The Crisis of the State Electricity Boards: Real Issues

The crucial issue regarding the electricity sector has been the health of the State Electricity Boards. Here also, the problem has not been with the generating side. The major problem has been in distribution and realisation of revenue.

The commonly held wisdom is that the SEBs are inefficient and mis-managed. Further, they provide huge subsidies to the agriculture sector due to political reasons and therefore not financially viable. In this understanding of the problems, if the agricultural sector is taken out, the SEBs should regain a large measure of health. Before we begin to address the problems of the SEBs, we will have to get rid of some of these myths.

The agricultural sector receives unmetered supplies; therefore the amount of electricity it receives is not known. This allows for large scale manipulation of figures as a large part of the theft of electricity is put in the agricultural account.

The problem with the SEBs is not one of low agricultural tariff alone. The agricultural tariff should be lower as it is given power mostly at night and this helps in flattening the load curve. While agricultural subsidies do account for a part of the financial problems of some of the SEBs, they are not the sole reasons of their impending collapse. The malaise is more generalised as can be seen from the case of Delhi and Orissa, which have low agricultural loads but T&D losses to the tune of 54% and 47% respectively.

There are three reasons for the financial straits of the SEBs. One is that the T&D losses including commercial losses of electricity are increasing rapidly and while the revenue realised is not. This makes the economics of power generation completely lopsided. The second is that the pattern of investments being made in generation is not suitable, leading to sharp rise in the cost per unit of electricity. The third reason is the high cost of power imposed on the industry, the mainstay of the SEBs, which is now deserting the grid in taking the captive route, and  worsening the crisis of the SEBs.

If the above are right, then the induction high cost private power in the grid with guaranteed off-take will only worsen the problems of the SEBs. Measures such as supplying Independent Power Producers (IPP) power directly to the industry also creates the same problem. The solution of splitting the SEBs into unbundled entities argues that only ownership is responsible for the crisis of the power sector in the country, an argument difficult to sustain considering this has been the global norm till date. While this may have become unfashionable today, it does not  therefore become a justification for unbundling, considering that the state owned utilities elsewhere are not in the same crisis as we find them in India. The British example of dismantling CEGB has not shown any improvements in efficiency.

The introduction of public ownership in infrastructure such as power did not arise from any ideological reasons but from the simple fact that they were monopolies and had the capacity to fleece the consumers. Without going into economic history, a cursory look at Delhi and the current private bus owners attitude brings out clearly the need for public ownership in crucial infrastructural services. If a large number of private owners can come together and argue for a criminalised bus services, the impact of a few private distributing agencies holding the consumers to ransom is certainly not far fetched. The regulatory regime, as shown by the by the private transporters case in Delhi, hardly exists and can be flouted wilfully. If state system is ill run, privatising the same will lead to little benefits. A weak state is likely to be a poor regulator as well, and therefore the pre-requisite to privatising monopoly infrastructural services does not exist in such a state.

The crux of the matter lies in the nature of the crisis of the SEBs. As we stated earlier, the conventional view is that increased agricultural consumption lies at the root of the financial crisis of the SEBs. However, if T&D losses are taken as another “consumer”, then the picture changes substantially (Reddy and Sumithra: 1997). An exercise has been done to examine the finances of the SEBs with T&D loss also as a consumer (Paul & Purkayastha: 1997). The computations show that the amounts due to T&D losses (Rs.16,168,00 crore) as a proportion of the losses of the Boards are very high and are comparable to that incurred due to subsidised power to agriculture (Rs. 17,491.2 crore) .

However, the figures given by the Boards are known to be manipulated for T&D losses. We need to construct some way of computing the actual agricultural consumption in a state. This exercise is not easy as it means knowing the type of pump sets and their consumption. In Karnataka, this exercise has been done (Reddy et al) and the figures are revealing. They have estimated that the T&D losses are under reported to the tune of  11.3% by transferring this to agricultural consumption. The T&D loss figures for Orissa as reported by Orissa GRIDCO is now 47% instead of 22% (Powerline: Nov.,1997). These figures indicate the range of manipulation: anywhere between 10% to 20% electricity lost in T&D is transferred to the agricultural account as it is unmetered.

If a proportion (25%) of the agricultural consumption is transferred to T&D head, we can compute revised figures for the T&D losses. The reworked figures for consumption of the various sectors including T&D has been computed (Paul & Purkayastha: 97). With theses computations, T&D losses compute as a major component of  the revenue lost to the Board and agricultural subsidy is not as high it is made to look. Compared to Rs.20,897 crore lost as T&D losses, the figure for agriculture is Rs.12,763 crore. If we consider that T&D losses can be easily halved by controlling pilferage and investments in T&D, the avoidable loss due to T&D is not substantially different from that due to agricultural subsidies.

The reason for doing this above exercise is not to argue whether agriculture should be subsidised or not. It was to show that agricultural consumption is not the sole reason for the crisis of the SEBs, particularly as the figures for Delhi and Orissa, both of which have low agricultural load is no different than that of SEBs that have much higher agricultural loads. Undoubtedly, in states such as Andhra, Tamil Nadu, Punjab and Haryana, the agricultural  consumption is high. However, this is not the only reason of the current crisis. The implicit subsidy provided to industry in allowing large thefts of electricity is also a big culprit as also large T&D losses due to starving this sector of funds.

For reviving the Boards, one can start simply by identifying how much electricity is given to a substation and how much is recovered in revenue. The minute this is done, it will identify the actual T&D losses and the commercial losses. That this has not been done is itself a commentary on the way in which the SEBs are being run: the attempt is to hide the problems then rectify them. The central government has compounded the problem by focusing first on agricultural tariff and then on private power, unbundling and privatisation, all of which are unrelated to the actual problems of the Boards.

Apart from high T&D losses, lower revenues realised from the industry as a proportion of the total is also important, as this is the only sector that provides a substantial surplus. While one part of the problem is that there is large scale theft by the industry, the other part is that the industry is moving away from grid power due to a combination of high costs and uncertainty of supply.

One of the intriguing aspect of the current situation has been that in spite of tariff increases that should have put the finances of the SEBs in order, this has not happened. In fact, the revenue realisation of many of the Boards have not improved as much as they should have considering the change in tariffs. The problem appears to be if the tariff charged goes above a certain figure, the industry goes in for large scale captive generation. Further, the incentive for theft increases unless backed up by a strong and vigilant Board. Both these factors have been the culprits. The industry is known to be moving away from the SEBs while the theft has increased drastically. This is particularly so as in the prevailing climate, there is a vested interest in showing the Boards as inefficient and so privatise it. Therefore, the Boards are being deliberately run down so that those in policy making positions can reap the windfall profits associated with privatisation.

That increased tariff does not lead to increased revenue is because there is an inelasticity to electricity tariff: it can not be increased beyond what the costs from alternate source of electricity: captive generation. It can be computed that the alternate means of generation using the captive route is about Rs. 2.50 to Rs.3.00. The tariffs being proposed by the World Bank experts are in the range of Rs. 6.00 for industry and about Rs. 3.50 for agriculture. This is far above the alternate costs of electricity using DG sets or coal based captive units. Obviously, something is wrong about the calculations of the costs of electricity if the SEBs or their unbundled private successors have to charge these amounts from the consumer. In other words, we have to look into the cost structure of the SEBs more closely if we are not to reach the figures that are prima facie not sustainable.

As we have argued, one reason for the high cost is due to high T&D losses. But this is not the only reason. The second problem of the SEBs have been an increase of costs per unit that is much higher than warranted, a part of this comes from a wrong choice of investments.
The cost of new power stations are much higher than the older ones and is more than warranted by the general rate of inflation. The major increase is not in the variable costs — the fuel cost — but in the capital cost of the plants. With private power being the mainstay of future power generation as envisaged by the Government, the capital cost is bound to rise even faster. One of the major reasons for rising capital costs in the past was the devaluation of the rupee. Even here, the major impact was felt by those units that were using imported equipment. As the private power plants are almost entirely taking this route, the depreciation of the rupee is going to add substantially to the increase in capital costs of such plants.

If the cost of new power plants is high, the cost per unit of power supplied by such plants will also be higher than existing plants. In a grid, if the proportion of such high cost power is not substantial, the average cost of power does not increase drastically. However, if the proportion is high, it will reflect in rapid increase in cost of power. Here, there is a significant difference in the economies of the Board depending on the nature of the demand curve. Thus, if there is a peaking shortage of 20% but an energy shortage of 10% (figures that are realistic in the current power scenario today), an addition to meet this peak shortage will lead to utilisation of only half this additional capacity: the rest will have to be backed down during times that there is no demand. If we invest in base load plants for meeting peaking shortage, there will be a financial loss equivalent to the capital cost that has to be paid for but not utilised. Therefore, it makes economic sense to go in for peaking duty stations for meeting peaking shortages. The comparative costs of peaking duty power stations and base load power stations are such that we should go in for open cycle gas turbine for meeting peak shortages and not combined cycle base load stations as we are currently planning.

However, with private power being contracted for base load duties, the question that we have to address is what happens when large base load capacities are added to meet peaking shortages, particularly when the existing base load capacity can produce power at much lower costs than either new base or peak load stations. The average cost of generation of the SEBs is much lower than from new plants. If we take the current figures, the average cost of generation of the SEBs is of the order of Rs.1.70. Instead of using this for base load purposes, if we use the newly added stations that produce power at Rs.2.80 per unit, the loss to the board is much more. Taking in to account the load curve, the cost per unit can go up by more than 25% if all the additional peaking requirement is added as through base load stations instead of as peak load stations.

The above illustrates that there is a case for examining rigorously the kind of investment required in the Indian grid for optimising the operating cost. A blind drive for adding to generation without examining the kind of generation can lead to unacceptable costs and tariffs.

The high cost of grid power and the likelihood of its going up to Rs. 6.00 after restructuring the SEBs as per the recommendations of the World Bank consultants, is causing a large scale desertion of the industry from the grid. Today, the captive capacity of the industry is at least 10,000 MW. The energy from captive units is 43800 Mkwh if it is assumed that the captive units operate at 50% PLF and is 45% of the grid supplied energy to the industry. Obviously, losing the customers that are the ones who cross-subsidise other sectors, is a serious loss for the SEBs. If the restructured Boards fix the tariffs recommended by the World Bank consultants, the only sectors that will bear the brunt will be domestic and the agricultural sector, as the industry will undoubtedly take the captive route. Thus, we have to focus on those reforms that will bring down the cost of power to the consumer rather than try and take the “soft” option of increasing tariffs.

The domestic consumer currently is treated as category that needs lower tariffs. A large section of the domestic consumers today are using electricity for luxury consumption and should not be subsidised. A multi-tiered tariff structure where those at the high end pay for peak energy costs while those at the lower end pay for base power is a more sensible tariff strategy for the domestic sector.

The other policy measure will be to encourage the industries that have installed captive units to synchronise with the grid it with its surplus capacity and provide them with proper incentives to supply power to the grid. The current policies give incentives to new IPPs but actively discourage supply from existing capacity with the industry. Currently, there is at least 10,000 MWs of captive capacity with the industry, which with appropriate policies can pump power into the grid and obviate the need for large additional investments. No guaranteed off-take is required to be given — only incentives to provide power to the grid during peak periods. In US, this was done by legislation long before de-regulation was attempted. In India, in spite of our capital crunch, we are willing to overlook the capacities that have already been built in order to chase high cost investments without regard for future consequences.
The major conclusions from the above is that the debate on the power sector has focused on the wrong issues. The agricultural subsidy is not the sole reason for the crisis. The major reasons for the current crisis lies in high T&D losses, a wrong choice of investments and the flight of the industry from the grid. None of the above are irreversible. The current focus on restructuring of the Boards the World Bank way, will only postpone examining the real problems of the sector. If the restructuring schemes are pushed through as they are being proposed in Orissa and Haryana, the industry will desert the grid in large numbers making grid power prohibitively expensive. Neither agriculture nor the domestic consumer will be pay these tariffs. Apart from its impact on the country as a whole, such a strategy will be disastrous for the power sector.

Impact of Restructuring on the Workers of the Electricity Sector
The current debate on the power sector reforms hardy lever mention the workers and the impact of restructuring on them. The 9th Plan projections are that and additional 40,000 MW will be planned for addition — 20,000 MW through private sector additions and 20,000 MW through the state sector. This, based on the current norms for the sector would normally imply a big expansion of the work force. Even if we revise the existing norms, there should be a net increase in the number of workers. However, the current restructuring drive has already targeted the workers and argues that the restructured Boards should get “rid” of workers and engineers to the tune of 30-40%. Already, the former OSEB employees have taken to agitation on the proposed retrenchments. Therefore, this is not an idle conjecture but the reality facing the workers in the state owned utilities.

The man/MW ratio has come down to 12.79 in 1997-98 from 14.3 in 1992-93. If the Draft Power Plan norms for the 9th Plan are considered, then the additional requirements in the 9th Plan should be about 5 lakhs. However, instead of any increase in man-power, we are likely to see a net reduction in work force as the restructured entities try and retrench their workers.
The addition of 40,000 MW in the 9th plan does not add substantial additional requirement of man-power as the new stations are highly automated and can be run with 500 persons per 1000 MW. Thus, the major increase in man-power requirements come from the distribution (or the power system in the above table) side. This is where the privatised entities would try and economise. Their attempts would be to concentrate workers only in areas where there is substantial revenue generation and provide a very thin cover for the rest of the system. Thus, while the workers would see a sharp increase in work load, the consumers are going to see a rapid deterioration of service, particularly in rural areas. As the service is already very poor in this areas, this will mean a virtual withdrawal to the towns, which was the condition before the state intervened in the power sector.

As we have shown, such a course of action is not inevitable nor is its called for from the current state of the state owned utilities. A massive global campaign for privatisation of electricity sector has been coupled in India with very low investments in the 8th Plan. This, with the known weaknesses of the SEBs, have led to the demand for restructuring the electricity sector.
The workers of the sector along with the consumers who are likely to suffer from the above restructuring must be able to raise the issues of the sector before the people. Unless, this is done, not only will there be  large scale dislocation, but power will become an item of luxury consumption. At stake is Rs. 800,000 crore investments in the power sector built with public money. It is the task of the working class today to rally behind it the people of the country to stop this impending loot of the power sector by international carpetbaggers.

Purkayastha, P., and Arun Ghosh, “Power Policy: Alternatives”, Delhi Science Forum Workshop on The Power Crisis: Where Does a Sustainable Solution Lie, Delhi, March 3-4, 1997.

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Roy, S.N., “Power Sector: Events to Follow”, Delhi Science Forum Workshop on The Power Crisis: Where Does a Sustainable Solution Lie, Delhi, March 3-4, 1997.

Reddy, A.K.N., and Gladys D. Sumithra, “Karnataka’s Power Sector: Some Revealations”, Delhi Science Forum Workshop on The Power Crisis: Where Does a Sustainable Solution Lie, Delhi, March 3-4, 1997.

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