Power Sector Reforms: From Light into Darkness

The last year has been a hectic one for the Power Sector. The Electricity Act 2003 has been passed in the Lok Sabha and Rajya Sabha. The CEA has produced its estimates of electricity demand for the next decade, prompting the Ministry of Power to plan for adding another 100,000 MW by 2011. We have also seen the complete failure of the Dabhol Project coupled with the spectacular collapse of its parent in the Enron in the US.   The then Union Minister of Power, Suresh Prabhu, in an interview (Business Line: January 22, 2002) had a dmitted that the policies of the past ten years have failed to address the basic problems of the power sector and the only way forward lies in improving health of the State Electricity Boards along with public investments in the power sector. Instead of following up on these lines, the Government has produced the Electricity Act 2003. The objective of the Act is quite simply to continue with the reforms of the past 10 years: private investments, privatisation of the SEBs, introducing competition in generation and trading in electricity. In other words, precisely the kind of policies that caused the California debacle in the summer of 2000 and which has failed in Orissa and in Dabhol.

The failure of the Orissa reforms – separation of generation, transmission and distribution first and then their privatisation – has received much less attention than it deserves considering that similar reforms are now the lynch-pin of the Government policies: most states are following the Orissa route. Incentives are now being offered in distribution that are similar to the concessions offered while inducting private IPP projects. The Central and the State Governments are both earmarking a considerable amount of money for “encouraging” private companies to take over the SEB’s assets. In other words, the State and Central Government will not only to hand over their assets to private companies but will also add “cash incentives”. The DVB privatisation is one such case where a provision of Rs.3,500 crore (of which, Rs.2,600 crore has been committed for 2003-04 alone) is being kept by the state government to “fund” the privatisation of DVB. Meanwhile, the Central Government is trying hard to force the SEBs in paying the central PSUs, failing which suspend their power supplies. The net result is severe power shortages in states such as UP, in spite of adequate installed capacity.

We will first take a look at the problems with the Electricity Act 2003. In the next section, we will try and analyse the impact of 10 years of reform on the Power Sector in the country, both with respect to induction of Independent Power Producers (IPPs) and the Orissa restructuring. We will also take a look at some decadal figures to examine the impact of reforms on the cost of electricity. Finally, we will examine the future path the Central Government wants to follow with respect to Power Policy and suggest alternatives.

The Electricity Act 2003

The Electricity Act 2003 was passed by the Lok Sabha on April 9th after being tabled in its current form on the 6th, thus ensuring no debate in the country. The Rajya Sabha has also passed it and it now supersedes the earlier Acts. While all the old ills of this legislation, which has been on the anvil for the last 3 years remain, some more new ones have been added ensuring that the electricity sector faces a disaster in the near future. Before we look at the underlying “vision” of this piece of legislation and its implications for the country, particularly the rural sector, let us briefly examine some clauses of the Act which can only have come from minds of persons who look upon all consumers as potential criminals.

This Act, by virtue of clause 126-6, and clause 135, allows a officer of the government or a private “licensee” to break open any premises, seize any material or equipment, take away accounts and documents on not only suspicion of theft of electricity but also its “unauthorised use” and “likely to be used unauthorisedly”. In other words, a private licensee has more powers under this Act than the police, and the tax authorities. And to cap this draconian power against consumers, they are completely indemnified against any action. The POTA mindset continues with government. Even the need of the private licensee is seen to override any right of the individual.

This may be contrasted with the provision of penalties for the licensee. The licensee can cause havoc in the system by not acceding to the directions of Load Despatch Centres. The maximum penalty for this is Rs. 15 lakh for inter state licensees, and Rs. 5 lakhs for the state licensees. The consumers obviously do not count in this Act. For the consumer, if any demand is made on him through a bill, he has to pay the amount immediately before he/she can appeal. And if he/she does not, even her property can be sold as electricity dues are now to be treated as revenue defaults.

Let us now take up the underlying assumptions of the current Act and its distinct difference with Electricity Act of 1948, which was piloted in the constituent Assembly by Dr. Ambedkar. In the earlier Act, it was recognised that electricity was a vital necessity for agriculture, industry and domestic consumption and should be provided at lowest cost. It should not be used for profiteering. It was also recognised that it would not be possible to extend rural electrification through existing private utilities and therefore put the task of rural electrification on the state leading to the formation of the State Electricity Boards. The current Act proposes that electricity should be regarded purely as a commercial, market-driven activity with regulators ensuring removal of cross subsidies and creating the market. For rural electrification, it is no longer anybody’s baby. To add a sop for the rural sector, it has been delicensed for NGO’s, co-operatives, Panchayats, etc. They can now become self-reliant while the government looks after Reliance.

The key to the Act, and this is where the BJP and the Congress are singing the same tune is “open access”, that is the generators should have the right to supply electricity to any bulk consumer or distributing company using the transmission system. Thus, the generating sector, the transmission system and the distribution areas are to be separated. The costs are supposed to come down as the generators “compete”, while the transmission companies get “wheeling” charges and the distribution companies make profit by selling the generators’ power to the consumer.

We are not going to here discuss here the myth about competition bringing down prices. Apart from this not happening anywhere reforms have been tried, the central argument that no competition can take place if there is a scarcity has yet to be answered by the proponents of competition. The key issue is under this open access, who looks after the integrity and balance of the electrical system? The new Act is totally silent on this question.

The problem with this open access model is that it demands a built-in surplus capacity for transmitting electricity. If we only have as much capacity as is currently being used, then all supplies will have to be done through existing transmission lines, severely limiting alternate sources of supply. However, as the SEB’s have no money to expand their system, therefore open access is to force them to go to private licensees for transmission as well. And this brings us to the central problem of the new Act.

In any electrical system, the generation of electricity has to match the consumption, without which voltage and frequency can rise or fall damaging equipment, not only of the consumers but of the electrical system as well. Wherever reforms are being thought of, the electrical system’s integrity is being maintained by the Transmission System being kept under one entity who the works with the Regulator and Load Despatch Centres to maintain the system. In this Act, anybody can become a transmission licensee, thus fragmenting the electrical system. In such a fragmented system there is no way for the transmission to take place as contracted. And in the absence of at least an integrated Transmission System — State Gridcos or Regional Gridcos — the electrical system will be open to anarchy. The Act then has a situation in which either there will be no open access as there is limited transmission capacity or will see a fragmented transmission system that can not maintain system stability.

The other problem of the Act is that it provides a definition of captive generator that allows anybody to set up a plant anywhere, supply to anybody in the system and be treated preferentially from generators. Given that the SEB’s and the Distribution companies are losing their best paying customers, this step makes them completely unviable. Giving incentives to captive generators to sell to the grid is one issue; allowing them “open access” to sell anywhere will only accentuate the current crisis of the system.

The last part is that the rural sector does not figure in the Act anywhere except as a responsibility of the rural people themselves. We can understand that co-operatives, Panchayats, etc., take responsibility of distribution in rural areas through rural utilities. The question is who will take electricity up to the substation and the HT transformer? At what price will they get electricity? And if they are not electrified, who invests in new generating facilities in rural areas?
It is clear that no private utility/licensee will do rural electrification. They did not do so earlier in the US, nor have they done so in Orissa now. The electrical lines and equipment that were damaged in the Orissa Cyclone have yet not been repaired in rural areas. In the US only after Roosevelt and the New Deal came into being in 1935, was rural electrification taken up in the US, something the private utilities had not done. The Electricity Act 2003 has no place for the rural sector reserving electricity now only for the rich. It differs from the 1948 Act that it sees electricity sector as another one for making profits. Unfortunately for those who expect to benefit from the new Act, it does not even have a coherent understanding of the sector. Unlike an Ambedkar who matched his vision with meticulous craftsmanship, its shallow vision is matched only by its shoddy drafting. This Act only will accelerate the downward trajectory of the power sector. We will take up the crisis of the system in the next section.

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 cost of power supplied rise from Rs.1.09 in 90-91 to Rs.3.04 for 2000-01. The rise in tariff is from Rs. 0.81 to 2.12 in the some period with the tariff to industry at Rs.4.00-5.00 is already one of the highest in the world. In this reform decade, the Central Government starved resources to the states and forced the State Electricity Boards (SEBs) to induct very expensive private power.
Consequently, the financial crisis of the SEBs has increased even more in the last 10 years.   While 10 years back, the loss per unit was about 27 paise, today the loss to the SEBs per unit of electricity sold is a hopping 93 paise per unit. Not surprisingly, the losses of the SEB’s have grown from Rs.26,638.5 crore (without subsidy) compared to Rs.3,748.4 crore in 1990-91.

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.

Incentives to IPPs: The First Leg of Reforms

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 various concessions given.

The argument offered was that all this would help bring in additional resources and provide more efficient power stations. A stock taking of the IPP route and fast track projects shows 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. This only confirms that other routes to raising additional resources existed, apart from the IPP route. However, as we will show in the next section, the IPP policies distorted the cost of power as NTPC and other central generators used the IPP incentives to raise their costs of power as charged to the SEBs. The IPP policies did not result in a major expansion of capacity as it was propounded, but did lead to the ballooning of the deficit of the SEBs.

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. Fortunately for the country, the IPP policy for whose benefit the naphtha policy or the liquid policy route was introduced did not find many takers. The country was saved of a bigger disaster due to the failure of the policy.

SEB Finances: In a Nutcracker

Currently, the finances of the State Electricity Boards (SEBs) are in complete shambles. The Losses to the SEB’s for the year 2000-01stand at Rs.26,000 crore without subsidies and at about Rs.20,000 crore with the subsidy by the State Governments. The SEB’s now owe about Rs.40,000 crore to the central PSU’s including the principal and interest charges. An Expert Group, headed by Montek Singh Ahluwalia, was set up to address this issue. The Montek Singh Committee submitted its report in May 2001, which the Central Government has accepted and is now being followed by the State Governments. The Group had suggested “a one time settlement” of the out-standings by issuing bonds by the state governments along with “a commitment to initiate the process of reforms” of the SEBs. The underlying assumption is that reforming the power sector means privatisation of the SEBs. The new Electricity Act has also the same objectives in mind.

One of the problems in privatising the electricity sector is deciding which entity takes over the accumulated losses of the existing SEBs. One of the reasons cited for the failure of reforms in Orissa was that the state-owned Gridco was burdened with virtually the entire past losses of the OSEB, after which it never was going to be viable. The state-owned Gridco carried this burden so that the distribution and generation parts of OSEB could be made more attractive to private bidders. As we shall see later, even such measures did not lead to the distribution companies being viable while Gridco continued to sink deeper in the red.
The Montek Singh Report addressed one of the key problems of privatising the SEBs, the accumulated losses of the SEB’s and their out-standings to central PSU’s. For power, coal, freight, etc., the SEBs owe about Rs.25,000 crore as principal to the Central Public Sector Undertakings (CPSUs), and another Rs.15,000 crore as interest and surcharges. Obviously, if this amount could be deleted from the balance sheet of the SEBs, it would remove “one of the major impediments to reforms” (read privatisation). The report had suggested that the principal amount and half of the accumulated interest be converted into tax-free bonds worth about Rs.35,000 crore. In other words, the State Governments should take over almost all the past dues of the SEBs. They would get a grace period of five years before repayments begin. This is the course that the State Governments are now following.

Montek Singh and his experts had carefully avoid the question of how the SEBs got into the current financial mess in the first place, as that would need the examination of the impact of the last decade of reforms on the SEBs. The dominant view today is that the state governments are giving power away free to agriculture and are also run very inefficiently. This, however, fails to explain why the SEB losses have ballooned so dramatically only in the last decade.
The power sector reforms began in the 90’s when a number of incentives were offered to Independent Power Producers (IPPs) for investing in the power sector. Though only few states were directly affected by IPPs, there was a far bigger impact on the SEBs due to the effect of these incentives on the price of power imported from NTPC and NHPC. For example, one such incentive — the increase of depreciation rate from the earlier 3.5% to 8.24% — raised the cost per unit of supply by about 35 paise. If we combine this with the increased return on equity allowed (16% from the earlier 11%) and the higher interest charges that NTPC incurred on its commercial borrowings (instead of the earlier soft loans), the increase in the cost of imported power to the SEBs was of the order of 75 paise per unit. This means a whopping additional Rs.5,000 crore per annum for the new generating capacity of   more than 10,000 MW that was added by NTPC and NHPC. If we add to this the exorbitant prices that SEBs are paying to IPPs, the use of the costly liquid fuel route, the increase in coal prices and freight charges, etc., it is not surprising that the increase in the cost of generation in the reform years has significantly outstripped the annual rate of inflation. In ten years, the cost of generating electricity almost tripled from Rs. 1.09 in 90-91 to Rs.3.03 in 2000-01. That is why, even after a rise in average tariff of 250%, the losses of the SEBs have increased steeply in the same period. While the central government took these decisions, the resulting burden was borne exclusively by the SEBs and the states.

As the electricity tariffs increased sharply, particularly for the industry, the industry sector moved away from the grid. Presently, the industrial demand is growing at a much lower rate than of the other two sectors. Consequently, the revenue per unit of this new demand – averaged over the three sectors — is below the current revenue per unit of existing demand. For supply it is just the reverse. All new electricity supply (even if we take the Dabhol or other IPPs out of the equation) is at a cost much higher than the average cost of generation. The SEB finances are in this classic pincer; if the demand increases the SEBs lose due to adverse marginal costs on both the supply and the generation sides. They get less revenue per unit of new demand while they have to pay more than their current generating costs for every new unit added.

Competition Model and Privatisation of Distribution

After the failure of the policies of inviting foreign capital on concessional terms, the Power Ministry in conjunction with the World Bank and the Finance Ministry, has introduced another new policy. The scheme is to restructure the Electricity Boards by breaking them up and selling them to the private sector. The privatisation of distribution is the centrepiece of all restructuring proposals currently on the anvil. 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.

The real aim of the policy is 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. 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.

What the policy makers are hiding from the people is that the current restructuring will push up the cost of electricity even further. The issue that is of vital importance 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. Even worse, only lip service is paid to rural electrification of providing electricity to every rural household.

Orissa Restructuring and Privatisation: A Failed Paradigm

The Aide Memoire that the Orissa Government signed in 1994 with the World Bank was that the Electric Supply Industry would be completely restructured in Orissa. The World Bank agreed to give a loan of $ 450 million for this restructuring. Out of this, $300 million was for Upper Indravati, originally frozen by the World Bank, but renewed as a part of the Aide Memoire.

The Aide Memoire with Orissa Government contained a time bound schedule within which the Orissa State Electricity Board would be completely privatised. As per this agreement, the Board’s activities were split in three and “unbundled” — distribution, transmission and generation were made into independent activities. An “independent” State Regulatory Authority was formed that was responsible for tariffs, access rights and terms of power exchange between the generation, transmission and distribution sides. The distribution side was hiked off to form four Regional Distribution Companies (DISTCO’s), while the transmission side was constituted as a State Power Grid Corporation (Gridco). The generation side was formed into independent generating companies — Orissa Hydel and OPGC — while the Talcher plant was sold to NTPC. All these companies — apart from Gridco and the Orissa Hydel Corporation — were privatised and the State Electricity Board wound up.

The four distribution companies were privatised in 1999 by transferring 51% of the share of these companies to private companies. Three of them were taken over by BSES, while the fourth (CESCO) was transferred to AES Corporation of US who were also the 49% owners of OPGC generating plant.   The record of the four privatised companies make dismal recording. A high level Committee was set up after the collapse of CESCO and the withdrawal of AES by the Government of Orissa headed by Shri Sovan Kunango, IAS (Retd.). The Report, submitted in October 2001, is a damming indictment of both the privatisation process and the private companies. Some of the major conclusions of Kunango Committee are given below.

  • The privatisation process should have been a sequential one by which errors in privatisation of one DISTCO could have led to avoidance of such errors in other zones
  • The private DISTCO neither brought in superior management skills nor working capital.
  • The privatised DISTCO’s working capital consisted of defaulting on payments to the state, owned Gridco. Gridco’s “generosity” allowed them to pile up huge arrears (estimated at Rs. 1,000 crore); AES arrears alone amounted to Rs. 403 crore.
  • The quality of management skills and personnel brought is by the private companies was poor.
  • Billing and collection efficiency under the privatised DISTCO’s actually worsened; from billing and collection efficiency of 84%, it went down to 77%. Rampant theft continued unabated.
  • Sharp increase in tariff without reduction of techno-commercial losses or improvements in consumer service.
  • There was complete neglect of maintenance as shown by much lower expenditure under this head compared to all other heads where expenditure grew by leaps and bounds.
  • Huge amounts were taken out of these companies as consultancy fees.
  • T&D losses did not show any improvement and remained at 45% (pre-restructuring period loss figure).

The conclusion of the report was that the power utilities would not break even in Orissa even if the retail tariff goes up from its current figure of Rs. 2.81 per unit to Rs. 4.32 per unit. It may be noted that the tariff for the year 1993-94 was Re.0.95 and now stands at Rs.2.81 in spite of Orissa having a considerable amount of cheap hydropower and low agricultural demand.

The condition of the three BSES DISTCOs is not much better than the AES mismanaged CESCO. IFC, the World Bank’s financial arm for the private sector, as well as other lenders, have turned down proposals from the BSES DISTCO’s as they find these projects not viable.

The revaluation of assets prior to restructuring led to two consequences. The Gridco’s loan burden increased from Rs. 820 crore to Rs. 3,300 crore, an increase, which will ultimately be paid by the consumer in the form of higher tariffs. The other is the increase in the cost of hydel power from Rs. 0.20 to Rs. 0.50, again an increase that has been passed on to the consumer in form of higher tariffs.

After 5 years of restructuring, the Orissa government now estimates that another Rs. 3,000 crore is required to restore some semblance of health to the electricity sector in Orissa. The annual losses to the state-owned Gridco are now higher than the earlier losses of the Orissa SEB. If we take these losses and the costs of restructuring already incurred by the Orissa government, we will see that this is much higher than the losses of OSEB earlier. This shows that the drain on the State exchequer does not stop after privatisation. The important issue here is that even after taking all the losses of OSEB on the state owned Gridco’s books, making Gridco responsible for loss making rural electrification, and with only nominal agricultural consumption of electricity (of the order of 5%), the privatisation experiment in Orissa has failed and failed miserably. Undoubtedly, the protagonists of privatisation will find new excuses for this failure. The stark reality is that if Orissa privatisation, deemed to be the most attractive case for privatisation in view of its low agricultural consumption, did not succeed, other boards have even less of a chance. The situation is no different for the Greater Noida distribution privatisation, which now owes huge amounts to UPSEB, even though it receives electricity at Rs.1.42 from UPSEB, estimated to be less than 50% of the current cost of supply.

We are not raising questions here regarding what happens to electrifying rural areas, which was the raison d’etre for the formation of the SEBs or the impact of privatisation on low-end consumers. There is little doubt that neither rural electrification nor providing power to low-end consumers will be an objective of the private distribution companies. They have already made clear that their business is to make profits for their shareholders and not fulfil any social objective.

Those arguing for reforms are committing a fraud on the people by not clarifying that the Government now does not consider that it has any social obligations in the sector. The privatisation proposals and the electricity bill being introduced is thus a complete re-orientation of the sector away from its earlier objectives.
In an article (Planning Commission website), Montek Singh had written that market failure does not automatically mean success of government intervention. He of course has no hesitation in arguing its converse that government failure automatically means the success of privatisation. That this is not so is brought out by the Orissa example.

The Delhi Case: One Year of Private Distribution

The bankruptcy of the privatisation policy of the power distribution is even clearer from what is happening in Delhi. Even after another 9% rate hike this year following the earlier steep rise of 16% about 20 months back, the Delhi Government will shell out Rs. 2,600 crore to the private distribution companies run by Tata and Ambani. This is a 250% increase in subsidy from the highest subsidy ever given to the erstwhile Delhi Vidyut Board in any year of its operations.
The crux of power privatisation is essentially one of subsidising private capital – subsidising Tatas (Tata Power) and Ambanis (BSES and now Reliance Power) — instead of the earlier policy of subsidising the less well-off consumers. And as private capital has deep pockets, the subsidy to them has to be of a much higher order of magnitude. It is clear that the policymakers have learnt nothing from the earlier debacle where the Kanungo Committee in Orissa had castigated BSES for essentially siphoning out money and bringing neither capital nor expertise in its operations. The Delhi case only proves the point further.

The promise of privatisation of distribution is that the private companies would reduce losses and improve revenue collection, thus lowering the outflow from the government exchequer. The private companies had committed to reduction of losses of the order of 2.5% per year, even lower than what DVB had achieved in the last year of its operation before privatisation. The private distribution companies have failed to achieve even these very modest targets and have instead demanded a rate increase to cover what they claim is a “huge revenue deficit”. Meanwhile, they have inflated their expenditure, siphoned off the money under various pretexts, cut down projected maintenance and other investments that DVB was putting in place for monitoring theft. As the Delhi government had agreed to underwrite the losses of the private companies for the initial five years, the consumers now have pay large increase in their bills with Delhi Government giving an even larger dole to the Tatas and Ambanis using taxpayers’ money. At the same time private capital was guaranteed a 16% rate of return on equity. Profits for the private sector is guaranteed while the government takes over the losses, the classic model of privatising profits and nationalising losses is what is being done in the power sector reforms.

The Delhi Government had transferred the assets of the distribution part of DVB at half the reserve price of these assets, agreed to take over all the previous losses of DVB, agreed that the private companies would reduce losses by only 12 % over the next five years. Even after this, the Delhi Government had agreed to provide power below cost from the state owned Transmission Company and subsidise the private companies over the next five years to the tune of Rs.3,500 crore. The private distribution companies have failed to meet their very modest targets for loss reduction or any of the performance criteria set for them. The subsidy in the first year alone is a whopping Rs.2,600 crore. In this context we would like to reproduce what we (Delhi Science Forum) had stated at the time of privatisation of DVB “If we now total all the commitments that the Delhi Government has made to these private companies, it is not less than Rs.8,000 crore over the next 3 to 5 years and much higher than the projected losses of DVB.” As we can see, our projection on this count was much closer to reality than what was claimed by Delhi Government at the time of privatisation. Obviously, the Delhi Government deliberately underplayed the real figures to cover the huge transfer of money it was committing itself to as a part of this privatisation exercise.

The argument for privatising DVB was the high losses of DVB, which are primarily due to high T&D losses consisting of technical losses and what is called euphemistically commercial losses but is in reality theft. Undoubtedly, T&D loss was one major reason for crisis in DVB. The financial crisis of DVB was also due to sharp rise in price of purchased power. The sharp rise in cost of power being bought by DVB was due to Government’s attempt to induct private Independent Power Producers (IPP) in the country. While the private power that came in was insignificant (except Enron), it led NTPC and other central generators to raise their price steeply, charging the SEBs IPP rates. The result has been the rapid worsening of the financial state of the SEBs, forcing them to raise their tariffs to very high levels. Once the price of power went up to figures that were very high, the industry, the mainstay of the power sector, started to move away from the grid. The net result was that in spite of such tariff hikes, the gap between revenue realised and the cost of power has only increased. DVB was no exception, its state being worse than other SEBs as it generates relatively a small portion of it total power requirement.

The T&D losses in Delhi should be one of the lowest in the country as Delhi is a compact area and has less than 3% agricultural load. Till 92-93, its T&D losses were comparable to any other SEB in the country and were of the order of 22-23%. The post reform period saw a sharp rise in such losses and they are now estimated by DERC — Delhi electricity regulator — at 51% today. The phenomenon of T&D losses rising rapidly has been there all over the country, even though DVB’s case is perhaps the worst. The major reason is that the period of “reforms” have seen a deliberate attempt to run down the SEBs in the country. One of the reasons is of course to justify the privatisation policy. The various measures required to control or bring down losses were not only not taken, the Government and the management of the SEBs went to town saying that the SEB losses could not be brought down unless they were privatised. They also pronounced all the employees and engineers were thieves or incompetent, completely demoralising them. The corruption in DVB – purchase of faulty or sub-standard equipment, allowing rampant theft – all of it increased in this “reform” period.   The entire exercise was to demoralise the honest and efficient employees within the SEBs while extending political patronage to the corrupt. The earlier BJP Governments presided over the rapid decline of DVB, with Madan Lal Khurana and the subsequent two chief ministers: Sahib Sing Verma and Sushma Swaraj continuing in this decline.

Once DVB was made sick, its losses increased from Rs.250 crore in 92-93 to Rs.1250 crore by the year 2000, the game plan was to how to sell of its assets at throw away prices. The entire argument of the Government – both the Congress Government in Delhi and the BJP led Central Government – that as the government is incapable of running the electricity sector, it should be given to the private sector. To facilitate privatisation, the Delhi Government decided to take over the entire past losses of DVB so that its balance sheet could be made clean. It also decided to split the distribution in three zones, Central-East, South-West and North. Generating stations were also separated as also the transmission company. As a first step, it was decided to privatise the three distribution companies. It is interesting that in all the models of privatisation, the transmission company is always state owned so that the government can buy power expensively and supply it cheap to the private distribution companies. This then remains as a conduit to subsidise private capital at taxpayers’ expense, precisely the method being followed in Delhi.

We also find the role of DERC in this exercise unfortunate. Before passing the tariff order, it should have opened it to public consultations. Instead, it has held private consultations with the distribution companies and the Delhi Government and issued the Tariff Order. This is a complete violation of all regulatory principles.

The governments of states such as Punjab, Andhra, Madhya Pradesh, etc, who are contemplating privatisation of distribution should learn from the results of Orissa and Delhi. It should be clear that such privatisation would only increase the outflow from the government and the costs to consumer. There is no escape but to reform the SEBs to strengthen their integrated operations and reduce losses. This is the path that the power policies should follow instead of the disastrous policies of inviting in Enrons and subsidising Tatas and Ambanis.

The Problems of the Sector: An Alternate Perspective

If we look at the technical parameters of the Boards such as availability and PLF, they have all shown a steady rise the last 10 years with PLF of thermal plants now standing at 69% (2000-01) from the earlier figure of 55.3% in 1991-92. In this, it is the SEBs that has registered the sharpest increase in their PLF. The problem of the power sector stems primarily 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.

For a realistic planning exercise, it is necessary to explode the myth of 100,000 MW additions to the installed capacity that the Ministry of Power is claiming is required in the next decade. 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.

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 in the last decade 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. The 15th EPS ( Fifteenth Electric Power Survey, Central Electricity Authority) 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. The 16th EPS follows the same pattern of overestimating demand. It is the 16th EPS that has been used by the Ministry of Power to project the need for adding another 100,000 MW in the next ten years. Neither has any attempt been made to examine why the earlier EPS figures have been much higher than the actual increase in demand nor has any examination been made of the impact on the electricity rates if such large additions are made without the demand actually materialising. A realistic assessment of demand will show that we need to increase our installed capacity by 25,00-30,000 MW every five years and not 50,000 MW as claimed by the Ministry of Power.

Table 1: Demand Growth: 15th EPS and Actual

94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02
15th EPS (MW) 58,904 63,490 68,373 73,458 78,936 84,466 90,093 95,757
Increase (%) 7.60 7.79 7.69 7.44 7.46 7.01 6.66 6.29
Actual Demand (MW) 57,530 60,981 63,853 65,435 67,905 72,699 74,216 78,500
Increase (%) 4 6.00 4.71 2.48 3.77 7.06 2.09 5.77

Currently, we are unable to meet a peak demand of about 78,500 MW with an installed capacity of 105,000 MW and are only providing a peak supply of 68,600 MW. The key issue on the generation side is low ratio of peak met with existing generating capacity (65%). Even Philippines, Bangladesh, 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 (MW) 57,530 60,981 63,853 65,435 67,905 72,699 74,216 78,500
Demand met (MW) 48,066 49,836 52,736 58,042 58,445 63,691 65,628 68,609
Shortfall (%) 16.5 18.38 17.4 11.3 13.9 12.4 11.6 12.6
Installed Capacity (MW) 82,193 84,316 85,940 89,166 93,408 97,836 101,630 105,000
Demand/Installed capacity (%) 69.9 72.32 74.3 73.4 72.7 74.3 73.0 74.8
Peak Met/Installed Capacity (%) 58.5 59.1 61.4 65.1 62.6 65.1 64.6 65.3

Note: The demand figures – actual and met – and the installed capacity figures in Table 1 and 2 are from Ministry of Power’s Annual Reports on their web site. The figures for the year 2001-02 are the author’s estimates.

We give as Table 3 the additions to installed capacity proposed originally for the 9th Plan. The status of the 9th Plan is that 19,000 MW is likely to have been added in the 9th Plan though the Ministry of Power has stated that the capacity addition for the 9th Plan would be 20,891 MW ( Agenda Notes, Conference of Chief Ministers/Power Ministers, Ministry of Power, March 3, 2001).   With this addition, shortages are of the order of 12.6 % in peak demand and about 6% 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 the CEA cleared schemes for the 9th Plan – a total of 28,447 MW ( Ninth Plant Power Programme (1997-2002), Report of the Working Group on Power, New Delhi December 1996) – would have been enough to meet the actual demand.

Table 3: Planned Capacity Additions – 9th Plan

Central  5,530 5,460 880 11,870
State 11,091 6,530 17,621
Private 790 27,454 28,244
Total 17,411 39444 880 57,735

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 in the 9th Plan 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.

Sixteenth Electric Power Survey: Inflating Demand
However, no lessons have been learnt from the earlier EPS studies and the failure of their predictions The 16th EPS ( Sixteenth Electric Power Survey, Central Electricity Authority, September, 2000) produced by the CEA has again predicted high growth of demand. And this inflated demand has become the basis of all planning by the Ministry of Power. The Ministry of Power has now projected a decadal target of an additional 100,000 MW to generation and a capital requirement of more than Rs.500,000 crore for this. For this reason it is important to analyse further the 16th EPS demand figures.

Table 4: PEAK DEMAND: 16th EPS and Actual

98-99 99-00 00-01 01-02
16th EPS (MW) 67,312 75,012 79,865 85,132
Increase (%)

11.4 6.5 6.6
Actual Demand (MW) 67,905 72,699 74,216 78,500
Increase (%) 3.8 7.1 2.1 5.8

Table 5: 16th EPS Projections Vs. Likely Growth

02-03 03-04 04-05 05-06 06-07 11-12
!6thEPS (MW) 90,510 96,211 102,161 108,597 115,705 157,107
Increase (%) 6.3 6.3 6.2 6.3 6.5 6.3
Author’s Prediction (MW) 81,993 85,642 89,453 93,434 97,591 121,326

The key issue here is the growth rate computed/assumed in the 16th EPS. For the period of 97-98 to 06-07, the average growth rate is taken as 8.62%, as against the actual compound rate of demand growth throughout the last seven years of round 4.45%. No explanation is offered for why the growth in demand would suddenly rise to more than the current rate of growth. It can also be seen that the “estimates” of 16th EPS, which start from 98-99 up to 01-02, are already belied from the actual figures of demand. The annual growth in demand is quite close to the figure of 4.5 %, a figure that has been quite constant over the last 10 years. If we revise the current the estimates using a more realistic annual growth figure and a better peak to installed ratio, there is little doubt that with the addition of about 30,000 MW in the 10th Plan, we would remove the existing shortage of electricity. If we plan using inflated demand, we will commit the power sector to expensive new power for which there will be no takers. This will only worsen the current crisis of the electricity sector, which has already been compounded by new expensive power.

The Agricultural Sector: Flogging the Wrong Horse

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 ( Public Electric Supply — All India Statistics — General Review, 1997-98, Central Electricity Authority ) 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. The figure of 1,963 KWhr/KW for agriculture must be seen 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 1,200 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
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 50% (Delhi Vidyut Board proposals to the DERC for increasing tariffs “Annual Revenue Requirement for the Financial Year 2001-02 and Tariff Determination Principles for the Year 2002 –2005 /06) 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 6 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 (Shri S.N.Roy, “Power Debacle May Lead to Political Uncertainty,” The Indian Economy 1999-2000: An Alternate Survey, Delhi Science Forum   and updated with CEA’s All India Statistics — General Review, 1997-98 quoted earlier).
Table 6: Impact of T&D Losses

95-96 96-97 97-98 Yearly Growth (%)
Net Generation (BUs) 356 371 395 5.3
277 280 297 3.5
T&D Losses (BUs) 79.36 91 98 11
T&D Losses (%) 22.26 24.53 24.8

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 2001 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. The Orissa restructuring conclusively process that such an exercise only wastes precious time while only increasing the state’s losses.