.1999

29.03.2004

01.04.2005

17.08.2006

08.09.2006

17.04.2008

OSEB was split into GRIDCO and OHPC. GRIDCO takes over the transmission and distribution business and OHPC takes over the hydel generation business of OSEB. Orissa Electricity Regulatory Commission was constituted. It became functional on 01.8.1996. GRIDCO divided its distribution functions into four geographical zones, namely Western Zone, Northern Zone, Southern Zone and Central Zone. GRIDCO incorporated four wholly owned subsidiaries namely WESCO, NESCO, SOUTHCO and CESCO under the Companies Act, 1956. Orissa Power Generation Corporation (OPGC) wasprivatised with divestment of 49% stake and transfer of management control to a private operator, AES. The management of the three companies i.e NESCO, SOUTHCO and WESCO was handed over to BSES pursuant to the Agreements signed. GRIDCO disinvested 51% of its equity held in CESCO in favour of the consortium led by AES Corporation, USA after obtaining approval of State Govt. The management of CESCO was handed over to AES from 01.09.1999. A new Public Limited Company under the name and style Orissa Power Transmission Corporation Limited was incorporated to carry on the business of transmission, STU and SLDC functions of GRIDCO. The new company obtained the Certificate for Commencement of business on 31.03.2004, which entitles the company to carry on any business. i) OPTCL became functional. GRIDCO continue to carry on its Bulk Supply functions. GRIDCO became a deemed trading licensee from 10.6.2005. ii) In exercise of powers u/s 19 of the Electricity Act, 2003 OERC revoked the Licence of CESCO (Central Electricity Supply Company of Orissa Ltd.). GRIDCO was declared as State Designated Utility by Govt. of Orissa for execution of Power Purchase Agreement with the Developers (hydel/bio-mass sources) generating energy like hydro power, wind power, power from agricultural waste etc. along with thermal power. The Central Electricity Supply Utility of Orissa (Operation and Management) Scheme, 2006 came into force. This empowers CESU to carry out the distribution and supply of electricity business in the area previously held by CESCO. CESU was advised / permitted by OERC to trade untied power from the Captive Generating Plants (CGPs).

2.14

Summary of Chapter Indian power sector has evolved over more than one hundred years. India had its first power plant(reportedly the first in Asia too), a hydroelectric station of 130kw capacity near Darjeeling in the year 1897(10.11.1897).CESC gave Calcutta its first electricity power supply at a place near Princep Street in the year 1899 65

(17.04.1899). By the year 1900,the total installed capacity in the country was 1.1MW(1MW thermal and 0.1MW Hydro).Generation and distribution of Electricity grew from 1.1 MW in the year 1900 to 1363MW by the year 1947.In these initial years of 50 years or so till independence the generation and distribution of Electricity was through private sector effort only. However in independent India, it was felt that the widespread availability of Electricity was vital for the countrys development. This was the consideration which resulted in the enactment of the Electricity (Supply) Act 1948 which aimed at the rationalization of Generation and Distribution of Electricity in India and created Electricity Boards to achieve that objective. Orissa State Electricity Board (OSEB) was created in the year 1961and looked after Generation, Transmission and Distribution of Electricity in the State. Since its inception OSEB like any other SEB was plagued with different maladies such as high T&D loss, frequent intervention in its affairs by State Government and Non sustainable Revenue model etc. Orissa was the first State to undertake reform in its power sector by enacting Orissa Electricity Reform Act 1995.In the year 1996 OSEB was unbundled in to two wholly owned corporations of the State Government such as GRIDCO looking after bulk supply, transmission and Distribution of Electricity and OHPC looking after hydel generation of the state. In the year1999 Distribution function of GRIDCO was handed over to four private companies such as CESCO, NESCO, WESCO and SOUTHCO. In these private companies the private investors have51% share where as GRIDCO and employees combined hold 49%share.During transfer of asset from OSEB to GRIDCO it was not transferred on book value but up valued by an amount of Rs1120cr for availing debt fund to carry out renovation and modernization of already run down transmission and distribution asset. That had resulted in five successive tariff rises between the year 1996-97 to 2000-01.Government of Orissa constituted a high power committee called Sovan Kanungo committee to suggest midterm corrective measures. As per recommendation of this committee among other things up valuation of asset of GRIDCO and OHPC was kept in abeyance till the sector turns around. After enactment of Electricity Act 2003 it was not possible to keep trading and transmission function under GRIDCO as per mandate of the said Act. So, a new entity called Orissa power Transmission Corporation (OPTCL) was created in the year 2005 and transmission function of Electricity was handed over to it along with SLDC and leaving only Bulk supply and trading with GRIDCO.From above analysis it can be seen that power sector of India has travelled full circle from private distribution companies in pre Independence era to subsequent nationalization and final disinvestment in the initial year of of 21st century.

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References: 1) 2) 3) 4) IIPA Study on impact of Restructuring of SEBs(Vol-III) Annual Administrative Reports of OSEB from1990-91 to 1995-96 Overview of Orissa Power sector published by OERC(2008) Sovan Kanungo Committee Report on Power sector of Orissa(GoO 2001)

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CHAPTER3

Corporate Governance and Literature Review

The growing role of market in the world in the later part of the 20th Century has led to the spread of capitalism, globalization, liberalization, privatization demanding efficiency, corporate culture, model code of conduct and business ethics for the very survival of the Corporate World. The subject of corporate Governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and World Com, the Tele Com Behemoth, shocked the Business World with both the scale and age of their unethical and illegal operations. The unethical and fraudulent practices such as Enron controversy of understating the liabilities in their balance sheet has led investors today demanding more transparency in business operations, adequate and qualitative financial and non-financial information and more accountability of companys board and management. In the words of Cadbury (1998) as the world has shrunk major institutional investors have moved beyond their domestic markets in search of attractive investment opportunities abroad and also look to spread their risks geographically. As they do so they demand high and consistent standards in terms of both financial reporting and treatment of shareholders interests and standards of Corporate Governance a global issue. 3.1 Historical perspective The seeds of modern Corporate Governance were probably shown by the Water Gate scandal in the United States. As a result of subsequent investigation, U.S. regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe Government officials. This led to the development of the Foreign and Corrupt Practices Act, 1977 in USA that contained specific provisions regarding the establishment, maintenance and review of systems of internal control. This was followed in 1979 by the Securities and Exchange commission of USAs proposals for mandatory reporting on internal financial controls. In 1985, following a series of high profile business failures in the USA, the most notable one of which being the savings and loan collapse, the Treadway Commission was formed. Its primary role was to identify the main causes of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The Treadway report published in 1987 high lighted the need for a proper controlled environment, independent audit committees and an objective internal audit function. It called for published reports on the effectiveness of internal control. It also requested the sponsoring organization to develop an integrated set of internal control criteria to enable companies to improve their controls.

68

Accordingly, COSO (Committee of Sponsoring Organizations) was born. The report produced by it in 1992 stipulated a control frame work, which has been endorsed and refined in the four subsequent UK reports. Cadbury, Rutteman, Hampel and Turnbull while developments in the United States stimulated debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990s led shareholders and banks to worry about their investments. These also led the Government in UK to recognize that the then existing legislation and self regulation were not working. Companies such as Polly Peck, British and Commonwealth, BCCI and Robert Maxwells Mirror Group News International in UK were all victims of the boomto-bust decade of the 1980s. Several companies which saw explosive growth in earnings ended the decade in a memorably disastrous manner. Such spectacular corporate failures arose primarily out of poorly managed business practices. 3.2 Definition of Corporate Governance Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of corporation and the welfare of the society in general. However, the concept of Corporate Governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of corporate entities. As a result different people have come up with different definitions, which basically reflect their special interest in the field. It would be useful to start with earliest definition of Corporate Governance by the Economist and Noble laureate Milton Friedman. According to him, Corporate Governance is to conduct the business in accordance with owner or shareholders desires which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and social customs. This definition is based on the economic concept of market value maximization that underpins shareholder capitalism. Apparently, in the present day concept, Friedmans definition is narrower in scope over a period of time the definition of Corporate Governance has been widened. It now encompasses the interest of not only the share holders but also many stake holders. Let us take a look at the other definition in the context of the present day situation. 1. According to some experts Corporate Governance means doing everything better, to improve relations between companies and their shareholders; to improve the quality of outside directors; to encourage people to think longterm; to ensure that information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders.

69

2.

3. 4.

5. 6. 7.

8.

Corporate Governance is a field in Economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanism, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance for example how to corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return. www.Encycogov.com. Mathisen [2002] Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. The journal of Finance, Shleifer and Vishny [1997, Page 737]. According to Expert of OECD Corporate Governance is the system by which corporations are directed and controlled. The Corporate Governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers share holders and other stake holders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance (OECD April, 1999). OECD definition is consistent with the one presented by Cadbury [1992, Page 15]. An article published in June 21, 1999 issue of the Financial Times quoted J. Wolfenson, President World Bank as saying that Corporate Governance is about promoting corporate fairness, transparency and accountability. Corporate Governance which can be defined narrowly as the relationship of a company to its share holders or more broadly, as its relationship to the society .. from an article in Financial Times [1997]. According to some Economists, Corporate Governance is a field in Economics that investigates how Corporations can be made more efficient by the use of institutional structures such as contracts, organizational designs and legislation. This is often limited to shareholders value i.e. how the corporate owners can motivate and/or secure that Corporate Managers will deliver a competitive rate of return. Rahul Bajaj, the Chairman of the National Task Force on Corporate Governance appointed by CII said that it dealt with laws, practices and implicit rules that determine a companys ability to take managerial decision vis--vis its claimant in particular its share holders and the creditors the state and employee in general. Thus, it is a system through which a company makes decision concerning its constituents.

Thus, in a nutshell, Corporate Governance is the structure and process of (a) (b) (c) (d) Monitoring executive performance Ensuring accountability of management to shareholders Motivating management towards creating value for share holders and Protecting interest of other stake holders including the local community.

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3.3 3.3.1

International Development of Corporate Governance Cadbury Report: The Financial aspects of Corporate Governance (1992) The Cadbury Committee was set up in 1991 by the financial reporting counsel, London stock exchange and the accountancy profession. The Cadbury report was submitted in 1992. This report is considered as the Magna Carta of Corporate Governance. It is one of the earliest and most influential document of its kind. The stated objective of the Cadbury Committee was to help raise the standards of Corporate Governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The Committee investigated accountability of the Board of Directors to share holders and to the Society. It submitted its report and associated code of best practices in December, 1992 wherein it spelt out the methods of Governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. Whilst the recommendation in the report themselves were not mandatory, the companies listed on the London stock exchange were required to clearly state in their accounts whether or not the code had been followed. The companies who did not comply were required to explain the reasons for that. The Cadbury code of best practices had 19 recommendations. The recommendations are in the nature of guidelines relating to the Board of Directors, Non-executive Directors, Executive Directors and those on reporting and control.

3.3.2

Hampel Report (1998): The Hampel Committee was constituted in UK in 1995. The task of this committee was to consolidate the recommendations of the Cadbury Report in 1992 (Focusing on financial reporting) and the Greenbury Report in 1995 (Focusing on directors remuneration) and prepare a Combined Code on Corporate Governance. The code published in 1998 was attached to the listing rules of the stock exchange with the requirement that in order to be listed, companies must either declare their adherence to its provisions or explain any deviation from them. Blue Ribbon Report (1999): Blue Ribbon Committee was set up by the Securities and Exchange Commission (SEC), US in 1998. In February, 1999, the Committee published the Report on Improving the Effectiveness of Corporate Audit Committee (the Blue Ribbon Report). The recommendations of the Blue Ribbon Committee were adopted and declared to be mandatory by NYSE, the American Stock Exchange (Amex), Nasdaq and the American Institute of Certified Public Accountant (AICPA). The recommendations are not mandatory for foreign issuers: these are subject to their own national laws.

3.3.3

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3.3.4

King Committee on Corporate Governance (2002): The King Report on Corporate Governance for South Africa has been developed as an initiative of the Institute of Directors in Southern Africa. Under South African Company Law, a company director is not a servant of the share holders, but on autonomous organ of the company and acting on the companys behalf. South African companies are expected to consider social, ethical and environment issues. As a matter of fact the King Committee covered workers participation, affirmative action programme and code of ethics. All companies listed on the Johannesburg Stock Exchange have to comply with the provisions of the report. Sarbanes Oxley Act (2002): Following the Corporate Governance scandals such as Enron and Word Com the Sarbanes Oxley Act was enacted in US which brought about fundamental changes in virtually every area of Corporate Governance. The Sarbanes Oxley Act applies to the following companies: (i) (ii) (iii) (iv) Companies listed or traded in the US (including non US companies) Subsidiaries of US companies in India (provided they have a business connection in the US) Foreign accounting firms that prepare or furnish audit report for an issues. Sometimes compliance expected by US Companies from business partners in India (implication for BPO sectors)

3.3.5

3.3.6

Salient features of Sarbanes Oxley Act CEO-CFO Certification compliance Audit committee to be composed entirely of Independent Directors Ban on loans to executive officers and directors Accelerated filing of periodic reports Filing of change of beneficial ownership within 2 days Reimbursement by CEO/CFO upon restatement of financial statement due to misconduct Independence of Board of Directors/Committee Enhanced Criminal Penalties for knowingly untrue certification (Section 906) Strict reporting of illegal or unethical behaviour Protection of whistle blowers restitution and penalties for victimization. Establishment of a Public Company Accounting Oversight Board (PCAOB) under the Security and Exchange Commission (SEC) to oversee public accounting firms and issue accounting standards. Additional disclosures off balance sheet items and transactions that may have materials current/future effect on financial conditions/results of operations. SOX Act requires Security and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.

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Sarbanes Oxley Act Overview

Areas of Emphasis

Management Reporting

Board Governance

Management & Board Conduct

Enforcement & Penalties

Auditor Independence

Key Section

Management Certification (Sec.302)

Audit Committee Standards

Accelerated report of insider trading

Public Company oversight Board (PCAOB)

Audit Committee preapproval all auditor services

Management Report on Internal Control (Sec. 404)

Prohibition of loans to Directors & Officers

Disclose Code of Conduct for Finance Officers

Criminal Penalties for knowingly Untrue Certification (Sec.906)

Prohibit Auditor from certain service

Protection of Whistle blowers 73

Lead Audit partner limited to 5 year rotation

OECD principles of Corporate Governance (1999) highlighted the following issues: (a) (b) (c) (d) (e) Protecting the rights of share holders Ensuring equitable treatment of all share holders including an effective grievance redressal system. Recognising the rights of stake holders as established by law. Ensuring the timely and accurate disclosure regarding the corporation including financial situation, performance ownership and governance of the company and Ensuring the strategic guidance of the company, effective monitoring arrangement by the board and boards responsibility to the company and the share holders.

3.3.7 The combined code on Corporate Governance (2003): This UK based code superseded and replaced the combined code issued by the Hampel Committee in June, 1998 on Corporate Governance. It was derived from a review of the role and effectiveness of non-executive directors by Derek Higgs and review of audit committees by a group led by Sir Robert Smith. 3.3.8 Higgs Report (2003): The report reviewed the role and effectiveness of nonexecutive directors in the UK. The review further developed the UK frame work of Corporate Governance, which commenced with the publication of the Cadbury Report 1992 and was taken forward by the Greenbury, Hampel and Turnbull Reports. 3.3.9 ASX Corporate Governance Council Report (2003): In March 2003 the ASX Corporate Governance council of Australia released principles of Good Corporate Governance and Best practice recommendations. Compliance with the recommendations was not mandatory except for the recommendations dealing with Audit Committees, but from 2004 listed entities are required to report in their annual report on whether they have complied during the year the subject of report, or if they have not, the reasons thereof. 3.3.10 OECD Principles of Corporate Governance (2004): Organization for Economic Cooperation and Development (OECD) is a forum for 30 member countries sharing a commitment to democratic government and the Market Economy. The Government of these 30 countries approved a revised version of the OECDs principles of Corporate Governance in 2004. The principles are intended to assist Government in their efforts to evaluate and improve the legal, institutional and regulatory framework for Corporate Governance in their countries and to provide guidance and suggestion for stock exchanges, investors, corporations and other parties that have a role in the process of developing good Corporate Governance. The principle focus on publicly traded companies, both financial and nonfinancial.

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3.4

Development of Corporate Governance in India In India, the question of Corporate Governance has come up mainly in the wake of economic liberalization and deregulation of industry and business as well as the demand for a new corporate ethos and strict compliance with the law of land. In the context of the unique situation in India where the financial institution holds substantial stakes in companies, the accountability of the Directors including nonexecutives and nominees has come into sharp focus.

3.4.1 CII Code on Corporate Governance (1998) The Confederation of Indian Industry (CII) published Indias first comprehensive code on Corporate Governance in 1998. This code was well received by corporate India and many of its recommendation became part of subsequent regulations. The important features of CII Code are (a) (b) (c) (d) (e) (f) (g) (h) (i) As the key to good Corporate Governance lies with the well functioning of the Board of Directors, the full board which should be single tired, should meet at least six times a year with a gap of two months. The non-executive directors should comprise 30% of the board and one of them being Chairman. The non-executive directors should comprise 50% of the Board if the Chairman and Managing Directors is the same person. No single person should hold directorship in more than 10 listed companies. Non-executive Directors should be paid commission and offered with stock options for their professional inputs besides their sitting fees. The Board should be informed of the operating plan and budget, long-term plans, quarterly divisional results and internal audit report. In audit committee comprising at least three non-executive directors should be set up and given access to all financial information. Disclosure norms and levels followed at home should be the same as those required for GDR issues. While accepting the corporate disclosure norm as recommended by the working group on Companies Act regarding financial and non-financial information, draft code recommended for disclosure of additional information in the annual report on the monthly average share prices, value-added and financial performance of divisions and segments should be adopted. Major Indian Stock Exchanges should gradually insist upon compliance certificate signed by the CEO and the CFO clearly stating that accounting policies and standard have been followed. Companies that default on fixed deposits should not be permitted to accept further deposits, make inter-corporate loans or investments and declare dividends until the default is made good.

(j) (k)

3.4.2 Kumar Mangalam Birla Committee on Corporate Governance (1999) The Committee was setup by SEBI to promote and raise the standards of corporate Governance. The Committees terms of reference included suggesting

75

suitable amendments to the listing agreement executed by the stock exchanges with the companies in order to enhance Corporate Governance standards of listed companies, drafting a code of corporate best practices and suggest safeguards to be instituted within the companies to deal with insider information and insider trading. The Committee made twenty five recommendations, nineteen of them are mandatory in the sense that these were enforceable. The listed companies were obliged to comply with these on account of the contractual obligation with stock exchanges. The mandatory recommendations of the Kumar Mangalam Committee include the Constitution of Audit Committee and Remuneration Committee in all listed companies, appointment of one or more independent Directors in them, recognition of the leadership role of the Chairman of a company, enforcement of accounting standards, the obligation to make more disclosures in annual financial reports, effective use of power and influence of institutional shareholders and so on. Apart from this Kumar Mangalam Birla Committee also made some recommendations that are non-mandatory in nature. Some of the non-mandatory recommendations are: The Board should set up a Remuneration Committee to determine the Companys policy on specific remuneration packages for executive directors. Half monthly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholders. Non-executive Chairman should be entitled to maintain a Chairmans office at the companys expense. This will enable him to discharge the responsibilities effectively.

3.4.3 Recommendation of the Naresh Chandra Committee Report on Corporate Audit and Governance (2002) Following the corporate scandals of the US,the department of Company Affairs constituted on August 21, 2002 a high level Committee, popularly known as Naresh Chandra Committee to examine various Corporate Governance issues and to recommend changes in the diverse areas such as the statutory auditor- company relationship, rotation of statutory auditors, procedure for appointment and determination of audit fees, restriction if necessary on non-audit fees, independence of auditing functions, ensuring presentation of true and fair statement of the financial affairs of companies, certification of financial statements and accounts, regulation of oversight functionaries, setting upon independent regulator and the role of Independent Directors. The committee has made very significant recommendation for changes, inter alia, in the Companies Act.

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3.4.4 Narayan Murthy Committee Report: Report of the SEBI Committee on Corporate Governance (2003) The Committee was constituted by SEBI to review the performance of Corporate Governance in the country as well as to determine the role of companies in responding to rumor and other price sensitive information circulating in the market in order to enhance the transparency and integrity of the market. The recommendation of Narayan Murthy Committee involves the following issues: Strengthening the responsibilities of Audit Committees. Improving Quality of financial disclosures Utilisation of proceeds from IPO. To asses and Disclose business risks. Formal code of conduct for Board. Whistle blower policy to be in place in a company providing freedom to approach the Audit Committee. Subsidiaries to be reviewed by Audit committees of Holding Company. 3.4.5 Clause 49 (2004) SEBI The market regulator SEBI considered the recommendation of the Birla Committee in January 2000 and decided to implement the recommendations through the medium of listing agreement entered into by the stock exchanges with the listed companies. The stock exchanges have included the directions on Corporate Governance as clasue 49 of the listing agreements which can be detailed under the following heads: (b) (c) (d) (e) (f) (g) (h) (i) Board of Directors Audit Committee Remuneration of Directors Board procedures Management Shareholders Report on Corporate Governance Compliance.

These cover various compliance requirements and the following are the highlights of the Code. Boards to have optimum combination of Executive and Non-executive Directors with not less than 50% of the Board of Directors comprising non-executive directors. All pecuniary relationship or transaction of the non-executive directors with the company should be disclosed in the annual report. Companies to set up a qualified and independent Audit Committee and the Company Secretary to act as the Secretary to the said committee. All members of the audit committee shall be Non-Executive Directors with the majority of them being Independent and with at least one director having

77

financial and accounting knowledge. Chairman of the committee shall be an Independent Director. Audit committee shall have power to investigate any activity within its terms of reference to seek information from any employee, to obtain outside legal or other professional advice. Remuneration of Non-Executive Directors to be decided by the Board. Board meeting to be held at least four times a year. Shareholders to be provided prescribed information about the appointment of new Directors and re-appointment of Directors. Companies to provide in Annual Report a separate section on Corporate Governance. Companies to obtain a compliance certificate from an auditor and to attach it with Directors report. Management must disclose to the Board all important financial and commercial transaction. Information like quarterly results and presentation made by the company to analyst shall be put on the companys website or shall be sent in such a form as to enable the stock exchange on which the company is listed to put it on its own website. The CEO or Managing Director and CFO or whole time Finance Director shall certify to the Board that they have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief.

3.5

Recent Development for Unlisted Public Sector Undertakings (PSUs) Central Government is mulling to bring unlisted public sector undertaking into the fold of Corporate Governance norms. Under the proposed norm it is mandatory for PSUs to have at least one-third of their respective Boards filled with Independent Directors. This move will bring more than 70 unlisted profit making PSUs under the ambit of Corporate Governance. This apart the proposed guidelines also make the setting up of an internal Audit Committee mandatory. This committee will have at least two-third of its members as Independent Directors. It will also be in constant touch with an Independent External Auditor. Again all subsidiaries of the PSU must have one Director of the parent company on their Board of Directors. Moreover, members on the Board of Directors cannot be members of more than two boards and Chairman of more than five at the same time. The new Corporate Governance guidelines also seek to put in place a formal whistle blowing mechanism to keep fraud or misappropriation of funds within the PSUs at bay. This is also being done to avoid victimization of employees for their misdemeanors by the management.

3.6

Models of Corporate Governance There is considerable debate about what actually constitutes Corporate Governance. Its key elements, however, concern the enhancement of corporate performance through supervision or monitoring of management performance and ensuring accountability of management to shareholders and stakeholders as 78

discussed in foregoing paragraphs. Four structural attributes of the modern corporation have been highlighted below (Saba, 1997): Separate identity Limited liability Centralized management Transferability of shares

The weakness or absence of one or more of these pillars significantly impairs any corporations efficiency. The Central feature of the corporation of 1960s was its authoritarian power structure, with the superior-subordinate pair relationship as the fundamental building block. Ultimate authority for all decisions lies at the top and this authority is delegated or withheld by the superior at each level. Most of the state-owned enterprises suffer from these types of structures. It would be worthwhile to examine different models of Corporate Governance that exist in the developed world to see whether they have any lessons to offer to us and whether any model is worth emulation with such modifications as would suit our body politic. In the context of the discussion outlined earlier, there is a broad convergence on the laws and forms of corporate organization and a few models like the Anglo-American, German and the Japanese are the ones selected for description for this purpose. 3.6.1 Model-I: The Anglo-American model of corporate governance has a corporate structure where the board of directors elected by the shareholders (owners) act as supervisors. Shareholders generally exercise their control over a private corporation through the board of directors. The board has three functions: representation, direction and oversight. In this model, it appoints and supervises the managers who mange the day-to-day affairs of the corporation.
Model-I

Structure

Board of Directors (Supervisors) Appoints and supervises Officers (Managers) Manage Company

Elect

Shareholders (Owners) Creditors

Own Lien Hold Stake Structural framework

Corporate

Stakeholders

Legal System

Anglo-American Model of Corporate Governance

79

While the legal system provides the structural framework, the stakeholders in the company will be the employees, suppliers and creditors. But the creditors exercise their lien over the assets of the Company. The policy is framed by the Board and implemented by the management. The board oversees the implementation through a well-designed information system. The Board of Directors, being responsible to their appointers the shareholders commits to them certain returns within the broad contours of the market framework. It will ensure an efficient organization for production, exchange and performance monitoring. However, there is no agreement on the cost effectiveness or efficiency of the model (Macey, 1998). While Fischel & Easterbrook (1991) and Romano (1993) make a very optimistic assessment of the US corporate governance system, Jensen (1993) finds it deeply flawed. It will not be costless for the market to provide a greater supply of institutional investor monitoring. 3.6.2 Model-II: In the case of the German model of corporate governance, although the shareholders own the company, they do not dictate the governance mechanism. Fifty percent of the members of the supervisory board are elected by the shareholders while the other fifty percent are appointed by the labor unions. This system implies that employees and labor are not just the stakeholders but they enjoy a share in Governance. They are equally responsible for the policy that has to be implemented by them for the profit of the organization. Model -II

Supervisory Board Structure

Appoint 1/2

Appoints and Supervises

Reports to

Corporate

Management Board (Including labor relations Director)

Employees and Labor Unions

Independently runs (day to day) Appoint 1/2 Own

Company

Shareholders (Own)

German Model of Corporate Governance

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The supervisory board appoints and monitors the management board. There is a reporting relationship between both the boards although the management board independently conducts the day-to-day operations of the company. One important features is that the labor relations director is represented on the management board. Therefore, the governance mechanisms have imbibed workers participation. German banks can own corporate stock unlike the US banks. Although the German Universal Banks as a group cast 54 to 64 per cent of the votes in 1992 without absolute majority there is no evidence that they had acted as effective institutional monitors on behalf of the shareholders. 3.6.3 Model III: In the Japanese model, the financing institution has a crucial role in the governance structure. The Shareholders and the Bank together appoint the board of Directors. Unlike in the other models, the President is also appointed by the Shareholders and the Bank. The relationship of the board to the president is hierarchical in nature. The president consults the board. Even otherwise, the board generally ratifies the presidents decisions. Model -III

Supervisory Board (Including President) Corporate Structure

Ratifies Presidents decisions Consults

Appoint*

Shareholders

Own

President
Consults Monitors, acts in emergencies Provides Managers

Executive Management
(Primarily Board of Directors

Main Bank
Managers Loans

Company (* This appointment is generally considered to be a ratification of nominees for the board chosen from within the company) Japanese Model of Corporate Governance Although shareholders own the company, the financing Bank has a crucial role. The executive management, which steps into the shoes of the Board of Directors, performs the management function. In fact, the financing bank provides even the managerial personnel and monitors the management function. It also has powers to supersede the board when it becomes expedient or in a state of emergency. All the three models have found methods for combining economic and control rights into large blocks, in order to overcome the ineffectiveness of fragmented voting power. In Germany, it takes the form of large investors, with their voting 81

clout sometimes augmented by proxy control. In Japan, it takes the form of coordinated networks, acting through institutions like the Presidents council and the main Bank. Both these arrangements are relatively stable, whereas in the US the aggregation is ad-hoc; voting power is assembled for the occasion, through a proxy context or tender offer or a leveraged buyout. While techniques differ, they appear to be addressing a common need in effective governance system (Scott, 1998). 3.6.4 Model IV: The Indian model is an amalgam of the Anglo-American and German models The Indian corporates can be typified into three distinct patterns: Private company. Public enterprises. Banks. Model -IV Regulatory Framework Company Law Takeover codes

Self V. Legal

Disclosure Requirement

Accountability Auditors role expectations gap Audit Committees Executive remuneration Committees/Disclosure Parliamentary Committee Directors (Executive)

Supervision of Directors Stakeholders Shareholders Financing Institutions Market for corporate control Non-Executive directors

Management

3.7

Corporate Governance, accountability and enterprise Indian Model for public enterprises The pattern of private companies is mostly that of closely held or dominated by a founder, his family, and associates. The role of external equity finance is small; the business is financed by retained earnings and heavily by debt (Tata group, Reliance group, Birla group, etc.) In respect of public enterprises, the Board is formed by the Central/State Government and even where divestiture has taken place, hold of the Government continues to be dominant. Here, the issues concerning protection of stakeholders generally take a back seat. Large Corporations are, therefore, often run more in the interest of the Government than in the interest of efficiency and maximization of aggregate shareholder wealth.

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The appropriation of corporate opportunities, excessive compensation, and consumption of managerial perks do not merit much discussion of the board as they are decided externally by a Government policy. Participation of workers is nominally represented by the presence of a representative of a recognized trade union sometimes both of the workers and officers separately where two separate unions exist whose voice does not represent the concerns of the organization. Governance models of the sub-sectors like insurance, banking, non-banking finance companies etc., in the Indian context are kept out of the purview of our discussion in view of the complexity of laws, rules and regulations that bind those structures. Structural changes in corporate governance call for a paradigm shift in the constitution of board. Admittedly the processes are only the means to an end and bringing into force the thoroughness, openness and objectivity in the reviews of systems would be very crucial to proper Governance. 3.8 Some peculiarities in the Indian Corporate Governance Indian Management practices and Corporate Governance is a blend of provisions provided by various laws, Government directives and Indian social traditions. Mostly Indian companies have the family members on the Board of Directors. Though the companies use public money in the form of share capital but the most of Directors belong to the same family. They control all the decision-making processes and the small investors have no role to play in decision-making and the control. This is because the majority of investors in India are small scale investors. However, the amendments in the companies Act, 2000 has tried to plug the lacuna by inserting a provision for the appointment of a representative director for small scale investors. India is characterized by paternal society. This results in the males being Directors or Chairman of the Board in succession or transmission. Indian Corporate Governance is strongly influenced by the ascribed authority. The father is the Chairman of Board of Directors though he has nothing to do with the affairs of the company and even is not a share-holder, but he may play an important role in decision making process. Even Peter F. Drucker, the Head Priest of management, has during a lecture in New Delhi during 1981 stressed that for good management decision-making and efficiency in governance, the sons and relatives of the Indian businessmen should first work in other establishment for some years and after gaining experience they should come to join their own businesses. 3.9 Corporate Governance abuses and the general scenes In Indian business groups the concept of dominant share holders is more amorphous. The promoters share holding is spread across several friends and relatives and also corporate entities. It may be difficult to establish the total effective holding of this group. However, the aggregate holding of all these entities taken together is typically swell below a majority stake. Since financial institutions have historically played a passive role, it paves the way for the

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promoters acting as the dominant share holders, despite they may not even be the largest single share holder. The promoters are thus enabled to play all the games that a dominant share holder can play, namely structuring of business and transfers of assets between group companies, preferential allotments of shares to themselves, payment for Services to closely held group companies and the like. This has led to the situation of what could be termed There may be many financially sick companies but no financially sick promoters. Thus Corporate Governance abuses perpetrated by a dominant share holder pose a difficult regulatory dilemma. The general scene with regard to Indian Corporate sector can be perceived as follows: Companies are often run as if they were the Managing Directors or CEOs personal fiefdom. Those at the helm are only interested about the principal share holders interests and any benefit to other share holder is only consequential. Majority of Directors are unaware that they are agent of share holders and their position is one of the trust and faith. Participation of non-executive Directors in meeting whether of the board or any committee thereof is inversely proportional to the health of the bottom line-better the bottom line lesser the participation. Most Directors do not consider it necessary to update themselves on changes in laws and regulations. Non-executive Directors do not see themselves as watchdog of the owners. Board rooms are invariably filled up by yes men who do not raise relevant questions. Except in a crisis even nominee Directors tend to play a passive role at Board meetings and do not oppose the proposals of the management.

Hence, in Indian context, it can be said that no amount of regulation can enforce the true spirit of good Corporate Governance practices in a company unless it comes from within the organization. 3.10 Corporate Financial Reporting Concept Corporate financial reporting includes dissemination of material and relevant facts through its published financial statement. According to FASB, financial reporting includes not only financial statements but also other means of communicating information directly or indirectly, to the information provided by the accounting system i.e. information about an enterprise resources, obligation, earning etc. Besides meeting the needs of the dominant group, financial reporting should also satisfy the information needs of the other user to achieve the objective of Corporate Governance.

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User of Corporate Report

Internal Parties

External Parties

Share Holder

Financier

Investment Analysis

Govt. and its Agencies

Customers Union, etc.

The transparency in corporate financial reporting ensures true and fair presentation of the financial statements and provisions of all the relevant and material facts which shall have bearing on the decision making of various users of the financial statements. The information disclosed depends upon factors such as legal provisions incorporated in various statutes, stock exchange requirements for purpose like listing disclosure standards as laid down by professional accounting bodies like ICAI and also the managements attitude to supply adequate and relevant information. Section 211 of the Indian Companies Act, 1956 requires that every company shall give true and fair view of its state of affairs and result of its operation at the end of the financial year. For this purpose, a balance sheet in conformity with Part-I of Schedule-VI and profit and loss account in accordance with Part-II of ScheduleVI under the said section should be prepared and presented. These are the only published financial statements of the company, for which it is legally bound. According to provisions of clause-41 of the listing agreement, companies are required to furnish the stock exchanges where their shares are listed and the unaudited financial results on the half yearly basis within two months of the expiry of the period and within 48 hours of the conclusion of the Board meeting. The information also has to be published in at least one English newspaper circulating in whole or substantially the whole of India and in a language newspaper of the region where the registered office of the company is located. It is also mandatory to disclose information on completion and diversification programmes, strikes, lockouts, changes in management, conversion of debentures into equity shares and any material developments relating to financial matters such as raising of tax claims by Government whether disputed or not, in the past six months. As per amended clause 49 of listing agreement companies are required to submit a quarterly compliance report signed by the compliance officer or Chief Executive Officer to the stock exchange within fifteen days of the end of the quarter in the prescribed format. A public company for raising capital from the public by issue of shares or debentures has to comply with the provisions of companies Act, Securities Contracts (Regulation) Act, 1956 Guidelines issued by various 85

Government authorities particularly by SEBI, stock exchange and Reserve Bank of India. The guidelines issued by SEBI with regard to issue of share are termed as guidelines for disclosure and investor protection. These guidelines issued by SEBI regulate matters like public issue by various types of companies, underwriting reservation in issues, promoters contribution, lock-in-period, debenture issue, preferential allotment and new financial instruments etc. The lead managers have been made responsible for the verification of the contents of a prospectus/letter of offer in respect of an issue. In large cap companies such as Hindustan Lever, HDFC and Infosys Technologies have begun to provide considerable information in their annual reports.. Infosys Technologies have even followed the provision of GAAP. The companies whose financial reporting measures have been regarded by accounting circles as exemplary, have preferred Generally Accepted Accounting principles (GAAP) of the US to the International Accounting Standard (IAS) even though the former implied higher costs for the company. Infosys Technologies has also become the countrys first company to announce quarterly audited results. 3.11 Role of Board in Corporate Governance As a Board of Directors is concerned with policy framing and directing the operations at the highest level, it is necessary to plan for its success and effectiveness. The Board should be large enough to promote deliberation and include the breadth of expertness required for its onerous jobs but no so large as to waste time or foster indecision. The member selected should be representative of the interest they are intended to serve and possess the requisite authority and they must also be able to perform well in a group. The Board is not a medium for exercising managerial functions and this should be left to the chief executive. A good Chairman can avoid many of the wastes and draw backs as he can set the tone and integrate the deliberation. An effective Chief Executive does not allow the Board to run amock but contains conflicts, cultivates group interests (for results) and above all makes use of the high authority and status of the board to fashion it to his own managerial purpose, as well as for enterprise objectives. Clause 49-I(A) of the Listing Agreement stipulates that the Board of Directors of a company shall have an optimum combination of Executive and Non-executive Directors. It also prescribes not less than 50 percent of total number of Directors on the board should comprise non-executive directors. Further, in the listing agreement there is considerable emphasis on the induction of independent Directors on the Boards. According to explanation to clause 49-1(A) , the expression Independent Directors means Directors who apart from receiving Directors remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect independence of judgement of the Director. The induction of independent Directors, it is believed, not only adds value to the Board but results in more objective and fair decision making process; in the process, outsiders also gain confidence in the functioning of the Board. The following suggestions have been made in order to make the Boards well balanced.

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 (a)

The company should clearly spell out the maximum size of the Board and then leave it to the Board to decide the actual size within the limit. Age limit for retirement of Directors from the Board should be clearly prescribed. The Board members should have a balance as regards the representation of business leadership skills vis--vis specialist technical or other expertise; The non-executive directors should be persons drawn from amongst professionals having expertise in business, finance, etc. Governance Code and Independent Directors The Kumar Mangalam Birla Committee extensively debated on the issue of independent Directors. It felt that the touch stone of the independence is the material pecuniary relationship or transactions of the non-executive directors with the company. Independent Directors, according to the committee are who apart from receiving Directors remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries which in the judgement of the Board may affect their independence of judgement. Further, clause 49 of the listing agreement has bracketed institutional Director or nominee Directors with that of independent Directors, whether the institution is an investing institution or lending institution. Further, Birla Committee report treats nominee Directors as independent whereas the Naresh Chandra Committee excuses them in calculating the percentage of independent Directors on the Board of the company.

(b)

Criminal liability of Independent Directors Various statutes make Directors criminally liable for acts of commission and omission. In case of independent Directors, the Naresh Chandra Committee has recommended a different approach as in its view independent Directors are not managers; they are fiduciaries who perform wider supervisory functions over management and executive Directors. The committee favours inserting suitable provisions in the definition chapter of certain Act such as Companies Act, NI Act, Provident Fund Act, Electricity Act, etc. to specifically exempt non-executive Directors and independent Directors from certain criminal and civil liabilities. As per listing agreement it is obligatory that all pecuniary relationship or transactions of non-executive Directors with the company should be disclosed in the Annual Report. This is in addition to the disclosure obligations contemplated under Section 299 of the Companies Act, 1956, whereby every Director of a company is required to make a disclosure on the nature of his concern or interest, at a meeting of the Board of directors, of his direct and indirect concern or interest in a contract or arrangement or proposed contract or arrangement entered into or to be entered into by or on behalf of the company.

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3.12

Board is not an Organ of Action According to Peter F Drucker, the Board cannot and must not be the governing organ that law considers it to be. It is an organ of review, of appraisal, of appeal. Only in crisis does it become an organ of action and then only to remove existing executives that have failed, or to replace executives who have resigned, retired or died, once the replacement has been made the Board again becomes an organ of review. The erosion of the Board of Directors is not an accident but rooted in profound causes. Some of these are; the much publicized divorce of ownership from control which makes it absurd that the business enterprise be directed by the representatives of the shareholders. The complexities of modern business operation and the difficulty of finding good men with the time to sit on boards and take their membership seriously are also other reasons for erosion of capability of the Board..

3.13

The Role of Board Committees A committee is an almost widely used organizational device. The Board Committees are no exception. The object and utility of various Committees vary and some of the typical Committees are: Budget committee, Works committee (welfare, safety social activities) Executive committee, Audit committee etc. The help of Committees is generally taken for resolving problems which requires more knowledge, expertise, experience and judgment. Some of these are formed for taking financial, major capital investment policy decisions, business planning and coordination. It is very important that Board wholeness is not jeopardized or short circuited. Committees can play a useful part in Governance as long as they never substitute for full Boards decision making authority and never get between the Board and the Management. Committees can save the full Boards time but board should take care that such use does not fragment Governance into committees fiefdoms. It should also be noted that Directors who are not on a given committee are not relieved of their overall accountability. (a) Executive Committee: They are frequently established to make decisions in the Boards absence. However, any system that creates a real Board within the full Board does not bode well for total Boards accountability. Audit Committee: Mandatory requirements have been prescribed in case of Audit committee and clause 49-II(A) of the listing agreement speaks about it. The clause stipulates that the Board shall set up a qualified and Independent Audit committee. Clause 49 applies to all listed companies. It may be important to mention that Naresh Chandra Committee has recommended that Audit committee of all listed companies as well as unlisted public companies with a paid up share capital and free reserve of Rs.10 crore and above or turn over of Rs.50 crore and above, should consist exclusively of Independent Directors.

(b)

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(c)

Compensation and Remuneration Committee: For the purpose of determining the companys policy on specific remuneration packages for executive Directors including pension rights and any compensation payment, Remuneration Committee is appointed. The remuneration of non-executive Director is decided by the Board. Compensation and benefit committee usually determines pay package for subordinate executives and other staff of the company. Monitoring and research role is undertaken by these committees and the options and implications of various approaches in the matter of Directors compensation are weighted in the best interest of all concerned. In addition, there may be Nominations Committee and Advisory Committee. A Nomination Committee researches possible criteria for new Directors. The appointment of new Directors who meet the criteria decided by the Board is said to add value to the full Boards role.

3.14

Evaluation of the Board Efficiently functioning Boards generally review their practices and outcomes on an ongoing basis, making changes wherever necessary. There should be a dynamic informal evaluation process. In order to test the effectiveness of the Board and for the purpose of improvements, the following checklist of questions is generally adopted Whether the Board has devoted significant/sufficient time and serious thought to the companys long-term objectives and the strategic options open to it? Whether the Board has reached formal conclusions on what may be referred to as Corporate Philosophy and whether it has explicit statements of policy on value system and on ethical and social responsibilities. Whether the Board periodically undertakes review of the organizational structure of the company? Whether the Board routinely receives all the information it needs to ensure that it is in effective control of the Company and its Management? Whether the board ensures that the MD presents his annual plans and budgets for review and approval? Whether the actual results achieved are evaluated against plans and budget? Whether the board takes major decision and whether it had adequate time and knowledge for those decisions or it is in effect, obliged to rubber stamp decisions already taken or commitments already made and/or whether it often finds itself overtaken by events?

3.15

Boards Effectiveness A key element in Boards effectiveness involves monitoring the Companys performance against its objectives. In the SEBI Corporate Governance code, fifteen items have been identified (Annex-I of the Code) regarding which information is required to be placed before the Board. While conducting the compliance audit, the statutory auditors need to verify whether the relevant information has been placed before the Board and decision, if any, was taken at the Board level or not. Notably, the principle laid down by OECD countries 89

provides that the Corporate Governance framework should ensure the strategic guidance of the company, the effective monitoring of the management by the Board and the Boards accountability to the Company and the shareholders. The need for independence is now widely acknowledged as the key component of any well-functioning Board. In this context, the recommendation of the Naresh Chandra Committee, that 50% of Directors should be independent, would surely improve the quality of Governance. It has also been recommended by the Committee that the persons appointed are not only Independent at the time of appointment but also remain Independent during course of their directorship. However, this has led to argument both in its favour and against it. Ashok Chandra, President, ICAI is of the view that, if the Independent Directors would only be 50% of the total strength then, how is the Board expected to carry its decision by taking into confidence every member and not the whims and fancies of a select few who may have a controlling interest.Mr. N. Balasubramanian, Professor of Corporate Governance, IIM Bangalore suggests that the independence of Corporate Board is considered essential to protect the interest of shareholders and, in a larger view the stakeholders as well. To be wholly functional it may be necessary to ensure that the Board decisions on specified critical issues are supported by a majority of all Independent Directors, not just only of those present. There is a crying need to train Independent Directors and comprehensively enumerate their corporate liabilities with saving and exclusions. 3.16 Whistle Blower Protection Whistle blowers are insiders who go public, usually at great risk to their careers on matters such as corruption, malpractices in the organization they are employed in etc. In the United States the Whistle Blower protection Act was passed in 1989 to prohibit federal Government from retaliating against employees who blow whistle against public sector misconduct. The Corporate Scandals in America have shaken the shareholders confidence tremendously. Therefore, the Sarbanes Oxley Act 2002 (SOX) was passed and the Act paved the way for effective Corporate Governance implementation. The Act has three major requirements. (a) The CEOs of public traded companies vouch for the veracity of the firms published financial statements. (b) Corporate Boards must have Audit committee drawn from Independent Directors and (c) Companies can no longer make loans to corporate Directors. The Act goes on to spell out penalties for various level of failure in Corporate Governance. SOX attempts to provide fundamental mechanism to prevent the misdeeds that led to investor losses. The need for legally protecting the Whistle Blowers in India has been recognized only recently. The decision to empower the Central Vigilance Commission to Act on the complaints of Whistle Blowers has been welcomed. The current notification authorizes CVC to act on any complaint of corruption or misuse of office against employees of the Central Government or of a corporation, company, society or local authority under the control of the centre. It empowers the Commission to keep the identity of the complainant secret and if necessary to protect him/her from being victimized. The Government of Indias notification covers only employees under its control but legislative protection must extend to

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the domain of state and local Government and of course to the private sector. The UK legislation covers the private sector. Following the recent financial fiddles in corporate houses such as Enron and Worldcom, the US extended legal protection to Whistle Blowers in public traded companies. A comprehensive legislation on whistle blowing must provide legal immunity to those who complain in the public interest against both Government and Corporate transgression. 3.17 Corporate Governance Mechanism and Public Sector As the State owns all of overwhelming large part of the equity of the PSUs and the Government representing the State appoints, controls and directs their Boards, it seems that latter cannot go way ward as in the case of private sector companies and therefore there is little problem of Corporate Governance. This however is a nave view because even in case of PSUs their Boards must focus on sound Corporate Governance practices, business and technological restructuring with a view to enhancing enterprise values and intrinsic (share holder) value (Disinvestment Commission, February 1997 P.28). Only those PSUs which are cost efficient economically viable, technologically progressive and posses undoubted financial transparency, integrity and accountability will be able to serve as strong arms of the state and achieve social objective they may be expected to aim at. Planning Commissions (1978) call for Central Governments non-departmental enterprises earning at least 10% return on the capital invested is pertinent in this regard. The PSUs have therefore to function as efficient business enterprises in order to economize on the use of scarce resources, generate hand some internal financial resources and attract outside loans to be able to invest for their expansion, diversification and technological modernization; their social gain objective notwithstanding. The Indian experience in this context is quite pertinent. Prior to 1991, since the public sector units in India were entirely owned and controlled by the state, Corporate Governance in them was in fact akin to what Roland (2000) called (in the context of erstwhile socialist economies) State Governance. The PSUs have been working under a system of three-tier managements. At the top was the administrative ministry headed by the minister(s) and the higher bureaucracy functioning as custodian of ultimate owners and the agent of the state respectively. Below it are Boards of Directors consisting of at least two Secretaries of the Government of India (from the administrative and finance ministry), part time members, if any, from among political activists, ideologically fellow traveler and professionals from industry and trade. These members have had little direct financial stake that acted as the fountain head of weak sense of belongingness. Since they cannot be more than 1/3rd of the total members, the majority of members are internal and therefore employees. At the third level is the Chief Executive Officer. As the members of the Board of Directors and the Chief Executive Officers are appointed at the discretion of the Government and hold office till their pleasure, exception apart, they give primacy in varying measures of course, to the extra PSU specific objectives over the PSU specific objectives. Expectedly, in large majority cases this system lead to political ingratiation rather than professional excellence and set at naught the role of incentives and penalties so essential to elicit professional commitment of the management teams to the enterprises.

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The Arjun Sengupta Committee therefore recommended that it is necessary to evolve a set of rules and conventions by which the Government can help in the better functioning of public enterprises by reducing the points of intervention without minimizing the Governments right to have information for evaluating performance. The Government should primarily be concerned with overall strategic planning and policy rather than with day-to-day functioning of the enterprises. In the year 1986, the MOU (Memorandum of Understanding) system was designed to give operational autonomy and to enforce accountability commensurate with authority for results. MOU served as an instrument to enumerate a list of agreed indicators and targets and to arrive at a composite performance evaluation measure. 3.18 Disinvestment, Privatization & Restructuring of Public Sector Units Disinvestment (as a prelude to privatization) to be successful, the State Governance of erstwhile PSUs will have to be replaced by appropriate Corporate Governance systems by changing the rules and regulations governing the constitution (internal/external members) and functional autonomy of their corporate boards, instituting, a set of norms regarding executive remuneration, incentives and penalties to ensure professional commitment and accountability of the Board members to the enterprises, establishing and strengthening institutional framework and conventions such as disclosure and internal/external audit for monitoring their corporate performance. Their Boards have to be sensitized in respect of stock market valuations of their enterprises. Studies by Friedman et al. (1999) Grosfeld and Nivet (1997) among others, have shown that privatization can enhance enterprise performance if Corporate Governance is sound. Whether disinvested fully or partially with or without transfer of Management control erstwhile PSU (including Navaratnas) have to restructure themselves for their very survival in the newly emerging global competitive milieu. The restructuring exercise could itself be of either Defensive or Strategic type (Grosfeld & Roland 1997). The kind of restructuring that an erstwhile PSU undertakes depends, according to Roland (2000) on factors like the degree of product competition they are likely to face, skills of their incumbent managers, need for external finance for restructuring and the degree of firm independence from Government. In the Indian context, we may add such other factors as the state of technology of the PSUs concerned, its stock of human capital, internal resources or retained earning and cumulative losses if any, the future prospects of the industrial sector in which it is currently operating. Public enterprise with little retained earnings (unless divested along with management control to attract fresh outside financial resources) would necessarily be undertaking defensive restructuring involving cost cutting. These enterprises would have to hive off some of their existing divisions or reduce output in other or even may have to close down some lines of business. In orders to right size the employment as a consequence of restructuring they will have to get rid of excess staff (unlike under the previous dispensation) by layoffs or retrenchment/voluntary retirement schemes etc.

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Public enterprises suffering chronic losses and those with cumulated losses equal to or more than their net worth need a more urgent attention for their rehabilitation/restructuring without further delay. In fact those with huge cumulative losses and the ones which cannot be rehabilitated need liquidation rather than restructuring. The best way to do this would be out right sell-offs of these enterprises and in case there is no buyer it is better to strip their assets and ultimately close them down. Incumbent managements in such enterprises are expected to be either inefficient or lacking in commitment or both and therefore, need an overhaul. Exit of these proven inefficient managements is absolutely necessary to make way for professional and efficient entrants. The success story of rehabilitation of Modern Foods (an ailing PSU that was sold off to Hindustan Level Ltd.) through infusion of necessary financial and managerial inputs by the taking over the firms reinforces our argument in no uncertain terms. In power sector also turn around of Talcher Thermal Power Station which was under the management control of Orissa State Electricity Board after it was handed over to NTPC Ltd. is another story to prove our point. PSUs with internal financial resources and operating in the sectors poised to grow (software for instance) need both Defensive and Strategic restructuring including diversification. These enterprises, if disinvested with management control to strategic partners, will be able to attract outside resources (both human and financial) and attempt the right kind of restructuring at the right time and incurring the right cost by eliminating duplication, obtain the economies of synergy and grow. In less than a year of privatization Paradeep Phosphate Ltd. (PPL) which was running at 40% capacity prior to being taken over is now running at 100% (Financial Express 29.11.2002): Operation of privatized PSUs operating in markets, notorious for asymmetric information (insurance for instance) will have to be closely monitored by the concerned regulatory authority to safeguard the consumer interests. Privatization in such sectors as providing services like Telecom or Electricity etc also need to be brought under the surveillance of concerned regulatory authorities who themselves be vested with necessary independence and powers to ensure accountability and transparency in their operations. Failure to do so would impair the improvements in Corporate Governance usually associated with process of privatization. 3.19 Corporate Social Responsibility: The third Pillar of sustainable development There is a growing public awareness of Corporate Governance and of environmental and social issues which is bringing about changes in consumer behavior, investment and policy or regulatory adjustments. There is a continued pressure on the Corporates to demonstrate that economic growth and sustainability are compatible. Sustainability ensures the long-term financial and economic viability of Corporate investments and of requiring compliance with minimum environmental viability and social standards. Sustainability will contribute to economic growth that improves peoples lives over the long-term. Sustainability = = Positive high impact Corporate Governance Economic performance and Environmental performance + Social performance

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Corporate social responsibility is the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life. In his classic book The Practice of Management Peter Drucker said that in a good, a moral, a lasting society the public good must always rest on private virtue.. It is Managements public responsibility to make whatever is genuinely in the public good become the enterprises own self interest. In companies where ownership is shared broadly, there is premium on trust. When one shares the risk of ownership together, one has to trust each other. Trust means confidence in the face of risk. Companies that build long-term relationship based on trust and interdependence will be better able to integrate ethical behaviour into their business operations. Businessmen are generally motivated by the principle of self-interest. They bribed the powers which had become the culture of business community during license permit Raj. Actually know who was more important for Indian business man than the know why of science or the know how of technology for success in the market place. The issues of Corporate Social Responsibility such as environmental degradation, employing child labour, violating fundamental human rights covenants, including women rights have a bearing on the future existence and overall financial health of the company. Corporate Social Responsibility (CSR) could only take root when it is rewarded by the financial markets. One way to ensure that markets reward ethical companies is to change accounting systems so that companies are audited not just according to their financial performance, but also according to a wide range of environmental and social indicators. This would mean that, if companies are audited in this way, and penalized if they do not perform, then financial markets and the share holders would begin to judge companies according to their wider impact on society. Share prices would then positively reflect the ethical dimensions of a companys operations. Internationally there are (a) (b) ISO 14000 is a series of international standards on environmental management. ISO 14001 specifies the actual requirements for an environmental management system.

Confederation of Indian Industry (CII) has aimed at promoting eco-efficient industrial operations through Environment Management Services. The activities carried out are (a) (b) (c) (d) (e) Design and implementation of EMS as per ISO 14001 Environmental Audits Environmental legislation and compliance audit Occupational health and safety management as per BSI 18001 Environmental risk assessment and disaster management plan

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(f) (g) (h)

Company-wide audit of environmental health and safety programme Social Accountability as per SA-8000 Environmental assessment of proposed development

Recently a lot of developments have taken place regarding displacement of people for proposed industrial activities. Displaced people are demanding proper rehabilitation in terms of alternative land site or jobs in the new industry. The Corporates have lots of role in this field. They must adhere to the commitment they have made during establishment of industry. Rehabilitation package must be a part of their Corporate Social Responsibility. They must supplement Government effort in this regard. 3.20 Corporate Governance Rating (CGR) The benefits of Corporate Governance rating (CGR) for the company, regulators and stakeholders, according to ICRA need to be advocated. However, according to the views of the Federation of Indian Chambers of Commerce and Industry Corporate Governance norms should not be made mandatory. However, it should be recommendatory or voluntary in nature, left to the companies whether they want to adopt it or not. Industry sources are concerned about the cost of compliance as numbers of compliance would eat into the profit margin of Corporate. Two rating organization in India ICRA and CRISIL have developed well thought out criteria for measuring Corporate Governance practices and value creation for all the stakeholders. Standard and poor (S&P) Governance services assigned a corporate governance score of CGS-8.6 to Infosys Technologies (April 2004). Infosys has demonstrated strong standards of Corporate Governance. It has also own Golden peacock Global award for Corporate Governance instituted by world council for Corporate Governance. 3.21 Corporate Governance in some prominent power companies of the country (A) NTPC Ltd: It is a prominent power company owned by Govt. of India primarily engaged in thermal power generation. The Corporate Governance philosophy has been scripted as follows: As a good corporate citizen, the company is committed to sound corporate practices based on conscience, openness, fairness, professionalism and accountability in building confidence of its various stake holders in it thereby paving the way for its long term success.

Board of Directors: As per article of association the Company Board shall not be less than four Directors and more than twenty Directors. These Directors may be either whole time functional Directors or part time Directors. Presently the Board of Directors consists of six whole time functional Directors, two Government nominee Directors and fair Independent Directors. The Board has complete access to any information within the company. The Board has established the following committees. i) Audit committee ii) Share holders/Investor Grievance Committee iii) Committee on Management controls iv) Contracts sub-committee

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v) vi) vii)

Project sub-committee Investment/Contribution sub-committee Committee of the Board for allotment and post-allotment activities of NTPC securities

Audit committee has been constituted with the membership of one Government nominee director and three independent Directors. NTPC Ltd. being a central public sector undertaking the appointment, tenure and remuneration of Directors are decided by Govt. of India. Independent directors are paid only sitting fees at rate fixed by the Board within the ceiling fixed under the Companies Act, 1956 and approved by the Government. Disclosures: The Company communicates with its shareholders through Annual report, General Meeting and disclosures through websites. The company has complied with all the requirements of listing agreement with stock exchanges as well as guidelines prescribed by SEBI. Code of Conduct: The Board of directors has laid down two separate codes of conduct one for Board members and another for senior Management personnel in alignment with companys vision and values. Code of insider trading: In pursuance of the Securities Exchange Board of India (Prohibition of Insider Trading) Regulation 1992 the Board has laid down Code of Conduct for Prevention of Insider Trading with the objective of preventing purchase and/or sale of shares of the company by an insider on the basis of unpublished price sensitive information. (B) TATA Power Company Ltd: Tata Power is a national level company in the area of Electricity Generation and Distribution. The company adheres to the conditions of Corporate Governance stipulated in clause 49 of the listing agreement. The company claims that it is abided by Tata Code of Conduct in letter and spirit. They are namely (a) Integrity (b) Understanding (c) Excellence (d) Unity and (e) Responsibility. The company further claims that they have different committees of the Boards such as Audit committee, Remuneration committee etc. before they were made mandatory. In case of Corporate Social Responsibility Tata Group is one of the pioneering Companies. They have established schools and institutes of higher learning, world class hospital etc for general public. They have developed state of art call centre for electricity in New Delhi which is unique in the country. North Delhi Power Ltd. a distribution utility in Delhi, a venture of Tata Group has set up Energy Clubs in schools to motivate children and create active ambassadors for energy conservation, environment, safety and other social issues. In view of energy shortage in Delhi, NDPL proposes to tie up with TERI, a deemed university based in Delhi to help slum residents use appropriately segregated municipal solid waste for biogas generation and use as fuel.

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3.22

Satyam Episode-Failure of Corporate Governance Satyam Computers Services was the fourth largest IT firm in India having worth estimated at 7 billion Dollars. In September2008, Satyam Computers Services had bagged the Golden Peacock Award for excellence in Corporate Governance but by December of the same year there was definitely nothing award worthy in that Company. Satyam was mired in biggest failure of Corporate Governance in India during present time Their audacious $1.6 billion acquisition of Maytas (Satyam spelled backward) properties and Maytas Infra had been lambasted by all. The attempt of CEO of Satyam Computer Mr. Ramalinga Raju to purchase the twin Companies was regarded as a mockery of principle of Corporate Governance. First of all, the decision was not announced taking in to confidence of all the stake holders of the company. The resolution was not passed in the EGM and almost declared unilaterally by Mr. Ramalinga Raju the majority stake holder (8. 5%).Therefore interest of fragmented 91.5% share holder was ignored by 8.5% stake holder. Secondly, the twin Maytas companies are being the companies run by the family members of Ramalinga Raju only. Thirdly, the deal would have made cash reach company Satyam into a debt ridden company as its entire holding of $1.3 billion cash would have gone to Mayatas properties (where promoters have 100% holding) and to Mayatas infrastructures. Fourthly, in the name of diversification from software to entirely new area of reality why a relatively new company like Mayatas was chosen when several other big players were still there. Corporate Governance makes the whole structure of the company more accountable towards each stake holders, whether it is majority or minority. Practice of corporate Governance is to make the proper disclosure to the stake holders about each strategic decision so that stakeholders and market can reward the good decision and punish the bad decision. According to Mr. Adrian Lim, Singapore based Aberdeen Asset Management company, the biggest foreign share holder of Satyam We need to be clear that as investor we will not tolerate a change in principal activity without consultation. When you are changing principal activity in such a dramatic fashion minority stake holders should be consulted and given a say" What stunned the corporate world and Investors much was the admission of Mr. Ramalinga Raju the founder promoter, that over the years the profit of the company had been falsified roughly to the tune of 1.5 billion Dollars which was not really existent. What shocked the analyst most is that the money which is supposed to be fictitious, had been recorded in Satyams balance sheets and books of account and had been audited by internationally reputed firm of Auditors, Price Waterhouse Coopers. Mr.Raju acknowledged that his Companys financial records had been fudged and manipulated for the last several years. He wrote to the Companys Board It was like riding a tiger, not knowing how to get off without being eaten. Then he attempted to acquire two companies controlled by his sons for 1.6 billion Dollar in order to compensate for the holes in his books of account. According to Prof. Arun Kumar, Professor of Economics at JNU, New Delhi the so called Independent Directors on the Satyam Board were not

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truly independent and added that Auditors often acted in collusion with corrupt company Managers.(IPS News Agency-The Story Underneath-Jan09,2009) Hence, Transparency and Accountability became the biggest victim in Satyams Corporate Governance System. 3.23 Should code of Corporate Governance be made mandatory or voluntary? Over the past decade, governance guidelines and codes have been issued by stock exchanges, corporations, institutional investors, and associations of directors and corporate managers. Compliance with these governance recommendations is generally not mandated by law, although the codes linked to stock exchanges may have a coercive effect. It will be interesting to note that Kumar Mangalam Committee while drafting its recommendation was faced with the dilemma of statutory v/s voluntary compliance. The desirable code of Corporate Governance, which was drafted by CII and was voluntary in nature, did not produce the expected improvement in Corporate Governance. It is in this context that the Kumar Mangalam committee felt that under the Indian condition a statutory rather than a voluntary code would be far more purposive and meaningful. This led the committee to decide between mandatory and non mandatory provisions. The committee felt that some of the recommendations are absolutely essential for framework of corporate governance and virtually form its core, while others could be considered as desirable. Besides, some of the recommendations needed change of the statute such as the Companies Act for their enforcement. Faced with this difficulty the committee settled for two classes of recommendations. The imperative for corporate governance lies not merely in drafting a code of Corporate Governance, but in practicing it. Even now some of the Companies are following exemplary practices, without the existence of formal guidelines on this subject. Structures and rules are important because they provide a framework, which will encourage and enforce good governance; but alone, these cannot raise the standards of Corporate Governance. What counts is the way in which these are put to use. Effective corporate governance in its true spirit can only be achieved by a voluntary change in the Corporate Governance philosophy. In order to achieve high standards of Corporate Governance, internal pressure such as peers and market competition should be more effective than the enforcement by regulating agencies. The best result would be achieved when the companies begin to treat the code not as mere structure but as a way of life. 3.24 Review of Literature on Power Sector Reform 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

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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 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? 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; 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; 99

slow pace of rural electrification; inefficient use of electricity by the end consumer; lack of grid discipline

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 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. 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 longterm multi-year tariff fixation, with explicit targets for T&D loss reduction and for various other parameters.

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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 it 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 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 Governments 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? 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 101

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, Indias 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. 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), former 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 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 102

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 Orissas 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. 3.25 Summary of the Chapter If the 19th Century was the age of entrepreneur and the 20th Century was the age of Management, the 21st Century will be the era of Corporate Governance and the way that power is exercised over all corporate entities in societies around the World. Attention of World Communities was drawn to Corporate Governance after series failures of Corporations such as Enron, Worldcom and recent failures of Lehmann brothers and Satyam Computers. There is no particular definition of Corporate Governance and different thinkers have attributed different definitions to it. According to Kumar Mangalam Birla Corporate Governance is indispensable for effective market discipline But it is broadly related to how Corporations are directed or controlled. Principles of Corporate Governance finds its origin as early as in Cadbury report of 1992.There are several other reports over the time and most prominent milestones in development of Corporate Governance is the enactment of Sarbanes-Oxley Act(2002) in United States. In India we have Kumar Mangalam Birla Committee Report, Naresh Chandra Committee Report and Narayan Murty Committee report etc. SEBI has incorporated certain recommendations of Birla Committee report in clause 49(2004) of listing agreement of companies with stock exchanges. There are different models of Corporate Governance such as Anglo-American, German, Japanese and Indian. The present chapter deals with role of Board in Corporate Governance etc. It also deals with different committees of the Board such as Audit Committee, Remuneration Committee and its importance in Corporate Governance. Recent development in Corporate Governance of unlisted PSUs also finds place in this chapter. This chapter also narrates among other things the importance of Whistle Blowers in companies and Corporate Social Responsibilities. Successful implementation of Corporate Governance in some companies in Power sector has been described whereas failure of the same in Satyam Computers has been highlighted. Several studies by World Bank and other independent researchers on impact of power sector reform have been reviewed for carrying out further research.

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References: 1. 2. Raju B.Yerram. Corporate Governance: Models of growth ASCI Journal of Management Vol27 (1&2); March1998 Mahajan Vibha, Improving the efficiency of Corporate Governance, Corporate Governance (Ed) P.P Arya,B.B.Tandon, A.K Vashisht2003, Deep &Deep publication Pvt. Ltd Magdi Iskander, Gerald Meyerman, F. Gray and Sean Hagon, Corporate Restructuring and Governance in East Asia, Finance and Development, March 1999, p.42 Chandratre, K.R Corporate Governance and Board Agenda Chartered Secretary, February2008 Gopal K Emerging Trends in Corporate Governance, The Management Accountant, June2006 The Cadbury Committee: Financial Aspects of Corporate Governance,Dec1992 OECD Principle of Corporate Governance, April 1998 Kumar Mangalam Birla Committee Report by SEBI, May1999 CII- Code for Corporate Governance, April1998 Sandhu P.S,Sandhu M.K Growing Relevance of Corporate Governance Corporate Governance(Ed)(2003) P.P Arya, B.B.Tandon, A.K Vashisht2003, Deep & Deep publication Pvt. Ltd Marshall,J and Harris, T.W (2005),As Boards Shrink: Responsibilities Grow, ICFAI Reader, August, 43-47 Sisodiya, A.S and Sekhar, Y.C (2007), The veil of Secrecy, Charted Financial Analyst, October59-62 Panchali, J(2008) Ownership Patterns and corporate performance, Management Review, December43-50 Mako,W.P(2004) Corporate Practices,August,38-42 Restructuring in Asia:Promoting Best

3.

4. 5. 6. 7. 8. 9. 10.

11. 12. 13. 14. 15. 16.

Andheri Shleifer and Robert W.Vishny A survey of Corporation Governance Journal of Finance, June 2006 Singh Karamjit,(2003) Corporate Governance in the twenty-first century, Corporate Governance (Ed) P.P Arya, B.B. Tandon, A.K Vashisht 2003, Deep & Deep publication Pvt. Ltd Andrews, K.R, The concept of corporate strategy Havard Business Review, 38/6-85 Kay John, Foundation of corporate Success-How Business strategies and value ,Oxford University press, 1994 Blake, Allan, Dynamic Directors: Aligning Board structures for Business Success (Macmillan Press Ltd, London1999) Chinn, Richard and Jones, Martyn E(Eds) The corporate Governance Hand Book(Geo Publishing Ltd, London 1999) 104

17. 18. 19. 20.

21. 22. 23. 24. 25. 26. 27.

Ginman P. The Guide to Directors Duties and Responsibilities_ Your Questions Answered (Kogan Page, London 1992) Institute of Directors, Assessing Boards effectiveness(The Director Publications London 1998) Corporate Governance Reporting: Best Practices, The Institute of Company Secretaries of India, New Delhi Boards and Governance; the New Agenda ICFAI University N. Gopalaswamy - (2006) A guide to Corporate Governance, New Age International Publishers Power Sector Reforms in India: A Critical Appraisal of Orissas Reforms Experience by Mr. Sarbesh Mishra, Ph.D Thesis submitted to Utkal University. Bharadwaj, A. and R. Tongia (2003). "Distributed Power Generation: Rural India - A Case Study." IEEE Transactions on Power Systems preparing for publication submission. Besant-Jones, John E., ed. 1993. "Power Supply in Developing Countries: Will Reform Work?" Occasional Paper No. 1. World Bank Industry and Energy Department, Washington, D.C.

28.

Internet Websites: i) Gregory, J.H, Gotshal and Manges L.L.P (2007), Overview of Corporate Governance guidelines and codes of best practices in developing and emerging market. Available at www.Corpgov.com News Archives (Feb2007) Corporate Governance. Available at www.corpgov.net www.infosys.com www.businessweek.com www.ntpc.co.in www.tatapower.com

ii) iii) iv) v) vi)

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CHAPTER4

Regulatory Governance in Orissa

Oxford English dictionary define regulate as control by rule. In its specialized political sense it is the control of privately owned monopoly by Government rules. Regulation is also used more broadly to cover any publicly imposed rules governing a firm or industry, safety and environmental rules. Much of the legislative power vested in administrative agencies comes from the fact that legislature can only go so far in enacting legislation or establishing guidelines for the agency to follow .Administrative agencies carry out legislation in several ways including enacting regulation to carry out the activities the agency believes is in the legislative interest. Laws and regulations are a major tool in protecting the rights of all the stake holders of electricity services. Once the law is enacted, an agency is supposed (as defined in the law) to be created to enforce regulations. It is because the laws often do not include all the details. The Electricity Regulatory Commissions are set up to create and enforce regulations in electricity services. 4.1 Goals of Regulation Natural monopolies have traditionally been subject to regulation because they pose risks to the society by accruing excess profits and costs at the expense of customers dependent on their services. Creating an efficient business environment in electricity distribution by regulation is a challenging task because of the nature of the industry. As Vogelsang (2002) points out capacity costs are the electricity distribution industrys paramount cost factor, while the services are not-storable. Regulation thus faces a problem of finding the balance between optimal capacity expansion, which requires cost-average and stable signals and optional capacity utilization, which requires fluctuating prices (Vogelsang 2002). The aim of regulation can be seen as to provide distribution companies with incentives to improve their investment and operating efficiencies and to ensure that customers also benefit from the efficiency gains (Jamasb & Pollit 2000). In addition, regulation should be acceptable to regulated companies and maximize the overall social welfare by promoting efficient operation. In electricity distribution business common forms of regulation are rateof-return regulation and price regulation. Rate-of-Return regulation provides the regulated companies with sufficient incentives for capacity expansion. In fact, rate of return regulation even creates incentives for over capitalization, which actually seems to have been the case in the Scandinavian distribution industry prior to deregulation (Agrell & al 2000). However, the rate -of -return regulation does not give incentives for cost reduction unless there is some form of efficiency benchmarking connected to it. In price regulation, incentives for cost reductions are built-in features but the method does not necessarily account for capacity expansion. 4.2 Different Approaches to Regulation

4.2.1 Incentive Regulation A common approach to regulation in electricity distribution business is a so called incentive regulation which by Vogelsangs (2002) definition means that the 106

regulator delegates certain pricing decisions to the regulated companies who can then reap profit which increases from cost reductions. Incentive regulation, including price cap, rate moratoria, profit sharing, banded rate-of-return menus and yardstick regulation makes use of regulated companies information advantages and profit motives (Vogelsang 2002). Distribution Companies themselves have the best knowledge of their opportunities to cut costs and incentive regulation encourages them to carry out the possible cost reductions. 4.2.2 Price Cap Regulation In price cap regulation the prices of regulated services are adjusted annually by an inflation factor, an X factor that reflects efficiency improvement and a Y-factor that allows for pass through of specific cost items outside of the companys control (Vogelsang 2002). For example, the excess cost of losses are often allowed to pass through to distribution tariffs because distribution companies have no control over the market price of electricity. Price caps are determined for the whole regulatory period in advance. At the end of the regulatory period price caps are reviewed and adjusted for the next regulatory period. In Indian context it is called truing up exercise. The X-factor is often obtained as a result of efficiency benchmarking and negotiations between the company and the regulators. The success of price cap regulation is due to its incentives for cost reductions and freedom and incentives for price rebalancing. In electricity distribution business one approach to achieve the freedom for price rebalancing has been to regulate the basket of services rather than the actual prices, which is considered to promote more efficient price structures (Vogelsang 2002). This approach is often referred to as Revenue cap regulation. Another special case of price cap regulation is rate moratoria. In this kind of regulation the X factor is set equal to the rate of inflation and the Y-factor is set equal to Zero. Under this regime the prices are kept constant over the regulatory period, which forces the regulated company alone to face the risks of external price shocks. This may threaten the companys viability. 4.2.3 Yardstick regulation In yardstick regulation the allowed prices or revenues of a company depend on the performance of other companies. Yardstick approach is risky in the sense that the benchmarked company may operate in a different kind of environment than the yardstick company. For example, cost differences between the two companies may be explained by factors such as geology, climate, population density, local wage rates and taxes. In connection to other method of regulation yardstick approach has been successfully used in cases where cost data has not been available. A special case of yardstick regulation is benchmarking based on a hypothetical efficient company. The optical cost level for a regulated company is calculated through engineering economic analysis by defining a model company, or model network in the case of distribution business (CEPA 2003). A significant disadvantage of this approach is that it does not take into account the historical circumstances, which have led to the current situation. For example, the demand growth may have evolved in such a manner that the model network would actually have been more expensive to build and maintain than the existing network (CEPA 2003). Another disadvantage is that the efficient long-run costs

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for the regulated company are determined based on model network and therefore, they may not be adequate to cover even the companys fixed and common cost (Vogelsang 2002). Indeed, determining the values of distribution companies based on reference or fictitious networks might give rather controversial results. 4.2.4 Profit sharing, banded rate-of-return and menus In profit sharing regulation customers directly take part in regulation. Excess profits or profit shortfall earned by a company are dealt by ex-post refunds or price reductions for future purchases. In banded rate-of-return regulation the regulated company is allowed to keep its excess profits and suffer profit shortfalls within a pre-specified band. Only rate of return below or above the band trigger have economical consequences, such as ex-post refunds or price reductions for future purchases. Menus allow the regulated utility to choose among different incentive regulation plans. The choice may consists of combinations between price caps and profit sharing 4.3 Different Regulatory Models Regulation by Government Regulation by Agency
Independent regulator sets tariffs and regulates access, quality of supply, customer service, dispute resolution

Regulator (or Ministry) administers contract (such as a concession contract

Regulation by Contract
Regulatory regime (including tariff setting) pre-specified in detail in legal instrument

Advisory regulators -Expert panels

Regulatory contract provides for external contractors

Government policy and legal framework

Regulatory Out-sources some support functions Independent reviews

Outsourcing of regulatory functions to third parties

Consultants or expert panels undertake or assist with tariff reviews, standard setting, monitoring, arbitration

Government policy and legal framework

Source: Eberhard (2007), University of Cape Town

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Developing countries attempting to implement the standard model of independent regulation have encountered many problems and challenges. These may arise when a regulatory system is incompatible with the countrys regulatory commitment and institutional and human resource endowment. Selecting from a menu of regulatory option to create hybrid model one that best fits a countrys own circumstances and challenges can improve regulatory performance. Regulating by contract involves pre-specifying regulatory regimes (including Multi Year Tariff setting systems) in detail in such legal instruments as basic law, Secondary Legislation, Licenses, concession contracts or power purchase agreement (Bakovic, Tenenbaum and Woolf 2003). Regulatory contracts are generally constructed for private participation but may also be used to improve the performance of State owned utilities. But wielding legal traditions together can also lead to problems. Even when the contract specifies the tariff setting formula, the regulator might feel obliged by its legislative mandate to intervene in the public interest. In these cases, clarifying regulatory roles and functions is essential. Out sourcing or contracting out regulatory functions involves relying on external contractors to perform such functions as tariff reviews, bench marking, compliance monitoring dispute resolution etc. Out sourcing might be considered where there are challenges or problems relating to a regulators independence, capacity or legitimacy - or where regulatory contract needs additional support for effective administration. Out sourcing might also be used for cost benefit reasons (Tremolet, Shukla and Venton 2004). There are two main models of regulatory out sourcing. The first involves consulting or technical support for regulators or the parties to a regulatory contract. The second involves the Governments contracting of separate advisory regulators or expert panel. In the strongest version of the model the advisory regulator or expert panel must give its advice in a publicly available document that clearly explains the decisions. The different regulatory models embody varying degrees of regulatory discretion. But they are not mutually exclusive and often co-exist as per the above figure. The success of the Regulatory system depends on its compatibility with a countrys regulatory commitment and institutional and human resource endowment 4.4 Electricity Distribution Business Regulations in Practice In several countries the electricity distribution sector has undergone major changes during the past decade. Regulators have faced the challenge of developing regulatory models that meet the requirements of different interest groups such as customers, distribution companies, investors and society. 1) From customers point of view, the regulatory model should protect them from excess prices of monopoly services. In other words, customers dependent on monopoly services should not be over charged and the quality of monopoly services should be sufficient. According to these principles reasonable prices, the role of power quality in regulation and appropriate service levels are determined explicitly.

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2)

3)

4)

From distribution companies point of view, the regulatory model should give incentives for optimal capacity expansion and capacity utilization, and it should treat distribution companies equally. The proper incentives are important in keeping the distribution network in appropriate shape. To avoid conflicting incentives, the directing signals of regulation should be consistent with the general planning and operating principles of distribution networks. From investors point of view, the regulatory model should protect their rights by ensuring reasonable returns on investments. Regulation should not weaken the competitiveness and attraction of distribution industry. In order to fulfill this goal, emphasis has to be put on the methods used in defining regulatory asset bases, reasonable returns on equity and loaned capital and the risks of distribution business. From societys point of view, the costs of performing regulatory activities should be in relation with the presumable cost savings. The regulator should not have to interfere with the minor company-specific details and the information required by the regulator should be relatively easy for the distribution companies to produce. In developing regulatory models, the focus has often first been on promoting cost reductions and on assuring that returns and/or prices are reasonable. Regulators are expected to allow distribution companies sufficient returns to cover the cost of capital and to confirm in advance the methods used in determining regulatory asset base, reasonable operational costs and reasonable capital expenditure.

Table- 16 Regulatory principles and practices in some European Countries Country Regulatory Supply Quality Adjustment Regulatory Asset Principle Base (ROR) Network Book Value Revenues are adjusted according to Ex-Ante Great (6.5%) companies performances based on Britain Revenue cap differences between target levels for Rgulation interruption times and frequencies (max 1.75% of the revenue) and customer services (max 0.125%) Adjusted network Companies are given targets for Norway Ex-Ante interruption costs. If they fail to meet these book value (7.7%) revenue cap targets, revenues are reduced and vice-versa rgulation Service quality is taken into account when Reference network Ex-Ante Spain composing reference network that is connected revenue cap according to real regulation network if the data from real network is available Network replacement Finland Ex-post rate of Average interruption as an output factor in DEA value (4.175%) 50:50 return debt/equity ratio regulation Interruption time and frequencies affect Network replacement Sweden Ex-post, Exallowed revenues value based on Ante revenue fictitious network cap regulation Source: Satu Viljainen, Regulation of Electricity Distribution Business, 2004. 110

4.5

International Experience in Regulatory Governance The process of electricity reforms can be said to have begun in the world in the mid-1980s. The reforming countries can be broadly divided into three categories. a) b) c) Those that were early reformers and where reforms have been consolidated to varying degrees (e.g. Argentina, Australia, Chile, England, the U.S.) Those that started later and are now in transition (e.g. Belgium, Brazil, Holland, Portugal, Scotland, Sweden) Those that are formulating reform programmes or are in the early stages of implementation (e.g. Germany, India, Peru, Russia, South Africa)

4.6

Reform Models adopted in different Countries Electricity reforms have followed three main models whereas Reform model adopted in Australia is a variant of US Reform model.

4.6.1 The US Reform Model In this model, private-investor-owned utilities dominate electricity generation and other down stream activities. However, regulatory intervention (Public Utility Regulatory Policy Act) has led to competition in wholesale as well as in retail markets and has diminished this dominance. Due to creation of vertically integrated geographical monopolies the privately owned electricity sector in the US has been sheltered from competition and also has been criticized for being inefficient. The main characteristic of this model are listed below: The generation and T&D (Transmission and Distribution) of electricity are vertically integrated There is an established presence of independent power producers and traders in electricity The presence of federal and State Government owned utilities is miniscule (Grey 1996) The federal nature of the US rules this model. The states set their own development policies. The State utility Commission establishes entry rules and incentives to bring more competition and lower consumer prices. At the federal level, the FERC (Federal Electricity Regulatory Commission) set prices in the US for interconnected transmission services. It has also wide ranging powers to regulate inter-state oil and natural gas pipelines along with bulk sales of electricity. The state public utilities have jurisdiction over natural gas, water, sewage, telecommunication and transport. The members are appointed on the basis of political affiliation and majority is decided in relation to which party heads the administration. The utilities in this model are moving towards higher vertical disintegration and increased open access to interstate transmission system which would allow distant utilities or wholesale customers to buy and sell power over transmission lines owned by others. The utilities under this model are moving towards higher independence in trading of power and freedom to customers to choose their suppliers. 111

4.6.2 The U.K. Reform Model The UK has three separate and differently organized electricity markets in 1) England and Wales 2) Scotland 3) Northern Ireland The Electricity Act (1990) created the market system of England, Wales and Scotland. Before reforms, the Central Electricity Generating Board (CEGB) held the monopoly for generation and transmission. Area Boards had similar monopolies for distribution. Competition was introduced by separating generation, transmission and distribution and by adding intermediary systems that allowed the cheapest generator to produce more by being able to sell more to the grid and by contracts between generators and large consumers. Some of the important features of restructured electricity industry in UK are as follows: All the electricity companies including the transmission company (that cannot have generation interests) are privately owned. The separation (unbundling) of entities can be seen in England, Wales and Northern Ireland but in Scotland utilities are vertically integrated. In the UK, the OFFER (Office of the Electricity Regulator) has now been replaced by the OFGEM (Office of the Gas and Electricity Manager) It is an agency of the state (and the regulator reports to the minister concerned) but is not directly responsible to any Government department The DGES (Director General of Electricity Supplies) is one member of electricity regulatory agency known by its acronym OFFER (now integrated into OFGEM) OFGEMs primary regulatory responsibilities are to ensure that reasonable demands of electricity are satisfied Next responsibility is to license the supplier of electricity and ensure that they are financially viable Although consumer protection is not a primary duty of OFGEM , it has been assumed that a competitive market in generation and supply is the best guarantee for consumer protection The price review is based on (CAPEX and OPEX benchmarks established in comparison with companies operating under similar conditions. Generation and distribution are subjects of competition. Energy costs are fully passed through to consumers Under the New Electricity Trading Arrangements most of the U.K electricity is traded through bilateral contracts ahead of time. Electricity is also traded on forward and future markets and through power exchange. In the first phase of reforms in England and Wales, the regulator played a very important role in determining the efficiency level desired and capital expenditure allowances. The level of regulatory discretion during control period is low but very high at beginning. The regulator currently does not set prices but monitors market power and quality of supply.

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4.6.3 Latin American Reform Models Chile & Argentina: Chile and Argentina are more or less identical as far as electricity regulation is concerned. The main features of this model are: Prior to reform, the sector was mainly vertically integrated. It is now vertically segregated with competition in generation and supply. The restructuring allowed open entry to participation in the generation area, but without any supply or purchase obligation. New generators had to rely on the market for sale of power. The load dispatch centres dispatches the system according to an economic merit order and determines SRMC (Short Run Marginal Cost) of the system. Generators had right or access to the line if capacity was available, subject to payment of wheeling charges to be determined by the regulator. Distribution required a license that was granted under competitive bidding system In Chile, the Economics Ministry and the NEC (National Energy Commission) and Electricity and fuels superintendence (Both decentralized agencies that work with the Government through the Secretary of Economy) are the main regulating entities. In Argentina ENRE (National Regulating Electric Entity) and CAMMESA (Compania Administradora del Mercado Mayorista Electrico SA) are the main regulating entities. There is no federal-state problems in Chile. Regulation is carried out by National Government. In Argentina, however, the ENRE regulates transmission at the national level and distribution in Greater Buenos Aires Region but generally provincial Government regulate provincial distribution In Argentina, the Ministry of Energy and Mines supervises compliance with laws, regulation, concession and all other aspects related to services rendered by the Electric Public Service. In Chile, the anti-trust Commission oversees competition in all sector of economy In Argentina ENRE determines the basis for and approves tariffs for the sectors transmission and bulk of the distribution business. The ENRE establishes a tariff for distribution utilities which incorporate performance criteria according to efficiently-run model enterprises of similar zone and service features. Retail tariff are established by indexed rate formulae in their concession contracts for five years period. The tariff also incorporates a rate of return to encourage the efficiency of the enterprise. In Argentina distribution companies maintain a monopoly franchise within a defined geographical area. The terms of distribution added value that leads to tariff is clearly defined in the concession contracts. Most of the companies are in private hands with limited participation of the federal government in the generation sector. In Chile price regulation follows the system of all energy and transmission costs being fully passed through. In the case of prices for distribution Chile follows a hybrid system that includes cost plus but with a cap on prices. Retail tariffs for regulated end consumers are based on the sum of the node

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price for energy and capacity in the system and the VAD (Value added distribution). The VAD is based on costs for a model distribution enterprise operating in a similar zone (load, density etc). The operating cost of the model firm is obtained as a weighted average of estimates made by consultant hired by the industry and the regulator NEC, where the NECs estimate has two-third weight age. The VAD incorporates (1) fixed costs of administration, billing and customer service (2) the investment operation and maintenance costs and peak power losses over the distribution system and (3) Energy losses in the distribution system. The rate of return is set to a level between 6% and 14%. The pricing mechanism does not include either quality of service issues or financial penalties. The tariffs are set for five typical zones representing different load densities. The Chilean customers who consume more than 2 MW that are large industrial and mining companies are not subject to regulated rates and are eligible to freely negotiate PPA with generators. These prices also act as reference points for node prices for regulated customers. In Chile two key Government institutions regulate the sector. The NEC or the regulator is managed by a board of directors comprising seven ministers. It proposes policies, set tariffs and grant licenses. The Superintendence of Electricity and fuels created in 1985 as a branch of the economic ministry supervises compliance with law and regulation and monitors the quality of services. It also deals with users and suppliers complaints and prepares the information for the licensing, pricing, investing and quality setting process carried out by the NEC. Chile is criticized for the multiplicity of regulatory institutions.

4.6.4 Australian Reform Model: Australian model is variant of US model. Reform was initiated in Australia the mid 1990s both at the state and national level. The National Government played a more active role through the establishment of a national grid and a national pool. (A pool for electricity refers to the equivalent of a stock exchange in financial markets. Since all electricity is not identifiable like the scrip of a company, all electricity supplied and demanded pooled together and the load dispatch centre keeps track of who supplied how much and who drew how much). The national regulatory regime is light handed and a form of price regulation has been applied to the regulated sector (Baijal 1999). The national electricity code established the regulatory and operational framework of the new Australian electricity market and binds all participants in the wholesale power generation market to specified rules. 4.6.5 Inter-Country Comparison of Regulatory Model The inter-Country comparison of different Regulatory Models in some important countries is presented in tabular form below:

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Table- 17 Inter-Country Comparison of Regulatory Model

Country Name of Body Great Britain Gas and Electricity Markets Authority (GEMA), responsible for the Office of Gas and Electricity Markets (OFGEM) 1989 (as OFFER) Spain National Energy Commission (CNE) USA (Federal) Federal Energy Regulatory Commission (FERC) October 1, 1977 (substituting the Federal Power Commission, FPC, estd. In 1920) Up to five Commissioners 5 years Subjective requirements to fulfill objectives Brazil Agencia Nacional de Energia Eletrica (ANEEL) India (Federal) Central Electricity Regulatory Commission (CERC) July, 1998

Established

In 1998 as Commission for the National Electricity System; 9 Members (in addition to a nonvoting Secretary) 6 years renewable once. Recognized technical and professional competence

No. of Members Terms of Office Required Qualification

Min. 3, currently 15 (2005) Maximum 5 years No specific requirements

1996; substituted the National Department of Waters and Electric Power ANEEL is managed by a collegiate Board of Directors 4 years No. specific requirements

Five (1+4) including the Chairman, CEA as ex-officio Member Maximum 5 years Engg., law, comm.., economics, finance, mgmt., or retired judge of Supreme Court or CJ of High Court. Central Govt. on Recomm. Of selection committee headed by Member of PC (Energy); as per Act No significant control by Govt. Dept., except policy guidelines budgetary allocation Electricity

Members Appointed by

Department for Trade and Industry

Proposed by the Ministry of Industry. Appointed through a Govt. decree after appearance in Congress Formally independent. The Ministry is responsible for monitoring the efficacy of the Commission Electricity , natural and liquefied petroleum gasses and oil Private entities

President of the United States with the advice and consent of the Senate Independent. There is no review of FERCs decisions by the President or Congress Natural Gas, oil and electricity Private entities (limited jurisdiction entities owned by the public sector) FERC regulates interstate electricity transmission, the sale of electricity for resale and mergers.

Presidente da Republica (but previously approved by Brazilian Senate)

Degree of Independence

Subject to Parliamentary oversight, but no significant control by Govt. Dept. Electricity and natural gas Mainly Private Sector companies, +nuclear generator

Semi-autonomous depends on the Ministry of Mines and Energy (MME).

Sectors

Electricity

Types of Entities Regulated

Concession companies, both private and state owned. To regulate and supervise the generation, transmission, distribution and commercialization of electric power..

Range of Electricity sector Responsibilities

Generation, transmission (including system operation), distribution and supply sector

Advisory body for the Govt. competition supervision, regulated costs of the electricity system.

Generation owned by Central Govt., generation serving more than on State, and InterState transmission Tariff of generating companies and Inter-State transmission and trading margin

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Country Price Regulation Powers Authority over Market Design

Great Britain Yes, full authority on prices

Yes, full powers over NETA

Spain No, although it is compulsory for the CNE to draft a nonbinding decision of each tariff proposal. No, although nonbinding decisions by CNE are required in most issues

USA (Federal) On transmission prices

Brazil Yes full authority on prices

India (Federal) Yes, full authority on prices

Yes, FERC has complete jurisdiction over the wholesale electricity marketplace. Indirectly through price regulation

Only in the frame work of MMEs general guidelines

Invest. Regulation Powers Quality Regulation Powers

Indirectly through price regulation

Yes

No, although nonbinding decision by CNE is required in the energy planning process No, but it monitors quality of service.

Together with North American Electric Reliability (Council NERC)

Indirectly through price regulation, concession bids and concession contract terms. Yes.

Market design determined by Electricity Act 2003. Time and phases of introduction to be decided by Commission Indirectly through price regulation

Yes.

4.7

Reform Philosophy Table 18 Reform Philosophy Unbundling Privatization of DISCOMs Regulator Wholesale Market -- Retail Access Unbundling Privatization of DISCOMs Regulator Wholesale Market -- Retail Access Private Participation Unbundling Regulatory Reforms Unbundling Regulator Part. Divestiture of DISCOMs Wholesale Market Retail Supply (partial) Unbundling Wholesale Market Privatization Unbundled Sector; No Regulator; A proposal for competitive power pool was dropped in 2003

Argentia Brazil PRC India Mexico Thailand

4.8

Multi-Sector Versus Sectoral Regulatory Institutions Regulatory agencies can be set up at various levels of Government (federal, regional, municipal), often depending on the regional level at which the service is itself being provided. Certain sectors are more national in nature, such as telecommunications, whereas others like water and sanitation are more local in nature with no interconnection issues involved. In many countries, regulatory agencies are set up for single sectors due to the different pace of reform in each of the utility sectors. Other countries have preferred setting up multi-sectoral regulators, to oversee a sector as a whole (for example, the energy sector including natural gas and electricity) or several sectors (often including telecommunications, energy and water and sanitation). An increasing number of countries with a small client base and limited regulatory capacity have opted for multi-utility institutions over single sector regulators.

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Advantages of Sector-Specific Regulatory Body: Sector specific regulators can be highly efficient in overseeing activities that are characterized by complex sector structures and need continued expert and focused decision making (e.g. United States and United Kingdom policy-makers have adhered to the industry specific regulator and maintained competition committees to oversee anti-trust activities). A well resourced industry specific regulator is capable of the rapid decision-making typically required by a constantly changing sector. Advantages of Multi-Sectoral Regulatory Body Credible long-term strategy for predictability Sufficiently independent view for balancing interests of providers and consumers, as well as their short-term and long-term interests Experience with more advanced sectors can be transferred to sectors progressing at lower pace Enables unified approach / procedures for licensing, tariff setting, public hearings More qualified staff can be attracted High density of issues for consideration i.e. no spare capacity Fit for multi-sector companies Better communication with parties involved/society at large Fit for comprehensive impact control on, e.g. inflation, total household spending, competitiveness of the economy

As a conclusion, multi-sector approach for regulation enables better evaluation of possible impact on (i) the sector concerned due to experience in other sectors; (ii) the entire economy due to broader approach; and (iii) Concerning the evaluation process due to unified principles. In addition to the independence of regulatory body critical for successful operation, and as we saw from the above described advantages, multi-sector regulator is better placed to maintain its independence. 4.9 Phases in the Power Sector Governance in India There have been three distinct phases in the growth of Indias power sector and its regulation. First phase covers the early years from the time electricity was first introduced in the country till 1948, when production and distribution was largely in private hand and concentrated in major cities and towns. The industry was governed /regulated by the provisions of Indian Electricity Act, 1910. A company could supply electricity to any area or individual after obtaining a license under section 3 of the Act. Second Phase covers the five decades after independence. The development of power sector was subject in the concurrent list of the constitution of India on which both GOI and State Government could make laws. Each State had a vertically integrated, state owned monopoly to distribute electricity in an assigned service area (normally the entire state). The Electricity Supply Act, 1948 provided

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the framework for Governance of the power sector. It provided a detailed methodology for transmission tariffs that could be charged by licensees. The SEBs were mandated to secure a minimum surplus of three percent of the value of fixed asset after meeting all the legitimate expenses. But over the years, several forms of Government intrusiveness that beset the Indian Public Sector quite naturally enveloped electric utilities as well. Utilities increasingly became financially nonviable and incapable of meeting demand-qualitatively and quantitatively. It was at this juncture that the GOI decided to attract private sector participation. In early 1992, the two Electricity Acts were amended to create a new legal, administrative and financial environment for attracting private investment. The inducement offered through Government notification were attractive upto 100% foreign equity investment, a debt-equity ratio of up to 4:1; a return on equity of up to 16% recoverable at a PLF (Plant Loud Factor) of 68.5%; repatriation of the entire dividend in U.S. dollar term (which would be a pass-through on tariff and for which there was protection of the exchange rate); capitalization of interest during construction and so on. These return on equity were extended to Central Government owned companies whose rate of return on equity was raised from 10% in 1992 to 16% in 1998 in order to give them a level playing field with foreign investors (The inappropriateness of the comparison was in that the risk to the Indian state owned company on investment in power was far less than for the private or foreign investor). The system of Government regulation that prevailed during this time had two interesting consequences. First, Government-owned generating companies were allowed to charge that recovered costs as well as a return equity and kept additional earnings like incentives. Second, SEBs even while being protected from competition, were discouraged by their political masters from recovering their costs through tariff. With the advent of reforms and possible private sector participation (especially in distribution), the need for a well designed regulatory mechanism gained urgency. With the pressure for commercialization of power sector, the traditional structure of vertically integrated, state-owned monopolies needed changes. It required private participation in generation and distribution, in course of time in wholesale power trade, and with transmission. This was expected to enable yardstick competition to emerge. As a consequence, monopoly elements in the restructured power sector were to be regulated. This led to beginning of third phase of power sector Governance. This may be called regulatory Governance. As more players especially private-emerged, there is a high degree of independence in the regulatory mechanism so that it could weigh the interests of all the stakeholders in a transparent fashion. Orissa pioneered power sector reforms in India. The Power Sector Reform Act was passed by the State Legislature in 1995. The restructuring of the power sector became effective with effect from 1st April 1996 the day in which OSEB was dissolved and GRIDCO was formed.

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4.10

Historical Background of Legislative Initiatives (a) The Indian Electricity Act, 1910 Provided basic framework for electric supply industry in India. Growth of the sector through licensees. License by State Govt. Provision for license for supply of electricity in a specified area. Legal framework for laying down of wires and other works. Provisions laying down relationship between licensee and consumer.

(b)

The Indian Electricity (Supply) Act, 1948 Mandated creation of SEBs. Need for the State to step in (through SEBs) to extend electrification (so far limited to cities) across the country.

(c)

Main amendments to the Indian Electricity Supply Act 1948 Amendment in 1975 to enable generation in Central sector. Amendment to bring in commercial viability in the functioning of SEBs Section 59 amended to make the earning of a minimum return of 3% on fixed assets a statutory requirement (w.e.f 1.4.1985). Amendment in 1991 to open generation to private sector and establishment of RLDCs. Amendment in 1998 to provide for private sector participation in transmission, and also provision relating to Transmission Utilities. The Electricity Regulatory Commission Act, 1998 Provision for setting up of Central / State Electricity Regulatory Commission with powers to determine tariffs. Constitution of SERC optional for States. Distancing of Government from tariff determination

(d)

4.11

Corporate Governance in new Regulatory Framework In pursuance to Orissa Electricity Reform Act Orissa Electricity Regulatory Commission (OERC) was established with effect from 01.08.1996 with two members and one Chairman. The new regulatory supervision is designed to be qualitatively and structurally different from the command and control exercised by the Government so far as the electricity industry is concerned. The Orissa Governments objective is to withdraw from the power sector as an operator of utilities and give way to privately managed utilities operating in a competitive and appropriately regulated power market. The Commission is designed to be an autonomous authority responsible for regulation of the power sector while policy making power continues to be retained by the State Government.

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In the scheme of Reform Act, OERC is clearly intended to be the pivotal body in the power sector. The Act requires the Commission to discharge the following function: a) to aid and advise, in matters concerning generation, transmission, distribution and supply of electricity in the State; b) to regulate the working of licensees and to promote their working in an efficient, economical and equitable manner; c) to issue licenses in accordance with the provisions of this Act and determine the conditions to be included in the licences; d) to promote efficiency, economy and safety in the transmission, distribution and use of the electricity in the State including and in particular with regard to quality, continuity and reliability of service so as to enable all reasonable demands for electricity are met; e) to regulate the purchase, distribution, supply and utilization of electricity, the quality of service, the tariff and charges payable keeping in view both the interest of the consumers as well as the consideration that the supply and distribution cannot be maintained unless the charges for the electricity supplied are reasonably levied and duly collected; f) to promote competitiveness and progressively involve the participation of the private sector, while ensuring a fair deal for the customers; g) to collect data and forecast on the demand for and use of electricity and to require the licensees to collect such data and make such forecasts; h) to require licensees to formulate perspective plans and schemes in coordination with others for the promotion of generation, transmission, distribution and supply of electricity; and i) act as arbitrator or nominate arbitrator to settle dispute arising between the licensees. The mandate is indeed wide. The mission statement of the Commission also reinforces it. The mission statement is reproduced below: The Orissa Electricity Regulatory Commission is committed to fulfill its mandate of creating an efficient and economically viable electricity industry in the State. It balances the interests of all stakeholders while fulfilling its primary responsibility to ensure safe and reliable supply of power at reasonable rates. It is guided by the principles of good Governance, namely transparency, accountability, predictability equitability and participation in the discharge of its functions. It safeguards the interest of the state and gives a fair deal to consumers. Although four distribution companies of Orissa namely CESCO (CESU), NESCO, WESCO, SOUTHCO and transmission company OPTCL have been registered under Companies Act, 1956 except for certain provisions they are more regulated by OERC in their day to day functions. The Corporate Governance in these companies work within regulatory framework. All the hallmarks of good Corporate Governance finds place in regulatory Governance which is clear from the mission statement of OERC as stated above. After Orissa enacted its Electricity Reform Act, 1995, Haryana, Andhra Pradesh & Karnatak etc followed suit. But, enactment of Electricity Act, 2003 is a milestone in the century old history of electricity legislation in India. This law

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consolidated the laws relating to generation, transmission, distribution, trading and use of electricity and generally took measures conducive to development of electricity industry. Hence, new Act replaced Orissa Electricity Reform Act 1995 but the features of reform Act which are not inconsistent with Electricity Act, 2003 remained in vogue. 4.12 Salient features of Electricity Act, 2003 Repealing of Electricity Act, 1910, the Electricity (Supply) Act, 1948, the Electricity Regulatory Commission Act, 1998. Saving of eight State Reform Acts not inconsistent with the provision of Act, 2003 The institution of CERC, SERCs, CEA, Electrical Inspector, Generating Companaies, CTU, STUs continue under the new Act. Preparation of National Electricity Policy & Plan Reorganisation of SEBs No license for generation, CPP and rural supply Provision of subsidy in advance by State Government Implementation of non-discriminatory Open Access in phases Competition in distribution with multiple licensees Development of electricity market Recognition of trading as distinct activity Compulsory metering within two years Setting up of SERCs made mandatory Cost reflective tariff Reducing cross-subsidies in a phased manner Introduction of multi year tariff Setting up of appellate tribunal for Electricity to hear appeals against orders of SERCs and CERC Establishment of Grievance Redressal Forum and Ombudsman for handling consumer complaints Formation of State Advisory Committee, Coordination Forum & District Committee Establishment of Special Courts and separate police stations to check power theft The Electricity Act, 2003 is expected to give a bigger impetus to power sector reform in the country by attracting private investment, by encouraging competition and ensuring consumer protection.

4.13

Role of OERC under Electricity Act2003 Under the Electricity Act, 2003 electricity regulatory Commission in general has to play three distinct roles as follows: (a) Core Role: This role includes tariff regulation, monitoring quality of service, adjudicating disputes, enforcing licensing conditions, monitoring compliance and redressing grievances.

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(b) (c)

Recommendatory Role: If approval (of licenses, for example) does not come under its jurisdiction, the ERC can give its recommendation to the concerned authorities. Advisory Role: In this role, the ERC provides to the Government, on request, information and advice on matters of importance to the sector.

OERC as an independent statutory authority to regulate the working of the power sector was a novel feature. The Commission being first in Asia neither had any predecessor body nor any model any where else in India to follow. Within short period of time the Commission became operational and has made impressive progress in the establishment of a regulatory mechanism through issue of license codes, standards and regulations of which the following are some of the important one. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) OERC (Conduct of Business) Regulations, 2004 OERC Distribution (Conditions of Supply) Code, 2004 OERC (Licensees Standard of Performance) Regulations, 2004 OERC (Grievances Redressal Forum and Ombudsman) Regulations, 2004 Orissa Grid Code Consumer Rights Statement Complaint Handling Procedures. OERC(Terms and Condition for Determination of Tariff)Regulation,2004 OERC (Terms and condition for Open Access) Regulation2005 OERC(Intra- State ABT) Regulation2007

Apart from those Commission has issued licensees to four distribution companies and one transmission company which is also state transmission utility (STU) under the Electricity Act, 2003. As a consumer friendly measure Commission has published regional language version (Oriya) of some Regulations. 4.14 Constitution of OERC As per Section 82 and 84 of Electricity Act, 2003, Orissa Electricity Regulatory Commission consists of three members including Chairperson. Electricity Act, 2003 provides that they should be persons of ability, integrity and standing who have shown adequate knowledge and capacity in dealing with problems relating to engineering, finance, commerce, economics, law or management. In other words they should be professional in their own field. Table - 19 Background of Members/Chairpersons since its inception (OERC) Background Engineering from Central Services IAS State Utility 4 2 1 Members NIL 3 2 Chairpersons From this it can be concluded that State Government has appointed only retiring Government servant or bureaucrats in the commission instead of professional from diverse fields.

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4.15

Organization Chart of Orissa Electricity Regulatory Commission

ORGANISATION CHART OF OERC

MEMBER CHAIRPERSON MEMBER

Director (Engg.)

Director (Law)

Commission Secretary
Public Affairs Officer Dy. Director(P&A)

Director (Tariff)
Jt. Director (Tariff/Eng.) Jt. Director (EA) Jt. Director (FA)

Jt. Director (Engg.)

Jt. Director (IT)

Dy. Director (Engg.) Dy. Director (IT)

Accounts Officer Jt. Director (Eco.) Dy. Director (Tariff/Eng.) Dy. Director (FA) Dy. Director (Tariff/Eco.)

(Source: Orissa Electricity Regulatory Commission) As per Section 91 of the Electricity Act, 2003, OERC appoint officers and employees of the Commission with the approval of the State Government. This structure of the Commission was made keeping mandate of OER Act, 1995 in mind. But afte reenactment of Electricity Act, 2003 the expanse of work of OERC has increased manifold. But request of the Commission to increase its staff strength has been turned down by the State Government although no budgetary support is available to the Commission from State Government. This leads to overburdening of the Commissions staff which may lead to erroneous decision making. Again even the existing posts are lying vacant for years due to apathy of the Commission. For erratic human resource policy both the State Government and commission are equally responsible. Regulators and their staff are largely drawn from Government or from public utilities which has been an inescapable consequence of the state monopoly over the sector for five decades. Under these circumstances it would not be surprising if many regulators and their staff had a somewhat alternated notion of independence from the state and saw their autonomy as the just that of any other Government body (Electricity Governance Initiative 2005). Regulatory Commissions are a key element of the power sector reform paradigm. Key functions to be performed by the state have now been delegated to this new Governance institution. To achieve this objective Regulatory Commission need to possess certain structural characteristics. There are about nine good Governance principles. We shall analyze one by one the applicability of these principles to

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Orissa Electricity Regulatory Commission. These are synonymous with good corporate governance principles stated earlier. 4.16 Application of Best Practice Regulation in OERC

4.16.1 Transparency Transparency requires regulators to be open with stakeholders about their objectives, processes, data and decisions. Regulator should establish visible decision making processes that are fair to all parties and provide rationales for decisions. Such openness can assist in gaining stakeholders confidence and acceptance of the regulators decisions. There are circumstances in which it is impossible to provide information by reason of its confidentiality. The rules about treatment of information, including rules about what information will be regarded as confidential or to which access will be restricted for any reason, should be identified early in the decision-making process and explained to stake-holders. It is important for regulators to make above principles a part of their cultures. Processes must be put in place to ensure that stakeholders understand the basis on which decisions have been made, the nature of information used to come to a decision and the type of analysis which has gone into decision. The regulator should willingly subject itself to scrutiny and accept that it will need to justify that decision it makes have been in the best interest of the community as a whole. If stakeholders trust the integrity of the decision-making process the impact of decisions will increase. This involves the making of the decision which are to be based on well defined processes and rigorous analysis. Trust in the integrity of the processes leads to less adversarial climate for regulation. The following steps have been taken by OERC for ensuring transparency in its business. Section 86(3) of the Electricity Act, 2003 states that The state Commission shall ensure transparency while exercising its power and discharging its function. Accordingly OERC has framed OERC (Conduct of Business) Regulations, 2004. Regulation 8 of CBR-2004 says All matters which the Commission is required under Central Act and the State Act to undertake and discharge through hearings shall be done through hearing in the manner specified under the said Acts and in these regulation. Regulation 72 of CBR 2004 says The proceeding before the Commission shall be open to the public subject to availability of sitting accommodation. As per regulation 70 of Conduct of Business Regulation, 2004, Commission may review its decision on its own motion or on the application of any of the person or parties concerned within 90 days of passing such order. Any affected party through a petition can initiate proceeding in the Commission. Presently they do not have to pay any fee for filing petition. Affected party means any licensee, individual or any organisation. Proceeding before the Commission is transparent. Regulation 21 of CBR 2004 says The records of every proceeding shall be open, as of right, to the inspection of the parties or their authorized representatives at any time either during the proceeding or after the orders are passed.

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The Commission has an interactive web portal addressed www.orierc.org. A case tracking system has been incorporated in it in which any body can see cause list of proceeding and orders relevant to any case. Any regulation, policy before being finally adopted are previously published in Commissions website, newspaper and notice board of the Commission inviting suggestions/objections. Tariff orders of the Commission are not like judicial orders. It consists of mainly three part namely proposal of the licensee, objections by the public and orders of the Commission with justification. From this all the affected parties can have clear understanding of the decision of the Commission. OERC has started publishing the tariff order both in English and regional language since FY 2007-08. It is observed from case tracking system that cases of different natures have been taken up by OERC as follows since its inception.

Tariff related to licensees 84 nos. Investment related to licensees 4 nos. PPA (Power Purchase Agreement) related by licensee 21 nos. Trading related 1 no. Consumer Grievance related 81 nos. Suo motu by the Commission 11 nos. (As shown in case tracking system up to 10/2007) Presently consumer Grievance related cases are not filed with the Commission because separate consumer Grievance redressal mechanism has been installed by Commission since the year 2005. Only cases relating to non-compliance of orders of Grievance Redressal Forum/Ombudsman come to Commission for adjudication under section 142 of Electricity Act 2003. Suo motu proceedings are initiated by commission for violation of license conditions or non-compliance of Commissions order. Since implementation of Right to Information Act (RTI) in the year 2005, the Public Affairs Officer has been designated as information officer under the said Act. Any body can collect information about the functioning of the Commission from said designated officer following the procedure as laid down in the said Act. 4.16.2 Accountability Accountability involves regulators taking responsibility for their regulatory actions. This requires regulation to establish clearly defined decision-making process and provide reasons for decisions. Supports to the decision-making process should be effective and appeal mechanism and adherence to principles of natural justice and procedural fairness should also be there. Respondents suggested that the performance of the regulator should be regularly reviewed and there be an appeal mechanism in regulatory decision. There should be periodic reviews of how regulation can best be administered and whether the existing bureaucratic arrangements are still compatible with achieving regulatory goals. There will be inevitably be discretion in the decision making of the regulatory organisation. There should therefore, be accountability and an appeal mechanism 125

as a part of best practice regulation. Let us examine OERC in the light of above mentioned points. OERC is a quasi-judicial and quasi-legislative body. As per section 181 of Electricity Act, 2003, OERC has brought out numbers of regulations as mentioned earlier and it is guided by these regulations while taking any decision. Again as per Section 182 every rule made by the State Government and every regulation made by the State Commission shall be laid, as soon as may be after it is made, before each house of the State Legislature. Recently, Orissa Legislative Assembly has amended the OERC (Terms and conditions for Determination of Open Access )( Regulation, 2005 prepared by OERC. Through this mechanism OERC is accountable to the State Legislature. As per Section 105 of Electricity Act, 2003 OERC shall prepare once every year in such form and at such time as may be prescribed an annual report giving summary of its activities during the previous year for the purpose of laying before State Legislature. In pursuance to this provision in the statute, OERC has been submitting its report to the State Government to be laid before the assembly every year. As per Section 111 of Electricity Act, 2003 any person aggrieved by an order made by State Regulatory Commission may prefer an appeal to the Appellate Tribunal for Electricity(ATE) established by Govt. of India at New Delhi. After establishment of this tribunal at New Delhi in 2005 numbers of orders of OERC particularly Retail Supply Tariff order FY 2006-07 and 2007-08 have been challenged in that tribunal. Appellate Tribunal for Electricity have directed OERC to redetermine tariff for FY 2006-07 which is now subjudice before Supreme Court of India. Appeal provision over commissions order make the Commissions courteous about the details of the orders to be issued.

4.16.3 Predictability The principle of predictability of regulation is an essential requirement for utilities to be able to confidently plan for the future and be assured that their investments will not be generally threatened by unexpected changes in the regulatory environment. Regulator need to appreciate the long term nature of assets and related investment decisions in the utility sectors. The implementation schedule of regulation that will affect the cost or price structure of market participants must therefore be taken into account. Key mechanisms for providing predictability in regulation include the establishment of decision-making criteria that are well defined and the provision of clear time tables for the review of standards and regulations. For this purpose particularly making future revenue more predictable for utilities OERC has issued three important orders and regulations. (a) Order on long term tariff strategy 2003 (b) Approval of Business Plan order 2005 and 2010 (c) OERC (Terms and Conditions for Determination of Tariff) Regulation, 2004

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Long Term Tariff Strategy (LTTS)-A tool for Predictability Long-term Tariff Strategy (LTTS) aims at providing regulatory certainty to the consumers and licensees. It also proposes to provide a more quantitative and unambiguous description of the operation of tariff policy and methodology that are easy to understand and can give a fair estimate of the future position by making reasonable assumptions and avoid different interpretation. The Commission has approved the Business Plan of the utilities to facilitate multi year tariff (MYT) regime. The salient features of above orders and regulations are as follows: The Commission has broadly classified cost incurred by the licensee as controllable and non-controllable. For all controllable costs, the Commission has set the targets for each year under review. For the purpose of the LTTS, network and financing costs and Aggregate Technical and Commercial (AT&C) losses are considered as Controllable. Any financial loss arising from the performance falling short of the targets in these areas will normally not be recoverable through tariff. Similarly, any financial gain arising from performing better than targets will not be adjusted against revenue requirement, and licensees will retain such gains during control period. The gain or losses arising from factors that are not under control of the licensees shall be deemed as uncontrollable and will be recoverable through tariffs in the ensuing years of the control period as special appropriation. The primarily relate to fuel cost changes that affect the cost of power purchase, inflation, exchange rate variation etc that may affect networking and financing costs. There are also a number of uncontrollable risk events arising out of force majeure conditions changes in the laws of the land, judicial pronouncement Government policies and directions and economy-wide influences, which have cost implications. These too will be recoverable through tariff of future year(s) to the extent they are not covered by Government subvention. Repair and maintenance, 5.4% applied on the opening gross asset value has been allowed For administrative and General Expenses the base year value is escalated 7% every year during control period. The Commission shall allow 2.5% of the total annual revenue billings from sale of power as prudential norm for provisioning of bad and doubtful debts to licensees for the control period. The Commission has fixed 16% return on equity for enabling fresh infusion of capital At the beginning of the control period, the Commission will approve power purchase and power purchase costs for each year of the control period. The sales forecast shall be made consumer category wise and slab wise. The forecast would not normally undergo annual revision except in the case of variations in excess of 10% in the quantum of purchase of electricity. 127

There are a number of risk events that can give rise to exceptional costs. Some of them like extreme and/or disruptive whether conditions, cyclones etc which can result in extensive grid damages and large variation in demand or supply of electricity in excess of 20%. If any such event occurs during the control period the Commission shall conduct a complete review of its impact. In such cases whether the difference are large, such as caused by natural factors and it is not feasible to recover the same in the ensuing year along with the tariff, the Commission may take a view to create regulatory asset, which will be recovered over a few years and may extend beyond control period and shall also compensate for carrying costs that will be incurred there on. In LTTS order commission adopted the concept of Aggregate Technical and Commercial (AT&C) loss concept. Going to explain it commission held that Distribution system losses have traditionally been used to measure the efficiency of distribution systems. Reliable data on the input units and the cash collected alone are available. Distribution losses are computed in terms of the difference between energy input (in units) and the energy sold (in units) as a percentage of the total input energy (in units). This ratio does not reflect collection efficiency achieved by the distribution licensees. This limitation is addressed by using Aggregate Technical & Commercial (AT&C) loss as a measure of efficiency. AT&C losses are computed as follows:

AT&C Loss (%) =

1-

Units Billed Revenue Collected -------------- X ----------------------Units Input Revenue Billed

The Commission noted that there are three different but inter connected performance criteria, namely billing efficiency, collection efficiency and AT&C loss, which is derived from a product of the first two. As bench mark, AT&C loss gives the licensee the freedom to utilize his resources and plan his strategy in a way best suited to the licensee. The licensee could concentrate on improving billing efficiency, which can be achieved in more ways than one, including the conversion of LT consumers into HT consumers at some capital cost. On the otherhand, the licensee could stress improvements in collection efficiency through systems and procedures which may not have a significant cost implication. It would in all probability prefer a combination of the two. For this reason Commission has decided to use AT&C losses as the benchmark to assess the performance of the licensee during the control period (1st April 2003 to 31st March 2007). In Business Plan order of 2005 for four distribution licensees such as CESU, NESCO, SOUTHCO and WESCO Commission has followed the LTTS principle and approved the AT&C loss as follows:

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Table - 20 AT&C Loss Approved by the Commission

Licensee NESCO WESCO SOUTHCO CESU NESCO WESCO SOUTHCO CESU 2002-03 52.25 47.30 49.76 55.04 41.38 38.29 39.14 43.03 2003-04 2004-05 2005-06 2006-07 2007-08 50.36 42.96 39.55 36.08 33.26 46.18 40.60 36.52 32.32 28.00 51.56 45.71 41.76 37.69 34.20 51.10 49.37 44.96 40.37 35.60 Distribution Loss Approved by the Commission 43.66 38.00 35.00 32.00 29.00 39.02 34.00 31.00 28.00 25.00 42.44 39.00 36.00 33.00 30.00 39.76 39.00 36.00 33.00 30.00 2008-09 29.2 27.5 34.6 32.8 25.5 25.0 30.4 29.3 2009-10 24.5 24.0 29.4 27.8 23.00 22.50 27.92 26.30

Source: Orissa Electricity Regulatory Commission Regarding depreciation OERC accepts the direction of Orissa High Court which fixes the depreciation at pre-92 level notified by Government of India. Govt. of Orissa kept in abeyance the upvaluation of assets of the then OSEB on 01.04.1996 till the sector turns around or FY 2005-06 which ever is earlier. This order of Govt. of Orissa has been accepted by the Commission till date as no communication to the contrary has been received. In accordance with the OERC (Terms & Conditions of Tariff) Regulations, 2004, the expenditure or revenue requirement of distribution licensee should cover the following: (i) (ii) (iii) (iv) (v) (vi) (vii) Cost of power purchase Financing Costs Working capital which will include O&M expenditure for one month amount equivalent to 1/6th approved annual revenue requirement. O&M expenditure Provision for bad debts Depreciation Return on Equity

Most of the above items can now reasonably be predicted as discussed above. Hence, regarding predictability of tariff licensees are comfortable. 4.16.4 Consistency: Consistency of treatment of participants across service sectors, over time and across jurisdictions was highlighted as a key principle for providing confidence in the regulatory regime. This principle is linked to the provision of consistent and fair rules that do not adversely affect the business performance of the specific participant. Section 61(a) of Electricity Act, 2003 says while determining tariff appropriate Commission shall be guided by the principle and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees.

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Section 61(i) of Electricity Act, 2003 mandates that appropriate Commissions shall be guided by Tariff Policy & National Electricity Policy issued by Government of India. Apart from these above two principles Section 61 enshrines seven other clauses by which State Commission are required to be guided. OERC has been following all the principles in Section 61 of Electricity Act, 2003 as other State Electricity Regulatory Commissions as they are legally bound by it. Hence consistency in order of the Commission is a natural outcome. 4.16.5 Consultation: Effective and early consultation between regulators ,customers and utilities is an essential component for ensuring appropriate regulatory systems are established. Consultation assists regulators to understand the implication of their regulations on industry participants and enables stakeholders to discuss the impact of regulation and suggests alternatives and improvements. Consultation helps regulators to be realistic in terms of the timing of introduction of new regulations. For example, where stakeholders will not be able to change their practices immediately to comply with the new regulation, consultation should take place well in advance of the making of regulatory changes. A spirit of openness between the regulator and industry stakeholders can go someway to address the issues of information imbalances between the stakeholders and the regulators. Proper consultation engenders trust and helps to avoid an adversarial relationship in which the exchange of information is restricted. Timely consultation will ensure that regulations are as widely accepted as possible which will reduce the likelihood of litigation. In facilitate consultative process more effective OERC has issued OERC (State Advisory Committee) Regulations, 2004. Accordingly State Advisory Committee has been constituted by OERC. The committee consists of 21 members (excluding ex-officio members) nominated by the Commission from time to time. The members of the committee are nominated for a period of three years. The Managing Directors/Director/CEO of the licensees and generating companies operating in the State are Special invitees. The committee shall meet at least once in every three months. The Commission consults SAC before any important decision is taken though advice of the SAC is not binding on the Commission. Consultation papers are circulated among all stakeholders in hard copies and through Commission websites. Recent example is consultation paper on Captive Generating Plant (CGP) pricing methodologies inviting suggestion from all stakeholders. These suggestion are given due consideration before final publication of any policy and regulation.

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4.16.6 Independence: Regulatory decisions should be free from undue influences that could compromise regulatory outcomes. The principle of independence is a necessary element in providing stakeholders with confidence in the regulatory system, and is linked to achieving the principles of consistency and predictability. Independence also has implications for accountability and facilitates transparency in the processes. A confident independent regulator will not seek to hide the process used to reach decisions. Independence, when openly exercised, builds trust and confidence in the regulator. Independence requires that regulators have the expertise necessary to make judgments without undue influence from or reliance on market participants. Section 84 of Electricity Act, 2003 says that The Chairperson and the members of the State Commission shall be persons of ability, integrity and standing who have adequate knowledge of and have shown capacity in dealing with problems relating to engineering, finance, commerce, economics, law or management. Till date all the members and Chairpersons of OERC have been either retired bureaucrats or retired engineers of state utilities. This is in contrast to the spirit of the provision in the law. These retired Government Servants have preset minds which sometimes prevent them to make innovation in the system. Independence of the Commission is seriously jeopardized due to Government link of these former bureaucrats. Government opinion indirectly reflected on the orders of the Commission. To make the Commission independent, Section 9 of the Electricity Act, 2003 has certain provisions which has given certain immunity to the members and Chairperson of the Commission. It makes mandatory on the part of the State Government to refer the matter to Appelate Tribunal of Electricity at New Delhi if removal of any member is contemplated by that Government. Under Section 103 of Electricity Act, 2003 a separate fund for State Regulatory Commission has been created. The fund is utilised for day to day functioning of the Commission. All the loans, grants, fees received by the Commission are deposited in the fund. This fund ensures financial autonomy/independence of the Commission. But Section 187 of Electricity Act, 2003, undermines the autonomy of the Commission. It provides for policy direction by the State Government involving public interest. There is a threat of misuse of this provision by State Government in the name of public interest. However, OERC has not received any policy direction from State Government till date since its inception. In the past OERC has steered clear of Regulatory capture. Regulatory capture is a term used to refer to situation in which a Government regulatory agency created to act in the public interest instead acts in favour of the commercial or special interest that dominate in the industry or sector it is charged with regulating. After the reform, the chief architect of reform, the World Bank and reform advocates within Orissa assumed that an independent regulator would quickly raise tariffs to cost recovery rates, in order to attract private investment. Ironically,

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however an independent OERC decided only a moderate rise in tariffs, thereby placing the privatization effort in jeopardy and triggering an explicit request from the World Bank to further raise tariffs for investors comfort, a request the regulator denied. Even as the Government lost control over use of tariff setting for populist and other political purposes, so too did reformers lost control over tariff as a device to attract investors. The World Bank interpreted OERC resistance to higher tariff as a misguided over emphasis on consumers. The regulator, by contrast, argued that there were no grounds for placing the cost of high (and unknown transmission and distribution losses on consumers and that the utility should bear the cost of those losses an incentive to reduce them. So, OERC was well within its mandate in exercising its own judgement in making the determination it did. Given the Governments continued dominance in infrastructure, are independent regulators really workable? Populist political interference is one problem (such s free power to farmer). State Ministries desire to protect and control the incumbent utilities adds a new dimension to capture possibilities, that by Government. Since State owned utilities provide several benefits to bureaucrats, the reality pits the regulator directly against the Government in influencing management decision of the utilities. State Government have often encouraged utilities to defy regulators rules and sometimes litigated against regulatory order. In a recent case OERC had allowed Central Electricity Supply Utility (CESU) to trade surplus power which is available from Captive Generating Plant (CGP) of the State. There is no bar in Electricity Act for distributor of Electricity to trade electricity. Previously GRIDCO (State owned trader) had monopoly over this. Hence, GRIDCO rushed to Orissa High Court to thwart this regulatory decision. This is again in the background that extra revenue that CESU would earn through power trading would wipe out CESUs liabilities to GRIDCO. Three categories of capture mechanisms are seen in case of SERCs. They are (a) exploitation or misuse of policy directives (b) informal opaque behind-the-scene processes that subvert procedure and (c) flagrant flouting of procedure and law. The thinking of World Bank the main architect of regulatory governance on independence of Regulatory Commission can be understood from the following (Ref: 9): THEN A requirement of all power lending will be explicit movement toward the establishment of a legal framework and regulatory processes satisfactory to the Bank This requires countries to set up transparent regulatory processes that are clearly independent. - World Bank 1993 NOW A credible regulatory system requires more than a formally independent regulatory entity Other transitional arrangements may need to be established. including limiting the amount of discretion that regulatory bodies have in setting prices and key parameters. - World Bank 2004

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4.16.6.1 Exploitation or Misuse of Policy Directives: Policy directives to guide regulatory functions are often necessary, partly to plug loopholes and clarify ambiguities in the law, but also to ensure effective and consistent application of law across the states. But the legal provisions for policy guidance in the Electricity Act, 2003 are discretionary not specific. Also these are binding on regulators and not amenable to justice. The Electricity Act, 2003 states that Commission will be guided by Government Policy (Section 61, 66, 79, 86). This gives ministry wide latitude to override regulatory decision. These provisions are often used to issue non policy directives. Since policy directives are legally binding, regulators may have to implement policies that contradict their legal mandate. State Governments promising free power, for example, directly contradicts the regulators mandate to bring tariff towards cost of supply. No legal recourse exists for this loophole. 4.16.6.2 Behind the Scene Process that Subvert Procedure Interactions between regulators and vested interests outside the scope of procedure and law are hidden from public domain. For instance, ministries often appoint members of their choice, though the law lays down a selection process involving an appointed selection committee. Informal lobbying is another example of this. These informal processes rather than reasoned decision-making determine outcomes. The regulator becomes a vehicle to legitimize rather than to challenge interest group politics. Universal appointments of bureaucrats or engineers on the verge of retirement from Govt. service as members of OERC so also other ERCs are indicative of some regulatory capture. 4.16.6.3 Flouting of Procedure and Law State Government in some states have often unilaterally altered SEB tariff or have rolled back regulatory tariff orders sometimes through legislation. In Orissa legislature amended OERC (Terms and Condition of Open Access) Regulations, 2005 unilaterally when draft regulation was laid before the house as remitted by OERC. As per Section 182 of Electricity Act, 2003 every rule made by the State Government and every regulation made by State Commission shall be laid before the legislature as soon as it is made. But act does not provide for amendment by the state legislature of any regulation made by SERC. Vested interest worked through the legislature and became successful in their endeavour. Similarly Governments have negotiated MOUs with independent power producers on their own in Orissa without any consultation with OERC. Even Government agencies have disregarded their obligation as electricity consumers. They have huge outstanding energy bills to be paid to distribution companies. In spite of several regulatory directions they have failed to clear their dues putting general consumers to hardship.

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Table - 21 Billing and Collection from Govt. Departments and PSUs (Rs. in Crores) Year FY FY FY FY FY FY FY 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 NESCO Billing 38.63 37.75 37.00 34.37 34.33 36.33 40.33 NESCO 28.01 30.33 34.95 32.69 30.48 33.10 37.24 Collection WESCO Billing 23.49 23.69 24.79 22.19 22.49 24.06 23.97 WESCO 17.56 14.52 16.65 19.47 18.99 19.51 21.97 Collection SOUTHCO 22.40 24.11 25.44 20.95 22.47 21.32 24.41 Billing SOUTHCO 17.56 15.52 18.12 21.94 17.97 17.68 27.56 Collection (Source: Orissa Electricity Regulatory Commission) CESU has accumulated arrear dues of Rs. 586.24 cr. from Government and PSUs as on 31.03.1999. This arrear has increased to Rs. 1258.80 crores by the end of March 2008. The huge uncollected power dues has not only put the utilities to the hardship but also has led to fund crunch for routine O&M activities. The fallout of this has manifested in quality of power supply which will be discussed in the subsequent chapters. 4.16.6.4 Institutional Capacity: An independent regulator is expected to make rules, administer them and adjudicate disputes immune to lobbyists influence. It is expected to act in public interest, actively engage virtually all sector stakeholders in decision making and effectively interprete and carry out a mandate based on a broad set of principles. Regulator needs internal expertise and capacity to carry out such a daunting mandate. OERCs average budget is about Rs.2.5 crore and that of CERC is Rs.6 crore. In comparison, the US FERC budget is $ 120 million (Rs.600 crore). The consumer base of a typical SERC is equivalent to that of the U.K. or South Africa. The U.K. office of Gas and Electricity markets (OFGEM) budget is $50 million (Rs.250 crore) and that of South Africa is $8.5 million (Rs.42 crore). In Orissa OERC has 40-50 staff in contrast U.S. and U.K. regulators have hundreds. Although State Government does not provide any budgetary support to OERC and OERC manages its affairs through levy of fees on the licensees, Government controls the OERC fund through fund rule approved by them. Even the scale of pay of members and staff of the Commission depends upon the Government approval. OERC has recently asked for approval for creation of some important posts for its day to day business such as Director (Consumer Affairs) which had been turned down by the State Govt. showing a reason that there is no necessity of that post as such type of post already exists in the Govt. This shows ignorance of decision makers in the Govt. who are completely unaware of provision of Electricity Act, 2003 and nature of consumer grievance and its readressal procedure in electricity sector. 134

4.16.6.5 Regulatory Capture through Privatization A common perception is that privatization of state owned utilities is a necessary and perhaps only method to distance the regulators from Govt. intervention. The creation of a concession agreement or license to facilitate privatization, and in some cases legislative action offers somewhat clean slate in defining the relationship between the regulator and the privatized utility. However, the private entity can exploit this flexibility to distance itself from the regulator as well, benefiting from the regulators susceptibility to Government influence. Capture is also possible with information asymmetry in cost plus regulation where regulators depend unduly on regulated entities for information in rule making for private entities. Thus Govt. capture of SERC occurs from above (legal mandate or policy directives), below (by the utility, through information asymmetry or noncompliance) and within (by Govt. appointed staff and members). 4.16.7 Flexibility: Flexibility involves the use of a mix of regulatory tools and the ability to evolve and amend the regulatory approach overtime as the external environment changes. This assumes that the organisation has knowledge of keeping up to date information and is open to alternative regulatory approaches. At times courage may be required to implement new initiative rather than to recycle approaches which can become a part of the culture within public sector. Flexibility includes taking into account the condition of local market when considering the design of regulation. These local conditions include the extent of infrastructure, the number of existing participants in the market and the existence of long term contractual obligation which are key mechanism for providing flexibility in regulation including being open to alternative regulatory tools and recognizing conditions that change over time. In case of OERC there is provision in the OERC (Conduct of Business) Regulation, 2004 vide regulation 70 to review its decision, direction and orders. Utilities by their application or Commission on its own motion or any parties for that matter can move the Commission within 90 days of its order to review its order, decision and direction. It is seen that after issue of annual tariff order all the utilities seek to review the order of the Commission. But the Commission generally turns it down claiming the petition to be frivolous and sometimes directing utilities to agitate that matter in next tariff hearing. From this it appears that although review provisions are there in the regulation, seeking review has become formalities on the part of utilities. Of course, it is not always true. In some cases the privatized DISCOMs and individual aggrieved parties, after their review petition were turned down have moved higher forum like Appellate Tribunal of Electricity (ATE) at Delhi under section 111 of Electricity Act, 2003 within 45 days. Hence, there are enough flexibility in the regulations to review or recall the order of the Commission. But, flexibility in regulation is not enough but it is the flexibility of the mind of the regulator that counts.

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4.16.8 Communication: Effective communication assists all stakeholders to understand regulatory initiatives and needs. Effective communication is both educative and informative, and can help to build commitment to regulatory initiatives through better understanding of the regulatory objectives and rationales. It is important for stakeholders to understand the rationale for decision by the Commission. The regulator should always provide an explanation to enable stakeholders to understand the background and rationale for a decision. The aim is to assist participants to understand the specific issues and inform them of policy objectives and requirement. This may lead to effective self-regulation. In addressing the principle of communication, regulators should establish process that provides relevant and comprehensive information that is also accessible, timely and inclusive of all stakeholders. All the orders of OERC are not just like judicial order issued by other civil court. The orders of the Commission are speaking order or reasoned order. Generally the order of the Commission particularly the important annual tariff orders consist of following parts. (a) (b) (c) (d) Proposals by utilities Objections by stakeholders Rejoinder by utilities Commissions observation

From proposal, objections and rejoinder, Commission forms its observations. Hence, ever for a layman point of view the order appears to be reasoned or speaking. The order conveys all stakeholders the basis of formation of views by the Commission. Relevant and comprehensive communication requires the regulator to provide information that address the key issues of importance to the stakeholders, in particular the effect of the regulation on the stakeholders. All the draft regulations of OERC are published in the local newspaper for public comments. Even summary of long tariff orders are also published in the newspaper and complete order is put in the Commissions website. Hence, information is provided to the stakeholder in an easily digestible format. Even Commission time to time publishes in vernacular medium many informations for general public in local newspaper. Some of the regulations made by Commission have been translated into regional language Oriya. Another important characteristic of effective communication is timely communication. It involves the provision of communication before major decisions are implemented, and in a way that enhances stakeholders involvement in, and access to, processes and ensure that there is adequate time to hear and consider opinions and needs. In OERC regulations, different time frame are provided for each step before issue of final order. As mentioned earlier even for review of order a certain time frame is allowed which is reasonable. Inclusive communication requires that all affected stakeholders receive information on regulator decision, rather than consultation taking place only with vocal or powerful sectional interests who could unduly influence these decisions. Specifically there is a need to include consumers in communication process.

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Table 22 Nos. of objections received in response to tariff application of DISCOMs of Orissa Year CESU NESCO WESCO SOUTHCO 18 18 21 15 2004-05 18 18 21 15 2005-06 15 16 29 10 2006-07 17 17 13 12 2007-08 13 18 28 11 2008-09 From the above table it is seen that numbers of objections over the years have remained more or less same although consumer strength in each DISCOM has been increasing in large numbers in successive years. There can be several reasons behind it. Perhaps the consumers are not properly communicated about tariff application filed in the Commission by distribution companies (DISCOMs) which may be the major reason for poor response. Even the objectors who have filed objections have come from particular areas where the corporate offices of DISCOMs are located. Instances of consumer coming from far flung areas are less or nil. Among the consumers who are objecting to the tariff application of DISCOMs number of industrial/commercial or high value consumers are more. This clearly shows the messages from regulators side or DISCOMs side have not reached the masses many of them are poor, illiterate or stay in far flung areas of the state. 4.16.9 Effectiveness and Efficiency Best practice regulation should include an assessment of the cost effectiveness of the proposed regulation and an assessment of alternative regulatory method. Suitable measurement should be established to monitor the benefits established through regulatory controls, and provide an assessment of the cost incurred by the regulatory body with utility. Efficiency takes a number of forms as shown below: Information requirement: Regulatory bodies must have access to information that relates to the operation of service provider. In order to achieve efficiency, it is important that the information required should be limited to that required for them to carry out their functions. There needs to be a balance between the disclosure of information required for regulation and the need for maintenance of confidentiality of commercial information. The regulators should therefore determine the minimum levels of information needed from stakeholders to support effective reporting and the minimum number of authorities for whom reports are necessary to effectively meet obligation to the Government and the community for disclosure and compliance purposes. In OERC for tariff determination purposes all the licensees are provided with formats divided into three groups such as TRT (Technical) and TRF (Financial) and TRP (Performance related). Licensees fill up those formats and submit those with tariff revision application to the Commission. As these formats are structured so that OERC attracts lots of information which are essential to know the technical and financial position of them. Technical formats contain the information like units of electricity purchased/sold, number of consumers in different categories, contract demand. Simultaneous maximum demand etc 137

whereas financial formats contains information on balance sheet, profit and loss account, asset value and loan position etc. As tariff determination is a judicial process licensees submit those information in affidavit form. At the time of tariff determination every year it does not become possible on the part of licensees to submit the audited data as per company law hence sometimes they provide provisional data as per their book of account and these are adjusted in subsequent year when a exercise called truing up is undertaken after receipt of audited account. Time taken to make decision: Decision making processes should be well defined and structured to eliminate unnecessary delays. Every year as per OERC (Terms and Conditions for Determination of Tariff) Regulation 2004 every licensee submits their annual revenue requirement and revision of tariff application within 30th of November for coming financial year. As per section 64 of Electricity Act, 2003 the Commission issues its order on those application within 120 days of receipt of application considering all the suggestions and objections of the public. Staff with appropriate level of technical knowledge: There needs to be a stock of technical knowledge within regulatory body to ensure that informed decisions can be taken. The alternative is the dominance, through superior knowledge by the organisations which are subject to regulations. In these circumstances, the regulator will tend to ask for higher volume of information than might otherwise be requested with a higher knowledge and experience base. This is neither efficient nor desirable for all the parties. Regulatory authorities should therefore invest in attracting, training and keeping good staff. OERC has been generally keeping good staff since its inception and their knowledge base is continuously being updated. Even some staff members have been selected by Central Electricity Regulatory Commission and other state electricity regulatory Commission in higher posts. But OERC is unable to increase its staff base due to section 91 of Electricity Act, 2003 which requires approval of the State Government for creation of any posts under the Commission. Generally State Government has no expertise to enter into technicalities of requirement of any posts in the Commission. Bureaucracy of the state thrusts its opinion on the commission regarding staffing pattern not withstanding their in-capabilities in understanding regulatory requirement. Recently, Commission has sought approval of the Government for creation of certain important posts in the Commission but it has been turned down by Government without going detail into it. It is to be mentioned here that State Government does not provide any budgetary support to OERC although it determine scale of pay, nature and categories of posts in the Commission. Process: It should also minimize waste and operate quickly and easily for all parties. As per OERC (Conduct of Business) Regulations, 2004 there seems to be fair play given to all the parties. Process in the Commission is simple and easy to understand as per the above regulation. The conduct of Business Regulation specifies inter alia the provisions of proceeding before the Commission, arbitration of dispute, procedure for grant of license and tariff filing procedures etc. To make the licensing procedure simpler OERC has already specified the licensing condition which the applicant for license has to accept while filing application for license. In the license condition format Commission has

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incorporated the complaint handling procedure including Grievance Redressal Forum (GRF) under section 42 of Electricity Act, 2003. 4.17 Code of Ethics for Regulator Electricity Regulatory Commissions have a delicate task of balancing different and sometimes conflicting interests of various stakeholders. Regulators have to maintain their credibility and stakeholders must perceive them to be fair and impartial. The suspicion of regulatory capture by any stakeholder group (including the Government) could significantly erode confidence in this newly formed institution. The members of the Electricity Regulatory Commissions therefore have to conduct themselves in such a manner as to elicit the greatest respect. They have to observe certain standards of propriety involving impartiality, integrity and objectivity in relation to stewardship of public funds and have to be accountable to the user of services. In India, the concept of Independent Regulation is still relatively new and success of this new institution and in fact the entire reform process is contingent on the credibility of this institution and their perceived in effectiveness in handling situation. To help selection process of the member of the Commission out of external influences section 85 of the Electricity Act, 2003 specifies that The State Government shall for the purposes of selecting the members of the State Commission, constitute a selection committee consisting of (a) (b) (c) a person who has been judge of the High Court Chairperson the Chief Secretary of the concerned State the Chairperson of the Authority or the Chairperson of the Central Commission

By above provision of the Act the external influence in the selection of the member becomes minimal. However, Chief Secretary of the concerned state being a representative of the Government in the selection committee might be able to reflect the desire of the State Government in the selection process. Any member ceasing to hold office as such shall (a) not accept any commercial employment for a period of two years from the date he ceases to hold such office and (b) not represent any person before the Central Commission or any State Commission in any manner The above provision of the Electricity Act, 2003 tries to keep the incumbent members from the allurement of job prospects after demitting office. All these provisions along with other provisions of the Act try to make the members independent.

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Under section 166(2) of the Electricity Act Central Government has constituted Forum of Regulators a body of Chairpersons of all the State Electricity Regulatory Commission. This forum popularly called as FOR has constituted a study on Code of Ethics in different regulatory Commissions across the globe through The Energy Research Institute (TERI), New Delhi. TERI has recommended a set of code of ethics after consultation process and is intended to State basic standards that should govern the conduct of all Commission members. The principles are discussed in brief. 4.17.1 Preamble of Code of ethics report of TERI The Code of Ethics for the Electricity Regulatory Commissions, although not exhaustive, is intended to state basic standards that should govern the conduct of all commission members (members include Chairperson) and to provide guidance to assist them in establishing and maintaining high standards of regulatory and personal conduct. Intrinsic in the provisions of the following Code of Ethics are the assumptions that Commission Members, individually and collectively, must respect and honour the Commission office as public trust, and enhance and maintain confidence in the regulatory system. 4.17.2 The role of the Commission Chairperson The chairperson has particular responsibility, other than the statutory responsibilities, for providing effective strategic leadership on matters such as: Formulating the Commissions strategy for discharging its statutory duties Representing the views of the Commission to the general public Running the Commission efficiently The chairperson will ensure that the Commission meets at regular intervals throughout the year in accordance with the Conduct of Business Regulations and that the decisions of the meetings are properly recorded. Communications between the Commission and the Ministry or Department will normally be through the chairman except where the Commission has agreed that an individual member should act on its behalf. The main point of contact between the Commission and the Ministry on day-to- day matters will be the Secretary of the Commission. The chairperson will ensure that all members (including the chairman) of the Commission, when taking up office, are fully briefed on their duties, rights and responsibilities. 4.17.3 Responsibilities of Commission Members Individual Commission member should be aware of his (her) wider responsibilities as members of the Commission. He/she should follow the principles of public life such as integrity, objectivity, accountability, transparency and leadership. The Commission members must:

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Comply with this Code of Ethics, Act in good faith and in the best interest of the public body, Not seek to use the opportunity of public service to promote their private interests. Not misuse information gained in the course of their public service for personal gain or for political purpose Declare publicly any private interests which may be perceived to be on conflict with their public duties; and; Should follow requisite principles of transparency and consultations.

4.17.4 Guidelines on acceptance of gifts The receipt of gifts by members of the Commission from those with whom they have official dealings must be governed by the highest standards. The term gift includes any benefit, which is given to a member of the Commission free of charge or at less than its commercial price. Gifts of nominal value (as prescribed in the Conduct Rules for Group A officers of the Central Government) may be accepted and retained. Members of the Commission may not solicit gifts, directly or indirectly. Members of the Commission may not approach any business with which they have contact through their official duties seeking sponsorship or support for any club, association, trade union or other organisation.

4.17.5 Handling conflicts of interests The chairperson and other Commission members should declare any personal or business interests which may conflict with their responsibilities as commission members. The Chairperson and the members, at the beginning of every year, should submit a return in sealed covers of their immovable properties to the Commission. The members of the Commission should not participate in the discussion or determination of matters in which they have a direct pecuniary interest.

4.17.6 Personal liability of Commission members Any legal proceedings initiated by a third party are likely to be brought against the Commission. In case any such proceedings are initiated against the chairperson or other individual Commission member and such individual Commission members have acted honestly and on good faith should not be required to meet out of their own personal resources, any personal civil liability which is incurred in execution or purported execution of their Commission functions. This is in keeping with the general dispensation that no suit, prosecution or other proceedings shall lie against any public servant for anything done or in good faith purported to be done in course of his duties.

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4.17.7 Delegation It is stated that to the extent permitted by the Business Regulations, responsibility for day-to-day management matters should be delegated to the staff. Further, this principle adds that the decisions taken by individual Members under delegated powers will be recorded in written minutes available to the Commission as a whole. 4.17.8 Transparency and responsiveness The Commission members shall conduct all their dealings with the public in a transparent manner. This should include: Ensuring that all important documents of the Commissions are in public domain. Where practical and appropriate, holding open hearings and consultations. Issuing orders in time and ensuring that the orders are reasoned. 4.17.9 Interaction with the media It is the chairperson of the Commission who should interact with media. In any case, members should consult the chairperson before interacting with media and in all cases, should not express views at variance from agreed Commission policy. Members should avoid publicly stating personal opinions on matters where the Commissions policy has not been determined, but is pending. Otherwise, personal views may be expressed so long as it is made clear that the member is speaking or writing in a purely personal capacity and stating his or her own private opinion.

4.17.10 Political activity The members of the Commission shall abstain from taking part or engaging in political activities. The members shall not occupy any paid or unpaid posts in political party. 4.17.11 Annual Report and Accounts The Commissions should adhere to the statutory provisions under the Electricity Act 2003 for preparation of the reports and accounts and timely submit the same to the Government. 4.18 Survey on Code of Ethics A brief survey was conducted on the present and past Members and Chairpersons(10 in Numbers) of Orissa Electricity Regulatory Commission. The finding of the survey is as follows: Majority of the respondents agreed that there is a need for a Code of Ethics for Members of Electricity Regulatory Commission. All respondent agreed that the Members of the Commission should abstain from taking part or engaging in political activity. 142

Majority of the respondents agreed that all meetings between Chairman and Members and Ministry officials should be recorded and minutes should be in public domain. Majority of the respondents agreed that the Chairman and Members should declare personal or business interests which may conflict with their responsibilities as Commission members. Majority of the respondents agreed that the Chairman and Members at the beginning of every year should declare the statement of immovable and movable properties. All respondents agreed that responsibility for day-to-day management matters should be delegated to the staff as far as practicable within a clearly understood framework of strategic control. All respondents agreed that the decision of individual members under delegated power be recorded in written minutes available to the Commission as a whole. Majority of the respondents disagreed that the Commission should release minutes or summary reports of meetings. Majority of the respondents disagreed that the expenses of the Commission be annually audited by outside auditors. All respondents disagreed with the setting of a panel to oversee compliance of the Code of Ethics, independent of the Commission.

It is important for regulators to make above principles a part of their cultures. Processes must be put in place to ensure that stakeholders understand the basis on which decisions have been made, the nature of the information used to come to a decision and type of analysis which has gone into the decision. The regulator should willingly subject itself to scrutiny and accept that it will need to justify that the decision it makes have been in the best interests of the community as a whole. If the stakeholders trust the integrity of the decision making process and the decision which result from that process, then the acceptance of that decision will increase. This involves the making of decisions which are based on well defined processes and rigorous analysis. Trust in the integrity of the processes will result in fewer appeals, greater effectiveness and a less adversarial climate for regulation. An important threshold question for regulations is whether regulation is required or if the problem to be regulated can be best handled by the market, by some self regulatory mechanism or by some other alternatives to regulation. This is a critical issue. The belief in free markets within Government in many Western nations including Australia entails deregulation of markets. In other words, Government regulation is seen to be less desirable than either self regulation or other forms of action which seek to improve the operation of market forces. Light handed regulation is seen to be desirable objective as it is consistent with removing inefficient regulation. It is pursued through the development of a regulatory impact statement which provides a structured framework to guide the activities of organisation that have a regulatory function. However, it should be recognized that in many cases, it is the policymakers rather than the regulators who determine what is to be regulated, while the regulators are charged with putting the policy into effect. Another component of best practice relates to the role and structure of the regulatory organisation. Being a best practice regulator not only requires the 143

appropriate processes and principles to be in place but also the resources and structure for the organisation to fulfill its role. Regulatory bodies must have sufficient knowledge of the industry to be able to make independent judgments. Market participants will tailor information to promote their own self interest. Economic regulators need Economic skills and access to special skills Detailed knowledge of the range of regulatory instrument available and quantitative and analytical skills in order to carry out the cost-benefit analyses Technical regulators need Industry knowledge and Technical expertise (for example engineering based asset management, reliability, quality and security of supply network) Without sufficient skills and knowledge the regulators is at risk of being dominated by industry players who have superior knowledge and information. In addition organizations with low levels of industry knowledge and technical skills will tend to ask for larger amounts of information than would be required if there were higher levels of expertise. This adds costs, reduces certainty, trust and confidence in reliability and consistency and increases the risk of regulatory failure. In OERC barring one technical member other two Members are career bureaucrat. As per Section 91 of the Electricity Act, 2003 OERC appoints officer and staff of the Commission with the approval of the State Government. The State Government has neither expertise nor information about Regulatory Governance. Hence, sometimes they pose bottleneck while approving the proposal of Commission for creation of posts. Section 103 of Electricity Act, 2003 provides for creation of a fund called State Electricity Regulatory Commission fund. The salary, allowances of staff and member and other day today expenses of the Commission are met from this fund. The manner of application of fund is approved by the State Govt. through a fund rule. But, it is seen in practice that due to lack of foresight state Govt. has approved a fund rule which does not take into account many unforeseen expenses of the Commission. Due to fund constraint many essential activities of the Commission has been postponed or done in very modest way curtailing quality. All this led to straining of staff of their ineffectiveness. There is a common argument among stakeholders that it is inefficient to have to deal with the different organizations that make up part of the regulatory jigsaw. This suggests the need for a concerted whole-of-Government approach to regulation. A small number of regulatory bodies and consistency in their approaches is desirable. The test for adequacy of the regulatory regime is the degree to which it imposes costs, delivers benefits and provides flexibility to reflect regional needs while at the same time providing consistent regulation

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nationally. In power sector of Orissa there are regulators like pollution control board which gives environmental clearance to power project whereas OERC approves the power purchase agreement. Presently the regulators are not at logger heads but multiplicity of regulators may create problems in future due to overlapping of their jurisdiction. Common regulator is preferable like Federal Electricity Regulatory Commission (FERC) of USA which is vested with wide ranging powers to regulate inter-state oil and natural gas pipelines along with bulk sales of electricity and inter-state transmission service. In that country most state public utilities have jurisdiction over natural gas, water, sewage and telecommunication and transport. So at the state level state public utilities Commission have wide ranging subjects to regulate. In India one area of concern has been delineation of roles and responsibilities between regulators. For example, an entity subject to regulation may need to deal with different regulatory bodies for different issues for example relating to pricing or environmental regulation. There needs to be a mechanism by which regulators can clarify spheres or area of responsibility and ensure this information is communicated to users in the most effective and efficient manner. The whole of Government approach to regulation is another principle vital to a successful regulatory regime. Environmental, oil, coal and water regulators all should be accountable for both the achievement of the objectives of their regulation and the financial consequence of their decisions. The economic regulators should bring together all regulators in a whole of Government approach. Another issue is clarity of role avoidance of conflicts of interest. The regulatory body makes the regulation and also administers it. A common regulatory model supports the separation of the role of policy/regulation maker and policy/regulation implementer. For example Australian competition and consumer commission implements regulation that has been established elsewhere in the Government. In U.K. water industry, there is a separation between the standard setters, the quality regulators and the economic regulators (pricing) customer champions (customer service). Just as regulators seek to compare the performance of service providers to improve their performance benchmarking of regulators can assist them to improve their performance. The principles of best practice regulation can provide a framework for this process. 4.19 Summary of the chapter This chapter deals with the need for regulation as a means of Corporate Governance. It encompasses the meaning of regulation, different regulatory models, international experience in regulatory Governance, best practice regulation and its application in Orissa Power Sector, Code of ethics for Regulators. There are different approaches to regulations such as Incentive regulation, Yardstick regulation, Price cap regulation and Profit sharing regulation etc. Advantages and disadvantages of different approaches and their applications in different countries have been discussed in this chapter. Power Sector reform has basically started since late eighties of last century. There are three basic models of Reform followed worldwide. They are US model, UK model and Latin American model. The reform model adopted in Australia is a variant of US model. A comparison of different models of reform adopted in different selected countries

145

has been made in this chapter. Electricity Governance in India went through three phases. The first phase covers the years before the Independence of this country and second phase covers the first fifty years after the independence. In first phase Electricity Act 1910 was enacted to give legal sanction to Electricity Business in this country. In the second phase Electricity (Supply)Act 1948 was passed which paved the way for creation of State Electricity Board(SEB) in different states. SEBs suffered from different shortcomings and were not viable business models .Orissa was the first state to think alternative to its ailing SEB. With unbundling of SEB in Orissa in 1996 started the third phase of Electricity Governance in India. Subsequently Government of India passed Electricity Act2003 which gave complete new dimension to Electricity business in this country. This act enabled Government to create Regulatory Commissions in States and Central level. Electricity Generation, Transmission and Distribution were treated as separate business models. Electricity Trading was recognized as a separate activity. Orissa Electricity Regulatory Commission (OERC) was created in1996 under Orissa Electricity Reform Act1995.OERC has been pivotal in Electricity Governance in the state. This type of governance can be said to be Regulatory Governance. As per best practice Governance followed worldwide Regulatory Governance should have following hallmarks such as Transparency, Accountability, Predictability, Independence, Flexibility, Institutional capacity, communication and effectiveness and efficiency. All the hallmarks of good regulatory Governance were tested in this chapter in case of OERC. It is found that in some tests OERC has far excelled whereas in some other cases it has fallen behind. However, overall achievement of OERC is remarkable. Regulatory capture is another area where independence of the Commission is compromised. It can take place through various means such as misuse of policy directives, behind the scene processes, flouting procedure of law, privatization etc. All the above means of captures have been discussed in the context of OERC. Finally for a effective and independent Regulatory institution the role of code of Ethics have been emphasized. TERI report on code of ethics has been discussed. An opinion survey of present and past members of the commission have been carried out. The findings of the survey have been included in this chapter. One of the hypotheses of our study is as follows: To check if the introduction of OERC (Orissa Electricity Regulatory Commission) has led to rationalization of Tariff structure, proper regulatory Governance and protection of the consumers interest. The hypotheses has been checked. From the above study it is found that OERC has been mostly successful in proper Regulatory governance in the power sector. However, it is under the constant threat of regulatory capture by the Government. Its autonomy and independence has been questionable at times.

146

References: 1. Agrell, P., Bogetoft, P. and Tind, J. (2000), Multi-period DEA Incentive Regulation in Electricity Distribution. Discussion Paper 2000-13, Centre for Industrial Economics, University of Copenhagen. Cambridge Economic Policy Associates, CEPA (2003), Background to work on Assessing Efficiency for the 2005 Distribution Price Control Review. Directive 2003/54/EC, Official Journal of the European Union, No L 176. European Commission, EC (2000), Green Paper Towards a European Strategy for the Security of energy supply, Brussels. Jamasb, T. and Pollit, M. (2000), Benchmarking and Regulation of Electricity Transmission and Distribution Utilities: Lessons from international Experience, University of Cambridge. Vogelsang, I. (2002), Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective, Journal of Regulatory Economics, 22:1. Webster, W. (2003), Presentation in the World Forum on Energy Regulation: Regulatory Authorities their role in the new European Electricity and Gas Market, Rome. Bakovic, Tonci, Bernard Tenenbaum, and Fiona Woolf, 2003. Regulation by Contract: A New Way to Privatize Electricity Distribution? Energy and Mining Sector Board Discussion Paper 7. World Bank, Washington, D.C. World Bank, 1993. The World Banks Role in Electric Power Sector. World Bank Policy Paper. Washington, D.C. -, 2004. Public and Private Sector Roles in the Supply of Electricity Services. Operational Guidance for World Bank Group Staff. Energy and Mining Sector Board, Washington, D.C. Eberhard Anton, University of Cape Town, PPIAF, Gridlines, Note Nos. 23, May, 2007. Electricity Governance Initiative, Prayas, Pune, 2005 Vinod Shrivastava, Marika Robertson, Core International Inc., Design of Regulatory Institution and Related International Experiences. TERI report on code of ethics for regulators in Indias Electricity Sector, 2007. Regulatory Review Unit (1995), Government Regulation: A Guide to Best Practice, The Cabinet Office, New South Wales.

2. 3. 4. 5.

6. 7.

8.

9.

10. 11. 12. 13. 14.

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CHAPTER - 5 Regulatory Financial Appraisal-A new way of financial Governance

In a Deregulated power sector source of Revenue basically depends upon the earning of DISCOMs from sell of power to consumers of the State .As per Regulation 80 of OERC Distribution (Condition of Supply) code 2004 there are about fifteen numbers of Consumer categories such as: (1) Domestic (2) General Purpose (3) Public lighting (4) Railway Traction (5) Irrigation including allied Agriculture and Agro Industries (6) Public water works (7) Specified public purpose (8) Low Tension (LT) Industrial (Small) supply (9) LT/HT Industrial(Medium) supply (10) Large Industries (11) Heavy Industries (12) Mini steel plant (13) Power Intensive Industries (14) Temporary supply (15) Emergency supply to Captive power plants. The above categories of Consumers avail supply of power through different supply voltages such as Low Tension (LT), High Tension (HT) and Extra High Tension (EHT).The consumer strength of Orissa has grown as follows: Table- 23 Consumer Strength of Orissa
DISTCOs CESU NESCO WESCO SOUTHCO TOTAL % Growth As on 31st As on 31st As on 31st As on 31st As on 31st As on 31st As on 31st As on 31st As on 31st As on 31st Mar. 1999 Mar. 2000 Mar. 2001 Mar. 2002 Mar. 2003 Mar. 2004 Mar. 2005 Mar. 2006 Mar. 2007 Mar. 2008 554,610 627,196 656,918 692,380 763,216 823,880 875,792 901,764 947,969 1,014,053 251,703 292,344 311,804 374,066 404,352 435,410 466,537 494,204 515,889 546,210 295,415 322,807 343,952 379,268 407,976 434,546 438,972 452,523 465,947 499,291 322,912 358,201 381,970 411,596 426,960 435,557 461,958 474,075 497,049 529,610 1,424,640 1,600,548 1,694,644 1,857,310 2,002,504 2,129,393 2,243,259 2,322,566 2,426,854 2,589,164 12% 6% 10% 8% 6% 5% 4% 4% 7%

5.1

Tariff Setting in Orissa While determining the tariff for consumers OERC is guided by OERC (Terms and Conditions for Determination of Tariff) Regulation 2004 and OERC (Conduct of Business) Regulation 2004. According to above Regulations the tariff for retail sale of electricity shall include the cost of generation, transmission and distribution of electricity. In Orissa GRIDCO being the deemed trading licensee, is the State aggregator of power. It purchases power from different sources including renewable sources and resells the same to DISCOMs at bulk supply price (BSP) fixed by the OERC. This has become necessary to maintain a uniform retail tariff throughout the State by adjusting the Bulk Supply Price. All the four DISCOMs of the State meet their requirement of power only through GRIDCO as all the subsisting Power Purchase Agreements (PPAs) with generators are made with the latter before it was unbundled into different DISCOMs. This has already been discussed in the previous chapters. Hence, power purchase price of the DISCOMs is the Bulk Supply Price (BSP) fixed by the Commission at which GRIDCO sells power to DISCOMs. When BSP is added with transmission and distribution cost we reach at retail supply price. According to OERC (Terms and Conditions for Determination of Tariff) Regulation 2004 different DISCOMs make their filings for Annual Revenue

148

Requirement (ARR) as per annual schedule by November 30th every year. The revenue requirement of DISCOMs generally consists of following components. Such as (1) (2) (3) (4) (5) (6) (7) (8) (9) Power Purchase Cost Cost of transmission Employee Cost Repair and Maintenance (R&M) cost Administrative and General (A&G) expenses Bad Debts Depreciation Interest Cost Carrying Cost of Regulatory Assets

Apart from this, their revenue requirement also includes principal payment of securitized arrear BSP to GRIDCO etc. As per OERC (Terms and Conditions for Determination of Tariff) Regulation 2004 the DISCOMs in their ARR filing for the ensuing financial year indicate the manner in which the Gap, if any, between the charges which it is permitted to recover and expected expenditure shall be filled up. The Commission classifies costs incurred by the DISCOMs as controllable and non-controllable. The controllable costs are distribution loss, R&M expenses, A&G expenses etc. The non-controllable costs are interest rate variation, foreign exchange rate variation, cost due to judgment of the court, loss due to natural calamities etc. For all controllable cost the Commission set the targets for each year under review. These targets are used for computing revenue requirement. The DISCOMs also submit long term business plan for adopting multi-year-tariff (MYT) regime. The Commission has also issued a MYT order and Business Plan Order in the year 2003 and 2005 respectively. The Commission has recently issued a new Business Plan Order in FY 2010 as the time period of five years of the last order has already elapsed. We shall now analyze each component of Annual Revenue Requirement (ARR) of each DISCOMs separately. 5.1.1 Sales Forecasts The DISCOMs while submitting their application for ARR, forecast the energy sales to consumers category-wise for the period under consideration. The Commission examines the sales forecasts of the DISCOMs for reasonableness, consistency and past trend etc before adopting it. Category-wise sales to different consumers are given in the table below: Table- 24 Sales to Consumer voltage-wise (In Million Units) in Orissa (All the DISCOMs) Year LT HT EHT 1999-00 3013.85 1187.41 1401.58 2000-01 3163.48 1280.95 1635.99 2001-02 3236.80 1220.33 1316.08 2002-03 3397.69 1229.94 2105.14 2003-04 3374.45 1296.78 2400.83 149

Year 2004-05 2005-06 2006-07 2007-08 2008-09

LT 3373.48 3518.36 3599.13 3907.85 4261.00

HT 1678.24 2255.13 2720.98 2999.92 2972.22

EHT 2546.96 2370.80 2968.12 3851.84 4499.24

In LT voltage level most of the domestic and commercial consumers are included where as at HT voltage levels both commercial and industrial consumers exist. In EHT voltage level purely all the high end industries draw their power from the DISCOMs. Graph- 6
Electricity Sales to Different Consumers (voltage wise)
4500 4000 3500 3000 2500 2000 1500 1000 500 0
-04 -00 20 02 20 04 -07 20 06
HT

Million Units

-02

-01

-05

-06

20 00

19 99

20 01

Year

20 05

LT

20 07
EHT

From the above table and graph it can be inferred that the sales to low end consumers (LT) is increasing very slowly where as sales to high end consumers such as industries is increasing very fast indicating rapid industrialization of the State. This can also be concluded that in spite of rapid industrialization the living standard of the people has not kept pace with it which is evident from proportionately less sale to LT consumers. 5.1.2 Distribution Loss The Commission approves a realistic and achievable loss target for the year under review based on opening loss level, licensees filing, submission and objection raised by the stakeholders. This approved loss target is used for computing sale of power to consumers for that year. The losses on account of under achievement of loss reduction targets are entirely borne by the licensees. OERC (Terms and Condition for Determination of Tariff) Regulation 2004 also stipulates that the licensee will have to share with the consumers part of the financial gains arising from achieving higher loss reduction vis--vis the target. From the table below it is clear that none of the licensee is able to achieve the target given by OERC in this regard over the years.

150

20 03

-08

-03

Table- 25 Distribution Loss

2003-04 Appr. Actual in ARR* (Aud) 30.9 39.8 34.8 43.7 31.1 39.0 30.9 42.5 31.9 40.8 2004-05 Appr. Actual in ARR* (Aud) 39.0 41.5 38.0 39.4 34.0 36.4 39.0 40.5 37.1 39.2 DISTRIBUTION LOSS (%) 2005-06 2006-07 Appr. Actual Appr. Actual in ARR* (Aud) in ARR* (Aud) 36.0 42.9 33.0 43.5 35.0 37.1 31.5 33.2 31.0 37.8 33.7 36.4 36.0 41.1 33.0 43.4 34.2 39.6 32.8 38.6 2007-08 Appr. Actual in ARR* (Aud) 29.3 41.5 26.0 31.2 25.0 36.1 30.4 45.5 27.1 37.5 Appr. in ARR* 29.3 25.5 25.0 30.4 27.0 2008-09 Actual (per. review) 40.3 34.6 33.6 47.8 37.5

CESU NESCO WESCO SOUTHCO ALL ORISSA

*ARR Annual Revenue Requirement (Source- Orissa Electricity Regulatory Commission &Audited accounts of DISCOMs) 5.1.3 Power Purchase: The quantum of power purchase for the ensuing financial year shall be estimated on the basis of actual purchase made during the previous financial years, actual to the extent available for the current year and projection for the balance period of the current year with appropriate adjustment for any abnormal variation during the period. OERC does not ordinarily consider the additional power purchase beyond the approved level. However, purchase beyond the approved quantum is taken into consideration in the subsequent year if it is proved to the satisfaction of the Commission that it is beyond the control of the licensees. Table- 26 Power Purchase Cost of DISCOMs (In Rs. Crs)
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 CESU App. Aud. 455.73 494.11 571.95 574.81 561.51 531.17 559.15 518.92 517.55 516.45 495.30 522.00 593.17 646.03 695.79 NA NESCO App. Aud. 298.65 295.03 313.05 319.61 287.97 298.23 350.54 329.74 366.24 378.25 396.61 416.41 470.85 466.72 664.65 684.27 SOUTHCO App. Aud. 184.36 189.06 200.91 198.31 207.42 193.51 211.64 201.50 201.76 202.36 201.24 196.72 230.35 201.66 178.71 173.90 WESCO App. Aud. 350.39 402.24 424.32 424.43 416.60 452.68 527.05 509.83 545.05 543.37 566.39 604.55 711.37 608.37 1086.41 946.94

App.- Approved, Aud.- Audited,NA-Not Available Source: Orissa Electricity Regulatory Commission Table- 27 Power purchased by DISCOMs (In Million Units) Year CESU NESCO SOUTHCO WESCO 4025.30 2443.11 1522.70 2867.77 2000-01 4186.45 2302.66 1521.97 2979.29 2001-02 4055.79 2396.76 1555.97 3354.74 2002-03 3899.57 2645.79 1607.04 3784.18 2003-04 3849.55 2985.68 1613.42 4051.01 2004-05 4184.50 3407.57 1702.16 4188.51 2005-06 4623.63 3998.69 1826.97 4670.62 2006-07 5203.61 4654.93 1975.17 5377.09 2007-08 5672.61 4544.98 2175.78 6378.45 2008-09 (Source-OERC) 151

Graph- 7
Rise in Power Purchase Cost vrs. Unit Purchsed by DISCOMs
15.00

Percentage Rise

10.00 5.00

0.00 -5.00

-10.00 Power Purchase Cost Unit Purchased

2001-02 9.90 1.21

2002-03 -2.74 3.39

2003-04 5.72 5.05

2004-05 5.16 4.71

2005-06 6.05 7.87

2006-07 10.52 12.14

2007-08 -6.12 13.83

Financial Year

From the above table and graph it is clear that although the power purchase in real terms has been increasing year after year the price at which DISCOM purchase the power from GRIDCO has not increased proportionately (Series-1). This means OERC through regulatory intervention has been able to keep the Retail tariff constant for several years by insulating DISCOMs from rise of power purchase cost through adjustment in BSP. That means the bulk power supplier of the State, GRIDCO has absorbed the incremental power purchase cost in spite of statutory provision in the Electricity Act, 2003 which mandates in Section 61 (d) to recover the cost of electricity in a reasonable manner. This has distorted the cost of Retail supply of power and actual cross-subsidy. 5.1.4 O&M Expenses: This component of the revenue requirement consists of employee cost, administration and general (A&G) expenses, Repair and maintenance (R&M) expenses and other miscellaneous expenses. (i) Employee Cost: Out of these expenses employee cost is allowed by the Commission after the prudence check. The employee cost over the years allowed by the Commission is given in the table below: Table- 28 Employee Cost of DISCOMs
2000-01 CESU Employee Cost (Rs Cr) Unit Sold (In MU) Employee Cost per unit of sale (Rs./Unit) NESCO Employee Cost (Rs Cr) 99.58 656918 2218.52 44.89 2001-02 95.31 692380 2143.038 44.47 2002-03 89.91 763216 2310.589 38.91 2003-04 97.83 823880 2348.98 41.65 2004-05 216.11 875792 2252.33 95.95 2005-06 108.8 901764 2391.59 45.49 2006-07 108.37 947969 2611.391 41.50 2007-08* 1014053 3043.64 -

46.47 311804

51.88 374066

52.22 404362

49.68 436410

52.51 466537

66.51 494204

104.65 515889

105.443 546210

152

Unit Sold (In MU) Employee Cost per unit of sale (Rs./Unit) SOUTHCO Employee Cost (Rs Cr) Unit Sold (In MU) Employee Cost per unit of sale (Rs./Unit) WESCO Employee Cost (Rs Cr) Unit Sold (In MU) Employee Cost per unit of sale (Rs./Unit)

2000-01 1357.479 34.23

2001-02 1128.31 45.98

2002-03 1404.97 37.17

2003-04 1490.6 33.33

2004-05 1809.182 29.02

2005-06 2144.21 31.02

2006-07 2670.17 39.19

2007-08* 3203.778 32.91

45.61 381970 875.431 52.10

47.34 411596 906.08 52.25

47.58 426960 946.94 50.25

48.4 436557 924.82 52.33

48.55 461958 959.914 50.58

61.54 474075 1003.164 61.35

85.87 497094 1034.249 83.03

106.47 529610 1077.59 98.80

55.17 343952 1628.992 33.87

57.09 379268 1595.781 35.78

58.66 407976 2070.26 28.33

59.49 434546 2307.714 25.78

68.22 438972 2577.248 26.47

85.5 452523 2605.273 32.82

145.17 465947 2972.42 48.84

96.36 499291 3434.607 28.06

* Audited Report of CESU is not available. Source: Orissa Electricity Regulatory Commission Graph- 8
Employee Cost per Unit of Sale (Rs/Unit)
120 100 Rs/Unit sale 80 60 40 20 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Financial Year

CESU SOUTHCO

NESCO WESCO

From the above table and graph it is seen that the most of the DISCOMs have increasing employee cost over the years. The employee cost of SOUTHCO per unit sale appears to be the highest among all the DISCOMs. The reason for higher per unit employee cost is due to higher LT base (Domestic etc.) of SOUTHCO among all the DISCOMs. The employee cost of WESCO for per unit power sale is less due to higher sale to Industries where number of consumer is less but sale per individual consumer is too high. However all the DISCOMs have shown increasing trend in employee cost for per unit sale of electricity. This has occurred in spite of reducing employee strength after privatization. This indirectly reflects reducing efficiency of employees over the years after reform and increasing compensation to them.

153

(ii)

Repair & Maintenance Expenses: As per Long-Term Tariff Strategy (LTTS) Order of the Commission in the year 2003 the Commission has stipulated that 5.4% of the gross fixed assets will be allowed as Repair and Maintenance expenses to the DISCOMs. The gross fixed assets for determination of tariff in the successive years for DISCOMs are as follows: Table 29 Asset of DISCOMs (Rs. in crore) Particulars WESCO NESCO SOUTHCO CESU Gross Book Value 139.867 137.89 122.41 188.697 as on 01.04.1996 Addition 1996-97 13.74 13.54 12.02 18.53 1997-98 16.84 16.60 14.74 22.72 1998-99 0 0 0 0 1999-00 53.32 41.11 37.53 87.16 2000-01 19.90 26.83 13.80 85.09 2001-02 19.58 30.63 20.72 67.25 2002-03 21.31 30.55 7.64 127.01 2003-04 35.14 28.63 12.60 88.42 2004-05 71.74 55.09 39.78 66.26 2005-06 23.52 30.20 13.89 -95.95 2006-07 22.21 30.73 11.10 22.57 2007-08 24.79 32.49 18.91 33.32 Total 461.957 474.29 325.14 711.077 The DISCOMs add asset to their base through system improvement work undertaken by them, rural electrification by different schemes funded by the Govt.and deposit work by consumers etc. Table - 30 Repair and Maintenance Expenses of DISCOMs

CESU

NESCO

Approved R&M (Rs. in Crs.) Audited R&M (Rs. in Crs.) Unit Sold (In MU) R&M Cost Paise per Unit sold Approved R&M (Rs. in Crs.) Audited R&M (Rs. in Crs.) Unit Sold (In MU) R&M Cost

2000-01 19.57 19.91 2218.52 8.97 14.22 11.02 1357.479 8.12

2001-02 23.43 15.60 2143.038 7.28 16.32 7.02 1128.31 6.22

2002-03 22.11 25.04 2310.589 10.84 14.62 5.65 1404.97 4.02

2003-04 24.12 21.22 2348.98 9.03 17.59 8.84 1490.6 5.93

2004-05 31.95 20.26 2252.33 9.00 17.66 11.13 1809.182 6.15

2005-06 33.67 12.26 2391.59 5.13 22.63 11.21 2144.21 5.23

2006-07 41.31 22.10 2611.391 8.46 24.48 13.37 2670.17 5.01

2007-08* 43.64

3043.64 0.00 24.43 13.02 3203.778 4.06

154

2000-01 Paise per Unit sold Approved R&M (Rs. in Crs.) Audited R&M (Rs. in Crs.) Unit Sold (In MU) R&M Cost Paise per Unit sold Approved R&M (Rs. in Crs.) Audited R&M (Rs. in Crs.) Unit Sold (In MU) R&M Cost Paise per Unit sold

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08*

SOUTHCO

12.63 7.31 875.431 8.35 14.43 10.25 1628.992 6.29

15.57 9.29 906.08 10.25 13.62 10.12 1595.781 6.34

16.82 6.43 946.94 6.79 15.33 8.04 2070.26 3.88

16.38 9.93 924.82 10.74 16.89 16.27 2307.714 7.05

13.25 8.43 959.914 8.78 17.28 12.85 2577.248 4.99

18.55 6.07 1003.164 6.05 21.30 9.61 2605.273 3.69

17.35 5.18 1034.249 5.01 24.25 12.5 2972.42 4.21

18.38 5.50 1077.59 5.10 23.82 12.38 3434.607 3.60

WESCO

* Audited data of CESU not available Source: Orissa Electricity Regulatory Commission Graph - 9
R&M Cost Per Unit of sale of Electricity
12.00 Paise/Unit sold 10.00 8.00 6.00 4.00 2.00 0.00 CESU NESCO SOUTHCO WESCO 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 8.97 8.12 8.35 6.29 7.28 6.22 10.25 6.34 10.84 4.02 6.79 3.88 9.03 5.93 10.74 7.05 9.00 6.15 8.78 4.99 5.13 5.23 6.05 3.69 8.46 5.01 5.01 4.21

Financial Year

From the table and graph the R&M cost of CESU and SOUTHCO appears to be higher than WESCO and NESCO. The higher R&M cost of CESU and SOUTHCO is due to the higher LT consumer base (domestic etc.) of these utilities. As WESCO and NESCO sale more to industries at higher voltage level the maintenance cost is proportionately reduced. Similar phenomenon has already been observed in case of employee cost also in preceding paragraphs. It is further to be noted that the DISCOMs have not 155

been able to spend the amount approved for them in R&M head in the successive tariff Orders. This has also reflected in the quality of service provided by them. 5.1.5 Administrative and General Expenses: Administrative General Expenses are required for expenses on vehicle, telephone, traveling allowance and house rent etc. As per LTTS Order of the Commission, for Administrative and General Expenses, the base year value is escalated by 7% every year for the Control Period of the Order. Accordingly the Commission approves the A&G expenses. The following table explains the A&G cost incurred by different DISCOMs. Table 31 A&G Cost of DISCOMs
2000-01 CESU Approved A&G Cost (In Rs. Crs) Audited A&G Cost (In Rs. Crs) Unit Sold in MU A&G Expense Paise/Unit sold Approved A&G Cost (In Rs. Crs) Audited A&G Cost (In Rs. Crs) Unit Sold in MU A&G Expense Paise/Unit sold Approved A&G Cost (In Rs. Crs) Audited A&G Cost (In Rs. Crs) Unit Sold in MU A&G Expense Paise/Unit sold Approved A&G Cost (In Rs. Crs) Audited A&G Cost (In Rs. Crs) Unit Sold in MU A&G Expense Paise/Unit sold 7.78 16.40 2218.52 7.39 5.91 8.74 1357.479 6.44 3.02 6.43 875.431 7.34 4.01 9.42 1628.992 5.78 2001-02 8.17 15.83 2143.038 7.39 6.21 8.38 1128.31 7.43 3.17 6.09 906.08 6.72 4.21 9.64 1595.781 6.04 2002-03 8.58 17.88 2310.589 7.74 6.52 7.95 1404.97 5.66 3.33 7.05 946.94 7.45 4.42 9.91 2070.26 4.79 2003-04 9.18 21.61 2348.98 9.20 6.98 7.48 1490.6 5.02 3.56 7.00 924.82 7.57 4.73 11.02 2307.714 4.78 2004-05 9.82 22.33 2252.33 9.91 7.86 8.89 1809.182 4.91 8.22 11.95 959.914 12.45 12.51 14.30 2577.248 5.55 2005-06 10.51 30.69 2391.59 12.83 8.42 9.41 2144.21 4.39 8.79 14.55 1003.164 14.50 13.39 15.54 2605.273 5.96 2006-07 13.11 42.27 2611.391 16.19 10.48 10.14 2670.17 3.80 10.88 16.40 1034.249 15.86 15.78 15.82 2972.42 5.32 3043.64 0.00 12.83 9.86 3203.778 3.08 12.08 13.13 1077.59 12.18 17.48 17.17 3434.607 5.00 2007-08* 14.03

NESCO

SOUTHCO

WESCO

* Audited data of CESU is not available Source: Orissa Electricity Regulatory Commission

156

Graph - 10
A&G Cost per Unit of Electricity Sold
20.00 Paise per Unit 15.00 10.00 5.00 0.00 CESU NESCO SOUTHCO WESCO

2000-01 7.39 6.44 7.34 5.78

2001-02 7.39 7.43 6.72 6.04

2002-03 7.74 5.66 7.45 4.79

2003-04 9.20 5.02 7.57 4.78

2004-05 9.91 4.91 12.45 5.55

2005-06 12.83 4.39 14.50 5.96

2006-07 16.19 3.80 15.86 5.32

Financial Year

From the above table and graph it is explicit that the A&G cost for per unit sale of electricity has been increasing over the years in case of CESU and SOUTHCO. This can be attributed to higher percentage of LT sale (Domestic etc.) in case of these utilities. Particularly in case of CESU the rise in A&G cost has been phenomenal in the year 2005-06 and 2006-07 although there has been rise in industrial sale which involves less A&G expenses. This indicates unnecessary expenses on different un-productive head by the DISCOMs. 5.1.6 Revenue from Sale of Power: Due to huge distribution loss and poor collection efficiency the revenue from sale of power had been poor in the pre-reform era. The following table depicts the revenue realization over the years after privatization. Table 32 Revenue from sale of power of DISCOMs (Rs. in Cr)
1999-00 CESU Approved Audited Unit Sold in MU Revenue realized Paise/Unit sold NESCO Approved Audited Unit Sold in MU Revenue realized Paise/Unit sold SOUTHCO Approved Audited 512.44 462.30 1990.00 232.31 2000-01 623.58 569.29 2218.52 256.61 2001-02 744.70 616.94 2143.038 287.88 2002-03 841.55 639.97 2310.589 276.97 2003-04 765.24 662.94 2348.98 282.22 2004-05 672.85 662.81 2252.33 294.28 2005-06 686.84 699.70 2391.59 292.57 2006-07 828.15 771.89 2611.391 295.59 2007-08 1029.64 3043.64 0.00

323.96 304.50 1279.00 238.08

400.49 328.13 1357.48 241.72

341.95 301.08 1128.31 266.84

381.26 366.87 1404.97 261.12

460 387.33 1490.6 259.85

472.64 469.15 1809.182 259.32

526.78 587.87 2144.21 274.17

765.22 729.65 2670.17 273.26

903.48 896.37 3203.778 279.79

239.48 204.82

255.32 221.71

260.90 251.40

310.57 265.23

288.01 261.31

272.08 259.17

319.97 278.97

349.29 290.68

359.91 305.92

157

Unit Sold in MU Revenue realized Paise/Unit sold WESCO Approved Audited Unit Sold in MU Revenue realized Paise/Unit sold

1999-00 833.00 245.88

2000-01 875.431 253.26

2001-02 906.08 277.46

2002-03 946.94 280.09

2003-04 924.82 282.55

2004-05 959.914 269.99

2005-06 1003.164 278.09

2006-07 1034.249 281.05

2007-08 1077.59 283.89

424.01 412.13 1500.83 274.60

506.04 452.63 1628.99 277.86

549.15 489.44 1595.781 306.71

616.66 601.94 2070.26 290.76

718.2 652.41 2307.714 282.71

739.87 730.94 2577.248 283.61

847.07 786.75 2605.273 301.98

961.51 907.82 2972.42 305.41

1291.92 1083.51 3434.607 315.47

Graph - 11
350 300

Revenue Realised (Paise/Unit)

(Paise/Unit)

250 200 150 100 50 0

19 99 -0 0 20 00 -0 1 20 01 -0 2 20 05 -0 6 20 03 -0 4 20 04 -0 5 20 06 -0 7 20 02 -0 3

Financial Year

CESU SOUTHCO

NESCO WESCO

From the above table and graph it can be seen that the revenue realization per unit sale of electricity of all the DISCOMs have taken upward turn. That means the collection efficiency have increased considerably over the years which has contributed considerably in reducing AT&C loss. The growth of collection efficiency is shown in the table below: Table - 33 Collection Efficiency of DISCOMs (in %) 01-02 02-03 03-04 04-05 05-06 06-07 71.2 79.9 82.1 83.5 88.9 92.81 CESU 74.3 81.5 85.5 95.6 90.2 88.74 NESCO 79.9 85.4 88.0 91.7 93.6 94.29 WESCO 79.3 83.4 88.2 100.5 95.3 94.31 SOUTHCO 75.5 82.4 85.5 91.0 91.6 92.37 ALL ORISSA (* Estimated by the licensee) 5.1.7 Regulatory Asset As per OERC (Terms and Conditions for determination of Tariff) Regulation 2004 depending upon on the amount of Regulatory assets submitted by the licensees and accepted by the Commission, the Commission shall stipulate the

07-08 94.10 93.16 92.91 94.05 93.40

08-09 91.80 92.50 93.86 94.21 92.98

09-10* 95.00 96.00 97.00 96.00 96.00

158

amortization and financing rules of such assets. The Regulatory gap is nothing but the gap between revenue requirement and expected revenue approved by the Commission from year to year. Creation of Regulatory assets only for the purposes of avoiding tariff increase should not be allowed and it shall only be created to take care of force majeure or cost variations due to uncontrollable factors or major tariffs shocks because of these reasons. The Commission has discretion of providing regulatory assets. Time to time the Commission amortizes the Regulatory gap or asset in the revenue requirement of the DISCOMs. Table - 34 Regulatory Gap Approved by Commission in different years (Rs. In Crore) Years 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Total WESCO -21.74 -50.78 8.80 36.21 48.08 32.86 123.32 187.42 149.15 NESCO -65.79 -53.43 83.28 -21.92 -21.31 -64.90 54.67 64.85 46.66 -144.46 41.36 41.36 65.00 3.26 SOUTHCO -43.60 50.59 -34.90 -18.49 -39.12 -86.51 4.75 -20.71 34.50 -254.66 31.91 31.91 0.00 -190.84 CESU -140.18 -84.93 -35.69 -69.05 -18.73 13.34 -30.84 2.66 -363.42 0.00 43.23 118.00 -202.19

513.33 Regulatory asset trued up 2006-07 2007-08 2008-09 Balance to be trued up -

(Source: OERC retail Tariff order for FY2009-10) 5.1.8 Provision for Bad and Doubtful Debts: In the revenue requirement the Commission allows 2.5% of the total sales revenue towards provision for bad and doubtful debts. But collection efficiency achieved by the DISCOMs is different. Hence Commission approves concept of carrying charges for financing the gap between the permitted collection efficiency and collectable revenue excluding bad debts on pragmatic consideration.

159

Table - 35 Provision for Bad & Doubtful Debts (Actual)

(Rs. in Crore)
1999-00 CESU Approved Audited Billing Amount Bad debt as %age of Billing Amount NESCO Approved Audited Billing Amount Bad debt as %age of Billing Amount SOUTHCO Approved Audited Billing Amount Bad debt as %age of Billing Amount WESCO Approved Audited Billing Amount Bad debt as %age of Billing Amount 12.81 19.49 NA NA 8.10 38.58 304.5 13% 5.99 13.70 204.82 7% 2000-01 15.59 22.35 584.37 4% 10.01 50.10 328.13 15% 6.38 25.29 221.71 11% 2001-02 18.62 27.17 638.15 4% 8.61 45.69 301.08 15% 6.52 21.05 251.4 8% 2002-03 21.04 19.69 666.92 3% 9.53 74.55 366.87 20% 7.76 19.77 265.23 7% 2003-04 19.13 14.78 691.62 2% 11.50 46.09 387.33 12% 7.20 19.93 261.31 8% 2004-05 16.82 16.50 690.99 2% 11.82 27.77 469.15 6% 6.80 7.91 259.17 3% 2005-06 17.17 12.66 713.06 2% 13.17 18.46 587.86 3% 8.00 12.69 278.97 5% 2006-07 20.70 8.53 782.59 1% 19.13 56.85 729.66 8% 8.73 3.56 290.69 1% 2007-08 25.74 NA 916.38 NA 22.59 52.50 896.37 6% 9.00 14.70 305.93 5%

10.60 48.00 412.13 12%

12.65 57.1 452.63 13%

13.73 75.84 489.44 15%

15.42 78.85 601.94 13%

17.96 102 652.41 16%

18.5 50.56 730.94 7%

21.18 51.71 786.75 7%

24.04 42.07 907.8 5%

32.3 48.2 1083.51 4%

Graph - 12
Actual Bad Debt as % age of Billing
25% 20%

%age

15% 10% 5% 0%

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Financial Year

CESU SOUTHCO

NESCO WESCO

From the above table and graph it can be concluded that higher percentage of billed amount remains un-collectable in case of NESCO and WESCO although their industrial consumer base is broader than CESU and SOUTHCO. Surprisingly CESU which has a huge %age of domestic consumer its bad debt amount is least among all the DISCOMs.

160

Table - 36 INCOME AND EXPENDITURE STATEMENT OF CESU / CESCO

Appr. Expenditure Cost of Power Purchase Transmission Cost Employee costs Repair & Maintenance A & G Expenses Provision for Bad & Doubtful Debts(Actual) Other expenses Depreciation Interest Chargeable to Revenue Carrying Cost on Regulatory Asset Sub-Total Less: Expenses capitalised Prior period expenses (Debit, credit) Total expenses Special appropriation Amort. of Reg. Asset Previous Losses EMP Cost Truing up Contingency reserve Total Return on equity TOTAL(A+B+C) Less Miscellaneous Receipt Total Revenue Requirement Revenue from sale of power GAP (+/-) 0.00 1.32 1.32 7.46 533.96 0.86 0.86 667.04 23.24 533.96 512.44 -21.52 643.80 462.3 -181.50 639.54 623.58 -15.96 0.00 0.00 0.00 4.13 639.54 1.08 1.08 0 681.79 27.49 654.30 569.3 -85.01 0.00 0.00 0.00 10.51 775.01 20.3 754.71 744.7 -10.01 1.29 1.29 0 762.42 30.33 732.09 616.94 -115.15 6.90 0.00 6.90 2.02 767.35 23.86 743.49 841.6 98.06 0.00 0.00 0 733.67 30.23 703.44 640 -63.47 0.00 0.00 0.00 11.64 783.89 26.22 757.67 765.24 7.57 0.00 0.00 791.31 33.26 758.05 662.94 -95.11 11.64 734.25 27.79 706.46 672.9 -33.61 0 2.63 2.63 887.87 46.69 841.18 662.81 -178.37 0 0 0 11.64 724.93 29.46 695.47 686.84 -8.63 757.19 28.9 728.29 699.7 -28.59 0 0 7.83 0 11.64 867.13 31.22 835.91 828.15 -7.76 36.69 905.09 771.89 -133.20 51.06 11.63 1039.95 13.37 1026.58 1029.64 3.06 46.68 999.57 895.03 -104.54 118.00 11.64 1110.73 18.7 1092.03 1095.1 3.02 43.23 118 1999-00 Aud. 453.63 97.92 24.01 11.51 19.49 27.9 26.14 0.00 2000-01 Appr. Aud. 455.73 89.37 19.57 7.78 15.59 0 26.42 20.95 494.1 99.58 19.91 16.4 22.35 33.04 0 Appr. 2001-02 Aud. 574.81 95.31 15.6 15.83 27.17 0 39.7 0 Appr. 2002-03 Aud. 531.2 89.91 25.04 14.84 19.69 11.12 44.95 0 Appr. 2003-04 Aud. 518.92 97.83 21.22 17.8 14.78 13.37 53.72 35.83 Appr. 2004-05 Aud. 516.45 216.11 20.26 22.33 16.5 9.57 61 20.34 Appr. 2005-06 Aud. 522.00 108.80 12.26 30.69 12.66 9.79 66.06 37.28 Appr. 2006-07 Aud. 646.03 108.37 22.10 42.27 8.53 0.00 48.79 49.76 0.00 925.84 3.00 -18.94 941.78 Appr. 2007-08 Aud. 648.49 212.93 25.11 13.84 9.68 26.88 49.65 56.29 0.00 1042.87 6.21 -9.59 1046.25 981.09 08-09 Appr. 649.25 163.19 41.87 26.27 27.38 2.74 27.53 42.86

364.29 82.75 19.05 6.28 12.81 25.18 25.70

571.95 93.27 23.43 8.17 18.62 16.12 35.07

561.5 95.63 22.11 8.58 21.04 15.39 39.16

559.15 108.86 24.12 9.18 19.13 0.00 16.80 35.01

517.6 107.5 31.95 9.82 16.82 22.25 16.73

495.30 113.30 33.67 10.51 17.17 23.45 19.88

501.56 91.61 113.10 41.31 13.11 20.70 28.84 38.22 7.04 855.49 0 855.49

589.27 106.52 126.14 43.64 14.03 25.74 30.22 36.04 5.66 977.26 0 977.26

536.06 10.88 525.18

660.60 7.82 13.4 666.18

635.41

685.39 5.04

766.63 2.13 764.50

768.42 1.43 -5.86 761.13

763.42 4.99 758.43

736.72 3.26 0.21 733.67

772.25

773.47 2.39

722.61

882.56 4.04

713.29

799.54 4.49

981.09

635.41

0.36 680.71

772.25

20.23 791.31

722.61

6.72 885.24

713.29

-37.86 757.19

161

Table - 37 INCOME AND EXPENDITURE STATEMENT OF NESCO

1999-2000 2000-01 Appr. Aud. Appr. Aud.
Expenditure Cost of Power Purchase Transmission Cost Employee costs Repair & Maintenance A & G Expenses Provision for Bad & Doubtful Debts(Actual) Other expenses Depreciation Interest Chargeable to Revenue Carrying Cost on Regulatory Asset Sub-Total Less: Expenses capitalised Prior period expenses(Debit,credit) Total expenses Special appropriation Amort. of Reg. Asset Previous Losses EMP Cost Truing up Contingency reserve Total Return on equity TOTAL(A+B+C) Less Miscellaneous Receipt Total Revenue Requirement Revenue from sale of power GAP(+/-) 0.00 0.99 0.99 0.00 0.90 0.90 0.00 1.20 1.20 3.06 416.87 5.94 410.93 400.5 0.00 1.05 1.05 0.00 1.13 1.13 0.00 1.15 1.15 0 485.00 16.24 468.76 301.08 8.27 1.36 9.63 1.7 421.62 2.6 419.02 381.26 0.00 1.27 1.27 0.0 519.68 18.40 501.28 366.87 0.00 1.45 1.45 10.55 498.77 4.26 494.51 460 -34.51 0.00 1.38 1.38 0.00 485.00 17.76 467.24 387.33 -79.91 0.00 0 0.00 10.55 504.96 13.14 491.82 472.64 -19.18 0.00 0.72 0.72 0.00 585.24 19.15 566.09 469.15 -96.94 0.00 11.89 0 0.00 10.55 561.58 12.49 549.09 526.78 -22.31 1.7 1.70 41.36 1.79 1.79 53.25 13.35 13.35 65.00 10.55 964.57 26.08 938.49 939.94 1.45 226.8 286.49 39.84 14.22 4.55 8.10 20.40 18.33 44.61 16.19 4.87 38.58 6.55 0.00 10.23 298.7 46.26 14.22 5.91 10.01 20.40 17.16 295.03 46.47 11.02 8.74 50.10 12.92 0.00 25.98

2001-02 Appr. Aud.

313.1 49.60 16.32 6.21 8.61 11.38 27.60 319.61 51.88 7.02 8.38 45.69 23.47 0 25.96

2002-03 Appr. Aud.

287.97 51.11 14.62 6.52 9.53 10.18 30.34 298.23 52.22 5.65 7.95 74.55 58.73 0 22.15

2003-04 Appr. Aud.

350.54 56.17 17.59 6.98 11.50 12.25 31.74 329.74 49.68 8.84 7.48 46.09 35.83 0 6.92

2004-05 Appr. Aud.

366.24 54.31 17.66 7.86 11.82 12.3 25.47 378.25 52.51 11.13 8.89 27.77 18.19 75.75 13.65

2005-06 Appr. Aud.

396.61 62.56 22.63 8.42 13.17 15.76 33.33

2006-07 2007-08 Appr. Aud. Appr. Aud.

2008-09 Appr.
680.36 102.33 25.87 14.52 23.50 2.35 17.18 22.91

416.41 470.85 466.72 565.72 684.28 91.72 98.93 66.51 69.6 104.65 85.07 105.45 11.21 24.48 13.37 24.43 13.02 9.41 10.48 10.14 12.83 9.86 18.46 21.38 17.56 26.73 19.13 17.18 34.35 56.86 56.49 18.54 20.18 22.59 17.13 34.38 52.50 14.35 16.10 21.48

332.23 407.52 2.71 0.95 332.23 405.76

412.61

450.26 432.77 1.90 -0.88 449.24 432.77

482.01 1.44 3.28 483.85

410.27

519.48 1.19 0.12 518.41

486.77

484.58 1.48 0.52 483.62

495.66 1.25

586.14 1.28 -0.34 584.52

552.48 1.45

2.68 0 3.16 587.67 740.47 746.95 864.23 917.04 1.37 1.62 0.83 1.70 0.60

889.02

412.61

410.27

486.77

494.41

551.03

-0.06 0.29 0.17 586.24 738.85 745.83 862.53 916.27 41.36 0 41.36

889.02 65.00

5.71 0 338.93 406.66 3.89 5.5

0 1.55 450.29 435.45 16.52 2.6

0.00 10.55 0 10.54 587.94 790.76 747.62 926.32 929.62 23.24 17.76 30.00 22.93 55.43

335.04 401.16 324 304.50 -11.08 -96.66

433.77 432.85 328.13 342

564.70 773.00 717.62 903.39 874.19 587.87 765.22 729.66 903.48 896.37 23.17 -7.78 12.04 0.09 22.18

-10.44 -105.64

-90.90 -167.68

-37.76 -134.41

162

Table - 38 INCOME AND EXPENDITURE STATEMENT OF WESCO

1999-00 Appr. Expenditure Cost of Power Purchase Transmission Cost Employee costs Repair & Maintenance A & G Expenses Provision for Bad & Doubtful Debts(Actual) Other expenses Depreciation Interest Chargeable to Revenue Carrying Cost on Regulatory Asset Sub-Total Less: Expenses capitalised Prior period expenses (Debit, credit) Total expenses Special appropriation Amort. of Reg. Asset Previous Losses EMP Cost Truing up Contingency reserve Total Return on equity TOTAL(A+B+C) Less Miscellaneous Receipt Total Revenue Requirement Revenue from sale of power GAP (+/-) 306.4 48.62 14.43 2.79 10.60 0.00 20.62 20.23 423.66 Aud. 345.8 54.01 15.90 5.91 48.00 1.77 0.00 15.09 486.49 3.30 423.66 0.1 483.09 477.25 2000-01 Appr. 350.4 56.92 14.43 4.01 12.65 0.00 20.62 18.23 477.25 Aud. 402.24 55.17 10.25 9.42 57.1 13.85 0.00 27.38 575.41 1.51 0.12 573.78 2001-02 Appr. 424.3 56.86 13.62 4.21 13.73 0 13.06 28.85 554.65 1.26 553.39 Aud. 424.43 57.09 10.12 9.64 75.84 26.91 0 27.53 631.56 1.04 0.09 630.43 2002-03 Appr. 416.60 58.16 15.33 4.42 15.42 10.67 28.02 548.62 1.29 547.33 Aud. 452.68 58.66 8.04 9.91 78.85 41.33 0 25.77 675.24 1.33 1.95 671.96 667.04 2003-04 Appr. 527.05 60.79 16.89 4.73 17.96 11.76 27.86 667.04 Aud. 509.83 59.49 16.27 14.82 102 8.76 0 4.23 715.40 2.15 0.25 713.00 2004-05 Appr. 545.05 65.18 17.28 12.51 18.5 12.03 19.80 690.35 1.69 688.66 Aud. 543.37 68.22 12.85 14.3 50.56 13.37 77.49 9.02 789.18 1.94 0.76 786.48 2005-06 Appr. 566.39 70.76 21.30 13.39 21.18 14.83 32.14 739.99 1.70 738.29 Aud. 604.55 85.50 9.61 23.80 51.71 23.78 17.93 22.13 839.01 0.97 0.24 837.80 2006-07 Appr. 610.17 101.2 80.16 24.25 15.78 24.04 17.02 31.43 3.37 907.41 3.38 904.03 Aud. 608.37 145.17 12.50 15.80 42.86 32.16 18.79 27.51 0 903.16 0.44 1.84 900.88 2007-08 Appr. 965.50 120.91 89.88 23.82 17.48 32.30 16.54 32.50 1.94 1300.86 2.60 1298.26 Aud. 946.94 96.36 12.38 16.44 48.20 9.06 17.01 25.83 1172.22 0.12 2.45 1169.65 1244.13 08-09 Appr. 1012.46 109.97 25.66 20.91 31.28 1.18 16.95 25.72 1244.13

0 1.00 1.00 1.51 426.17 2.42 423.75 424 0.26

0 0.94 0.94 0 484.03 10.59 473.44 412.1 -61.31

0.00 1.14 1.14 1.14 479.53 3.76 475.77 506 30.27

0 1.14 1.14 0 574.92 11.99 562.93 452.63 -110.30

0 1.28 1.28 1.42 556.09 3.28 552.81 549.2 -3.66

0 1.23 1.23 0 631.66 13.17 618.49 489.44 -129.05

9.17 1.44 10.61 1.51 559.45 3.8 555.65 616.7 61.01

0 1.29 1.29 0 673.25 19.36 653.89 601.94 -51.95

0 1.48 1.48 7.78 676.30 6.4 669.90 718.2 48.30

0 1.37 1.37 0 714.37 17.19 697.18 652.41 -44.77

0 0 0.00 7.78 696.44 8.99 687.45 739.87 52.42

0 0.7 0.70 0 787.18 26.68 760.50 730.94 -29.56

0 7.88 7.78 746.07 11.4 734.67 847.07 112.40 3.39 3.39 0 841.19 31.51 809.68 786.75 -22.93 7.78 911.81 17.19 894.62 961.51 66.89 1.89 1.89 0 902.77 26.78 875.99 907.82 31.83 7.88 7.78 1313.92 22.06 1291.86 1291.92 0.06 1.14 1.14 1170.79 37.60 1133.19 1083.51 -49.68 0.00 7.78 1251.91 25.65 1226.26 1251.08 24.82

163

Table - 39 INCOME AND EXPENDITURE STATEMENT OF SOUTHCO

1999-00 Appr. Expenditure Cost of Power Purchase Transmission Cost Employee costs Repair & Maintenance A & G Expenses Provision for Bad & Doubtful Debts(Actual) Other expenses Depreciation Interest Chargeable to Revenue Carrying Cost on Regulatory Asset Sub-Total Less: Expenses capitalised Prior period expenses(Debit, credit) Total expenses Special appropriation Amort. of Reg. Asset Previous Losses EMP Cost Truing up Contingency reserve Total Return on equity TOTAL(A+B+C) Less Miscellaneous Receipt Total Revenue Requirement Revenue from sale of power GAP (+/-) 1.07 1.07 3.47 269.07 3.68 265.39 239.48 -25.91 0.84 0.84 0 297.82 9.94 287.88 204.82 -83.06 1.12 1.12 0.97 288.69 2.26 286.43 255.32 -31.11 0.98 0.98 0 325.05 9.11 315.94 221.7 -94.23 1.09 1.09 1.46 316.58 2.55 314.03 260.9 -53.13 1.04 1.04 0 342.32 10.95 331.37 251.40 -79.97 1.26 1.26 1.67 327.50 3.55 323.95 310.57 -13.38 1.11 1.11 0.00 359.25 13.46 345.79 265.23 -80.56 1.42 1.42 6.03 340.89 3.55 337.34 288.01 -49.33 1.14 1.14 0.00 344.73 11.85 332.88 261.31 -71.57 0 0.00 6.03 316.31 9.96 306.35 272.08 -34.27 1.16 1.16 0.00 367.13 12.96 354.17 259.17 -95.00 6.03 346.69 11.12 335.57 319.97 -15.60 1.33 1.33 31.91 0.00 6.03 328.45 412.48 15.61 11.85 312.84 400.63 278.97 349.29 -33.87 -51.34 1.42 1.42 0 381.52 11.70 369.82 290.69 -79.13 37.25 6.03 378.22 14.53 363.69 359.91 -3.78 356.81 25.11 331.70 305.92 -25.78 18.05 18.90 163.08 43.87 12.63 2.01 5.99 Aud. 182.32 44.30 13.39 4.51 26.15 8.55 0 13.70 18.05 15.90 2000-01 Appr. 184.36 46.26 12.63 3.02 6.38 Aud. 189.1 45.61 7.31 6.43 35.08 14.67 0 25.29 10.85 29.48 2001-02 Appr. 200.91 47.53 15.57 3.17 6.52 Aud. 198.31 47.34 9.29 6.09 45.00 11.90 0 21.05 12.74 27.97 2002-03 Appr. 207.42 48.53 16.82 3.33 7.76 Aud. 193.51 47.58 6.43 7.05 55.86 24.65 0.00 19.77 11.41 30.33 2003-04 Appr. 211.64 52.92 16.38 3.56 7.20 Aud. 201.5 48.4 9.93 7.00 41.80 13.77 0 19.93 9.23 14.17 2004-05 Appr. 201.76 56.85 13.25 8.22 6.8 Aud. 202.36 48.55 8.43 11.95 7.3 14.38 65.04 7.91 12.91 27.44 2005-06 Appr. 201.24 63.73 18.55 8.79 8.00 Aud. Appr. 2006-07 Aud. 201.65 85.87 5.19 16.40 3.56 38.72 14.16 15.03 12.85 25.18 1.26 380.58 0.64 -0.16 380.10 0 334.94 351.98 0.55 4.34 347.09 340.23 2007-08 Appr. 138.71 40.00 77.48 18.38 12.08 9.00 Aud. 173.90 106.47 5.50 13.14 14.70 8.66 14.21 15.40 2008-09 Appr. 180.18 93.06 19.08 12.88 8.29 1.16 12.73 12.85

196.72 191.85 38.50 61.54 68.18 6.07 17.35 14.55 10.88 10.59 13.77 13.62 12.17 12.69 26.77 1.57 8.73

264.53

292.92 2.24 -6.30 296.98

286.60

323.45 0.87 -1.49 324.07

314.03

338.98 0.65 -2.95 341.28

324.57

354.85 0.53 -3.82 358.14

333.44

342.33 0.83 -2.09 343.59

310.28

365.92 1.16 -1.21 365.97

340.66

329.55 376.00 2.76 1.46 -0.33 327.12 374.54 31.91

264.53

286.60

314.03

324.57

333.44

310.28

340.66

334.94 31.91 5.34

340.23

0.00

0.00

0.00

0.00

0.00

0.00

0.0

0.00

0.00

0.00 9.72 0.00 6.03 346.26 14.56 331.70 331.77 0.07

164

5.2

AT&C Loss and Distribution Loss As we know power is purchased by GRIDCO from Different generators such as OPGC, OHPC and NTPC etc. Then it flows through the transmission line of Orissa Power Transmission Corporation Ltd. (OPTCL) to DISCOMs then DISCOMs sale the power to Retail consumers through their network. While selling the power to consumers, DISCOMs suffer from two types of losses such as technical and commercial. The technical loss is inherent to the network of the system which can be changed only with technical intervention such as network augmentation etc. As per one approximation technical loss in DISCOMs system is around 15 to 20%. Rest of the loss which DISCOMs incur is commercial loss which arises due to power theft by hooking, meter bypassing and tampering etc. OERC is always pressing upon the DISCOMs to carry out the energy audit to pinpoint the location of commercial loss so that effective measures can be taken up. The above thing is represented pictorially below:

Generation

PRESENT STRUCTURE

OPGC OHPC IPP NTPC CPP

Generators

GRIDCO (Bulk Supply & Trading) Through OPTCL Transmission System

Cesco Wesco Nesco Southco
Retail Supply & Distribution

CCC C C C C C C C C C C C C

165

Power House
Transmission line (OPTCL) (400/220/132 KV)

400/220/132/33 KV Grid (OPTCL)

33 KV Distribution Line (DISCOMs)

33/11 KV Sub-stations 11 KV Line (DISCOMs) Distribution Transformer 11/0.4 440 V LT Line (DISCOMs) Consumer
Hence, units billed to consumers are not the same which is purchased by DISCOMs from GRIDCO. The lost units are called the distribution loss. The units which is actually sold to consumers is called billed units. This is measured through an indicator called billing efficiency. = Unit Billed by DISCOMs to consumers Units Purchased by DISCOMs Similarly, the unit which is billed is not collected in terms of revenue. This is measured through collection efficiency. Collection efficiency = Revenue collected Revenue billed Billing efficiency The health of the utilities depends upon their business efficiency which is in this case the revenue collected for the units (electricity) they sell to consumers. This depends upon both billing efficiency and collection efficiency. A measure called Aggregate Technical and Commercial Loss (AT&C Loss) is a better way to index the whole gamut of business of the distribution companies (DISCOMs). This is defined as follows: AT&C Loss(%) = Units Billed Revenue Collected -------------- X ----------------------% Units Input Revenue Billed The Aggregate technical and commercial loss of different DISCOMs is given in the subsequent tables. 1166

Table 40
1999-00 CESU / CESCO Energy Purchased (MU) Energy Sale (MU) Distribution loss(%) Total Revenue Billed (Rs Crore) Collection (Rs in Crore) Avg Revenue Billed (P/U) Collection efficiency (%) AT & C LOSS (%) NESCO Energy Purchased (MU) Energy Sale (MU) Distribution loss(%) Total Revenue Billed (Rs Crore) Collection (Rs in Crore) Avg Revenue Billed (P/U) Collection efficiency(%) AT & C LOSS (%) 2,257.61 1,278.90 43.35% 307.38 243.97 240.35 79.37% 55.04% 2,443.11 1,357.41 44.44% 340.58 279.67 250.90 82.12% 54.38% 2,302.66 1,128.31 51.00% 314.26 233.63 278.52 74.34% 63.57% 2,396.76 1,404.97 41.38% 380.30 309.79 270.68 81.46% 52.25% 3,611.14 1,990.24 44.89% 481.72 335.84 242.04 69.72% 61.58% COMPUTATION OF AT&C LOSS Contd.. 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Actual 4,025.30 4,186.45 4,055.47 3,899.54 3,849.34 4,185.51 2,218.52 44.89% 587.72 437.89 264.92 74.51% 58.94% 2,143.04 48.81% 636.93 453.32 297.21 71.17% 63.57% 2,310.59 43.03% 658.80 526.30 285.12 79.89% 54.48% 2,348.98 39.76% 684.15 561.46 291.25 82.07% 50.57% 2,252.34 41.49% 692.05 578.08 307.26 83.53% 51.12% 2,391.59 42.86% 710.35 631.78 297.02 88.94% 49.18% 2006-07 4,623.63 2,611.39 43.52% 782.59 732.84 299.68 93.64% 47.11% 2007-08 5203.61 3043.64 41.51% 916.38 846.66 301.08 92.40% 45.96% 2008-09 5,672.61 3384.30 40.3% 1027.46 943.23 303.59 91.8% 45.23%

Actual 2,645.79 1,490.60 43.66% 396.56 338.93 266.04 85.47% 51.85% 2,985.68 1,809.18 39.40% 470.30 449.49 259.95 95.58% 42.09% 3,407.57 2,144.21 37.08% 593.76 535.62 276.91 90.21% 43.24% 3,998.69 2,670.18 33.22% 735.97 651.02 275.63 88.46% 40.93% 4654.59 3203.78 31.17% 892.82 857.26 278.68 96.02% 33.91% 4544.98 2973.71 34.6% 875.02 821.09 294.25 94% 38.60%

167

COMPUTATION OF AT&C LOSS 1999-00 WESCO Energy Purchased (MU) Energy Sale (MU) Distribution loss(%) Total Revenue Billed (Rs Crore) Collection (Rs in Crore) Avg Revenue Billed (P/U) Collection efficiency(%) AT & C LOSS (%) SOUTHCO Energy Purchased (MU) Energy Sale (MU) Distribution loss(%) Total Revenue Billed (Rs Crore) Collection (Rs in Crore) Avg Revenue Billed (P/U) Collection efficiency(%) AT & C LOSS (%) 2,688.43 1,500.83 44.17% 419.88 350.01 279.77 83.36% 53.46% 2,867.77 1,628.89 43.20% 459.00 364.10 281.79 79.32% 54.94% 2,979.29 1,595.78 46.44% 499.44 399.31 312.97 79.95% 57.18% 3,354.74 2,070.26 38.29% 616.31 526.30 297.70 85.40% 47.30% 2000-01 2001-02 2002-03 2003-04 2004-05 Actual 3,784.18 2,307.71 39.02% 660.29 580.82 4,051.01 2,577.25 36.38% 737.00 675.84 2005-06

Contd.. 2006-07 2007-08 2008-09

4,188.51 2,605.28 37.80% 796.38 745.79 305.68 93.65% 41.75%

4,670.62 2,972.42 36.36% 914.00 861.81 307.49 94.29% 39.99%

5377.09 3434.61 36.13% 1073.29 1022.82 312.49 95.30% 39.13%

6378.45 4238.24 33.6% 1349.38 1289.31 318.38 95.55 36.51

286.12 285.96 87.96% 91.70% 46.36% 41.66% Actual 1,607.04 924.82 42.45% 268.65 236.84 290.49 88.16% 49.27% 1,613.43 959.92 40.50% 263.33 264.60 274.32 100.48% 40.22%

1,433.00 833.39 41.84% 212.77 167.56 255.31 78.75% 54.20%

1,523.00 875.43 42.52% 227.57 189.62 259.95 83.32% 52.10%

1,521.95 906.03 40.47% 259.55 205.81 286.47 79.29% 52.80%

1,555.99 946.94 39.14% 275.43 229.62 290.86 83.37% 49.26%

1,702.16 1,003.16 41.07% 283.99 270.52 283.10 95.26% 43.86%

1,826.97 1,034.25 43.39% 296.99 276.05 287.15 92.95% 47.38%

1975.17 1077.59 45.44% 316.98 298.48 294.16 94.16% 48.63%

2175.78 1136.21 47.8% 331.83 311.53 292.05 93.88 50.97%

168

COMPUTATION OF AT&C LOSS 1999-00 ALL ORISSA Energy Purchased (MU) Energy Sale (MU) Distribution loss(%) Total Revenue Billed (Rs in Cr.) Collection (Rs in Cr.) Avg Revenue Billed (P/U) Collection efficiency(%) AT & C LOSS (%) 9,990.18 5,603.36 43.91% 1,421.75 1,097.38 253.73 77.19% 56.71% 10,859.17 6,080.25 44.01% 1,614.87 1,271.28 265.59 78.72% 55.92% 10,990.35 5,773.16 47.47% 1,710.18 1,292.07 296.23 75.55% 60.31% 11,362.96 6,732.76 40.75% 1,930.84 1,592.01 286.78 82.45% 51.15% 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Actual 11,936.55 7,072.11 40.75% 2,009.65 1,718.05 284.17 85.49% 49.35% 12,499.46 7,598.69 39.21% 2,162.68 1,968.01 284.61 91.00% 44.68% 13,483.75 8,144.24 39.60% 2,384.48 2,183.71 292.78 91.58% 44.69% 15,119.90 9,288.24 38.57% 2,729.55 2,521.72 293.87 92.39% 43.25% 17,210.46 10,759.62 37.48% 3,199.47 3,025.22 297.36 94.55% 40.89% 18771.82 11732.47 37.5% 3583.68 3365.16 278.74 93.9% 41.31%

Source: Audit Reports of DISCOMs (The above table represents audited figures up to FY 2007-08 and Performance Review data furnished by Discoms for FY 2008-09)

169

The Overall distribution loss is due to sale at three voltage levels such as LT, HT and EHT. The EHT sale for DISCOMs is a zero distribution loss business. The maximum loss takes place in LT segment (domestic) which is different from HT and EHT. In this segment both technical and commercial losses are very high. The table given below depicts distribution loss in LT segment which is more than the overall loss. Table - 41 Distribution Loss at LT Level (in %) (Based on Filing of Licensees) 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10* 54.5 49.6 46.4 47.4 49.7 53.2 53.8 53.24 52.20 CESU 65.1 58.8 62.1 60.6 59.2 59.5 59.3 59.40 52.70 NESCO 63.3 58.6 63.4 65.0 65.5 65.0 65.3 65.65 55.40 WESCO 46.7 45.9 50.2 47.8 49.6 52.4 54.9 57.63 54.40 SOUTHCO 53.1 54.9 54.9 55.8 57.5 58.2 58.63 53.50 ALL ORISSA 57.6 (* Estimated by the Licensee for 2009-10) (Source: OERC) Graph - 13
Performance of CESU
100.00 90.00 80.00 70.00

%age

60.00 50.00 40.00 30.00 20.00 10.00 0.00 199900 200001 200102 200203 200304 200405 200506 200607 200708 200809

Financial Year
Distribution Loss (%) Collection Efficiency (%) AT&C Loss (%)

170

Graph - 14
Performance of NESCO
100.00 90.00 80.00 70.00 60.00

%age

50.00 40.00 30.00 20.00 10.00 0.00 199900 200001 200102 200203 200304 200405 200506 200607 200708 200809

Financial Year
Distribution Loss (%) Collection Efficiency (%) AT&C Loss (%)

Graph - 15
Performance of WESCO
100.00 90.00 80.00 70.00

%age

60.00 50.00 40.00 30.00 20.00 10.00 0.00 199900 200001 200102 200203 200304 200405 200506 200607 200708 200809

Financial Year
Distribution Loss (%) Collection Efficiency (%) AT&C Loss (%)

171

Graph - 16
Performance Review of SOUTHCO
120.00 100.00 80.00 %age 60.00 40.00 20.00 0.00 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Financial Year
Distribution Loss (%) Collection Efficiency (%) AT&C Loss (%)

Graph - 17
AT&C Loss (%) of DISCOMs
70.00 60.00 50.00

%age

40.00 30.00 20.00 10.00 0.00

00 20 1 -0 01 20 2 -0 02 20 3 -0 03 20 4 -0 04 20 5 -0 05 20 6 -0 06 20 7 -0 07 20 8 -0 08 20 9 -0
NESCO WESCO

Financial Year

CESU SOUTHCO

5.3

Balance sheet Analysis The Common size balance sheets of the utilities formed after unbundling Orissa State Electricity Board are given below: Table 42 Balance Sheet of CESU

Financial Year Ending 1998-99 March31 A. SOURCES OF FUNDS 1. Shareholder's Funds Share Capital 72.70 Reserves and 63.60 Surpluses

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

(Rs. In crores) 72.70 69.01 72.70 77.50 72.70 84.89 72.70 95.85 72.70 113.11 72.70 141.95 72.70 168.45 72.70 180.46

172

Financial Year Ending March31 Total 2. Loan Funds Secured Loans Unsecured loans

1998-99 136.30

1999-00 141.71

2000-01 150.20

2001-02 157.59

2002-03 168.55

2003-04 185.81

2004-05 214.65 22.25

2005-06 241.15 39.41 964.72 1004.13 110.27 1355.55

2006-07 253.16 35.52 1012.62 1048.14 142.39 1443.69

219.40

449.50 449.50 35.40 626.61

595.34 595.34 41.84 787.38

647.54 647.54 54.04 859.17

752.96 752.96 66.24 987.75

902.99 902.99 75.90 1164.70

926.01 948.26 88.45 1251.36

Accrued Interest Total Loans 219.40 3. Other Funds Consumer's Security Deposit Total Funds 355.70 B. APPLICATION OF FUNDS 1. FIXED ASSETS Gross Block 343.70 Less Accumulated 67.70 depreciation Net Block 276.00 Less Provisional loss due to Super Cyclone Total 276.00 Cap. Expd. in progress 79.89 2. Investments

430.87 93.88 336.99 27.90 309.09 89.20

515.97 126.93 389.04 27.90 361.14 96.83

583.22 166.63 416.59 27.90 388.69 100.66

710.23 211.58 498.65 27.90 470.75 85.09

798.65 265.30 533.35 27.90 505.45 47.32

864.91 326.30 538.61 27.90 510.71 37.50

768.96 364.25 404.71

791.53 423.12 368.41

404.71 44.08

368.41 44.85

3. CURRENT ASSETS, LOANS AND ADVANCES Cash and Bank 25.45 38.00 Balances Stores and Spares 49.11 50.00 Sundry Debtors Other Current Assets Loans and Advances Total Current Assets TOTAL ASSETS Current Liabilities Liabilities to Trust Fund Provisions Total current liabilities TOTAL LIABILITIES Net Current Assets 63.20 269.40 11.15 418.31 774.20 388.90 177.20 275.20 2.90 543.30 969.49 497.00

36.77 42.36 307.12 275.53 29.73 691.51 1177.38 628.61

40.23 36.82 466.18 275.42 16.84 835.49 1352.74 847.32

47.14 50.48 580.96 275.88 18.71 973.17 1556.91 985.97

98.38 52.20 667.47 275.51 11.10 1104.66 1685.33 1032.55

141.49 60.45 763.66 280.25 7.90 1253.75 1829.86 1268.78

145.89 45.87 832.93 283.86 4.99 1313.54 1762.33 1153.57

145.59 41.40 886.45 277.03 7.43 1357.90 1771.16 1169.62

Less: CURRENT LIABILITIES

388.90 681.00 29.41

497.00 1054.60 46.80 181.52

628.61 1338.49 62.90 266.51

847.32 1621.60 -11.83 381.65

985.97 1877.87 -12.80 444.71

1032.55 2084.14 72.11 539.82

1268.78 1452.18 -15.03 718.18

1153.57 1375.95 159.97 746.79

1169.62 1420.23 188.28 842.15

4. a. Miscellaneous Expenditure b. Profit and Loss -29.60 Account debit balance Current Ratio (Current Assets/Current liabilities) Note - Higher 1.08 the ratio the greater the short term solvency Debt - Equity ratio (Debt / Equity) Note4.89 The lower the ratio, the higher the degree of protection enjoyed by

1.09

1.10

0.99

0.99

1.07

0.99

1.14

1.16

8.62

10.83

11.82

13.59

16.02

17.21

18.65

19.86

173

Financial Year Ending March31 the creditors Debt ratio (Debt / Assets) Quick ratio (Current assets inventories/current liabilities) Return on Net Worth (PAT/Share capital + Reserves and surpluses)

1998-99 0.32 0.95

1999-00 0.51 0.99

2000-01 0.55 1.03

2001-02 0.52 0.94

2002-03 0.51 0.94

2003-04 0.55 1.02

2004-05 0.53 0.94

2005-06 0.58 1.10

2006-07 0.61 1.13

-0.22

1.28

1.77

2.42

2.64

2.91

3.35

3.10

3.33

Table- 43 Balance Sheet of NESCO

Financial Year 1998-99 Ending March31 A. SOURCES OF FUNDS 1. Shareholder's Funds Share Capital Reserves and Surpluses Total 2. Loan Funds Secured Loans Unsecured loans Total Loans 3. Other Funds Consumer's Security Deposit Capital Contribution from consumers Total Funds 28.19 45.99 245.17 29.25 47.65 288.42 31.60 50.30 469.17 45.72 55.17 539.03 47.15 59.72 596.48 57.60 74.19 650.20 74.31 93.40 686.10 102.79 110.31 927.95 128.30 130.94 826.49 168.89 164.10 866.60 105.07 105.07 141.25 315.95 347.18 65.91 0.01 65.92 65.91 4.36 70.27 141.25 65.91 5.41 71.32 315.95 65.91 25.05 90.96 347.18 65.91 36.34 102.25 387.17 0.19 387.36 65.91 45.36 111.27 406.93 0.21 407.14 65.91 52.39 118.30 399.87 0.22 400.09 591.46 442.06 405.67 65.91 57.48 123.39 591.46 65.91 59.28 125.19 442.06 65.91 62.03 127.94 405.67 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (Rs. In crores)

B. APPLICATION OF FUNDS 1. FIXED ASSETS Gross Block Less Accumulated depreciation Net Block Cap. Expd. in progress 2. Investments 239.58 53.77 185.81 39.65 280.68 53.77 226.91 41.85 307.51 53.77 253.74 56.54 338.14 53.77 284.37 62.97 368.69 53.77 314.92 72.32 397.32 53.77 343.55 77.41 452.31 129.51 322.80 53.01 482.51 147.07 335.44 49.50 513.24 165.65 347.59 42.69 545.74 185.51 360.23 51.58

3. CURRENT ASSETS, LOANS AND ADVANCES Cash and Bank 10.60 12.08 13.92 Balances Stores and 2.56 3.76 3.43 Spares Sundry Debtors 45.37 72.83 88.57 Loans and 186.19 182.16 25.88 Advances Total Current 244.72 270.83 131.80 Assets

16.18 2.35 128.59 17.65 164.77

27.09 2.08 121.47 27.15 177.79

12.00 3.31 131.10 26.14 172.55

30.28 3.27 131.92 27.58 193.05

68.12 2.34 171.83 32.67 274.96

106.45 2.52 147.94 42.99 299.90

197.30 3.05 140.12 49.13 389.60

174

Financial Year 1998-99 Ending March31 TOTAL ASSETS 470.18 Less: CURRENT LIABILITIES Current Liabilities Provisions 64.47 160.54

1999-00 539.59 185.68 162.15 347.83 442.99 -77.00 96.66 288.42 0.78

2000-01 442.08 171.40 3.80 175.20 272.71 -43.40 202.29 469.17 0.75

2001-02 512.11 338.39 4.68 343.07 454.70 -178.30 369.99 539.03 0.48

2002-03 565.03 434.53 38.41 472.94 586.19 -295.15 504.39 596.48 0.38

2003-04 593.51 473.46 54.19 527.65 651.37 -355.10 584.34 650.20 0.33

2004-05 568.86 490.78 73.22 564.00 704.44 -370.95 681.24 686.10 0.34

2005-06 659.90 288.57 101.45 390.02 558.72 -115.06 658.07 927.95 0.70

2006-07 690.18 382.67 127.05 509.72 703.93 -209.82 646.03 826.49 0.59

2007-08 801.41 391.54 167.12 558.66 793.46 -169.06 623.85 866.60 0.70

Total current 225.01 liabilities TOTAL 424.18 LIABILITIES Net Current 19.71 Assets 4. a. Miscellaneous Expenditure b. Profit and Loss 0.00 Account debit balance Total Current Ratio (Current Assets/Current liabilities) Note Higher the ratio the greater the short term solvency Debt - Equity ratio (Debt / Equity) Note- The lower the ratio, the higher the degree of protection enjoyed by the creditors Debt ratio (Debt / Assets) Quick ratio (Current assets inventories/current liabilities) Return on Net Worth (PAT/Share capital + Reserves and surpluses) 1.09

1.59

2.14

4.79

5.27

5.88

6.18

6.07

8.97

6.71

6.15

0.21 1.08

0.24 0.77

0.63 0.73

0.60 0.47

0.61 0.37

0.61 0.32

0.64 0.34

0.83 0.70

0.60 0.58

0.48 0.69

0.00

1.38

2.84

4.07

4.93

5.25

5.76

5.33

5.16

4.88

Table- 44 Balance Sheet of WESCO

Financial Year Ending March31 A. SOURCES OF FUNDS 1. Shareholder's Funds Share Capital Reserves and Surpluses Total 2. Loan Funds Secured Loans Unsecured loans Total Loans 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 (Rs. In crores) 48.65 48.94 97.59 381.16 381.16 48.65 53.30 101.95 383.89 383.89 2005-06 2006-07 2007-08

48.60 0.21 48.81

48.60 10.92 59.52 193.26

48.60 12.06 60.66 293.90 293.90

48.60 31.50 80.10 314.70 314.70

48.60 40.35 88.95 345.14 5.99 351.13

48.65 69.45 118.10 527.58 527.58

48.65 71.34 119.99 423.21 423.21

48.65 67.80 116.45 392.08 392.08

143.10 143.10

193.26

175

Financial Year Ending March31 3. Other Funds Consumer's Security Deposit Capital contributions from consumers Total Funds B. APPLICATION OF FUNDS 1. FIXED ASSETS Gross Block Less Accumulated depreciation Net Block Cap. Expd. in progress 2. Investments Total 3. CURRENT ASSETS, LOANS AND ADVANCES Cash and Bank Balances Stores and Spares Sundry Debtors Loans and Advances Total Current Assets TOTAL ASSETS Less: CURRENT LIABILITIES Current Liabilities Provisions Total current liabilities Net Current Assets 4. a. Miscellaneous Expenditure b. Profit and Loss Account debit balance Total Current Ratio (Current Assets/Current liabilities) Note - Higher the ratio the greater the short term solvency Debt - Equity ratio (Debt / Equity) Note- The lower the ratio, the higher the degree of protection enjoyed by the creditors Debt ratio (Debt / Assets) Quick ratio (Current assets -inventories/current liabilities) Return on Net Worth (PAT/Share capital + Reserves and surpluses)

1998-99 48.40 47.40 287.71

1999-00 56.02 49.04 357.84

2000-01 62.73 51.38 468.67

2001-02 72.40 53.00 520.20

2002-03 92.05 57.17 589.30

2003-04 106.34 64.01 649.10

2004-05 133.80 73.53 693.17

2005-06 144.12 83.44 873.24

2006-07 164.87 99.02 807.09

2007-08 234.37 112.59 855.49

252.20 56.27 195.93 74.87 270.80 11.63 0.48 53.89 198.90 264.90 535.70 74.34 173.65 247.99 16.91

305.51 56.27 249.24 67.11 316.35 13.65 2.36 86.96 204.93 307.90 624.25 151.70 175.96 327.66 -19.76

325.41 56.27 269.14 79.69 348.83 11.45 2.46 127.75 31.37 173.03 521.86 221.82 2.92 224.74 -51.71

343.60 56.30 287.30 78.20 365.50 25.10 2.40 154.80 190.60 372.90 738.40 342.40 176.40 518.80 -145.90

364.97 56.27 308.70 87.41 396.11 40.85 2.51 168.60 23.95 235.91 632.02 365.99 29.27 395.26 -159.35

400.09 56.27 343.82 72.28 416.10 50.46 6.00 145.87 24.89 227.22 643.32 346.77 44.78 391.55 -164.33

471.84 133.46 338.38 40.48 378.86 68.21 2.62 155.51 24.89 251.23 630.09 331.48 32.28 363.76 -112.53

495.36 151.39 343.97 44.51 388.48 73.36 2.45 105.82 133.89 315.52 704.00 229.04 51.57 280.61 34.91

517.57 170.18 347.39 43.67 391.06 110.81 2.17 112.34 163.32 388.64 779.70 248.86 141.79 390.65 -2.01

542.36 189.86 352.50 34.19 386.69 157.38 2.14 151.63 216.72 527.87 914.56 367.85 158.93 526.78 1.09

0.00 287.71

61.25 357.84

171.55 468.67

300.60 520.20

352.54 589.30

397.33 649.10

426.84 693.17

449.85 873.24

418.04 807.09

467.71 855.49

1.15

1.16

10.74

1.08

0.82

0.56

0.77

1.26

1.26

1.26

2.94 0.56 1.07 0.00

3.98 0.74 0.93 1.03

6.05 3.35 0.76 2.83

6.48 1.27 0.71 3.75

7.22 4.38 0.59 3.96

7.83 4.70 0.56 4.07

7.89 2.42 0.68 4.19

1.25 0.56 1.12 3.81

1.25 0.56 0.99 3.48

1.25 0.56 1.00 4.02

176

Table- 45 Balance Sheet of SOUTHCO

Financial Year Ending 1998-99 March31 A. SOURCES OF FUNDS 1. Shareholder's Funds Share Capital 37.66 Reserves and Surpluses 0.05 Total 37.71 2. Loan Funds Secured Loans Unsecured loans 131.60 Total Loans 131.60 3. Other Funds Consumer's Security 23.87 Deposit Capital contributions from 43.77 Consumers Total Funds 236.95 B. APPLICATION OF FUNDS 1. FIXED ASSETS Gross Block 225.00 Less Accumulated 49.91 depreciation Net Block 175.09 Cap. Expd. in progress 46.59 2. Investments Total 221.68 3. CURRENT ASSETS, LOANS AND ADVANCES Cash and Bank Balances Stores and Spares Sundry Debtors Loans and Advances Total Current Assets TOTAL ASSETS Less CURRENT LIABILITIES Current Liabilities Provisions Total current liabilities Net Current Assets 4. Miscellaneous Expenditure b. Profit and Loss Account debit balance Total Current Ratio (Current Assets/Current liabilities) Note - Higher the ratio the greater the short term solvency Debt - Equity ratio (Debt / Equity) Note- The lower the ratio, the higher the degree of protection enjoyed by the creditors 8.71 4.61 91.45 174.94 279.71 723.07 96.92 167.52 264.44 15.27 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (Rs. In crores) 37.66 6.99 44.65 177.41 177.41 24.92 45.20 292.18 262.51 49.90 212.61 58.75 271.36 37.66 7.97 45.63 309.39 309.39 28.71 47.35 431.08 276.32 49.90 226.42 69.50 295.92 37.66 26.37 64.03 325.90 325.90 35.95 49.54 475.42 295.57 49.90 245.67 75.08 320.75 37.66 33.39 71.05 360.86 2.07 362.93 38.78 55.32 528.08 303.22 49.90 253.32 93.24 346.56 37.66 40.92 78.58 405.54 1.21 406.75 44.07 62.50 591.90 315.82 49.90 265.92 98.01 363.93 37.66 46.64 84.30 403.65 0.86 404.51 48.31 72.50 609.62 355.60 114.94 240.66 78.82 319.48 37.66 51.48 89.14 370.71 370.71 51.50 84.32 595.67 369.49 128.56 240.93 84.63 325.56 37.66 52.9 90.56 340.58 1.7 342.28 55.48 90.39 578.71 380.59 142.73 237.86 85.63 323.49 37.66 53.29 90.95 299.73 299.73 61.75 97.22 549.65 399.50 157.36 242.14 73.64 315.78

11.09 1.69 66.53 173.93 253.24 795.96 147.40 168.09 315.49 (62.25)

14.90 4.18 68.58 19.74 107.40 699.24 134.48 15.03 149.51 (42.11)

3.32 19.49 70.65 10.23 103.69 745.19 186.99 19.29 206.28 (102.59)

11.08 2.88 59.97 6.06 79.99 773.11 205.03 31.23 236.26 (156.27)

12.04 3.45 39.40 7.11 62.00 789.86 194.85 48.56 243.41 (181.41)

17.53 0.70 32.30 4.94 55.47 694.43 208.72 60.98 269.70 (214.23)

23.24 0.28 38.44 5.25 67.21 718.33 264.73 70.64 335.37 (268.16)

35.14 2.51 26.06 5.65 69.36 716.34 351.18 80.84 432.02 (362.66)

38.72 1.36 26.85 7.28 74.21 705.77 343.63 139.91 483.54 (409.33)

0.00 236.95 1.06

83.07 292.18 0.80

177.27 431.08 0.72

257.26 475.42 0.50

337.79 528.08 0.34

409.38 591.90 0.25

504.37 609.62 0.21

538.27 595.67 0.20

617.88 578.71 0.16

643.20 549.65 0.15

3.49

4.71

8.22

8.65

9.64

10.80

10.74

9.84

9.09

7.96

177

Financial Year Ending March31 Debt ratio (Debt / Assets) Quick ratio (Current assets -inventories/current liabilities) Return on Net Worth (PAT/Share capital + Reserves and surpluses)

1998-99 0.29 1.04 0.00

1999-00 0.38 0.80 1.86

2000-01 0.93 0.69 3.88

2001-02 0.93 0.41 4.02

2002-03 1.09 0.33 4.75

2003-04 1.24 0.24 5.21

2004-05 1.37 0.20 5.98

2005-06 1.20 0.20 6.04

2006-07 1.11 0.15 6.82

2007-08 0.95 0.15 7.07

Table - 46 Comparison of Percentage composition of common size Balance Sheet of DISCOMs

SOUTHCO 1998-99 2007-08 Funds Capital Reserves and others Long term loans Current Liabilities Total Liability Assets Fixed Assets Current Assets Accumulated loss Total Assets 13 57 30 100.00 70 30 100.00 24.19 29.01 46.80 100.00 30.56 7.18 62.25 100.00 NESCO 1998-99 2007-08 13 50 37 100.00 63 37 0 100.00 32.34 28.46 39.20 100.00 28.89 27.34 43.77 100.00 WESCO 1998-99 2007-08 18 50 32 100.00 67 33 100.00 33.52 28.37 38.11 100.00 27.97 38.19 33.84 100.00 CESU 1998-99 2007-08 13 47 40 100.00 60 40 100.00 17.34 42.56 40.10 100.00 13.60 50.63 35.76 100.00

From the analysis of the balance sheet it is found that the Sundry debtors have been increasing year after year reflecting arrears accumulating due to noncollection of electricity dues. OERC allows 2% as bad debt from the billing revenue but DISCOMs have not been able to collect what they bill to the consumers. Although collection efficiency has increased after privatization still then the arrears in electricity revenue have been accumulating year after year due to higher sales to LT consumers (Domestic and Commercial category) in absolute terms. Hence, the balance sheet shows the real picture vis--vis the improvement in collection efficiency as discussed in preceding paragraphs. There has been no investment in the electricity network by the shareholders causing lot of strain on the same resulting poor quality of service. Stores and inventories have been showing declining trend in spite of Consumers security deposit has increased manifold after privatization which has helped the DISCOMs to over come liquidity problem due to less in flow of revenue resulting from poor billing efficiency. The Capital contribution from consumers has increased also considerably due to addition of huge network by rapidly growing consumer base. Current liabilities such as payment of power purchase dues to GRIDCO have also increased considerably as seen from the balance sheet. Although DISCOMs have been able to pay the monthly power purchase dues to GRIDCO from FY 2004-05, the arrear still persists which the DISCOMs are unable to pay. This has happened due to payment security mechanism such as creation of Escrow account in banks in which all the revenue of the DISCOMs are deposited. After GRIDCO adjusts its current dues from the DISCOMs nothing is left in the said account for DISCOMs to manage their affair. Every month DISCOMs request GRIDCO to relax the Escrow mechanism for their day to day expenditure such as salary of the staff and A&G expenditure etc. Due to operational inefficiency DISCOMs have eroded their equity base. The net worth of DISCOMs have become negative. 178

Current ratio of all the DISCOMs have shown downward trend at the same time Debt Equity ratios have shown up ward trend indicating the poor loan arrangement capability of DISCOMs. Percentage of accumulated loss of DISCOMs have been increasing year after year and SOUTHCO has accumulated the highest percentage of loss and among the DISCOMs. In addition to this the income and expenditure statement shows a negative gap year after year to confirm this. From the above analysis it can be inferred that although DISCOMs have been made structurally viable but they have become financially unviable due to operational inefficiency and mismanagement. This operational inefficiency can be particularly loss of revenue due to huge amount of distribution loss.
5.4

Accounting Profit and Loss Account of Power Sector of Orissa as a Whole Table 47 Accounting Profit and Loss Account of Power Sector of Orissa as a Whole (Rs. In Crore)
1996 97 199798 66.15 77.79 -319.11 199899 112.8 55.21 -578.61 199900 124.39 50.38 13.73 -181.5 -96.66 -61.3 -83.05 -120.54 -175.17 -410.6 -234.01 200001 109.88 -27.44 -85.24 -85.01 -105.64 -110.3 -94.24 -397.99 200102 132.22 -3.89 74.5 -115.15 -167.68 -129.05 -79.98 -289.03 200203 181.7 -41.92 -598.08 -63.47 -134.41 -51.95 -80.54 -788.67 200304 136.23 6.17 417.77 -95.11 -79.91 -44.77 -71.57 268.81 200405 143.39 64.08 357.38 -178.37 -96.94 -29.56 -95 164.98 200506 153.37 -22.96 25.82 -24.95 -28.59 23.17 22.94 -33.54 115.26 200607 161.91 60.98 236.88 -9.06 -95.33 12.04 31.83 -79.13 320.12 200708 168.69 137.10 566.05 -15.22 -85.36 22.18 -25.95 -25.78 608.21 200809 111.32 NA 98.14 -28.53 NA -2.22 10.59 -37.66 151.64

OPGC OHPC GRIDCO OPTCL CESU NESCO WESCO SOUTHCO Total

104.6 69.85 -294.99

Source: Orissa Electricity Regulatory Commission (Power Sector Reform In Nut Shell) From the above profit and loss account of power sector of Orissa as a whole it can be seen that the sector has turned around from the year 2003-04 onwards. This has been made possible due to profit of GRIDCO and power generators like OHPC and OPGC in spite of poor performance of DISCOMs. GRIDCO has made profit after the year 2003-04 due to trading of surplus power and income due to Unscheduled Interchange (UI). But the power surplus scenario has changed recently and the State is moving towards power deficit due to rapid industrialization and non-addition of capacity in generation. 5.5 What Is Availability Based Tariff (ABT)? Tariff in the Power Sector is defined as the rate of charge per Kilowatt hour of Energy supplied to a consumer/beneficiary. The tariff is generally framed/ designed so as to ensure attractive return on capital investment in a power project over a certain period of time (Annual Tariff & MYT). Tariff in Indian Power Sector has undergone the following structural changes as shown in the Diagram given below :

179

Single Part Tariff

Two Part Tariff

ABT

Price Discovery Through PX

Market based Competitive Tariff

The term Availability Based Tariff in Indian Power Sector, stands for a rational tariff structure for power supply from generating stations on a contractual basis. In Availability Based Tariff mechanism, the fixed and variable cost components are treated separately. The payment of the fixed cost to the generating company is linked to the availability of the plant i.e its capability to deliver MWs, on a day-by-day basis. The total annual fixed charges payable to the generating company depends on the cumulative average availability (MW delivery capability) of the plant over the year. In case the cumulative average availability actually achieved over the year is higher than the normative plant availability, the generating company gets a higher payment. In case, the cumulative average availability achieved is lower, the payment is also lower. Hence, the name is appropriately termed as Availability Tariff. The fixed charges are the first element/ component of Availability Based Tariff and is termed as Capacity Charge. The second component/element of Availability Based Tariff is the energy charges which comprises of the variable Cost (i.e fuel cost) of the power plant for generating energy as per the given schedule in 96 time blocks (in each 15 minute time block) for the day ahead. It is specifically noted here that energy charge is not based on actual generation and plant output but on scheduled generation (Exp: If a Power plant delivers 400 MW against the schedule to supply 350 MW, the energy charges will be paid for scheduled generation of 350 MW but not on actual generation/ delivery of 400 MW and the excess generation (50 MW) would get paid at a rate or penalty to be paid dependent on system frequency prevailing at the time). The third component of the Availability Based Tariff is payment for Unscheduled Interchange (UI) which takes care of payment for deviation from the schedule at a rate dependent on system frequency. This is the element which has brought discipline to the system. The salient features of Indian version of ABT are : ABT consists of three parts o Capacity Charges o Energy Charges o Unscheduled Interchange (UI) charges.

180

Merits of ABT o Facilitating grid discipline o Facilitating merit order operation (economic generation) o Facilitating bilateral trading in both capacity and energy. Facilitating Auto Power trading/deem trading through UI. o Benchmarking the Trading Price with the grid frequency varying from Rs.17.46/ KWh to zero price compelling the Electricity Market to recognize the hours of high demand /low demand in the grid as well as to avoid the stiff penalty. Price Mechanism of ABT o Fixed Cost Plant Availability for Thermal & Nuclear & Capacity Charge plus Primary energy charge. o Variable Cost Scheduled Energy for Thermal & Nuclear only. o Deviation Unscheduled Interchange (UI) attracting frequency-linked charges. o UI- Difference between Scheduled generation and Actual Generation. o Recovery of full (100%) fixed charges at Target Availability of 85% for Thermal & Capacity Index of 85% for Run-off- River Hydel Plants with storage and pondage. o Incentive at the rate of 25 paise / KWH provided scheduled generation exceeds the target generation level of 85% for the corresponding power plant for Thermal and Nuclear Power Plant. Incentive paid to all hydel stations when Capacity Index is above 85% for Run-off-River Plant with storage and pondage upto 100%. Comparison of Different Tariff Models Table 48 Comparison of Different Tariff Models Item Single-part - Tariff Two-part-Tariff ABT Full fixed cost 62.8% 62.8% 85% (at PLF) FC Recovery Energy Drawn Energy Drawal Capacity allocation VC Recovery Actual Energy Actual Energy Scheduled Energy Incentive Linear at the same Above 68.5% @ 1 Above 85% @ 25 p/kwh rate over 62.8% paisa for every 1% increase in PLF Disincentive Linear at the same Graded reduction Prorate below 85% rate over 62.8% in fixed charges, 50% at zero PLF UI Nil Nil Payable/recoverable depending on system frequency How is ABT different from normal proceedings to determine generation tariff? The ABT proceeding has not attempted to consider most of the cost drivers like ROE, Operational Costs, depreciation rate, composition

181

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. 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. UI charges are payable/ receivable for the following four identifiable grid in disciplines: A generator generates more than the schedule thereby increasing frequency. A generator generates less than the schedule thereby decreasing frequency. A beneficiary over-draws power thereby decreasing the frequency. A beneficiary under-draws power thereby increasing the frequency. Variation in actual generation / drawal and scheduled generation/ drawal are accounted for through UI. UI is worked out for 15 minute time block. Charges for all UI Transactions are based on Average Frequency of the time block and the following rates are being followed w.e.f. 3rd May,2010 as per CERC Notification dtd.28.04.2010 Table 49 UI Rate UI rate (Paise/Kwh)Linear in 0.02 HZ step Av. Frequency of time block w.e.f 03.05.2010 (i) 50.20 HZ and above 0.00 (ii) Below 50.20 HZ & upto 49.70 @15.50 (iii) Below 49.70 HZ & upto 49.50 @47.00 (iv) Below 49.50 HZ & upto 49.20 @873.00 plus penalty (v) Below 49.20 HZ @873.00 plus penalty with stringent conditions The UI charges received by GRIDCO in FY 2007-08 is presented in the figure below.UI accounts are settled on weekly basis Graph- 18
UI RECEIVED DURING FY 2007- 08
8000 7000 6000

U I in L akh s

5000 4000 3000 2000 1000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

WEEK

182

The figure below depicts how GRIDCO has earned from UI (Unscheduled Interchange) charges over the last 5 years.This shows GRIDCO has managed its drawl of power well by earning UI charges and injecting surplus power when frequency is low. Graph 19

YEAR WISE UI CHARGES RECEIVED BY GRIDCO

100000 80000 60000 40000 20000 0 UI(Lakhs)

2003-04 16945.10

2004-05 8394.80

2005-06 9324.43

2006-07 49479.07

2007-08 95305.62

5.6

Electricity Tariff: It may be mentioned here that there was frequent tariff revision during pre-reform period. There was also overall tariff rise of 17% during 1996-97, 10.33% in 199798, 9.3% in 1998-99, 4.5% in 1999-2000 and 10.23% in 2000-01. After 2000-01 the retail tariff has remained more or less constant with minor changes here and there. If we consider the price rise it would be seen that the effective real rise in tariff has been of the order of (-) 26.24%. This means the tariff rise as approved by the OERC is much less as compared to the rise in general prices which is evident from the table and graph given in the next paragraph. Table - 50 Tariff Rise vis-a-vis Inflation (Wholesale Price Index) 1993-94 28.58% (State Govt.) 1994-95 15.73% (State Govt.) Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Increase in Average Tariff 17.47% (State Govt.) 17.00% (State Govt.) 10.33% 9.30% 4.50% 10.23% 0.00% 0.00% 0.00% 0.00% 183 Increase in WPI 19.30% 6.45% 4.80% 6.84% 3.02% 7.16% 3.60% 3.41% 5.46% 6.48%

Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Increase in Average Tariff -0.37% 0.00% 0.12% -0.64% 0.00% 22.20% Graph - 20

Increase in WPI 4.43% 5.37% 4.75% 8.34% 3.36% (Average From 4/09 to 2/10) 5.50% (assumed)

WPI Vrs Tariff Rise (Base 1993-94 = 100)

20.0% 16.0% 12.0%
1 9.30% 1 7.00% 1 7.00% 1 0.23% 9.30%

1 0.33% 6.84% 4.50%

1 0.23% 8.34% 6.48% 5.37% 4.75% 0.1 2% 0.00% -0.64% 3.36% 0.00% 5.50%

%age

8.0% 4.0% 0.0%

6.45%

7.1 6%

5.46%

4.80% 3.02%

3.60%

4.43% 3.41 % 0.00% 0.00% 0.00% -0.37%

-4.0%
1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201096 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Financial Year

Increase in Average Tariff

Increase in Price Index

Comparative tariff of Industrial consumers across the States. Graph - 21

** Tariff for an embedded consumer of 5MW at 11KV (33KV in some cases) which shows electricity tariff in Orissa is one of the lowest in the Country. (Source Economic Survey of India - 2008-09) 184

5.7

Cross Subsidy in Tariff In terms of Section 61 (g) of Electricity Act, 2003 the appropriate Commission shall be guided by the objective that the tariff progressively reflects the efficient and prudent cost of supply of electricity. Section 61 (i) of the same Electricity Act, 2003 provides that while determining tariff Electricity Regulatory Commissions shall be guided by National Electricity Policy and National Tariff Policy. Govt. of India has notified National Tariff Policy in the year 2006 as per Section 3 of the Electricity Act, 2003. As per para 8.3.2 of National Tariff Policy for achieving the objective that tariff progressively reflects the cost of supply of electricity, the SERC would notify road map within 6 months with a target that latest by the end of year 2010-11 tariffs are within 20% of the average cost of supply. For example, if the average cost of service is Rs.3 per unit, at the end of year 2010-11 the tariff for the cross subsidized categories excluding those referred to in Para 1 above should not be lower than Rs.2.40 per unit and that for any of the crosssubsidizing categories should not go beyond Rs.3.60 per unit. In other words the difference between tariff a consumer pays and the cost of supplying electricity to that consumer is the cross subsidy amount which the consumer bears. OERC has taken several steps to rationalize tariff which means tariff in a particular category of supply voltage is uniform. Therefore, the consumers in a particular supply voltage pay equal charges for equal consumption. This has led to reduction of cross subsidy between categories as envisaged in National Tariff Policy notified by Govt. of India and followed by different SERCs including OERC. OERC has tried to make the tariff cost reflective as per the mandate of the reform and subsequent Acts, Regulation and National Tariff Policy. In practical terms this has meant designing tariff in such a manner that the average realization from each category converges with the overall average realization. To measure the extent to which this has been done TERI (The Energy Resource Institute, New Delhi) has developed the following index. CI (Convergence Index) = { N C=1 [(ARc / ARo)-1]2/N} Where ARc = Average realization from category C ARo = Overall Average Realisation N = No. of categories This implies that if the average realization from each category equals the overall average realization then CI would be zero, indicating that no category of consumers cross subsidizes another with reference to the average realization. Therefore, a reduction in the CI is an indicator of a reduction in the cross subsidy. In Orissa the electricity tariff is fully rationalized basing on three voltage level of supply such as LT, HT and EHT. That means the consumers in a particular voltage level of supply pay uniform tariff for electricity they use. For example EHT consumers like FACOR, TATA Steel etc. pay an uniform tariff regardless of their contract demand or purpose for which they use electricity. Therefore, the value of the symbol N in the above formula is 3 as the consumers in Orissa can be broadly categorized into three categories such as LT, HT and EHT.

185

Table 51 Calculation of Convergence Index

Year Sold (MU) EHT HT LT TOTAL Collection (Rs in Cr.) EHT HT LT TOTAL Collection (P/U) EHT (ARC) HT (ARC) LT (ARC) OVERALL AVG (ARO) CI 2002-03 2,126.79 1,195.96 3,409.02 6,731.77 654.14 424.04 511.99 1,590.17 307.57 354.56 150.19 236.22 0.40 2003-04 2,424.87 1,254.00 3,393.25 7,072.12 688.48 434.28 601.28 1,724.04 283.92 346.32 177.20 243.78 0.30 2004-05 2,546.96 1,671.90 3,379.82 7,598.68 701.25 573.08 670.74 1,945.07 275.33 342.77 198.45 255.97 0.24 2005-06 2,370.82 2,250.59 3,522.82 8,144.23 729.84 745.07 705.92 2,180.83 307.84 331.05 200.38 267.78 0.22 2006-07 2,968.12 2,720.98 3,599.13 9,288.23 930.46 892.92 738.92 2,562.30 313.48 328.16 205.31 275.87 0.20 2007-08 3,851.84 2,999.92 3,907.85 10,759.61 1,214.25 1,014.10 796.86 3,025.21 315.24 338.04 203.91 281.16 0.21 2008-09 4,499.24 2,972.22 4,261.00 11,732.46 1,484.36 1,028.88 851.92 3,365.16 329.91 346.17 199.93 286.82 0.23

Graph - 22

Convergence Index ( C I )
0.50 0.40 0.40 0.30 0.30 0.20 0.10 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0.24 0.22 0.20 0.21 0.23

In the present environment the Commission would have preferred to use embedded cost approach for cost of service determination. However, it is not possible to obtain basic embedded cost details due to over lapping of common services between licensees and consumers of different voltage of supply. Under these circumstances the Commission based tariffs, in a phased manner, on the average cost of supply approach and has continued with this approach in the current tariff order also. As a result of this approach there has been a reduction in the extent of cross subsidization over time. This has been measured as the gap between the average realization from a category and overall average realization of supply from all the consumers as a ratio. Hence, change in the average convergence index shown above indicates reduction in the level of cross-subsidies in tariffs. 186

5.8

Subsidy by the Government Orissa Government has stopped paying any subsidy to this power sector after the initiation of power sector reform. Just before the reform Government had been paying subsidy to the tune of Rs.250 cr per annum before reform which means Government has saved more than Rs.3000 cr. during these years in stead the Government has collected electricity duty from consumption of electricity from this sector which is given in the table below:
Table -52 Collection of Electricity Duty from 1994-95 to 2009-10 Year Collection (Rs. Cr.) Year Collection (Rs. Cr.) 1995-96 121.35 2003-04 200.43 1996-97 120.06 2004-05 261.89 1997-98 127.73 2005-06 353.13 1998-99 110.13 2006-07 282.58 1999-00 127.21 2007-08 327.46 2000-01 146.71 2008-09 * 359.38 2001-02 136.96 2009-10 (BE) 410.00 2002-03 172.17 Total 3257.19 * Provisional

In other words Government of Orissa has earned more than Rs.6000 crs in shape of electricity duty and saving in payment of subsidy due to power sector reform till date. This amount of money has been invested in other welfare sector like health and education which is a big contribution of power reform. 5.9 Franchisee Operation in Distribution As per Section 4 and 5 of the Electricity Act, 2003 Central Government has notified Rural Electrification Policy on 23rd August, 2006 for Rural Electrification and for Bulk Purchase of Power and Management of Local Distribution in rural areas through Panchayat Institutions, Users Associations, Co-operative Societies, Non-Governmental Organizations or Franchisees. Section 2 (27) of the above Act also defines Franchisee which means a person authorized by a distribution licensee to distribute electricity on its behalf in a particular area within his area of supply. As per Para 9.5 of Rural Electrification Policy deployment of franchisees for management of local distribution in rural areas is considered necessary in order to ensure revenue sustainability and improve services to the consumers. Franchisee agreement is not revenue model per se but it is envisaged as a mechanism to ensure that commercial losses are reduced, energy supplied is billed and revenue is collected. Franchisees for the management of rural distribution could be NonGovernmental Organizations (NGOs), Users Associations, Co-operatives or Individual Entrepreneurs. Panchayati Raj Institutions will have an important role of overseeing in advisory capacity, the delivery of service by franchisees according to their identified responsibilities. The franchisees are not required to obtain a license from the State Commission under 7th Proviso of Section 42 of the Electricity Act, 2003.

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The Franchisee operation in the loss prone area can be depicted by the figure below:

Licensee Operated Area

Loss prone Area such as Rural Area

Franchisee in Loss prone area

DISCOMs before Franchisee Operation

DISCOMs after Franchisee Operation

OERC vide Case No. 47, 57, 58, 59, 60 and 61 dtd.23.03.2007 has directed in Para 7.24.4 as follows: Commercial loss is a matter of great concern. Its reduction can make the sector self sustainable and reduction of theft can be possible only with public participation particularly in rural areas. We are of the firm view that participation of panchayats as franchisee for distribution licensees for billing, collection and loss reduction could be put to effective use. For that purpose we may have to give preference to the Gram Panchayats giving them an incentive for reduction of loss and improvement of collection efficiency. The licensees should come forward with an appropriate action plan within the next two months about the engagement of franchisee in their respective areas after due consultation with various authorities. WESCO model happens to be a good model for introduction of franchisee throughout the State giving the liberty to select a franchisee operator giving preference to the concerned Gram Panchayats. 5.9.1 Benefits of Franchisee System Franchise business in distribution of electricity provides a win-win situation for both the parties. The following advantages can be derived from such an arrangement. (a) Local problems like energy theft, long standing collusion between staff of DISCOMs and the consumers and political influence can be avoided (b) Outsourcing of special expertise, knowledge at a competitive price (c) Understanding the requirements of consumer closely and delivering the required services; thus bridging the gap between the two leading to better consumer satisfaction (d) Reduction of T&D losses and accumulated arrears. (e) Risk can be shared between two parties; responsibility & obligations can be assigned between two parties through proper Service Level Agreements (SLAs). (f) Development of feeling of ownership. (g) Generation of employment; development of villages and villagers.

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5.9.2 Different models of Franchisee DISCOMs of Orissa have considered different models of Franchisee System and introduced the model suitable for them. The different models are as follows: (a) Input Based Distribution Franchisee (IBDF) (b) Revenue Based Distribution Franchisee (RBDF) (c) Input Based Distribution Franchisee with Investment (IBDFI) (d) Involvement of Local Communities in Franchisee Operations (e) Women Self Help Groups (SHGs) as Franchisee (f) Franchisee Operating involving Ex-serviceman From the above classification of the Distribution Franchisee it can be seen that the first two models mentioned above are basic models and others are derivatives of them. Now we discuss basic features of first two models. (a) Input based Distribution Franchisee (IBDF) Franchisees buy power at a pre-determined rate from utility and collect the amount from the consumers as per the tariff orders of OERC. Utility will be paid at an agreed rate per unit (based on last one year realization) for the input energy every month by the Franchisee. The input rate per unit implies the realization amount of input energy. The realization amount is exclusive of Electricity Duty, Cess, Arrears and other adjustments, if any. The input rate will be revised over the period at a rate agreed both by utility & franchisee. Franchisees earning is the difference amount of collections made from consumers and input energy charges paid to utility. Input charges are decided logically based on the last years performance figures. Responsibilities of Input Based Franchisees Meter Reading, Bill generation and distribution Collection of revenue Credit control through disconnection of defaulters Consumer grievance redressal through customer care center Carrying out necessary works to release new connection Replacement or installation of new or defective meters of the consumer Regularization of unauthorized consumers Collection of disconnected / connected arrears Resolving long dispute cases thereby reducing arrears Responsibilities of the Licensees/Utilities Availability of Power Supply Installation of meters at Input Points Existing manpower to be retained for line maintenance Providing consumer meters for 100% actual billing New connection sanction order Providing support in accordance with the Electricity Laws to prevent theft of power

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 (b)

Replacement of defective feeder and transformer meters Maintenance of sufficient rolling stock of transformer at current failure rate Carrying out the network augmentation work Manpower support during initial survey Use of licensees facilities like building & telephone Payment of Incentives to franchisee

Revenue Based Distribution Franchisee (RBDF) Franchisee will be responsible for collection of 100% of billing and ensure that all the consumers in its territory are covered for meter reading, bill distribution and collection. Responsibilities of RBDF The responsibility of RBDF is as follows: will be responsible for collection of revenue from all the LT consumers. should deposit the money collected from the consumers on the same day or the next working day to the designated office of the licensee. will do the meter reading, billing and bill distribution using Spot Billing Machines (SBMs) for the assigned consumers along with revenue collection will coordinate with licensee for metering of consumers, feeders and distribution transformers will play a pivotal role in checking power theft and help licensee in taking appropriate action will collect all consumer complaints and pass them on to licensee. He will also coordinate the solving of the consumer complaints. will also coordinate the issue of new connections and regularizations. may be assigned additional responsibilities by licensee for which separate remuneration will be worked out from time to time.

Remuneration to RBDF: The remuneration methodology may consist of the following components: Payment of a fixed sum for executing routine commercial activities like meter reading & bill distribution by using SBMs ( A) Payment of the franchisee margins (which will be a percentage of collections) on achievement of the target (B) Levy of penalty for not achieving the target collection and other performance indices (meter replacement, consumer grievance redressal, revenue improvement etc.) (C) Incentives for exceeding these targets. (D) Incentive for achieving AT & C loss reduction target (E) Remuneration to RBDF (R) = A+B-C+D+E Of course there can be deviations in these two models also depending upon the agreement between the licensee and the franchisee. 190

As per OERCs Order dtd. 23.03.2007 regarding introduction of franchisee all the DISCOMs have introduced franchisee in their area of business and it is found that one Major Franchisee called M/s Enzen Global has either started its operation or in the process of negotiation with DISCOMs on the basis of inputbased assured revenue with O&M model. But the performance of the franchisee appears to be unsatisfactory or model unsustainable. There are some franchisees in CESU area who are either NGOs or SHGs who have been operating in revenue based model. Table 53 Key performance Indicators in the Area of Franchisee Operation
DISCOMs/ Area of Franchisee Operation NESCO JAJPUR TOWN YEAR Input Energy (MU) Energy Dist. Billed Loss (MU) (%) Amount Billed (Rs.in Lakh) 759.44 843.78 218.17 762.80 855.74 238.14 Amount Collection AT & C Agreed Realization Paise /Unit Collected Efficiency Loss (%) Input (Rs.in Lakh) (%) Rate (P/U) Remark

2007-08 2008-09 2009-10 (4/09 to 6/09) DHARMASALA 2007-08 2008-09 2009-10 (4/09 to 6/09) SOUTHCO RAMBHA 2007-08 2008-09 2009-10 (4/09 to 6/09) 2007-08 2008-09 2009-10 (4/09 to 6/09) Aug,07 to July,08 Aug,08 to July,09 Aug,07 to July,08 Aug,08 to July,09 CESU PURI Feb,08 to July,08 Feb,09 to July,09 Feb,08 to July,08 Feb,09 to July,09

101.60 88.98 21.19 102.38 91.29 22.76

34.41 37.22 9.45 31.36 35.06 9.53

66.1% 58.2% 55.4% 69.4% 61.6% 58.2%

452.51 559.02 119.28 587.90 685.48 128.63

59.6% 66.3% 54.7% 77.1% 80.1% 54.0%

79.8% 72.3% 75.6% 76.4% 69.2% 77.4%

47.0 51.0

44.5 62.8 56.3 57.4

Input based franchisee taken by ENZEN w.e.f. April,08 Input based franchisee taken by ENZEN w.e.f. April,08 Input based franchisee taken by ENZEN w.e.f. April,08 Input based franchisee taken by ENZEN w.e.f. April,08 Input based franchisee taken by ENZEN w.e.f. Aug,08 Input based franchisee taken by ENZEN w.e.f. Aug,08

61.0 66.0

75.1 56.5

42.88 47.16 11.10 57.48 64.67 16.18

12.39 13.87 3.98 21.10 20.60 6.27

71.1% 70.6% 64.1% 63.3% 68.1% 61.3%

309.78 332.70 95.97 503.28 469.17 140.56

208.03 279.72 69.51 318.55 331.66 90.70

67.2% 84.1% 72.4% 63.3% 70.7% 64.5%

80.6% 75.3% 74.0% 76.8% 77.5% 75.0%

55.0 60.0

48.5 59.3 62.6 55.4 51.3 56.0

KHALLIKOTE

62.0 66.0

WESCO PATNAGARH

54.77 73.27 39.57 44.71

17.84 22.01 12.20 14.35

67.4% 70.0% 69.2% 67.9%

448.53 557.35 331.98 387.37

347.00 422.59 178.52 256.79

77.4% 75.8% 53.8% 66.3%

74.8% 77.2% 83.4% 78.7% 46.0 62.0

63.4 57.7 45.1 57.4

KANTABANJI

39.55 44.70 5.52 5.08

18.74 19.29 2.36 2.71

52.6% 56.8% 57.2% 46.7%

586.89 618.38 51.28 58.33

437.45 554.05 38.02 42.66

74.5% 89.6% 74.1% 73.1%

64.7% 61.3% 68.3% 61.0%

110.6 123.9 68.9 84.0

ORIKANTA

Revenue based Distr. Franchisee involving CESU Retd. Workers and others. Revenue based Distr. Franchisee involving local consumer Forum

(Source: Filing of DISCOMs with OERC) It is seen from the above indicators that though collection efficiency during franchisee operation has increased considerably the distribution loss has registered very marginal improvement. The Distribution loss including AT&C loss has even increased in certain areas of SOUTHCO and WESCO. The reasons for above performance include settling time of franchisee in a particular area, non-cooperation of DISCOMs staff with unfounded apprehension about job loss etc. However, franchisee operation in Orissa is at very nascent state. It would be premature to reach any conclusion at this stage of operation.

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5.10

Competition in Power Sector and Open Access Electricity Act, 2003 has introduced competition in electricity sector for the first time. A consumer is allowed to purchase electricity from any licensee, generator or trader other than incumbent distribution utility. This provision has introduced competition in distribution sector. The consumer is now free to purchase power at a competitive rate from other sources. As per Section 42 (2) the State Regulatory Commission shall introduce Open Access in such phases and subject to such conditions (including the cross subsidies and other operational constraints) as may be specified within one year of the appointed date by it and in specifying the extent of open access in successive phases and in determining the charges for wheeling, it shall have due regard to all relevant factors including such cross subsidies and other operational constraints. OERC is among few first states to allow non-discriminatory open access to transmission and distribution system under Section 42 of Electricity Act, 2003.OERC has issued OERC (Terms and Conditions for Open Access) Regulations, 2005 effective from 06.06.2005 for introduction of Open Access to the intra-state transmission and distribution system in Orissa. For consumers seeking Open Access to the distribution and/or intra-state transmission system to avail supply of electricity from a generating company has been allowed above 1 MW from 01.04.2009. Similarly for consumers seeking Open Access to distribution and/or intra-State transmission systems to avail supply of electricity from any licensee other than the Distribution Licensee of the respective area of supply has been allowed above 1 MW from 01.04.2008. OERC has also issued OERC Open Access Charges Regulation, 2006. Any person seeking open access to transmission and distribution system shall have pay applicable transmission charges, wheeling charges and cross subsidy surcharge apart from other charges. The cross subsidy surcharge is to be utilized to meet the requirement of current level of cross subsidy within the area of supply of the distribution licensee. A consumer would avail of open access only if the payment of all the charges leads to a benefit to him. While the interest of distribution licensee needs to be protected it would be essential that this provision of the Act, which requires the open access to be introduced in a time-bound manner, is used to bring about competition in the larger interest of consumers. Accordingly, as per para 8.5 of

National Tariff Policy when open access is allowed the surcharge for the purpose of sections 38,39,40 and sub-section 2 of section 42 would be computed as the difference between (i) the tariff applicable to the relevant category of consumers and (ii) the cost of the distribution licensee to supply electricity to the consumers of the applicable class. Surcharge Formula S = T [C (1+ L / 100) + D] Where S is the surcharge T is the Tariff payable by the relevant category of consumers; C is the Weighted average cost of power purchase of top 5% at the margin excluding liquid fuel based generation and renewable power
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D is the Wheeling charge L is the system Losses for the applicable voltage level, expressed as a percentage
The OERC has fixed following cross subsidy surcharge and wheeling charges for HT and EHT consumers for FY 2009-10 Table - 54 Surcharge as per Tariff policy for FY 2009-10 at HT Wheeling charge p/u Load Factor % Tariff (HT) p/u Surcharge P/U WESCO NESCO SOUTHCO CESU 100% 90% 80% 70% 60% 50% 40% 30% 20% 291 51 64 111 85 299 59 72 119 93 309 69 81 129 103 321 82 94 142 115 338 99 111 159 132 361 121 134 181 155 376 136 149 197 170 401 162 174 222 196 452 212 225 273 246

50.73 64.16 81.27 73.62

Table - 55 Surcharge as per Tariff policy for FY 2009-10 at EHT Wheeling ch. P/U Load Factor % Tariff (EHT) p/u Surcharge p/u WESCO NESCO SOUTHCO CESU 100% 90% 80% 70% 276 101 125 185 154 285 110 134 194 162 295 120 144 204 173 308 133 157 217 186 60% 50% 40% 30% 20% 326 151 175 235 204 351 176 200 260 228 366 191 215 275 244 391 216 240 300 269 442 267 291 351 320

21 21 21 21

Let us examine the cross subsidy surcharge over last two years in Orissa for an ideal load factor of 80% both in EHT and HT. Table - 56 Surcharge Paise per Unit at EHT & HT (80% Load Factor) Licensees Surcharge for FY 2008-09 Surcharge for FY 2009-10 EHT HT EHT HT 173 102 173 103 CESU 149 87 144 81 NESCO 117 64 120 69 WESCO 204 125 204 129 SOUTHCO From the above tables for HT and EHT consumers for a particular load factor (80%) it is seen that cross subsidy surcharge has increased in FY 2009-10 over FY 2008-09 instead of decreasing. As retail supply tariff of Orissa has remained constant over these two years it is the cost of supply which has shown its impact on the cross subsidy surcharge. OERC deviates from mandates of National Tariff Policy while computing cross subsidy surcharge. OERC accept the Bulk Supply Price as the power purchase cost of DISCOMs instead of considering weighted average cost of power purchase from top 5% at the margin of power purchase cost from generators. This is because of single buyer model power purchase followed 193

in Orissa. All the DISCOMs are required to purchase power at Bulk Supply Price (BSP) fixed by OERC from GRIDCO. Therefore, the competition in power purchase is automatically hampered. Many observers feel the continuance of GRIDCO is against the spirit of Electricity Act, 2003. OERC argues that continuance of GRIDCO is necessary to maintain a uniform retail tariff throughout the State due to differential BSP. According to OERC it has become necessary as the consumer base of all the utilities are not the same. Therefore, the utilities with huge LT consumer base are supplied power by GRIDCO with lower BSP where as utilities having higher industrial consumer base are supplied with higher BSP to maintain uniform retail tariff. Therefore, although competition in distribution is already introduced through Open Access in Orissa it has not become so in power purchase by utilities. There have been numbers of Inter-State Open Access transactions take place in Orissa by EHT industries. But till today there exists not a single intra-State open access customer. The high cross subsidy surcharge is alleged to be one of the reasons for intra-State transaction not taking place. 5.11 Comparison of Orissa Reforms Model with Delhi Reforms Model Orissa and Delhi have under taken reform in their power sector. They are only two states in the country which have privatized their distribution business during the reform. Orissa was the first State in the country to go in for a comprehensive restructuring of the electricity sector. The process of restructuring commenced with the enactment of the Orissa Electricity Reform Act, 1995 and the unbundling of Orissa State Electricity Board (OSEB) into generation, transmission and distribution entities. This was followed by the corporatisation, commercialization and privatization of the distribution entities and the creation of the Orissa Electricity Regulatory Commission (OERC). The Delhi reform process had the experience of the reform process undertaken in the State of Orissa. There were concerns amongst the investors with most of the concerns emanating from the Orissa restructuring experience. An effort was made to address these concerns during privatisation of DISCOMS in Delhi. Though Orissa State took the pioneer step towards restructuring of electricity sector and privatisation of Distribution business, but the reform process in the State of Orissa is perceived as failure for the various known reasons. Delhi, incorporating the lessons learnt from Orissa Reforms process restructured the electricity sector and privatised the distribution business which is perceived as success of the reforms process. The following Table captures the comparison of key issues during restructuring of electricity sector and distribution privatisation in the States of Orissa and Delhi. Table 57 Comparison between Orissa and Delhi Model Orissa Delhi No Financial support Government committed during transition phase to the success of reforms Utilisation of proceeds Clear cut Policy 194

Issues Government commitment

Issues

Prevalent Loss levels

Orissa received from Prviatisation of distribution sector in other areas Actual loss was far higher than reported loss Difficulty in segregating technical and commercial losses

Funding support

Commercial lenders showed lukewarm response in providing the debt support Approved Revenue Gap of Rs.515 Crore before truing up No support in spite of recommendation from various committee and consequential notification Rs. 3240 Crs deficits as highlighted by Kanungo Committee recognised by OERC. Non Segregation of serviceable and unserviceable liabilities

Government Financial Support

Pre-privatization liabilities

Receivables

Unrealistically high Entire doubtful & Bad debts not allowed by Regulator To be considered for truing up.

Audited Accounts

Audited Accounts not available Led to Post Takeover Problems with the Statutory

Delhi Directions for 5-years Committed support of Rs. 3450 crore Concept of AT&C losses to: Reduce scope for baseline data errors Provide a more realistic figure for losses. Provide comfort to the investors since it was approved by the Regulator Assurance sought from the Government for funds under the APDRP, PFC sanctioned schemes, etc. Bidding structure assures guaranteed returns which facilitates commercial loan availability Govt. committed Rs. 3450 crore as transition support to avoid tariff shock to the consumers. This support was provided to TRANSCO to meet the gap between the BST and the actual power purchase cost. Government created a relatively clean balance sheet by retaining non-serviceable liabilities in the Holding Company Only serviceable liabilities transferred to DISCOMS Limited to last months receivables Past receivables to the account of Holding Company, the DISCOMS were authorised to collect the past receivables (20% incentive on amount collected) Audited Accounts not available, however, clean Balance Sheets assured to DISCOMS

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Issues

Asset Valuation

Orissa Bodies Unrealistic levels of recoverable Highly undermined /suppressed terminal liabilities as on 31.03.1999 Assets re-valued at higher levels prior to bidding process by over Rs.2000 Crs
DISCOMs privatised based on equity premium quoted by bidders

Criteria for Privatisation

Delhi Business valuation approach mitigates risk of asset valuation Stores & Spares, Loans to Personnel, etc. to be based on actual Audit To ensure a sustainable level of liabilities, assets valued through business valuation based on revenue earning potential Equity given at par Privatisation based on commitment towards reduction in AT&C losses

As observed from the above comparison, Delhi learned lessons from Orissa reforms process and implemented the reforms process including privatization of DISCOMs. It is important to note that no model can be adopted mutatis mutandis, but the key learnings from the successful model can be considered. Hence it is imperative at this stage, that Orissa should show its innovative way to turnaround its Power Sector. 5.12 Summary of the Chapter Although AT&C loss has decreased considerably over years for DISCOMs the distribution loss has shown very slow declining trend. This is perhaps due to rural electrification and growth in Domestic consumer base. Collection efficiency has increased considerably after privatization. This indicates that DISCOMs have shown more interest in revenue collection than maintenance of their network to reduce their distribution loss. Balance sheets of DISCOMs have been analyzed. It showed debt burden of DISCOMs had been increasing year after year. They are not in a position to collect what they bill to consumers. Stores and Inventories are practically empty indicating poor maintenance. After 2000-01 the retail tariff has remained more or less constant with minor changes here and there. If we consider the price rise it would be seen that the effective real rise in tariff has been of the order of (-) 26.24%. This means the tariff rise as approved by the OERC is much less as compared to the rise in general prices Cross subsidy is the difference between tariff and cost to serve a particular category. It is seen that cross subsidy in Orissa has been gradually declining as mandated by law. Franchisee in distribution sector is a novel concept which has been introduced in Orissa DISCOMs. Most of the franchisee are input based franchisee with O&M liability. From an experience of one year or so it is seen that Franchisee have not been very successful to reduce the distribution loss which is the main malady of the distribution sector although they have been somewhat successful in improving collection efficiency. Competition in distribution has been introduced through Open Access in Orissa. But due to presence of single buyer model of power purchase competition is stifled in power purchase area. DISCOMs are not allowed

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to purchase power from outside sources except GRIDCO. Recently some small captive generators are allowed to sell power to DISCOMs. After onset of reform era, Delhi and Orissa have only privatized their distribution sectors. But Delhi has learnt many lessons from shortcomings of Orissa model. Government of Delhi allowed privatized DISCOMs to start with clean balance sheet with serviceable liabilities whereas in Orissa there has been no segregation and DISCOMs got some unserviceable liabilities such as old Government dues which Government had been continuously defaulting in payment. Some of the hypotheses we have adopted for our study are as follows: 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 cross subsidy in tariff has reduced over the years. To study if the power sector reforms have brought in Fiscal Discipline. To study the franchisee operation as viable distribution model To study how far power sector reform has brought in competition in this sector. Now all the hypotheses have been tested and we have the following results. Although power sector reform has brought structural viability in the utilities it has failed to bring financial viability except in case of GRIDCO. However, GRIDCO the bulk supplier, has taken a situational advantage by selling power through UI mechanism of ABT. But this advantage will not be available always in the future. Then the continuance of GRIDCO would be a liability for the consumer of the State. Although the power tariff in the State has remained constant from 2001-02 to 2009-10 by the intervention of the OERC but it has added huge liabilities to the DISCOMs in shape of under recovery of revenue. Cross-subsidy in the tariff has been gradually decreasing. After power sector reform although some fiscal discipline has been brought about but still there has been some areas such as A&G cost has not been properly managed. Franchisee operation in distribution is partially successful. Power sector reform has not brought in competition in this sector due to monopoly of GRIDCO as bulk power supplier to DISCOMs. The Open Access through which a consumer can avail electricity from any supplier has not taken off fully. But it is likely to improve in future after proper enforcement by the regulators.

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Reference: 1) 2) 3) 4) 5) 6) 7) OERC Case No. 47, 57, 58, 59, 60 and 61 of 2007 dtd.23.03.2007. Tariff Orders of OERC from 1999-2000 to 2009-10 Audit Reports of DISCOMs National Tariff Policy OERC Terms and Condition for Open Access Regulation, 2005 OERC Case No. 23, 24, 25, & 26 of 2009 dtd. 03.07.2009 ABT Regulation of CERC, 2009

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CHAPTER 6 Impact of Reform and Analysis of Beneficiary Survey

Power distribution is the first interface of the utility with the consumer, the source of revenue and a major instrument of Govt. policy. While many states and the Central Electricity Authority (CEA) have been preparing Annual Report on performance of generating stations, it is only recently that CEA has announced a Report on performance of distribution utilities in different areas. Reasons cited for this neglect of analysis of distribution sector mainly include lack of credible data on T&D loss, percentage of billing & collection and revenue arrear etc. These are some performance indices of the distribution sector which have gained attention in the past few years. A balanced proportion of investment between generation and transmission and distribution is 1:1.1. The actual ratio of State investment has been more like 2:1 but is reported to be improving since late 90s. The suggested proportion as per Rajadhyakha Committee Report is 4:2:1:1 for generation: transmission: distribution: rural electrification. 6.1 Quality of Consumer Service One of the results of this attention on distribution has been the increased attention to quality of consumer service, public declaration of Citizens Charters (on performance and service), formation of consumer Grievance Redressal Forum/ Electricity Ombudsman and Regulation on Standards of Performance. It is also not right to assume that quality issues will automatically be addressed by competition. As a report of the South African Regulator (NER) notes In an ideal world power quality levels would be determined by competition in the supply industries. However, giving the nature of the electricity supply industry, some regulatory requirements on power quality will probably be necessary. We are far from ideal world or ideal competition. NER Reports a quote from a study by European Regulators: Where market competition replaces monopoly regimes, quality competition should replace quality regulation. However, the complete withdrawal of regulator is not usually possible because while some quality factors can be individually negotiated others cant. Quality of Service (QOS) can be defined as the end result of utilities planning, designing of network, operation and service management, which determines the degree of satisfaction of the consumers. It consists, mainly, of two aspects; one related to technical standards and operation of power system and the other to support and responsiveness to consumer needs. 6.1.1 International Experience in Quality of Service: UK Experience: The Electricity Act, 1989 and competitive and service (utilities) Act, 1992 in the UK govern the regulatory intervention in lying down and enforcing the Quality of Service (QOS) standards in the electricity sector. This is intended to ensure a minimum level of service to all consumers, and to encourage companies to aim at higher level of performance. The PESs (Public Electricity Suppliers) are subject to standards of performance in supplying electricity to consumers. OFGEM (Office of Gas and Electricity Market) set these standards after consultation with 199

companies, the electricity consumer committee etc. The standard set by the regulators are two types: Guaranteed standards at service levels that must be met in each individual case, failing which the companies are required to compensate the customer. Overall performance standards for utilities that cover areas of service, where whilst it is not feasible to give individual guarantees, it is appropriate to assure customers of the predetermined minimum levels of service. The overall standards set the minimum levels of performance, which PESs are required to achieve over a 12 month period in specific service areas. The guaranteed standards cover eleven areas of service and the overall standards cover eight areas of service. Initially the service standards were set to reflect those prevailing before 1989 (Year of privatization). Since then the Regulator has expanded the list and raised the QOS to a higher level. In the majority of the cases companies equaled or improved on their performance since 19992000. In the UK, the regulator also obtains reports on the transmission and distribution system performance, which outlines the reliability of such networks. These reports show the trends in security (i.e. supply interruptions per 100 connected customers) and availability (i.e. minutes lost per connected customer). The distribution companies are also required to report on particular aspects of quality of supply to the regulator. For example, companies are required to set targets for network performance indices as a result of which some companies are aiming at and reducing the overall customer-minutes lost. The companies service obligations are set out in their codes of practice. United States of America In USA some of the federal states have undertaken re-structuring of their electricity industries such as California, Massachusetts and New York. Experiences from Massachusetts and New York have been given below: Massachusetts: In Massachusetts, the Electricity Restructuring Act passed in 1997 authorizes the Department of Telecommunications and Energy (DTE) to establish Performance Based Regulation (PBR) rates for each distribution company, and directs the DTE to establish QOS standards for a variety of service quality categories. In addition, the Act authorizes the DTE to levy a penalty, of up to two percent of the distribution service revenues for the previous year, on any distribution company that fails to meet the QOS standards. It has five categories in QOS standards. The actual benchmark for a company on any of these measure is based on the companies own historical performance. New York: In 1991, the Commission adopted two indices namely (a) System Average Interruption Frequency Index (SAIFI) and (b) Customer Average Interruption Duration Index (CAIDI) for (1) measuring frequency and duration of service interruptions in each operating area of each major New York State electric utility and (2) identifying the worst-performing circuits in each operating area. The standards set excluded interruptions caused by major storms from the calculations. The standard, which was adopted by the Commission, states that 200

each company should take measures necessary for each of its operating areas to meet a threshold minimum level of adequate service and should strive to attain a better objective level of electric service. Each level was defined by using SAIFI and CAIDI indices in the criteria. Also utilities are required to submit the annual performance report to the Commission by the end of the March every year covering the areas as envisaged in the order. South Africa: The quality of service rendered by electricity distributors in South Africa was first addressed in 1997 when National Electricity Regulator (NER) prepared a set of standards on quality of supply and service. The standards on quality of supply include voltage, frequency and fluctuation etc. The standard on quality of service set by the NER has mainly two categories. (1) Minimum standards, this will be used as the criteria for the purpose of license renewal. (2) Reporting guidelines. Utilities are required to provide the NER with information under guidelines which broadly covers areas like (a) Credit metering (b) network fault (c) planned interruption (d) non-compliance with quality of supply standards. Recognizing the existence of varying degrees of capacity among electricity distributors, the NER had agreed to phase in the implementation of quality of service standards. At the same time, the NER has made it mandatory for all distributors to install equipment to measure the standards on consistent basis and to ensure their proper functioning. 6.1.2 Orissa experience in Standard of Performance In the Indian context, even today affordable access is one of the major challenges for the distribution utility. Poor public image of the consumer interface, badly maintained infrastructure, top-down and personality driven approach and rampant corruption at all levels are some of the major obstacles in the path to achieve it. Arriving at a right mix of performance indices with the optimum level of detail that can be supported by data and a monitoring system that facilitates transparency, accountability and participation can help in the turn around of the utilities. OERC has issued Orissa Electricity Regulatory Commission (Licensees Standards of Performance) Regulation 2004. These Regulations are applicable to all the DISCOMs and trading licensees engaged in supply of electricity to the public. These Regulations have divided standards of performance into two categories such as guaranteed and overall standards of performance. The guaranteed standards of performance being the minimum standards of service that a licensee shall achieve and maintain in the discharge of his obligation as a licensee. On the other hand overall standards for performance which the licensee shall seek to achieve in the discharge of his obligation as a licensee. The DISCOMs shall be liable to pay the affected consumers compensation as specified for its failure to meet the guaranteed standards for performance. The Compensation so payable shall be paid within 90 days of the failure of guaranteed standards for performance on his own. The standards for performance shall remain suspended during force majeure condition. Generally the compensation allowed is adjusted in the next electricity bill of the consumer. But except some sporadic cases the DISCOMs have not paid compensation to any consumer on the plea of

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force majeure condition. OERC has no such mechanism to verify such claims of the DISCOMs. The different heads of Guaranteed Standards of Performance as specified by OERC are given in table below: Table- 58 Payment of Compensation for Violation of Guaranteed Standards of Performance Service Area Compensation Payable (In Rs.) Manner of Payment Normal fuse-off Rs.100/- in each case of default Automatic Line break down Rs.100/- in each affected consumer To be claimed Distribution Rs.200/- in each affected consumer To be claimed transformer failures Period of scheduled Rs.200/- in each affected consumer To be claimed outages Voltage variation Rs.100/- in each case of default Automatic Harmonics To be decided by the Commission Complaint about meters Rs.100/- in each case of default Automatic and Rs.200/- in case of burnt meter not attributable to the consumer Automatic Application for new Rs.100/- for each day of default connections /additional load To be claimed Where power supply Rs.100/- for each day of default requires extensions of distribution main Automatic Transfer of ownership Rs.100/- for each day of default and conversion of services. Complaint about Rs.50/- for each day of default Automatic consumer bills. Re-connection of Rs.100/- for each day of default Automatic supply following disconnection due to non-payment of bills The overall standard of performance is the standard which the DISCOMs are expected to maintain in their area of supply. Failure to maintain the overall standards of performance no compensation is payable to the consumers. All the DISCOMs furnish to the Commission a monthly report on both guaranteed and overall standards for performance. The power supply outage is an unplanned event and can be described in terms of the frequency, duration and amounts of loads (or consumers) affected. A momentary outage is defined as an outage lasting less than 5 minutes, corresponding to the time taken by automatic re-closure schemes to restore temporary faults; a sustained outage last longer than 5 minutes (NERC 1996). IEEE standards 1366 give the definition for outage indices. These outage indices are based on the duration of each power supply interruption and the frequency of interruption. It is clear that all three major functional components of the power system generation, transmission and distribution contribute to the reliability. As 202

far as the consumer is concerned, transmission and distribution outages are important. In fact, surveys (in developed countries) show that 80 to 90% of outages experienced by consumers are caused by distribution outages. 6.1.3 System Reliability Indices used by Regulators System Average Interruption Duration Index (SAIDI) This represents the average time each consumer is interrupted. If interruption duration is specified in minutes then the unit of SAIDI is minutes. SAIDI is expressed by the following formula: Consumer Interruption Durations SAIDI = Total number of Consumers served System Average Interruption Frequency Index (SAIFI)

This represents the average number of interruptions per consumer. SAIFI is expressed by the following formula:

Total No. of Consumer Interruptions SAIFI = Total number of Consumers served SAIFI and SAIDI are the most used pair of reliability indices. A North American survey showed SAIFI figure of 1.1 (indicating 1.1 interruptions/ year/consumer) and SAIDI of 1.5 hours. Singapore is reported to have a SAIDI of 3 minutes.
Consumer Average Interruption Duration Index (CAIDI)

This represents the average interruption duration or average time to restore service per interrupted consumer. CAIDI is expressed by the following formula:
SAIDI Sum of Consumer Interruptions CAIDI = = Total number of Consumers Interruptions SAIFI
6.1.4 Comparison of Standard of Performance Regulation of different States

In the table given below we have made a comparison of different Standard of Performance (SoP) Regulations adopted by different States of India.
Table - 59 Comparison of SOP Regulations
1. Fuse Off State 1. Andhra Pradesh 2. Delhi 3. Gujarat 4. Haryana 5. Karnataka 6. Maharashtra 7. Orissa 8. Rajasthan 9. Tamil Nadu 10. Uttar Pradesh 11. West Bengal OFGEM Urban hrs 4wh 3 4 4 6 4 6 4 3 4 4 3 Rural hrs 12wh 8 24 8 24 24 24 24 9 8 12 NA Compensation Rs. 50/def NA 25/6h 100/d 50/def 50/h 100/def NA 50/6h 50/def 25/h 20/def BenchMark % 99 NA NA 99 99 NA 90 NA 75 NA NA 99.5 Urban hrs 24 48 24 24 24 24 24 48 24 24 72 18 2. DT Failure Rural hrs 48 48 72 48 72 48 48 72 48 72 216 NA Compensation Rs. 100 NA 25/6h 100/d 50/def 50/h 200/def NA 50/6h 50/def 25/h 50/def BenchMark % 95 NA NA 95 95 NA 95 NA 95 NA NA 99.5 3. Resolve Voltage problem no. s/w change Days CompenBenchsation Mark % (Note no) Rs. 10 50/d NA(2) 3 NA NA NA 50/d NA(2) 4h 100/def 95(2) 7 50/def 95(2) NA 100/w NA(2) 15 200/d NA(2) 10 NA NA(2) 2 250/def 90 1 50/def NA(2) 15 25/d NA NA NA NA 4. Resolve Voltage problem with n/w change Days Compen- Benchsation Mark Rs. % 120 100/d NA 180 NA NA 60 50/d NA 60 100/d 90 120 50/def 90 NA 100/w NA 15 500/d NA 180 NA NA 180 250/def 95 180 150/def NA 180 25/d 180 20/def 100

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State 1. Andhra Pradesh 2. Delhi 3. Gujurat 4. Haryana 5. Karnataka 6. Maharastra 7. Orissa 8. Rajasthan 9. Tamilnadu 10. UttarPradesh 11. West Bengal OFGEM

5. Burnt Meter replacement problem attributed to licensee Days CompenBench sation Mark Rs. % 7 50/d NA 3 7 1 7 1 30 NA 30 3 13 NA NA 25/d 200/d 50/def 100/w 200/def NA 100/d 50/def 25/d NA NA NA 95 90 NA NA NA 95 NA NA NA

6. Burnt meter replacement problem attributed to consumer Days CompenBench sation Mark % Rs. 7 50/d NA 3 7 7 1 1 15 60 30 3 NA NA NA 25/d 200/d 50/def 100/w 200/def NA 100/d 50/def NA NA NA NA 95 95 NA NA NA 95 NA NA NA

7. Bill Complaints No additional info needed Days 1 15 1 1 1 NA 30 1 bc 7 NA NA Compensation Rs. 25/d NA 50/def 100/d 50/d NA 50/d NA 150/def 50/def NA NA Bench Mark % NA NA NA 99 99 NA NA NA 95 NA NA NA

8. Bill complaints additional info needed Days 7 30 10 7 7 NA NA 7 bc 7 NA NA Compensation Rs. 50/d NA 50/def 100/d 50/d NA NA NA 150/def 50/def NA NA Bench Mark %

NA NA 99 99 NA NA NA 95 NA NA NA

Note:

1. 2. 3. 4. 5. 6. 7.

h= Hour, d= day, wh/wd=working hour/day, w=week, bc= billing cycle, def= default, NA= Not Available; n/w= network Voltage Limits: LT: +6,-6%; HT:+6,-9%; EHT:+10,-12.5%. Gujarat, Rajasthan has 2% as neutral voltage limit. AP: Compensation is less (about half) if more than one consumer is affected. Haryana: In most cases, compensation is automatic; Regulation has format for monthly reporting; DT failures urban <5%, rural <10%. Karnataka: DT failures urban <5%, rural <12%. Orissa: In most cases, compensation is automatic. Rajasthan: Regulation has complaint record procedure; monthly grievance meeting at AE and SE levels; RC is to set overall standards and decide on compensation. Maharashtra: Benchmark figures not given; voltage compensation is only for Mumbai rest to be notified later; Regulation asks for reports to RC and GRF as well as putting the information on website. OFGEM: Guaranteed and Overall Standards of Performance 2003; FO-3h on weekdays & working hrs, or else 4 hrs; all compensation in GBP; DT failure column gives Fault details.

8.

9.

6.1.5 Overall Standards of Performance in Orissa

DISCOMs in Orissa had supplied the following information regarding their Standard of Performance to OERC before tariff hearing which has been published by them in newspaper:

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Table - 60 Overall Standard of Performance of Electricity Distribution Companies

PERFORMANCE OF ELECTRICITY DISTRIBUTION COMPANIES IN ORISSA DURING 2007-08 AS REPORTED AND FURNISHED THROUGH AN AFFIDAVIT LICENSEES Period Achievement in % of the licensees in the following service area Rectification of fuse-off call within 6 hrs. of receiving the complaint in urban areas Rectification of fuse-off call within 24 hrs. of receiving the complaint in rural areas Restoration of line break-down within 12 hrs. of receiving the complaint in urban areas Restoration of line break-down within 24 hrs. of receiving the complaint in rural areas Replacement of Distribution Transformer within 24 hrs. of receiving the complaint in urban areas Replacement of Distribution Transformer within 48 hrs. of receiving the complaint in rural areas Completing the work within 12 hrs. of the scheduled outage before 5 PM/6 PM No. of hourly measurement in which the supply frequency went beyond + 3% No. of cases in which voltage at the point of commencement of supply exceeded 3% of the voltage limits fixed under I.E. Rules, 1956 EHT HT LT Rectification of Street light fault within 6 hrs. of receiving the complaint No. of faulty bills prepared as a percentage of total no. of bills issued No. of faulty/defective meters as a percentage of total no. of existing meters Total no. of interruption each lasting more than 5 minutes faced by 1 KW connected load (SAIFI) Total no. of interruption each lasting less than 5 minutes faced by 1 KW connected load (MAIFI) Total duration of interruption in minutes each 1 KW connected load (SAIDI) No. of accident cases Fatal Human Fatal Animal Non-fatal Human Non-fatal Animal Minimum % target fixed by the Commission 90 90 95 95 95 95 90 CESU For the year 07-08 NESCO For the year 07-08 WESCO For the year 07-08 SOUTHCO For the year 07-08

99.98 99.99 99.97 99.85 98.26 94.87 100 Not furnished

100 99 97 94 94 94 Not furnished Not furnished

99.80 99.84 99.19 99.64 97.73 95.85 Not furnished Not furnished

99.60 99.46 99.67 99.76 99.31 93.92 Not furnished Not furnished

90 0.1 5

Not furnished Not furnished Not furnished 93 10 12 62.442 48.173 1996.299 06-07 07-08 6 4 3 2 5 1 5 0

Not furnished Not furnished 95 Not furnished 0.93 29 249.53 102.08 3421.19 06-07 07-08 9 15 1 2 16 15 3 0

Not furnished Not furnished Not furnished 90 0.1 5 27.74 29.98 734.89 06-07 07-08 18 20 18 1 20 33 16 2

Not furnished Not furnished Not furnished 94.58 2 7 160 109 5578 06-07 07-08 14 11 16 4 16 10 16 0

(Source: Orissa Electricity Regulatory Commission) 205

OERC has published these above information in the newspaper as submitted by the DISCOMs in the public interest. They have notified that they dont subscribe to the veracity of the information. There is no mechanism yet developed by OERC to check the authenticity of the information submitted by DISCOMs on Overall Standards of Performance.
6.1.6 Re-look at the Prioritisation of Performance Indices

There is also a need to prioritize indicators. At this stage, the focus could be on consumer interfacing and group indicators complaint handling system, distribution transformer failure, feeder interruptions, tail end low voltage etc which have impact on a large number of consumers. It is important to give high attention to good quality 11 kV metering, division / zone wise MIS reports, DT metering etc. These are low lying fruits for improvement of quality of service easy to measure and monitor. Improving the consumer interface including the complaint recording procedure and response to complaints are critical to build confidence in the system. It is good to see the Tamil Nadu Regulation on SoP having a performance index related to keeping consumer appointment. The regulations could be made simpler with few essential indices and time taken to stabilize the monitoring system. This is essential to gain credibility at the initial stages. Initial measures of quality of service could even be from a mix of qualitative consumer satisfaction surveys and few measurements. After having a few measurable indices, a phased approach can be taken to expand the list. The approach could be guided by the initial goal of taking the whole system with a poor performance level to a reasonable level. It should be understood that web enabled services, bank payments, check drop facility etc., which are typically helpful to urban middle class should not be overemphasized while measuring consumer service. The idea of having difference performance targets based on geography or consumer category also needs to be explored. Complex indices like SAIFI, SAIDI, harmonic content etc. can be considered much later or on a very selective basis. Almost all State regulations mentioned these sophisticated indices to be implemented in future. There is no consistency in the methods suggested for calculating and monitoring these indicators. The approach towards phasing is summarized in the Table below: Table- 61 Phasing of Standard of Performance Phase No. Phase Activities 1. Consumer Complaint handling, bill payment, transparency of interfacing information, survey of existing performance levels, consumer issues. This phase is the essential first step for all utilities. 2. Quality of Minimize interruptions, voltage, frequency problems. Power delivery Stabilize monitoring systems. The second step should be followed once phase one is satisfactory. 3. System Pro-active continuous background activities required to Improvement maintain quality of service. Transformer sizing, line maintenance, earthing, protective fencing etc. Use monitoring systems to detect abnormal system operation (overload, under-voltage etc.) and to improve even complex indices like SAIFI, harmonic content etc. 206

In the above phasing the first phase is related to consumer interface, the second one to quality of supply and the third one to system improvement. Phase two could be taken up once the required minimum system for monitoring phase-one are in place and satisfactorily operational. The same applies to phase three.
6.1.7 Grievance Redressal Fora in Orissa

General consumers are the end users of the electricity services in any country. Electricity Regulatory Commissions have notified licensees Standards of Performance Regulation for the interest of the consumers. As per Section 42 (5) of Electricity Act, 2003 every distribution licensees shall within six months form the appointed date or date of grant of license which ever is earlier, establish Forum for Redressal of Grievances of the consumers in accordance with the guidelines as specified by the State Commission. Section 42 (6) of Electricity Act, 2003 further stated that Any consumer, who is aggrieved by non-redressal of his grievances under sub-section (5), may make a representation for the redressal of his grievance to an authority to be known as Ombudsman to be appointed or designated by the State Commission. Accordingly, OERC has promulgated OERC (Grievances Redressal Forum and Ombudsman) Regulation, 2004. As per this Regulation the four DISCOMs of the State have established Grievances Redressal Forum (GRF) at 12 places. A complainant aggrieved by any action or lack of action by the engineer (DISCOMs) under OERC Distribution (Condition of Supply) Code, 2004 may file a complaint before the forum for the redressal of his grievances after expiring of 15 days from the time limit fixed by the licensees in their complaint handling procedure. The forum shall decide the complaint expeditiously and shall communicate its decision to the complainant within a period not exceeding 45 days of the receipt of the complaint by the forum. The DISCOMs shall meet all the cost and expenses of the forum. The Commission shall have general power of superintendence and control over the forum. The forum consists of three members including its President who are appointed by the respective DISCOMs with concurrence of the Commission. As per the Regulation the President is a serving or retired electrical engineer of the DISCOM having 20 years experience in electricity sector. The next member is also a retired / serving officers of the licensee possessing a degree in Finance/Accountancy or Law having five years experience in the same electricity sector. The third member is a co-opted member appointed from the members of State Advisory Committee (SAC) of the Commission constituted under Section 87 of Electricity Act, 2003. All the members including President have tenure of fixed three years.
6.2 Electricity Ombudsman Scheme in Orissa

As per Section 42 (6) of Electricity Act, 2003 and OERC (Grievance Redressal Forum and Ombudsman) Regulation 2004 two nos. of Ombudsmen have been appointed by OERC for the four DISCOMs of the State. One Ombudsman has been appointed for WESCO, NESCO & SOUTHCO and other for CESU only considering the workload. The Ombudsmen receive and consider all the representation filed by the complainant for non-redressal of the grievance by the

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forum under Section 5 of the Section 42 of the Electricity Act, 2003. Any consumer aggrieved by the non-redressal of the Grievance by the Forum may make a representation to the Ombudsman within 30 days from the date of the decisions of the forum or within 30 days from the date of expiry of the period within which the forum was required to take decision and communicate the same to the complainant. The Ombudsman shall in the first instance act as a Conciliator and mediator in the matters which have been filed before him. The Ombudsman shall decide the representation generally within two months from the date of the receipt of the representation of the consumer. There is no provision in Electricity Act, 2003 or GRF and Ombudsman Regulations, 2004 regarding subsequent appeal against the order of the Ombudsman. Generally Petitioners aggrieved by the Orders of the Ombudsman file writ petition before the High Court for adjudication. This is a grey area both in the Electricity Act, 2003 and GRF and Ombudsman Regulations 2004 of OERC.
Complaint Handling Procedure of DISCOMs

GRF

Ombudsman

Table- 62 Comparison of Constitution of Grievance Redressal Fora of some States Remarks State No. of Strengths Qualification of GRF Maximum GRFs Members time for disposal Combined Andhra 1/Utility 3+1 co- 1. Chair: Retired/serving 45 Regulation for Pradesh opted the utility, degree in GRF & Electrical, 20 yrs in ombudsman. distribution, SE; 2. More GRFs if the Retired/ serving the 45 day target cant utility, 10 yrs in be met. 4 GRFs Accounts, 5 in Revenue, formed. Sr. Accounts Officer; 3. Retired/serving the utility, 5 yrs in Legal, Asst Secretary; 4. Representative of a registered consumer organization (co-opted). Combined Delhi 1/Utility 3 1. Chair: Degree in 60 Regulation for Electrical, SE; 2. Degree GRF & in law, 10 yrs in legal; 3. Ombudsman. Representative of a registered consumer organization, 5 years in consumer matters; Utility to advertise for posts, give 3 names for posts 1&2 to RC and get approval. 2 years after retirement from utilities.

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State

No. of GRFs

Strengths

Karnataka

1/Utility

Maharashtra 1/zone

Tamil Nadu

1/Utility 3 or more (37 formed)

West Bengal

3 Tier

Remarks Maximum time for disposal Combined 1. Chair: Experience in 60 Regulation for Electrical, finance, law, GRF and administration 2. Ombudsman. Employee of the utility, Forms for filing SE; 3. Representative of complaints given. a registered consumer organization, 5 years in consumer grievances; All should have working knowledge of Kannada Combined 1. Senior judicial officer 60 Regulation for or a civil servant not GRF and below the rank of a Ombudsman. Collector; or Principal of Forms for filing a reputed Engineering complaints given. college or Professor of 1-member GRF if the Electrical consumers Engineering of a reputed <1,00,000. 15 institute or a senior GRFs formed 12 electrical engineer of the for MSEB, 1 each Government (all retired); for TPS, REL & 2. Executive Engineer BEST. rank; 3. Representative of a registered voluntary consumer protection organization of the area, working preferably for 5 years on consumer grievances. Combined 1. Chair: Full time 60 Regulation for officer of utility, SE; 2. GRF and 15-20 yrs in finance/law, Ombudsman. nominated by district Forms for filing collector; 3. From NGO/ complaints given. Consumer organization, Number of GRFs nominated by district to be such that collector. none need travel > 100 kms. 3 Tiers District: AE; 49 CESC had 3-tier Regional: DE, system before ECorporate: CE Act. RC can change grievance officer. Qualification of GRF Members

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Table- 63 Comparison of features of Grievance Redressal Fora of different States

Sl. No 1. 2. 3. 4. 5. Feature Consumer Rep in GRF with voting Rights Non-utility member in GRF with voting rights Fixed Term for members No reappointment Time limit for grievance handling Standards of Performance Performance Benchmark Automatic Compensation SoP Reporting formats in Regulation AP N N Y Y Y Delhi Y Y Y N Y Gujarat Y Y Y Y Y Haryana Y Y Y Y Y Karnataka Y Y N Y Y Maharashtra Y Y Y Y Y Orissa N N Y N Y Rajasthan NS NS NS NS Y TN Y Y Y Y Y UP N Y Y Y Y

1. 2. 3.

Y N N

N N N

N N Y

Y Y Y

Y N N

N N N

Y Y N

N N Y

Y N Y

N N Y

6.3

Energy Audit and Power Theft The main reason of high distribution loss in Orissa is lack of proper metering and power theft. The progress of Energy Audit has been very tardy. The metering position for consumer feeder transformer (CFT) is given in the table below: Table - 64 Metering Position in Orissa as on 31.03.2009 Feeder /Transformer Metering CESU NESCO WESCO SOUTHCO TOTAL Position No. of 33 KV feeders (excluding GRIDCO interface) 125 58 87 159 429 No. of 33 KV feeder metering 120 55 87 159 421 No. of 11 KV feeders 584 427 417 425 1,853 No. of 11 KV feeder metering 584 144 417 425 1,570

No. of 33 / 11 KV transformers 347 260 No. of 33/11 KV transformer Nil metering position 81 No. of distribution transformers 18,688 18,148 (11/0.4 & 33/ 0.4 KV) No. of distribution transformer 8,189 101 metering position Consumer Metering Position Total number of meters 1,038,969 526,374 No. of working meters 930,828 373,582 Percentage of working meters (%) 90% 71% No. of defective meters 108,141 152,792 (Source: Orissa Electricity Regulatory Commission) 210

256 16,907 12,558 513,899 497,727 97% 16,172

215 30 12,351 9,236

1,078 111 66,094 30,084

556,610 2,635,852 522,942 2,325,079 94% 88% 33,668 310,773

From the above table it is explicit that among all the metering points the percentage of metering in distribution transformer is very low. The utilities are unable to audit the distribution transformer which services numbers of consumers. Unless the consumer metering and distribution transformer metering including indexing of consumer are complete it is very difficult on the part of distribution utilities to pinpoint the area where energy theft or distribution loss takes place. In case of NESCO only 71% of meters are working which means 29% of consumers are availing power supply with defective meters basing on their load factor. Similarly in all Orissa level only 88% of meters are working leaving 12% of the consumers to avail supply in defective meter basing on their load factor. Although OERC has abolished the load factor billing since 2004 the DISCOMs are continuing with the same. This is perhaps one of the reason which contributes to the high distribution loss. Another question of concern is tampering / bypassing of working meters which is rampant in the state. The Electricity Act, 2003 has numbers of provisions for arresting unauthorized use of electricity. As per Section 135 of the Electricity Act, 2003 (1) Whoever, dishonestly,(a) taps, makes or causes to be made any connection with overhead, underground or under water lines or cables, or service wires, or service facilities of a licensee or supplier, as the case may be; or (b) tampers a meter, installs or uses a tampered meter, current reversing transformer, loop connection or any other device or method which interferes with accurate or proper registration, calibration or metering or electric current or otherwise results in a manner whereby electricity is stolen or wasted; or (c) damages or destroys an electric meter, apparatus, equipment, or wire or causes or allows any of them to be so damaged or destroyed as to interfere with the proper or accurate metering of electricity; or (d) uses electricity through a tampered meter; or (e) uses electricity for the purpose other than for which the usage of electricity was authorized, so as to abstract or consume or use electricity shall be punishable with imprisonment for a term which may extend to three years or with fine or with both: Provided that in a case where the load abstracted, consumed, or used or attempted abstraction or attempted consumption or attempted use(i) does not exceed 10kilowatt, the fine imposed on first conviction shall not be less than three times the financial gain on account of such theft of electricity and in the event of second or subsequent conviction the fine imposed shall not be less than six times the financial gain on account of such theft of electricity. (ii) exceeds 10 kilowatt, the fine imposed on first conviction shall not be less than three times the financial gain on account of such theft of electricity and in the event of second or subsequent conviction, the sentence shall be imprisonment for a term not less than six months, but which may extend to five years and with fine not less than six times the financial gain on account of such theft of electricity:

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In Orissa eight Special Energy Police Stations have already been opened in Khurda, Cuttack, Sambalpur, Balasore, Berhampur, Kendrapada, Dhenkanal and Baripada and other 27 police stations are on the anvil. The utilities bear the entire expenditure of those police stations. The police personnel employed in those police station work under the supervision of Superintendent of Police of the concerned district. The DISCOMs allege that the police personnel employed in those police stations are utilized by SP of that district for general law and order duty although DISCOMs bear the entire expenditure of the police station including the salary. The FIR lodged in the Energy police station is also very less. The establishment of energy police station in Orissa has not yielded the desired result which is evident from unrelenting distribution loss. As per Section 153 of Electricity Act, 2003 five Additional District Judge Courts have been declared as Special Court for Energy. But till date there has been no conviction through those courts. This shows poor case handling by energy police stations.
6.4 Consumer Satisfaction Survey

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. 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. 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 of data collection consist of a structured questionnaire (Annexure I) 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. Therefore, we had prepared a questionnaire involving consumer service which was administered to about 1200 consumers basically domestic and commercial in nature. After pilot testing of the instruments and rigorous training

212

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 2009. The senior members of the study team conducted some of the FGDs and principal informant interviews themselves in two installments. The findings of the above survey can be summarized into three categories namely supply related, grievance redressal related and overall satisfaction related.
6.5 Power Supply Related Findings:

Regarding voltage of supply 23% of respondents have termed it as very good, while 57% have termed it as good.
Graph- 23 Supply Voltage (All Orissa)
Supply Voltage Quality %age of Respondents

60% 50% 40% 30% 20% 10% 0%

57%

17%

23% 3%

Poor

Good
Opinion

Very Good

So So

Therefore, most of the consumers are satisfied with the voltage level at which they are being supplied with electrical energy. But the opinion varies greatly between DISCOMs and so also among the rural and urban consumers which is depicted in the table below: Table - 65 Supply Voltage Quality (% of respondents) Licensees Area Poor Good Very Good So so Rural 28 64 8 0 CESU Urban 12 60 24 4 Rural 20 64 12 4 NESCO Urban 8 44 44 4 Rural 32 56 8 4 WESCO Urban 12 56 32 0 16 64 12 8 SOUTHCO Rural Urban 8 48 44 0 Regarding the number of interruption many of the consumers are dissatisfied. This can be understood from the following graph and table. It is seen that interruption in Rural area is lower than Urban area which is fully dependent on perception of the respondents. Rural respondents view that present interruption level is less than pre reform period.

213

Graph- 24 Interruption Level (All Orissa)

Interruption Level

Less Interruption, 48%

High Interruption, 52%

High Interruption Less Interruption

Table - 66 Interruption Level (% of respondents) Licensees Area High Low Rural 40 60 CESU Urban 60 40 Rural 36 64 NESCO Urban 68 32 Rural 48 52 WESCO Urban 64 36 44 56 SOUTHCO Rural Urban 56 44

In quality of power supply no indicators are more important than the supply voltage and interruption level. From the above discussion it is concluded that the power interruption problem is more a menace than poor voltage level.
Graph- 25 Fault Related Service (All Orissa)
Fault Related Service

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

44% 32% 20%

% ag eo fR esp o n d en ts

4% 0%

Sa tis fa ct or y

Po or Ve ry

Opinion

214

No tk no wn

G oo d

Po or

Licensees CESU

Table - 67 Fault related Service (% of respondents) Area Good Satisfactory Poor

Very Poor

Not Known

Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban

48 48 56 40 40 48 48 24

36 32 32 20 36 36 40 24

16 20 8 24 24 16 8 44

0 0 4 16 0 0 4 8

0 0 0 0 0 0 0 0

Regarding attending the supply failure the performance of the DISCOMs are also good as is evident from the above graph. Around 72% of the consumers are happy with fault related service of DISCOMs.
Graph- 26 Metering Status (All Orissa)
Metering Status
100%

89%

%age Respondents

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Meter w orking

4%
Not w orking meter

7%
Meter not provided

Opinion

Table - 68 Metering Status (% of respondents) Licensees Area Working Not Not Working provided Rural 96 4 0 CESU Urban 92 0 8 Rural 88 8 4 NESCO Urban 80 4 16 Rural 92 8 0 WESCO Urban 88 4 8 56 40 4 SOUTHCO Rural Urban 80 4 16

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As per the survey around 11% of consumers are availing power without a meter or through a faulty meter. In SOUTHCO around 40% of the rural population are using electricity with defective meters. This is perhaps one of the reasons for high AT&C loss in case of SOUTHCO. Section 55 of Electricity Act, 2003 provides that no licensee or DISCOM shall supply electricity except through installation of a correct meter. Therefore, in addition to non-compliance of a statutory provision the DISCOMs have failed in energy audit. This one of the reason for high distribution loss in Orissa.
Graph- 27 Supplier of Meters (All Orissa)

Supplier of Meters %age of Respondents 40% 30% 20% 10% 0% DISCOMs Consumer Either / Or Opinion
Table - 69 Suppliers of Meters (% of respondents) Area DISCOMs Consumers Either/ or

37%

34% 26%

3% Can't say

Licensees CESU

Cannot say

Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban

44 32 32 40 48 36 32 28

24 60 8 48 20 44 12 56

32 8 56 12 28 16 48 16

0 0 4 0 4 4 8 0

As per proviso of Section 55 of Electricity Act, 2003 the licensee may require the consumer to give him security for the price of a meter and enter into an agreement for the hire thereof, unless the consumer elects to purchase the meter. Therefore, the meter can either be supplied by the consumer or DISCOM. From our survey only 26% of the consumers are aware of this fact.

216

Graph-28 Prior Intimation of Power Shutdown (All Orissa)

Prior Intimation of Power Shutdown

No, 52%

Yes, 48%

Table - 70 Prior Intimation Power Shutdown (% of respondents) Licensees CESU Area Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban Yes No

44 56 32 48 40 52 52 60

56 44 68 52 60 48 48 40

The DISCOMs have failed in intimating the consumers about the planned power shutdown for maintenance work. The opinion is approximately divided into same percentage here with slight swing towards no prior intimation. It is seen from the above table most of the rural consumers doe not get information about planned power shutdown from the licensees.
6.5.1 Quality of Consumer Service Related Findings:

It is found that around 76% of the consumers are satisfied with the billing related services of the DISCOMs. This has been depicted in the graph and table below:

217

Graph- 29 Billing Related Service (All Orissa)

4% 20%

Billing Related Services

Good Satisfactory

44%

Poor Very Poor

32%

Table - 71 Billing Related Service (% of respondents) Licensees CESU Area Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban Good Satisfactory 52 28 44 36 40 44 36 20 44 40 40 24 48 32 48 32 Poor 16 16 12 36 12 32 20 20 Very Poor 4 4 4 8 4 4 0 0

Grievance Redressal is a major problem the consumer experience in electricity service. Very large percentage of consumers are not satisfied with the inherent mechanism the licensees have installed in their organization to address public grievance.

218

Graph- 30 Grievance Redressal (All Orissa)

Grievance Redressal by DISCOMs

70% 60% 50%

61%

%age

40% 30% 20% 10% 0%

Good Satisfactory Poor/Very Poor

22%

17%

Opinion

Table - 72 Grievance Redressal (% of respondents) Licensees CESU Area Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban Good Satisfactory 32 12 20 16 24 28 16 8 28 16 24 12 20 24 12 20 Poor/Very Poor 56 64 48 76 56 64 56 68

From our survey it is evident that the awareness of consumers about Grievance Redressal Forum (GRF) is less which have been installed under Electricity Act, 2003 to address the grievances if they are not properly heard by the licensees. There are about 56% of consumers who do not have information about GRF. Therefore, Grievance Redressal Mechanism and associated rights such as compensation for failure of guaranteed standard of performance are beyond the reach of the general consumers.

219

Graph- 31 Awareness about GRF (All Orissa)

Awareness about GRF
%age of Respondents

60% 50% 40% 30% 20% 10% 0% Yes

Opinion

56% 44%

No

We have a very interesting finding that about 83% of consumer in all Orissa basis say that the attitude of the staff is good or satisfactory. The graph and table below represent consumers opinion about attitude of the staff.
Graph- 32 Attitude of Staff (All Orissa)
3% 3% 11%

Attitute of the Staff

Good 50% Satisfactory Poor Very Poor 33% Can't Say

Licensees CESU

Area Rural Urban Rural NESCO Urban Rural WESCO Urban SOUTHCO Rural Urban

Table - 73 Attitude of Staff (% of respondents) Good Satisfactory Poor Very Poor Cant say 64 20 12 4 0 32 48 12 4 4 52 16 8 0 4 28 52 12 4 0 64 20 8 4 4 28 52 16 4 0 80 8 4 4 4 32 44 16 0 8

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Regarding electricity tariff the consumers pay to the DISCOMs the opinion of the consumer is satisfactory. They feel the electricity tariff is justified and is commensurate with the service.
Graph- 33 Justification of Tariff (All Orissa)

Justification of Tariff

38%
Justified Not Justified

62%

Table - 74 Justification of Tariff (% of respondents) Licensees Area Justified Unjustified Rural 88 12 CESU Urban 44 56 Rural 80 20 NESCO Urban 40 60 Rural 88 12 WESCO Urban 36 64 72 28 SOUTHCO Rural Urban 48 52

Tariff for electricity is fixed by the Orissa Electricity Regulatory Commission (OERC) considering various factors like cost of supply and consumer services etc. The opinions of the people in this regard indirectly assess the orders issued by the Commission. More than 13 years have passed since power sector reform was initiated in the State. People have felt considerable improvement in the electricity service after the initiation of the reform. About 64% of people(All Orissa basis) have opined that there have been perceptible changes in the consumer services after the reform.

221

Graph- 34 Improvement of Consumer service (All Orissa)

70% 60% 50% %age 40% 30% 20% 10% 0% Yes Opinion No 36% Improvement in Consumer Services after Reform 64%

Table - 75 Improvement of Consumer service (% of respondents) Licensees Area Yes No Rural 80 20 CESU Urban 44 56 Rural 84 16 NESCO Urban 48 52 Rural 84 16 WESCO Urban 48 52 76 24 SOUTHCO Rural Urban 48 52

Privatization of DISCOMs is the major step which has taken place after disbanding of erstwhile OSEB. The Government distanced itself from the day to day functioning of the utilities. Consumers are satisfied with the functioning of private management in the utility which can be seen from the graph below. People feel privatization of power distribution is good for consumers and the utilities. Graph- 35 Is Privatization good for consumer and Utility (All Orissa)
Is Privatization good for Consumer and Utility ?

70% 60% 50% %age 40% 30% 20% 10% 0%

65%

35%

Yes

Opinion

No

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Table - 76 Is Privatization good for consumer and Utility (% of respondents) Licensees Area Yes No Rural 88 12 CESU Urban 44 56 Rural 80 20 NESCO Urban 52 48 Rural 84 16 WESCO Urban 48 52 88 12 SOUTHCO Rural Urban 36 64

Electricity Regulatory Commission is the pivot of the power sector of the State. It not only regulates the utilities but also facilitates the development of power sector of the State. It fixes tariff, over sees Grievance Redressal Mechanism and resolves the dispute between utilities etc. But it is surprising to note that majority of the consumers have no idea about existence and functioning of Orissa Electricity Regulatory Commission. It shows failure of the Commission in publicity of its activities.
Graph- 36 Awareness about OERC (All Orissa)
Awareness about OERC 80% 70% 60% %age 50% 40% 30% 20% 10% 0% Yes Opinion No 33% 67%

6.5.2 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.

223

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 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.
6.5.3 Alternative sources of power and associated cost:

The Table below 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).
Table - 77 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 >1 KW TO >5 KW TO Above <=5 KW <=10 KW 10 KW 9 7 17 2650 8597 6789

Type of Alternatives

<=1 KW

Total

No. of Units Avg Cost (Rs. Diesel Per month) Generator Avg Hrs per Month No.of Units Avg Cost (Rs. Gas Per month) Avg Hrs per Month No. of Units Avg Cost (Rs. Solar Per month) Avg Hrs per Month No.of Units Avg Cost (Rs. Per month)

7 3078 61 28 369 38.2 0 0 0 25 757

40 5614 45 49 745 42.3 2 335 7.5 44 1141

55 18 1290 41.7 0 0 0 14 2005

31 3 733 72.7 0 0 0 3 1133

39 0 0 0 2 335 7.5 2 500

224

Type of Alternatives

<=1 KW

Others

Total

Avg Hrs per Month No.of Units Avg Cost (Rs. Per month) Avg Hrs per Month

40.0 100 867 42.2

Capacity wise User Category >1 KW TO >5 KW TO Above <=5 KW <=10 KW 10 KW 46.3 8.7 7.0

Total

37.1 222 2268 40.9

59 1773 45.6

28 5060 37.8

34 5421 31.2

6.5.4 Gist of finding of beneficiary survey

Attitude of the staff towards consumer service is good. People are not satisfied with the way the grievances are handled by the utilities. People are unaware of existence of GRF. People are unaware of compensation for violation of standard of performance. Power interruption is a major problem than poor voltage. Consumers are satisfied with fault related services People dont get prior intimation for planned power shutdown. Although consumers avail supply through proper meter they are unaware of who is to supply meter Consumers are satisfied with billing related services People know about their consumer category and tariff. Tariff is commensurate with the electricity service. People are unaware of existence/functioning of OERC. Privatization is beneficial both for consumers and utilities. Generally, consumers feel there has been considerable improvement in electricity service after reform.

From the above findings it can be summarized that although there have been improvements in electricity service after reform still consumer awareness level is unsatisfactory. They are unable to avail or claim different services which have been created for them after reform. Electricity supply related problems override the billing related problems in Orissa. This has necessitated investment in electricity distribution network. The important institution like OERC has failed in publicizing the different benefits available to the consumers.
6.6 Impact of Reform on Poor of Orissa A complete fiasco

Power sector reforms generally involve commercialization setting up of Independent Regulators, restructuring and privatization of electricity sector. Ensuring that power sector interventions are designed so as to benefit the poor is vital both for social equity and sustainability of the reform process. Following a more than a decade of energy sector reforms in Orissa it is appropriate to ask to what extent these reforms have benefited the poor. There is often a concern that these reforms disadvantage the poor. 225

Graph- 37

From the above table it can be seen that higher the State per capita domestic product more is the level of electrification of households. The States like Punjab, Maharashtra and Haryana have both higher level of households electrification and per capita State domestic product. Since the present study seeks to identify the extent of the impact of reforms of the poor it is necessary to make a distinction between the poor and non-poor. Various options available to distinguish electricity access for the poor and the non-poor along with their merits and demerits are discussed below: Electricity access for BPL (Below Poverty Line) population: The ideal option would be to study electricity access for the poor as defined by the National Poverty Line or other income definition of the poor. However, often data on this is not available directly. The Govt. of India launched the KJ (Kutir Jyoti) programme in 1988-89 for extending single point light connection to the households of BPL rural families. Since the KJ programme was designed to target the BPL population, the number of KJ connections has been used for identifying electricity access to the BPL population. A second option is to use the electricity data for rural access as proxy for the poor. The rationale for using for proxy is that the income level and access to the electricity in rural areas are significantly lower than those in urban areas. The limitation of this approach is that it implies the whole population in rural areas is poor and ignores the urban poor. Again in Orissa utilities compile data according to different categories of consumers and not according to urban and rural areas. Because of non-availability of data this approach has not been adopted in this thesis.

226

Graph- 38

Graph- 39

In Orissa the number of KJ connections has been used as a proxy for the poor households electrified in rural areas. For this study the urban poor in Orissa have not been considered which is not a serious limitation as 85% of the poor population of Orissa lives in rural areas. Orissa has a population of 36,706200 with an annual growth rate of 1.4%. Only 14.97% of the total population in the State is urban. It is one of the poorest State in India with the highest percentage of BPL population (47.15%). Table - 78 Share of rural and urban population in Orissa Year Urban Rural Rural Population Urban Population % BPL (Below Population (%) Population (%) % BPL (Below Poverty Line) Poverty Line) 1991 13.38 86.62 49.72 41.64 2001 14.97 85.03 48.01 42.83 Source: Census of India 2001 and Tariff Orders of OERC Access to the electricity is indicated through an indicator called electrification level. This indicator provides an estimate of the proportion of the households that 227

have physical access to the electricity. As 85% of the population of Orissa reside in villages, level of rural electrification may be a approximation of the access of electricity to the poor of Orissa. Rural electrification has been regarded as a vital programme for the development of rural areas. In 1947, only 1500 villages were electrified in India. The per capita consumption was 15 units. The initial focus was on 'electrification for irrigation' to enhance agricultural produce which was reflected in the definition of village electrification accepted till 1997 - that "a village was deemed to be electrified if electricity is being used within its revenue area for any purpose whatsoever". This definition of village electrification was reviewed in consultation with the State Governments and State Electricity Boards and following new definition was adopted after 1997: "A village will be deemed to be electrified if-electricity is used in the inhabited locality within the revenue boundary of the village for any purpose whatsoever. In February, 2004, the definition was made even more encompassing as also target specific. " A village would be declared electrified if : (ii) Basic infrastructure such as distribution transformer and distribution lines are provided-in the inhabited locality as well as the dalit basti/ hamlet where it exists. (For electrification through Non-conventional Energy Sources a distribution transformer may not be necessary). Electricity is provided to public places like schools, panchayat offices, health centres, dispensaries, community centres, etc. and The number of households electrified should be at least 10% of the total number of households in the village.

(iii) (iv)

Government of India from time to time had launched different programmes such as MNP programme, PMGY and Kutir Jyoti scheme (KJ) etc. for rural electrification. Inspite of numbers of programme for rural electrification as well as for energization of pump sets it had not progressed as expected. The poor financial health of the OSEB, increasing reluctance to move to the rural areas because of high costs and low returns is largely responsible for this trend (Gokak, 2002). The Gokak study also points out that the financial burden imposed by the programme of rural electrification, which was subsidized was enormous. Govt. of India launched Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in April 2005 for achieving the National Common Minimum Programme objective of providing access to electricity to all Rural Households within four years which was subsequently extended upto 2011-12. Rural Electrification Corporation (REC) is the nodal agency for the programme. Under this scheme 90% Capital Subsidy will be provided for rural -electrification infrastructure through: (i) (ii) Creation of Rural Electricity Distribution Backbone (REDB) with one 33/11 kV (or 66/11 kV) substation in every block where it does not exist. Creation of Village Electricity Infrastructure (VEl) for electrification of all un-electrified villages/habitations and provision of distribution transformer(s) of appropriate capacity in every village/habitation.

228

(iii)

Decentralized Distributed Generation (DDG) and Supply System from conventional sources for Villages/Habitations where grid supply is not cost effective and where Ministry of Non-Conventional Energy Sources would not be providing electricity through their programme(s).

Balance 10% will be loan assistance on soft terms by REC. The scheme, inter-alia, provides for funding of electrification of all un-electrified Below Poverty Line (BPL) households with 100% capital subsidy. The scheme aims at electrifying all un-electrified villages within 2011-12 and provide access to electricity to all rural households.
Table- 79 Percentage of Village Electrification Total inhabited villages Nos. of Village Electrified as per 2001 census as on 31-03-09 47529 26535 Source: Ministry of Power, Govt. of India

%age of villages electrified 55.8

Year

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Nos. of Kutir Jyoti Consumers 64155 62690 69260 49836 32039 23691 21703

Table- 80 The level of electrification Consumption Nos of other in Million Units Domestic Consumer (MU) (Non-BPL) 34.01 1375599 13.64 1532695 24.58 1670905 13.86 1790740 11.15 1905126 13.46 2009148 8.58 2133456 Graph- 40

Consumption in Million Units(MU) 2228.60 2398.64 2387.07 2348.32 2470.37 2519.52 2678.53

Percentage Grow th of KJ cosum ers(poor) Vrs other Non poor Dom estic Consum ers Percentage Growth 20 10 0 -10 -20 -30 -40 Years 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Series1

Series2

(Source: Performance Review of DISCOMs by OERC)

229

Graph- 41
Per Capita Poor Vrs Non Poor (Dom estic) Electricity Consum ption 150 Units(kWH) 100 50 0
Series1 Series2

2001-02 1.97 114.88

2002-03 0.78 121.94

2003-04 1.38 119.68

2004-05 0.77 116.11

2005-06 0.61 120.46

2006-07 0.73 121.16

2007-08 0.46 127.02

Series1 Series2

Years

(Source: Performance Review of DISCOMs by OERC. Calculation is made on Actual sales to particular Category not on Gross method) From the above study it is seen that the percentage growth of Kutir Jyoti consumers and per capita electricity consumption of poor have taken a negative trend after the reform. The per capita consumption of poor is less in comparison to other non-poor consumer also. This may be due to low paying capacity of the poor and frequent power interruption in rural areas. Therefore, it can be conclusively stated that the power sector reform has failed to change the lives of the poor consumers of the State.
6.7 Power surplus a myth in Orissa

Orissa has been adjudged as a power surplus state after the initiation of reform. Even GRIDCO has been trading the power with outside state due to this surplus situation. This surplus situation had arisen due to poor status of rural electrification, less industrialization and low level of standard of living. The per capita consumption of electricity in Orissa is around 500 units/year today where as it was around 293 units/year during the initiation of reform in the year 1995-96. The present per capita consumption in India of electricity is 732 units/year. The Government of India has an ambitious programme of making per capita consumption of 1000 units per year by 2012. It can be observed from the table below that from the year 2007-08 the requirement of electricity has already overtaken the availability. Therefore, power regulation is likely to be imposed in the State from the first month of the year 2010. To add to the woes of the utilities due to massive rural electrification through Central sponsored programme like RGGVY and BGJ around another 28 lakh consumers will be added to the network of them by 2012. The present crisis appears to be the outcome of complacent attitude of the State Government towards addition of generation capacity. Not a single MW of capacity has been added to the system by the Government except ongoing projects from pre-reform period like Indravati Hydro Electricity Project till date in spite of huge addition of consumers to the system.

230

Graph- 42 Electricity Availability vrs. Demand

25000 19948.521 20000 14970.732 Unit in MU 15000 11845.439 12994.732 10000 11302.568 13163.486 14216.469 17019.239 18059.941 15766.904 17928.806 15856.811 18220.894 19382.079

5000

0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Period

Net availability - firm sources (onw and EREB share)

State's requirement

Addition of huge numbers of rural consumer to the system will not only make the state power deficit but will also have problem in tariff setting as these groups of consumers are basically BPL (Kutir Jyoti) consumers getting cross subsidy in tariff from cross subsidizing consumers like industries. That means tariff for industrial and commercial consumers is likely to go up in near future in Orissa.
6.8 Summary of the chapter:

Improvement in the Quality of supply with optimum cost and better consumer services are the main aims of Power Sector Reform in the state. Quality of service basically involves the uninterrupted power supply with desired voltage. Regulators have devised Reliability indices to measure the frequency and duration of interruption of power supply. They are namely SAIFI, SAIDI and CAIDI etc. The DISCOMs supply the measured indices to Regulators at different intervals. In case of Orissa there is no such mechanism to verify the authenticity of those indices supplied by DISCOMs. The public opinion some times contradicts the information supplied by the DISCOMs. Regulatory Commission has specified different performance standards for DISCOMs in the power supply front. They are namely guaranteed standards of performance and overall standard of performance. The DISCOMs pay compensation to consumers for violation of guaranteed standards of performance where as they are expected to achieve the overall standard set by the Commission. Different State Regulatory Commission have issued performance standards and rate of compensation for non-compliance of those standards. Consumers can move Grievance Redressal Forum (GRF) and Ombudsman if their grievances are not addressed during the stipulated time. A sample survey of 400 domestic and commercial consumers were made through a questionnaire. It was found from the survey that power interruption is a major problem in comparison to poor voltage. The consumers are satisfied with the prevalent power tariff. They had expressed their anguish over non-redressal of their grievance in time. They were generally unaware of Grievance Redressal Procedure available to them under restructured model. Orissa Electricity Regulatory Commission has failed in publicizing the rights and duties of the

231

consumers under different Regulations framed by them. People opined that privatization of utilities had brought about improvement in electricity services after reform. Poor of the State particularly the rural poor have become victim of power sector reform. There has been tardy progress in providing Kutir Jyoti electricity connection to BPL category of consumers. The per capita consumption of poor people have also declined seriously. This has been due to frequent power interruption in rural areas. We have adopted the following hypotheses for our study. To study the performance standard in consumer services To study if the impact of reform has been good for the poor. The hypotheses have been examined and it was found that consumer service after the reform has partially improved. But it has not met the desired expectations due to various reasons such as poor or no investment in the distribution network and management inefficiency of the DISCOMs. The impact of reform on the poor has been disastrous. Most of the BPL households have remained beyond the electricity network. The privatized DISCOMs have shown little interest in electrifying BPL households as supplying electricity to those household is highly cross-subsidized. DISCOMs have, therefore, failed in discharging their social responsibility.

232

References:

1. 2. 3. 4. 5. 6. 7. 8.

Quality of Service of distribution utilities, Prayas, Pune. OERC (Grievance Redress Forum and Ombudsman) Regulation 2004. OERC (Licensees Standards of Performance) Regulation 2004. LTTS(8/2003)order of OERC OERC tariff orders of various Years Report of FERC Performance review of DISCOMs for different years by OERC Census report of Orissa2001(www.orissa.gov.in)

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CHAPTER7 CONCLUSION

The Infrastructure Sector in India was after independence completely in the hands of the public sector and this hampered the growth of this sector. India's less spending on real estate, power, telecommunications, construction, and transportation prevented the country from sustaining very high rates of growth. The amount that India was spending on the Infrastructure Sector was 5% of GDP in 2006-07. Infrastructure Sector Growth Rate in India GDP came to 3.5% in 1996- 1997 and the next year, this figure was 4.6%. The Growth Rate of the Infrastructure Sector in India GDP increased after the Indian government opened the sector to 100% foreign direct investment (FDI). This was done in order to boost the Infrastructure Sector in the country. The result of opening the sector to the private sector has been that Infrastructure Sector Growth Rate in India GDP has increased at the rate of 9%. It is estimated that the Growth Rate of the Infrastructure Sector in Indian GDP will grow at the rate of 8.5% between 2006 and 2010. Infrastructure Sector Growth Rate in India GDP thus has increased over the last few years due to the efforts that have been made by the Indian government. The government of India must continue to take steps to improve the Infrastructure Sector in the country. For this in its turn will help to boost the Indian economy in future. Among the different segment of infrastructure sector power plays an important role. Different players such as Central Government, State Government and Private sector have their roles in the development of power infrastructure in India. After liberalization of Indian Economy in 1991 the role of private player in this sector has been phenomenal. Power Sector has seen most of the reforms than other sectors in the infrastructure portfolio. The reform in power sector had been first initiated in a small State like Orissa. The monolithic State Electricity Board was corporatised into different utilities basing on their functions. Orissa is the first State to get a regulator in the power sector in entire country. This Orissa model of reform was pursued by Government of India and several other States in subsequent years. In the mean time 13 years have already passed in Orissa since power sector reform was first experimented here. During the last 13 years the reformed power sector of Orissa is expected to have attained maturity. A lot of curiosity is likely to be generated in the minds of the researchers whether the aim for which power sector reform was initiated in the one of the poor state of the country has achieved the target for which it was initiated. This is the main reason for which the present study The Power Sector Reform in Orissa a new way of Corporate Governance A Case Study of Orissa has been carried out. Reform became imperative since the power sector in the State had become unsustainable due to various factors as mentioned below: (a) (b) (c) Vertically integrated monolithic structure of Orissa State Electricity Board (OSEB) which did not engender either efficiency or effectiveness; Lack of commercial orientation Adverse capital structure

234

(d) (e) (f) (g) (h) (i)

High Transmission and Distribution losses both technical and commercial Non-remunerative tariff Downward trend in industrial consumption and increase in domestic and agricultural consumption which entailed a high level of cross-subsidy Inadequate investment in generation, transmission and distribution sectors Widening demand-supply Gap Inadequate maintenance of the existing generating stations and transmission and distribution network resulting in low plant load factor (PLF) of generating stations and poor reliability of transmission and distribution network Poor billing and collection Poor quality of the service to the consumers Manpower related problem and Misuse of section 78A of the Electricity (Supply) Act 1948 which stipulated that Government should provide policy directives to the State Electricity Boards (SEB).
Major Findings

(j) (k) (l) (m)

7.1

The vertically integrated State Electricity Board has been corporatized into different utilities basing on their functions such as generation, transmission and distribution. Due to this functional separation more accountability and responsibility have been built up in the sector. Distribution business has been disinvested in favour of private investors. Apart from equity investment the private investors have not invested anything in the business. The Government of Orissa has stopped providing any subsidy to this sector after reform which is still continuing in the other states. On the other hand Government collects revenue around Rs.250 crore per annum in the shape of electricity duty which is collected from the general consumers of the State. 7.1.1 Distribution Loss which was 44.01% in the year 2000-01 has not reduced much and is still 37.35% in the year 2008-09. The LT loss is major source of worry. The LT loss which was 57.6% in 2001-02 was now around 58%. This means after nearly 10 years of privatization the DISCOMs have not been able to control commercial loss in shape of power theft, meter bypassing and tampering etc. Due to this huge LT loss the honest consumers are burdened with higher tariff as total revenue for LT sales is to be partially recovered from the units billed to the consumers. 7.1.2 The growth of consumer base after reform has been phenomenal. This may be due to urbanization, poverty alleviation and industrialization. The consumer strength which was around 14 lakh during 1999-2000 has already reached the level of 25 lakhs by the end of financial year 2007-08. The percentage rise in sales to LT consumers has been less than EHT consumers during the year after privatization. The high sales to EHT consumers has been able to camouflage the high over all distribution loss as EHT sale is a zero loss business.

235

7.1.3 It is found that although the power purchase in real terms has been increasing year after year the price at which DISCOM purchase the power from GRIDCO has not increased proportionately. This means OERC through regulatory intervention has been able to keep the Retail tariff constant for several years by insulating DISCOMs from rise of power purchase cost through adjustment in BSP. 7.1.4 It is seen that the most of the DISCOMs have increasing employee cost over the years. The employee cost of SOUTHCO per unit sale appears to be the highest among all the DISCOMs. The reason for higher per unit employee cost is due to higher LT base (Domestic etc.) of SOUTHCO among all the DISCOMs. The less per unit employee cost of WESCO is due to higher sale to Industries where number of consumer is less but sale per individual consumer is too high. 7.1.5 CESU and SOUTHCO have higher R&M cost for unit sale of electricity than WESCO and NESCO due to their higher percentage of LT network which requires frequent maintenance. 7.1.6 It is explicit that the A&G cost for per unit sale of electricity has been increasing over the years in case of CESU and SOUTHCO. This can be attributed to higher percentage of LT sale (Domestic etc.) in case of these utilities. Particularly in case of CESU the rise in A&G cost has been phenomenal in the year 2005-06 and 2006-07 although there has been rise in industrial sale. This indicates unnecessary expenses on different un-productive head by the DISCOMs. 7.1.7 It is found that the revenue realization per unit sale of electricity of all the DISCOMs have taken upward turn. That means the collection efficiency have increased considerably over the years which have contributed considerably in reducing AT&C loss. It can be concluded that higher percentage of billed amount remains un-collectable in case of NESCO and WESCO although their industrial consumer base is broader than CESU and SOUTHCO. Surprisingly CESU which has a huge %age of domestic consumer its bad debt amount is least among all the DISCOMs. 7.1.8 Higher percentage of billed amount remains un-collectable in case of NESCO and WESCO although their industrial consumer base is broader than CESU and SOUTHCO. Surprisingly CESU which has a huge %age of domestic consumer its bad debt amount is least among all the DISCOMs. 7.1.9 Stores and inventories of utilities have been showing declining trend in spite of Consumers security deposit has increased manifold after privatization which has helped the DISCOMs to overcome liquidity problem due to less in flow of revenue resulting from poor billing efficiency. 7.1.10 Due to operational inefficiency DISCOMs have eroded their equity base. The net worth of DISCOMs have become negative. Current ratio of all the DISCOMs have shown downward trend at the same time Debt Equity ratios have shown up ward trend indicating the poor loan arrangement capability of DISCOMs. Percentage of accumulated loss of DISCOMs have been increasing year after year and SOUTHCO has accumulated the highest percentage of loss among the DISCOMs.

236

7.1.11 It can be inferred that although DISCOMs have been made structurally viable but they have become financially unviable due to operational inefficiency and mismanagement. This operational inefficiency can be particularly attributable to loss of revenue due to huge amount of distribution loss. 7.1.12 Orissa power sector as a whole has turned around since 2003-04.This has been made possible due to profit of GRIDCO and power generators like OHPC and OPGC in spite of poor performance of DISCOMs. GRIDCO has made profit after the year 2003-04 due to trading of surplus power and income due to Unscheduled Interchange (UI). But the power surplus scenario has changed recently and the State is moving towards power deficit due to rapid industrialization and nonaddition of capacity in generation. 7.1.13 Unless the consumer metering and distribution transformer metering including indexing of consumer are complete it is very difficult on the part of distribution utilities to pinpoint the area where energy theft or distribution loss takes place. 7.1.14 The Retail Tariff in Orissa has remained more or less constant with minor changes here and there after 2000-01 Cross subsidy in tariff. If we consider the price rise it would be seen that the effective real rise in tariff has been of the order of (-) 26.24% by 2009-10. But there is a tariff rise of 22.20% over the tariff of 2009-10 in 2010-11. This means the tariff rise as approved by the OERC is much less as compared to the rise in general prices. In Orissa the electricity tariff is fully rationalized basing on three voltage level of supply such as LT, HT and EHT. That means the consumers in a particular voltage level of supply pay uniform tariff for electricity they use. The cross subsidy paid by the high end consumers through tariff have been decreasing gradually year after year. Now, it is within 20% of the cost of the supply. 7.1.15 OERC deviates from mandates of Tariff Policy while computing cross subsidy surcharge for Open Access. OERC accept the Bulk Supply Price as the power purchase cost of DISCOMs instead of considering weighted average cost of power purchase from top 5% at the margin of power purchase cost from generators. This is because of single buyer model power purchase followed in Orissa. Therefore, although competition in distribution is already introduced through Open Access in Orissa it has not become so in power purchase by utilities. 7.1.16 Delhi Government has learnt from Orissa power sector reform experience. There has been transitional support to power sector after reform but in contrast Government of Orissa has completely stopped paying any subsidy since the inception of reform. During initiation of reform the private investors had no idea about actual level of distribution loss. This is one of the reason for wrong projection of cash flow by them. The DISCOMs of Delhi have very less rural consumer base in comparison to Orissa but still they have been availing support in the form of cash subsidy from the Government. 7.1.17 Franchisee Operation in distribution sector has been introduced in Orissa recently in limited manner. Though they have been able to increase collection efficiency they are still way behind in curbing in the distribution loss.

237

7.1.18 Competition has been introduced in the form of Open Access in the distribution sector. Though there are numbers of inter-State Open Access consumer there has been no intra-State consumer. The intra-State Open Access consumers are basically industrial houses which mean general domestic consumers have not availed the benefit of competition in this sector due to high cross subsidy surcharge. 7.1.19 DISCOMs have not been paying compensation to any consumer for violation of guaranteed standard of performance on the plea of force majeure condition. OERC has no such mechanism to verify such claims of the DISCOMs. Even OERC has not developed any mechanism to verify authenticity of data supplied to it pertaining to overall standard of performance by DISCOMs 7.1.20 Electricity Act2003 has no mention of appellate forum over the electricity ombudsmens order. People generally approach High court for their redressal of Grievances if they are not satisfied with the order of Ombudsmen. This should be clarified in the Act itself. 7.1.21 The establishment of energy police station in Orissa has not yielded the desired result which is evident from unrelenting distribution loss.FIR lodged in the police stations are very less 7.1.22 Gist of finding of beneficiary survey Attitude of the staff towards consumer service is good. People are not satisfied with the way the grievances are handled by the utilities. People are unaware of existence of GRF. People are unaware of compensation for violation of standard of performance. Power interruption is a major problem than poor voltage. Consumers are satisfied with fault related services People dont get prior intimation for planned power shutdown. Although consumers avail supply through proper meter they are unaware of who is to supply meter Consumers are satisfied with billing related services People know about their consumer category and tariff. Tariff is commensurate with the electricity service. People are unaware of existence/functioning of OERC. Privatization is beneficial both for consumers and utilities. Generally, consumers feel there has been considerable improvement in electricity service after reform.

7.1.23 It is found that the percentage growth of Kutir Jyoti(Poor) consumers and per capita electricity consumption of poor have taken a negative trend after the reform. Hence, poor people of Orissa have not benefited from power sector reform 7.1.24 Not a single MW of capacity has been added to the system by the Government except ongoing projects from pre-reform period like Indravati Hydro Electricity

238

Project till date in spite of huge addition of consumers to the system. After reform Orissa has become power deficit since FY2008-09 for the first time 7.1.25 OERC has adopted best practice regulations such as transparency, accountability, predictability, consistency, consultation, independence etc successfully. The State Government has unnecessarily intervened in the Regulation making power of OERC by amending certain Regulation. The appointments of retired bureaucrats and engineers of the Government as Members of the Commission has defeated the spirit of the Electricity Act, 2003. 7.1.26 The participation of objectors in the Tariff Hearing process is limited. The message from Regulators side or DISCOMs side have not reached the masses many of whom are poor, illiterate or stay in far flung areas of the State. Therefore, OERC has failed in communicating the scope of participation by consumer in Regulatory process. 7.1.27 State Government taking the help of statutory provision has curtailed the authority of the Commission in appointment and fixation of remuneration of the staff of the Commission.
7.2 Suggestion / Recommendation

a.

After reform DISCOMs appears to be weakest link in power chain. They are afflicted by high distribution loss resulting in un-sustainability of the power sector. Therefore, immediate attention should be given to arrest high distribution loss particularly in LT sector. Apart from strengthening their managerial capability they should be given Government support in the form of Energy Police Station immediately. Energy police stations should work directly under the supervision of DISCOMs. Nexus between staff and power thieves should be broken immediately. Distribution is the cutting edge of the power industry and it needs to be set right. Energy audit should be completed as soon as possible to pin-point the area prone to distribution loss. OERC should verify the authenticity of data submitted by DISCOMs regarding standard of performance through an independent agency. There should be massive publicity campaign regarding the role of OERC and Grievance Redressal Forums. Government of Orissa should take immediate action to set up both thermal and hydel power station to overcome present power crisis. Renewable energy should also be given priority. Unless the electricity market allows itself to be put under competitive pressure, performance improvement to the desired level might be difficult to achieve. Government should step in providing cash support in the intervening period to bridge the gap in profit and loss account. If budgetary support is not available then the initial funding agency like World Bank and DFID should be roped in. 239

b. c. d. e.

f.

g.

h. i.

GRIDCO past dues to generators before privatization should be borne by State Government through budgetary support. Single buyer model in Orissa is no longer viable. DISCOMs should be allowed to purchase power from generators. Therefore, PPAs should be reallocated between DISCOMs. Cross subsidy surcharge is to be calculated basing on marginal cost of power purchase. Open Access Charges should be so designed that more players will step in intra-State transactions. Government should enforce shareholders agreement signed with private investor in distribution. The private investor should be motivated to invest in the sector to upgrade the fragile distribution network

j.

k.

7.3

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.

240

Consumer Satisfaction Survey Form Please put a Tick Mark ( 3) in the appropriate Box. Name of Consumer: Category of Consumer: (Dom/ Com./Agri./ Ind. HT/ Ind. LT/ Ind. EHT) Location: Urban Rural Name of Distribution Company: CESU/NESCO/WESCO/SOUTHCO Supply/Quality Related Response 1. 2. 3. How is the Supply Voltage in your area? Poor Good Very Good Is your meter working properly? So so

Annexure-I

4. 5.

Yes No Not provided How did you get your connection? a. Through due procedure b. Paying unofficially for connection c. Through some known person Is there frequent interruption of power supply in your area? Yes No If the answer of above questions is YES then what is the maximum duration of interruption? Less than Within More than 5 Minutes 30 Minutes 1 hrs What is the reason for frequent power failure? Transformer Line failure breakdown Consumer Awareness (a) Who is to supply meter? (b) (c) (d) (e) (f) (g) (h) climatic disturbance Not known

6.

7.

Do you know how to calculate your load?

DISTCOs

Consumer Yes

Either or No No No No No

Do you know when and where to pay the bill? Do you know what is your consumer category and tariff? Do you know when you are liable for disconnection?

Yes Yes Yes

Do you know about call centre operating in your area? Yes Do you know about grievance redressal forum of your area? Yes No Are you aware of compensation for violation of standard of performance in service? Yes No

Consumer Service 8. What is the time period generally the fault is repaired after your complaint is lodged? Within 1 hr 2-3 hrs 4-6 hrs Indeterminate

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9. 10. 11. 12. 13.

How is the behaviour of the staff?

Very cordial

satisfactory

Poor

Do you get advance intimation regarding power shutdown? Yes Have you ever received any erroneous bill? Occasionally Do you get the electricity bill sufficiently in advance to get the rebate? Yes Have you suffered any inconvenience in paying electricity bills? Long Queues Distant Place No Problem Major Problems with your electricity service. (a) Billing related service 1 2 3 4 5 (b) Fault related service 1 2 3 4 5 (c) Counter Service 1 2 3 4 5 (d) Grievance Redressal 1 2 3 4 5 (e) General attitude of staff 1 2 3 4 5 [1] Good, [2] Satisfactory, [3] Poor, [4] Very Poor, [5] Not known/cant say. Are you aware at antitheft law? Meter tampering/By pass/Hooking? Yes No Are you aware of OERC and its function? Yes No Are there considerable improvements in electricity service due to power sector reform? Yes No If the answer to the above question is NO then which area requires most immediate attention? Poor voltage Yes High Tariff Frequent interruption Lack of proper attitude of staff Yes Billing mistakes Yes No Yes No Yes No No Yes Yes No No No Frequently No No Never

Occasionally late

14.

15. 16. 17. 18.

19. 20.

Is the electricity tariff justified commensurate to the service? Is privatization of power distribution business is good for Consumer and utility?

242

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