Power Sector Policies and the New Electricity Bill: From Crisis to Disaster

Draft Electricity Bill is in its nth avatar[i] and is now going through its final round of consultations before being placed in the Parliament. The salient features of the Bill – still called Draft Electricity Bill 2000 though we are in the year 2001 – are given below:

Generation will be free from licensing and will not require a techno-economic clearance from Central Electricity Authority (CEA) and would need to conform only to minimum technical standards laid down by CEA.
Any industry can set up captive generation anywhere and will get the right to transmit electricity to his plant through transmission lines of others.
Load despatch will be by an independent entity.
Transmission utilities will be for solely wheeling of electricity from generating stations to load centres but will not trade in electricity.
Distribution agencies will have their tariff regulated till competition is established. Once competition is established, the regulator will only fix wheeling charge.s
Rural Electrification will be done through users associations, co-operatives, NGOs, panchayats, etc.
Setting up of trading companies and a spot market for electricity. Transmission and distribution companies will have to provide an open access for wheeling such electricity for electricity traders.
All cross subsidies will be removed progressively and converted to explicit subsidies for any class of consumers.

These are indeed far reaching reforms and will lead to an electricity sector quite different from that we have seen in the last 50 years. For the first time, the electricity sector is being recast to strip away all social objectives that had been built into the sector. Instead, what is being attempted is a sector that will function on “commercial lines”, i.e., generate enough profits to fund its own expansion. The state’s role will be limited to regulating the sector and providing explicit subsidies to any group of consumers that it considers economically vulnerable and requiring such subsidies.

Apart from removal of all social objectives, the other premise of the Bill is to convert electricity into a commodity that can be traded freely. This, according to the proponents of the Bill, will introduce competition in generation and lead to reduction in prices of electricity. This coupled with the improvement in “efficiencies” that will presumably follow privatisation of the state run electricity sector, will see reduction of electricity rates in the long run.

Let us see what are the implications of some of the above assumptions. The argument of disengaging the state from the electricity sector is that this will reduce the state’s burden, as it will not have to foot the bill for the losses of the SEBs. What is left unsaid is that the subsidies that the state will need to provide may be much larger than the current losses. The Bill leaves the question of ownership, particularly of the transmission company deliberately vague. If the transmission company is owned by the state government, as it was in Orissa after these reforms were introduced there, then the losses of the transmission company will have to be added to the subsidies that the state will have to provide. If all these are added together, a back of the envelope computation will show that the outflow of the state governments is actually likely to increase after these reforms. This is a sleight-of-hand exercise — to call what are subsidies now as losses and call them subsidies later — claiming a reduction in losses.

The other premise of the Bill is that electricity can be supplied to rural areas through NGOs, Panchayats, Co-operatives, etc. Though there is no doubt that such innovative distribution schemes are urgently required for the rural areas, this leaves aside the question of who is to take electricity up to the distribution point near a village from where the local community structures can take over. The major cost is in providing the high-tension line and the substation. Purely from commercial standpoint, this activity is unlikely to be profitable and was the raison d’etre originally of setting up of the State Electricity Boards. Once the existing structure is dismantled as is being proposed in the Bill, there has to be an alternate mechanism in place for satisfying the need of rural electrification. It is not an accident that even in United States, rural electrification was completed in the 1930’s only after Roosevelt, under his New Deal, created Tenesse Valley Authority and Rural Electricity Administration for explicitly this purpose. For millions of people, the greatest conquest of New Deal was the electricity co-ops that brought electricity to vast regions that private utilities had refused to service.

[ii]
Important as the above issues are for social and political implications of the power sector reforms, they can be decoupled from another set of issues. These are related to the unbundling of the vertically integrated monopolies that have been the norm in the electricity sector all over the world till the mid 80’s. The reforms — in Chile under Pinochet and in UK under Thatcher — were to separate generation, transmission and distribution and spin them off as independent companies. The premise was that it would lead to competition amongst generators and bring down the price of electricity. It was with this end in view that California introduced large-scale changes in 1996 and dismembered its vertically integrated power utilities. Major reforms are underway in the world with the UK and now the California reforms as the model. However, the recent crisis of the electricity sector in California and the lack of success of the reforms in UK underline that these reforms are being undertaken with little evidence to show that there is a realistic basis for believing that the consumer, particularly the small consumer, benefits in anyway from such competition. Even worse, if these reforms fail, as it did in California, it is the smaller consumer who bears the brunt of the failure.
Another feature of the proposed Bill is taking away the power of techno-economic clearance from CEA. Currently, any project above a certain size needs this clearance. One of the crucial issues in the Enron case was that CEA did not give it a techno-economic clearance but had given it only a technical clearance. It had stated in its technical clearance that as the Finance Ministry had given Enron a financial clearance, presumably CEA did not need to examine the economic aspects of the project. This was one of the items challenged in the Court that under the Law, CEA cannot abdicate this responsibility and therefore no valid techno-economic clearance was obtained for the project. The implication of CEA’s lack of techno-economic clearance must now be clear to all; CEA was well aware that Enron was a project with inflated capital cost but chose to side-step it due to the political patronage that Enron obviously enjoyed. By removing CEA’s right to examine the capital costs of any major project, the Government wants to ensure that there are no hindrances to gold plating power projects and then claiming the need for higher tariffs. This is not an idle speculation. In the Hirma project, the Central Electricity Regulatory Commission compared the capital cost only with other fast-track projects such as Enron thus ensuring that the high capital cost of Hirma was not questioned. Thus, the Central Government, through this Bill, wants to ensure that any serious scrutiny of private power projects do not take place.

It may appear that the provision of captive generation in the Bill is quite innocuous; it allows industry to set up captive generation anywhere and without any restrictions. The issue here is that industry is the one class of consumer that provides cross subsidy to others. If industry is allowed to move away from the grid, then the grid will only have agriculture and domestic consumers. Under these conditions the Government subsidy to agriculture and low-end domestic consumers who will require support will only grow. One of the reasons for the current crisis of the SEBs is the industrial consumers are deserting the grid. The Bill is aimed at accentuating this flight instead of containing it.

The Current Power Policies: a Stock Taking

The current power policies being followed in the country have been able to address neither the problems shortages of supply in various parts of the country nor provide power to the people at affordable rates. The last one-decade has seen the average rate of power rise from Rs.1.00 to Rs.2.50; the tariff to industry at Rs.5.00 is already one of the highest in the world. The Central Government is starving resources to the states and forcing State Electricity Boards (SEBs) to introduce private power at very high prices. Consequently, the financial crisis of the SEBs has increased even more in the last 10 years.
The objectives that the power sector had served before the reform period are as follows:

To expand the electricity sector at least cost and provide power at affordable rates to the people
To expand rural electrification and provide power cheaply to agriculture, thus safeguarding the food security of the nation
To provide industry power at rates that they are globally competitive
To provide industry power at rates that they are globally competitive
To provide access to power for economically disadvantaged sections and backward areas
Build self-reliance in not only design, construction and commissioning of power plants and systems but also in manufacture of plant and equipment for the power sector

All these objectives are valid today and indeed must form the bedrock of any policy for the power sector. It is in the light of these objectives that we have to examine the success or failure of the current policy for the sector.

The last decade has seen a sharp reduction in the resources provided in the Five-Year Plans. The investments in the Power Sector used to be 19-20% of the total plan allocation in the 70’s and 80’s and have now come down to about 16% in the 90’s. The budgetary allocation has dropped and was only about Rs.3,000 crore last year, the rest being met by borrowings of power Public Sector Undertakings. As a result, while we could add more than 20,000 MW in the 7th Plan, the capacity addition in the 8th Plan was only 17,666 MW and is likely to be less than 20,000 MW in the 9th Plan.

Instead of providing adequate resources, the government offered a large number of concessions for attracting foreign capital into the sector. The major initiatives taken were with regards to fast tract projects, liquid fuel based power stations, and now unbundling and privatisation. The fast track projects were through negotiated Memorandum of Understandings (MOU) – the MOU route — for setting up power stations with Independent Power Producers (IPPs). Eight such IPPs were identified and concessions given such as

16 % guaranteed return on capital with further incentives pushing it up to 32%
Increased depreciation of 8.24% from 3.5 % allowed originally
Complete protection against foreign exchange fluctuations and sovereign guarantees by the Union Government with regards to their dues
A two part tariff, allowing a capital servicing charge plus an operating cost
Option to import fuel
Guaranteed off-take much higher than the average load demand in the country
Exemption from income tax for five years
Lower import duties

The argument offered was all this will help bring in additional resources and provide more efficient power stations.
A stock taking of the IPP route and fast track projects will show that it has failed completely. The three fast-track projects that have come on-line have taken more than 7 years to start. As the Enron case has shown, the cost of such IPP power is bankrupting the SEBs. The capital costs have been grossly inflated for these projects and most of the capital costs have been met from loans advanced by public financial institutions. The foreign exchange outflows are 30 times the inflows. Thus, none of the premises of the policy for promotion of IPP projects have been fulfilled. Instead, viable boards such as MSEB have been rendered bankrupt by imposing Enron like projects on them. It is instructive that in the same period that the Government was focussing on IPPs, National Thermal Power Station (NTPC) has added 10,000 MW, all of it without any budgetary support.

The second initiative was to go in for naphtha or liquid fuel as the fuel for power stations. It was planned to add 12,000 MW through the liquid fuel route in contradiction to the then existing fuel policy of promoting only indigenous coal based projects. The sharp rise in price of oil in the international market has shown how short sighted and dangerous this policy was. The cost of naphtha today is such that to produce one unit of power, the cost of naphtha required is more than Rs.3.00.

The third phase of reforms is ‘unbundling’ the sector and privatising the unbundled entities. The stated objective of this policy is that only competition can bring in improved efficiencies and lower costs of power. Therefore, according to the government, once generation, transmission and distribution are separated, the generators will compete amongst themselves and bring down power costs. Further, the policy makers claim that the privatisation of distribution will lead to reduction of losses including revenue leakage. We will examine the issues arising out of this competition and privatisation model in the next section.

Competition Model and Privatisation of Distribution
The privatisation of distribution is the centrepiece of all restructuring proposals currently on the anvil. However, the issue that is of vital importance is the impact of such a measure on the cost of power. The increased tariffs have been projected to go up to Rs.5-6 for industrial and domestic consumers and Rs.3.50 for agricultural consumers — two to three times increase for domestic and industrial sectors and a 7 to 8 times for the agricultural sector. Even worse, only lip service is paid to rural electrification of providing electricity to every rural household.

The experience of unbundling carried out in the country, as in Orissa, belies the beliefs that unbundling improves efficiencies or lead to lower tariffs. The unbundling and privatisation of generating and distribution companies in Orissa have completely failed. The transmission and distribution losses have not come down and the private distribution companies owe the state-owned Gridco an excess of Rs.450 crore. After the super cyclone that hit Orissa last year, the private distribution companies refused to restore electricity to the rural sector unless helped by a heft loan from the government and a rate increase. After unbundling, the average price of electricity has also doubled in the last three years. The annual losses to the state-owned Gridco are now higher than the earlier losses of the Orissa SEB. This shows that the drain on the State exchequer does not stop after privatisation.

One has to only look at the California disaster to realise that under conditions of electricity shortage, competition does not work. Shortages create profiteering and as long as there are shortages in the electricity sector, this talk of competition has little meaning.

One of the important objectives in any reforms is the price at which power is going to be delivered to the consumer. In India, this objective currently finds little mention. Instead, the slogan advanced is ‘no power is as costly as no power’ or power at any cost is preferable to shortages. It is this mindset that power has to be added whatever its cost that has produced aberrations such as Enron and choosing the expensive hydrocarbon route.

The policy of unbundling and privatisation is being introduced in order to promote private power further. As private capital is loath to invest in new plants, they are being encouraged to invest in existing public assets built with peoples’ money. What the policy makers are hiding from the people is that the current restructuring will push up the cost of electricity even further.

Any restructuring and privatisation will mean that either the assets will have to be transferred to the new companies at their book value or at their market value. If it is transferred at book value, it means gifting peoples assets at throw away prices to private investors. As this is politically difficult, these will have to be re-valued at market prices or what it will cost today set up such plants and equipment to run for the rest of its useful life span. Through the consumer has already paid earlier for the capital costs of these plants through his/her electricity bills, he/she will have to pay for them again after such revaluation. In the case of Orissa, the hydro-power, which used to cost OSEB only 10 paise, now costs 40 paise after such restructuring. By our calculations, the restructuring exercise alone will increase the cost of power through such revaluation by at least 75%; the average rate of electricity will not be Rs.2.00 as now but closer to Rs.3.50 or even more. If we add the profits for each of the three entities – the generator, the grid company and the distributor – and account for the cost of new power to be added into the system, the average power rates will go up to Rs.5.00.

California Crisis
California’s attempts at de-regulating the electricity sector was hailed as a model for others to follow – both in the United States and in other parts of the World including India. The Electricity Bill 2000 clearly has the California model in mind. Recently,[iii] Gajendra Haldea, the architect of the Bill, expressed his earnest hope that after the current reforms, with the introduction of competition and a “free market” in electricity, power would be traded as easily as soap. Instead, he should listen to the words of the California Governor, Gray Davis, who, in his January 8, 2001 State Address, said “My friends, electricity is not an exotic commodity like pork bellies, to be traded in the chaotic equivalent of a futures market; electricity is a basic necessity of life.”

California is currently faced with rolling blackouts, bankrupt utilities and rising electricity bills. The electricity rates for the consumers with the San Diego Gas and Electric utility jumped by as much as 240% in just one month this summer before regulatory action forced a price cap. The other areas escaped as they are operating with a fixed rate till 2001. The US Energy Secretary, Bill Richardson, on November 01, 2000 said “…. California’s electricity market has become dysfunctional.” Five years into the uncharted territory of unbundling, competition, free market in electricity and deregulation, California’s electricity sector looks to be going belly-up.

What is the nature of the crisis that engulfed California last summer and now this winter? Simply put, the power generators in California held up supply during peak demand periods, leading to shortages of power. In order to meet the demand, the utilities and the Independent System Operator (responsible for maintaining the power system in California) then had to buy power on occasions at prices 20 times that of last summer. Not only did the electricity prices rise astronomically during peak demand periods, they “refused” to come down during periods of low demand; even on Sundays, the prices last summer were seven times that of 1999. Obviously, those generating power made a killing as California’s purchasers paid out an estimated $ 10.9 billion more last summer for their electricity than the summer before[iv]. The division of this amount between the utilities and consumers is the current divide. The 9% increase in the existing fixed rate regime of two utilities – Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), both threatened with bankruptcy – and other measures voted by the California legislature have been opposed by consumer groups. Further rate increases are likely to follow after PG&E filing recently for bankruptcy under Chapter 11.

Why did this situation come about this year and not earlier? The genesis of this lies in the “restructuring” that California instituted under the earlier Republican Governor Pat Wilson in 1996. California’s Public Utilities Commission and Legislature put in a system designed to separate electricity generation from transmission and distribution. This meant hiving off the power plants from the three major utilities in California, leaving them with transmission and distribution only. The arguments advanced were that once the generation became independent of the utilities, the generators would compete amongst themselves and bring down electricity prices. For enabling such competition, a Power Exchange — on the pattern of a Stock Exchange – was created.

The Power Exchange was the spot market for next day’s wholesale electricity supply. However, this leaves open the possibility that there could be a shortage of supply vis-à-vis demand. In such a scenario, the entity looking after the grid – the Independent System Operator (ISO) — would enter the picture. ISO is responsible for ensuring that there is a balance between supply and demand at each instant of time. It buys power in what is termed as the “real time” power market to meet immediate demands and if need be, instructs load shedding. It was originally envisaged that there would be adequate supplies available and ISO would enter the power market only rarely. Instead, ISO, faced with large shortages and imminent collapse of California’s grid, has been forced to buy very expensive power repeatedly in the “real time” power market.

What the lawmakers failed to understand is that if the spot market is starved of supplies creating an artificial scarcity, “free market” could then drive the prices through the roof in the real time power market, a phenomenon now called “gaming” the market. This is precisely what happened last summer and is happening during winter as well. The private generators have reaped windfall profits of 800% to 900% last summer. In one week alone ending June 14, 2000, the purchasers of power in California spent $1.2 billion or 1/8th of their total cost of power for all of 1999. Governor Davis has called the power generators “..pirates, marauders, gougers and greedy profiteers.” The California Public Utilities Commission and the Electricity Oversight Board have charged the generators with stonewalling investigations and deliberately withholding information. Six investigations are underway on charges of market rigging. There are now powerful calls for reversing de-regulation and the formation of a California Power Authority to take over the entire power sector in California, a threat recently held out by Governor Davis as well.

Denying charges of gaming, the power generating companies have advanced two reasons for the rise in prices. According to them, a burgeoning Californian economy led to a sharp rise in demand this summer. This created temporary shortages driving up prices. They also argued that the rise in gas prices — the fuel for most of the power plants in the state — further compounded the problem. A committee set up by Governor Davis consisting of Michael Kahn, Chairman, of the Electricity Oversight Board and Loretta Lynch, President of the California Public Utilities Commission has exploded this myth. In their report, they showed “ .. the highest loads for 2000 were consistently well below 1999 peak loads”. With respect to gas price increase, the Kahn-Lynch report[v] argues that even a doubling of gas prices can not explain why “ .. the wholesale prices for power in June 2000 have increased as much as tenfold over the last year”.

Why did the markets fail in California? Electricity, unlike any other commodity, cannot be stored. The amount of electricity pumped into the system must be consumed instantly – in factories, offices and homes. In such a scenario, creating an artificial shortage is simple. Electricity has another attribute; it is difficult to stop consuming it. Electricity demand is relatively inelastic; it does not fall if prices rise. All this creates a situation ideal for rigging the market. Once a scarcity is created, competition fails. Competition only works if there is a surplus of supply over demand.

Interestingly, there is a set of utilities and consumers in California who have escaped the current crisis. These are about 30 publicly owned utilities — the municipal authorities of Sacramento, Los Angeles, etc., with 23% of California’s total generating capacity — that chose not to go under the de-regulatory hammer and maintained their integrated operations. Not only did their subscribers escape any rate increase, these public utilities have even increased their profits last year.

Commenting on the California crisis, Dr. Mark N. Cooper, Director Research, Consumer Federation of America states in his analysis of the restructured US electricity industry[vi], “Judging market performance by the ability to provide consumers with a choice of high quality products at stable, reasonable prices, the restructured electricity market is failing from coast-to-coast.” He further argues “Inflexibility of supply and demand are basic conditions that render the electricity market volatile and vulnerable to abuse.

Short-term supply responses are constrained because of the difficulty of storing electricity
Significant additions to supply still require substantial lead times.
The coordination of an integrated, real-time network has broken down because competition reduces the incentive for market participants to cooperate and makes it difficult for system operators to manage the electricity grid.
Provision of reserve margins is uncertain in a competitive market, since no one has an interest in building excess capacity, suggesting that these markets may remain tight.”

What lessons can we in India learn from California’s example? The first and the most important one is that there can be no free market in electricity when there are shortages. Instead, we need to strength the grid, integrate the power systems better and make the best use of our installed capacities. With this objective, we outline below an alternate set of policies for the power sector in the country.

The Problems of the Sector: An Alternate Perspective

The problem of the power sector stems from an inability to recover enough revenue from the sale of electricity, leading to a financial crisis in the sector. Though there are shortages in the sector, they are neither as high as predicted nor are they are of an order that cannot be met by better utilisation of existing resources.
One of the problems of planning in the Power Sector has been inflating the demand for grid power. On one hand, captive generation for the industry has been encouraged, on the other, the demand of the industry on the grid is predicted based on earlier growth rates. This has helped to create a false sense of panic and short-term measures such as expensive IPP power and the liquid fuel route. One of the reasons for introducing Enron in Maharashtra was the alleged future shortages that were predicted which are now shown to be fictitious.

For a realistic planning exercise, it is necessary to explode the myth of 100,000 MW additions to the installed capacity required in the next decade. Others also have noted this over-projection of demand by policy planners. The growth rate of electricity is not autonomous but depends on the cost of power, purchasing power of the people and economic growth. If we look at the steep rise in electricity rates, we will see that it has risen much faster than either the rate of inflation or the per capita increase in peoples’ income. Further, the industrial growth has been low as also the growth of the economy. We will find that the annual rate of increase in power demand for the last decade has been of the order 4-5% and not 7-8% as predicted by the 14th, 15th and now the 16th Electricity Power Surveys[vii]. The 15th EPS[viii], estimated that the demand by the year ’00-01 will be at 90,000 MW as against an actual demand of only 73,000 MW for ’00-01. A realistic assessment of demand will show that we need to increase our installed capacity by 25,00-30,000 MW every five years.

Table 1: Demand Growth

	94-95	95-96	96-97	97-98	98-99	99-00	00-01	01-02
15th EPS	58904	63490	68373	73458	78936	84466	90093	95757
Increase (%)	7.6	7.7	7.6	7.4	7.4	7.0	6.6	6.2
Actual Demand	57530	60981	63853	65435	67900	70500	73440	76500
Increase (%)	4.0	6.0	4.2	2.4	3.7	3.8	4.2	4.2

The key issue on the generation side is low ratio of peak met with existing generating capacity (65%). Even Phillipines, Bangaldesh, Pakistan meet a higher peak to installed capacity ratio (75-90%). Even with this poor ratio, actual shortages are much lower than predicted: shortages of 10% in peak demand and 5% in energy demand.
Table 2: Installed Capacity Vs. Demand

	94-95	95-96	96-97	97-98	98-99	99-00	00-01	01-02
Actual Demand	57530	60981	63853	65435	67900	70500	73440	76500*
Demand Met	48066	49836	52736	58042	60363	62754	65628	68250*
Shortfall (%)	16.45	18.28	17.97	11.3	11.1	11.0	10.6	10.78
Installed Capacity	82193	84316	85940	89166	93408	97000*	101000*	105000*
Demand/ Installed (%)	70	72.32	74.3	73.39	72.69	72.68	72.71	72.86
Peak Met/ Installed	58.48	59.1	60.94	65.09	64.62	64.69	64.98	65.00

* Estimated
We give as Table 3 the additions to installed capacity proposed originally for the 9th plan. The status of the 9th Plan is that about 19,000 MW likely to be added in the 9th Plan though the Ministry of Power has stated that the capacity addition for the 9th Plan will be 20,891 MW[ix]. With this addition, shortages are of the order of 10% in peak demand and 5% in energy demand. If we had added about 28,000 MW, we would have met the current peak demand of 76,500 MW even with the existing peak to installed capacity ratio of 65% The slippages from 8th Plan and CEA cleared schemes — total of 28,447 MW[x] – would have been enough to meet the actual demand.

We give as Table 3 the additions to installed capacity proposed originally for the 9 plan. The status of the 9 Plan is that about 19,000 MW likely to be added in the 9th Plan though the Ministry of Power has stated that the capacity addition for the 9 Plan will be 20,891 MW. With this addition, shortages are of the order of 10% in peak demand and 5% in energy demand. If we had added about 28,000 MW, we would have met the current peak demand of 76,500 MW even with the existing peak to installed capacity ratio of 65% The slippages from 8th Plan and CEA cleared schemes — total of 28,447 MW – would have been enough to meet the actual demand.

Table 3: Planned Capacity Additions — 9th Plan

	Hydro(MW)	Thermal(MW)	Nuclear(MW)	Total(MW)
Central	58530	5460	880	11870
State	11091	6530	—	17621
Private	790	27454	—	28244
Total	17411	39444	880	57735

The amount of new power that is added in the system has an impact on power tariffs. As is well known, in computing the price of power, we have to take into account the total pooled cost. In any electrical system, there are new sources of power that are expansive, while the older ones have a lower cost. With time, the capital costs of older plants get written off and their power becomes cheaper. Thus, NTPC’s Singrauli Plant still supplied power at Re. 0.77 while its newer power stations charge about Rs.3.00, giving a pooled cost of Rs.1.40 per unit for NTPC as a whole. In this pool, if we add a very large amount of new power plants, the cost of power will rise sharply, particularly if the off-take is low. Therefore, if we want the increase in the cost of power to be low, we have to add only the amount we require and not base our planning on inflated and unrealistic demand figures.

If we had indeed added 57,775 MW in the 9th Plan, we would now be surplus by about 30,00 MW and 150 billion units. The average cost of power would then have increase by 40-50% due to this addition of costlier power to the pool. The other distortion in the power pool is that while our shortages are currently of peaking power, our focus still remains base load plants. It is creating base load capacity with expensive liquid fuel that has compounded the current problem. If we had also added 28,244 MW of private power as base load stations, we would have distorted the economics of the power pool even further. Not meeting 9th Plan target was therefore a blessing in disguise.

The second issue that needs to be addressed is the pricing of electricity. Currently, industry and commercial establishments pay higher rates than the actual cost of power, while the domestic and agricultural consumers pay a lower rate. We believe that there has to be an element of cross-subsidy in a country where a large number of people have very low incomes. One of the distortions that we have introduced currently is to allow the industrial consumers set up a large amount of captive capacity and move away from the grid. We need to either force the industry to take at least 50% of its electricity from the grid or introduce an electricity surcharge that is used cross-subsidise the low-end consumers.

For the domestic consumer, there is a need to introduce a slab-wise tariff that cross subsidies the low-end user and generates a surplus from the elite consumers. The recent increase in elite consumption – air-conditioners, geysers and heaters – have to be charged suitably for providing much needed resources for the power sector.

The agricultural sector is being wrongly blamed for large subsidies. According to the Government, in 1997-98, 30.75% of the total power supplied or 91.25 Billion units were supplied to agriculture. This is against a connected load in agriculture was 46, 486 MW[xi]. If we convert the connected load to the number of hours that each pump set must work in order to consume 91.25 billion units, this gives a figure of 1,963 KWhr/KW. This works out to nearly 6 hours of power every day of the year for each agricultural consumer as against a figure of 1,667 KWhr/KW only for industry. These are patently false figures and wilful manipulations to hide actual technical and commercial losses. Agricultural consumption of 200 days and 6 hours will give us 1200 KWhr for every KW of connected load.

With this correction, With this correction, the agricultural consumption is not 30.75% of the total as claimed by the government, but about 18%. Thus the subsidy being provided, is not of the order of Rs.15,000 crore as claimed but about Rs.8,000 crore.

However, unmetered supply introduces distortions as it allows pilferage and does not promote efficiency. Due to unmetered supplies, a large part of the existing Transmission and Distribution (T&D) losses and pilferage are put to the agricultural account. As the revenue from agricultural sector does not depend on the amount of electricity supplied to it, agricultural sector and all rural areas are starved of electricity. Thus, it is in the interest of the agricultural sector and the rural economy that the rates for agricultural are kept but low but the supply is metered. If populist measures such as free electricity are introduced, they can only be fulfilled by sporadic and poor quality supply. However, rate of electricity to agriculture needs to be pegged lower than the average rate of electricity as agricultural is given off-peak power, generating much needed base demand on the system. It also requires cross-subsidies as all advance countries are providing huge subsidies to their agriculture.

Along with the above measures we need to plug the current losses in the system – the T&D losses. With the correction for agricultural consumption, the Transmission and Distribution losses increase from 24.79% as claimed but to about 36%.-
The technical losses in the India system are high as we have long LT lines for the distribution of power. We have spent much less on the T&D system leading to higher transmission and distribution losses. The other aspect of the current policies has been the sharp increase in pilferage of electricity. In Delhi, for example, the T&D losses were of the order of 22-23% till 1992-93. Currently they stand at about 48%[xii] even though Delhi has no agricultural load and a compact area. Under the liberalisation policies, we have seen the demoralisation of the employees due to gratuitous attacks constantly emanating from the government and the policy makers. This has been coupled with a complete absence of political will to support the employees in recovering dues. Instead, defaulters are protected under various pretexts. This has led to sharp increase in theft of electricity.
Table 4 below gives corresponding consumption figures for the increased generation from 1995-96 to 97-98. Interestingly, while the number of units generated has increased by 39 billion units, almost half this increase –18.64 billion units – is on account due to T&D losses. The figure of an increased T&D loss in percentage terms does not bring this out, as it shows that the T&D losses in this period have risen marginally from 22.26 to 24.8%. It is clear from the actual loss figures that the new installed capacity is not realising additional revenue[xiii].

Table 4: Impact of T&D Losses

	95-96	96-97	97-98	Yearly Growth(%)
Net Genetation(BUs)	356	371	395	5.3
Consumption	227	280	297	3.5
T&D Losses(BUs)	79.36	91	98	11
T&D Losses(%)	22.26	24.53	24.8	—

We need to establish a policy, which involves the workers and other employees in plugging electricity losses. Instead of constantly running down the employees, an attempt should be made for their participation in policies and plans for bringing down losses. Energy audits at substation level onwards, proper provision of meters, doing away with substandard suppliers and contractors, a time bound program of loss reduction, and transparency and public accountability will go a long way in bringing down such losses

Currently, the State Electricity Boards have a low equity base. While they are expected to generate enough surplus to carry the existing cross-subsidies, they pay huge interest amounts to the state governments due to their large debt burdens. It is necessary to implement the Rajyadaksha Committee’s recommendation and provide them an equity base of at least 30% by converting past loans suitably into equity.
The other aspect of the electricity sector that needs to be addressed is provision of enough resources for Renovation and Modernisation (R&M). Currently, we are unable to meet a peak demand of about 75,000 MW with an installed capacity of 100,000 MW and are only providing a peak supply of 65,000 MW. An accelerated R&M program will help to improve our ability to meet a higher peak with existing resources.
It is time that the government stops its journey towards a mythical market driven power sector and focuses on the real needs of the people for secure and affordable power. The Electricity Bill 2000 is unfortunately based on a wrong understanding of the power sector that has failed not only in India but also elsewhere. It seeks to bring in unbundling, competition and private power including IPP power. IPP projects have been found not only prohibitively expensive in Maharashtra but in country after country – Pakistan, Indonesia, Hungary — amongst others. Unbundling and markets have failed in Orissa and California and have led only to sharp increase in electricity rates. Privatisation of essential infrastructure imposes high costs on the consumer, which a poor country such as India can ill afford. A least cost option for the power sector means an active state sector. Instead of creating participatory structures for the employees and public accountability for the sector, efforts are on to set the people against the electricity employees. These divisive methods are being use to divert attention of the people from the real problems of the power sector and privatise its 800,000 crore of public assets.

[i] The current version of the Draft Electricity Bill 2000 is available at www.ncaer.org.
[ii] Daniel M. Berman, “The Confederates Cartel’s War Against California,” www.sfbg.com
[iii] IPPAI Seminar on Power Sector Reforms, Chandigarh, 21st December, 2000.
[iv] Two interesting articles on this are available on the Los Angeles Times website. One is by David Ferrell “Electricity a Mystery to Many Consumers,” December 28, 2000, and the other Nancy Vogel, “How States Consumers Lost with Electricity Deregulation,” December 9, 2000.
[v] Michael Kahn and Loretta Lynch, “California’s Electricity Options and Challenges: Report to Governor Gray Davis,” August, 2000.
[vi] Mark N. Cooper, “Reconsidering Electricity Restructuring: Do Market Problems Indicate a Short Circuit or a Total Blackout?,” Consumer Federation of America, November 30, 2000
[vii] The 16th EPS follows the same pattern as the earlier EPS of grossly inflating demand. It also has taken no cognisance that the India is no longer planning development and therefore the future investments are more likely to be speculative rather than firm estimates. Even when the investment decisions were planned, EPS projections were much higher than the actual demand that occurred in the system. Sixteenth Electric Power Survey, Central Electricity Authority, September, 2000.
[viii] Fifteenth Electric Power Survey, Central Electricity Authority.
[ix] Agenda Notes, Conference of Chief Ministers/Power Ministers, Ministry of Power, March 3, 2001.
[x] Ninth Plant Power Programme (1997-2002), Report of the Working Group on Power, New Delhi December 1996.
[xi] Public Electric Supply — All India Statistics — General Review, 1997-98. Central Electricity Authority.
[xii] Delhi Vidyut Board proposals to the DERC for increasing tariffs “Annual Revenue Requirement for the Financial Year 2001-02 and Tariff Determination Principals for the Year 2002 –2005 /06,” www.dercind.org
[xiii] This computation was done earlier by Shri S.N.Roy, “Power Debacle May Lead to Political Uncertainty,” The Indian Economy 1999-2000: An Alternate Survey, Delhi Science Forum. I have enlarged on this here using current data given in 11 above.

The other aspect of the electricity sector that needs to be addressed is provision of enough resources for Renovation and Modernisation (R&M). Currently, we are unable to meet a peak demand of about 75,000 MW with an installed capacity of 100,000 MW and are only providing a peak supply of 65,000 MW. An accelerated R&M program will help to improve our ability to meet a higher peak with existing resources. The other aspect of the electricity sector that needs to be addressed is provision of enough resources for Renovation and Modernisation (R&M). Currently, we are unable to meet a peak demand of about 75,000 MW with an installed capacity of 100,000 MW and are only providing a peak supply of 65,000 MW. An accelerated R&M program will help to improve our ability to meet a higher peak with existing resources. The agricultural sector is being wrongly blamed for large subsidies. According to the Government, in 1997-98, 30.75% of the total power supplied or 91.25 Billion units were supplied to agriculture. This is against a connected load in agriculture was 46, 486 MW. If we convert the connected load to the number of hours that each pump set must work in order to consume 91.25 billion units, this gives a figure of 1,963 KWhr/KW. This works out to nearly 6 hours of power every day of the year for each agricultural consumer as against a figure of 1,667 KWhr/KW only for industry. These are patently false figures and wilful manipulations to hide actual technical and commercial losses. Agricultural consumption of 200 days and 6 hours will give us 1200 KWhr for every KW of connected load. The other aspect of the electricity sector that needs to be addressed is provision of enough resources for Renovation and Modernisation (R&M). Currently, we are unable to meet a peak demand of about 75,000 MW with an installed capacity of 100,000 MW and are only providing a peak supply of 65,000 MW. An accelerated R&M program will help to improve our ability to meet a higher peak with existing resources. The other aspect of the electricity sector that needs to be addressed is provision of enough resources for Renovation and Modernisation (R&M). Currently, we are unable to meet a peak demand of about 75,000 MW with an installed capacity of 100,000 MW and are only providing a peak supply of 65,000 MW. An accelerated R&M program will help to improve our ability to meet a higher peak with existing resources.