On 3rd of March, a Chief Ministers (CMs) Conference was held in New Delhi to chalk out a program for the power sector

sickle_s.gif (30476 bytes) People’s Democracy

(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXV

No. 11

March 18, 2001

The Chief Ministers Conference

False Consensus on Bankrupt Path

Prabir Purkayastha

ON March 3, a Chief Ministers (CMs)
Conference was held in New Delhi to chalk out a programme for the power sector. This was
similar to many such conferences held in the past, namely the Committee of the National
Development Council comprising six CMs in 1993 and CMs conferences held in 1996, 1998 and
2000. The directions identified in those conferences and the goals agreed then such as
increasing agricultural tariffs and reducing Transmission and Distribution Losses
(T&D) are no different from what has been agreed upon here also. The broad thrust in
this conference was to encourage privatisation of the power sector, the focus now turning
to the privatisation of distribution. Though the final resolution did leave the states
some leeway and mentioned other options, it is clear that privatising distribution is
currently the centrepiece of the central government’s proposed reforms. Both the
Congress and BJP partners in the NDA such as TDP support this agenda; they are going ahead
with privatisation of distribution in their states. This was also evident from Digvijay
Singh making a plea for de-politicising power sector reforms.

The politics in power sector reforms is
not which party supports what variety of reforms. It has to do with whether people get
electricity at affordable prices and whether electricity is taken to the villages. In the
name of de-politicising power sector reforms, what is being attempted is a false consensus
through which the vast majority of the people are being deprived access to electricity.


It is worthwhile to examine one issue
that the Chief Ministers’ Conference did not address. This is the question of the
rapid rise in the cost of electricity after the start of the neo-liberal policies in 1991.
The price to the consumer today has risen to Rs 2.50 from that of Rs 1.00 only a decade
back. Yet the losses of the SEBs are steadily mounting and stand today at Rs 28,000 crore.
It seems to have struck nobody that if the average rate for electricity has risen so
rapidly, why are the SEBs losses increasing instead of decreasing? This is also related to
the second premise of the reforms that we are facing huge shortages and need 100,000 MW in
the next ten years.

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 expensive, 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 Rs 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, particularly
expensive power from IPPs or liquid fuel based plants, the cost of power will rise
sharply. If the off-take is low, it will obviously compound the problem. 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.

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, aberrations such as Dabhol and
the costly liquid fuel route.

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. 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 per
cent and not 7-8 per cent as predicted by the 14th, 15th and now the
16th Electricity Power Surveys. A realistic assessment of demand will show that
we need to increase our installed capacity by 25,00-30,000 MW every five years.

It is not surprising that the prime
minister focussed on the need for fifty per cent of all future investments in the power
sector to be from private and foreign sources for meeting this mythical future demand of
100,000 MW. Inflating demand is a way of facilitating private entry into the power sector.
For those who remember the Enron controversy, this is familiar territory. The need for a
2,000 MW base-load station at Dabhol based on expensive liquid fuel was advocated painting
a bleak picture of huge future shortages in Maharashtra. The subsequent disaster is now
glossed over by talking, as the PM did in the Conference, about “useful learning
experience”. This useful learning experience means a loss of about Rs 3,000-4000
crore annually for MSEB once Dabhol Stage II comes on-stream. The recent guarantees sought
to be given for the Hirma Project of Reliance threatens the country with another Enron
like debacle. We seem to have learnt little from this “learning experience”;
perhaps “education” from Enron and Reliance overcomes learning.


Not talking about the cost of power
helps in avoiding certain unpleasant questions. The conference talks about expanding rural
electrification to cover all villages by 2007 and connecting all households by 2112.
Unfortunately, either the PM’s speech or the Final Resolution had little to say about
how the objective of rural electrification would be met. No discussion took place of where
the investments for rural electrification will come from, when the budgetary support for
the entire power sector stands at a measly Rs 3,500 crore, less than the losses from
Dabhol annually. Neither did the central government have anything to offer on how power
can be made affordable to the people. Instead, all the exhortations were on the need to
increase tariffs, particularly agricultural tariffs and do away with cross-subsidies. The
PM went as far as to term cross-subsidies as irrational. In the new scheme of
de-politicised power sector reforms, perhaps the prime minister feels that subsidy to
Enron of Rs 3,500 crore is a merit subsidy while subsidising the poor and the farmers is

The PM stated “Even today, as many
as 80,000 of our villages are without electricity. Less than 40 per cent of our rural
households have access to electricity. The momentum of expanding rural electrification has
visibly faltered during the last ten years.” Even after conceding that the last ten
years of reforms had slowed down considerably rural electrification, the vision held out
is of privatising distribution and increased power rates, which will slow this down even
farther. We have already seen that AES Power Corporation, after the Orissa super-cyclone
refusing to restore electricity lines in rural areas, let alone expand rural

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 State Electricity Boards (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. That the PM still
talks of private investments in generation speaks volumes about the lop-sided priorities
of this government.


The broad thrust in this conference was
to enlarge privatisation of the power sector, the focus now turning to distribution, even
though the final resolution did leave the states some leeway. We need to examine the
results of privatising distribution in the country. The Orissa restructuring has seen the
privatisation of generation and distribution with transmission in the hands of State owned
GRIDCO. The private distributors owe Rs 450 crore to the State owned GRIDCO. The T&D
losses also have not come down in Orissa. There has been a rapid rise in tariffs, about
200 per cent in the last three years. Similarly, the privatised Greater Noida power
company owes UPSEB Rs 150 crore even though it is getting power at Rs 1.40 per unit
against UPSEB’s cost of supply of over Rs 2.00. The losses of Orissa GRIDCO are huge
providing a continuous drain on Orissa government’s resources. Therefore, before we
address the problems of the SEBs, we need a proper stocktaking of the Orissa reforms.

Any restructuring and privatisation will
mean that the assets will have to be transferred to the new companies either 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. Though 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 per cent; 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’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 (now 2001) clearly has the California model in mind. Recently, 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.”

The current model of reforms pressed by
the central government is to provide very low budgetary support for the Power Sector
– of the order of Rs 3,000-3,500 crore per year. We need to step up public
investments in power sector. A least cost option for the power sector means an active
state sector.

Instead of using privatisation as the
main instrument of reforms – earlier the induction of costly private power such as
Enron and now privatisation of distribution – we need to strengthen the grid,
integrate the power systems better and make the best use of our installed capacities.

Employees have become a convenient
scapegoat for poor performance of the SEBs, diverting attention from gross political
mismanagement that has been the hallmark of the power sector. 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. We need
to forge a partnership with the employees and engineers and provide real autonomy to the

Instead of addressing the real issues of
the power sector – providing adequate good quality power at affordable costs –
the government is talking of ‘unbundling’, ‘restructuring’ and
‘competition’. Such measures, instead of strengthening the basic infrastructure
in the power sector and focussing on the efficient use of existing resources, will only
lead to a California type melt down of the system, endangering the economic and political
stability of the country. Unfortunately, the so-called consensus in the Chief
Ministers Conference is only treading the same bankrupt path of reforms that have failed
for the last ten years inflicting huge losses on the SEBs and high tariffs for the people.

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