The Chief Ministers Conference False Consensus on Bankrupt Path

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 irrational.

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 electrification.

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 SEBs.

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.