The Power Sector: Crisis of the Reforms

With the growing resistance of the people in Andhra, the much hyped power reforms are slowly unravelling. The game plan of these reforms are quite clear: first restructure the state electricity boards and install regulatory commissions, next let the regulatory agencies hike up the power tariffs, then privatise the lucrative portions of the Boards while letting the state continue with the loss making rural sector. Unfortunately for this game plan, the people of Andhra have now taken to the streets to demand that these policies be reversed.

It is important to understand the overall game plan in the power sector. The parts make sense only when the end objectives are realised. Without this, the various steps can be considered as errors of judgement, either by the Government or the regulatory agency. Thus the AP State Regulatory Commission decided the hike in power tariffs; Chandra Babu Naidu has been claiming that he can only provide some relief through subsidy. What needs to be seen is that restructuring and setting up of regulatory commissions was primarily for increasing tariffs and allowing Naidu to distance himself from such unpopular decisions. Further, it is now public knowledge that raising of tariffs was done with the active connivance of the Andhra Government. Once the tariffs have reached high levels, the restructured entities, which would then be profitable, can be privatised easily.

The World Bank has been arguing on the need to “de-politicise decision making” and “freeing it from populist pressures” and therefore the need for independent agencies. The argument is that if power tariffs (and other infrastructure prices) are increased, then only they become attractive to the private sector. The problem with the agricultural sector and rural electrification is that given the importance of food security and the impact of high electricity costs on food grain prices, very high tariffs for agriculture are not feasible. Rural electricity sector is thus unlikely to give high returns and will probably need subsidies. Therefore, the unbundled electricity sector will finally leave the rural sector with the state, either in terms of the subsidising its costs or retaining it in the state sector with mounting losses. This is at the core of all the reform models that are being pushed by the World Bank and its ally: the Central Government.

If we take the global scenario, it is true that the electricity sector is being drastically restructured. The interesting twist in these restructuring efforts is that while the arguments advanced for reforms are “efficiency” and need for new investments, rarely has any discussion taken place on the impact of the reforms on the cost of power. The few examples that are there before us, all indicate that the power tariffs go up by 100% to 200% after reforms. This has been the case of Philippines earlier and is now shown to be true for Andhra as well. In Orissa also, the power tariff has gone up by 96% in the last two years after it’s restructuring.

Meanwhile, the signs for the power sector in India are more ominous. There are two important figures that the Ministry of Power is hiding from the people. The first is that though installed capacity and energy generation in the country has gone up by roughly 5-7% every year in the last five years, the energy actually delivered to the consumer has hardly risen. According the Shri S.N.Roy, former Chairman, Central Electricity Authority “The average power tariff to industry at about Rs.5 per unit has already become the highest in the whole world. It is in view of this high tariff the industries are gradually changing over to captive generation. This has resulted in minus 3% growth of energy consumption in 1996-97 according to the official figures published by Ministry of Power (MOP). It is unlikely that there will be any growth during the Ninth Plan and all the additional energy generation will be completely lost”. The second important fact, again hidden from the people, is that India is meeting an aggregate demand (sum of the peak demands of all the states) of 60,000 MW on an installed capacity base of 96,000 MW, a pathetic 63% against a world average of 85-90%. If we take into account that the aggregate demand is always more than the actual peak (all the states do not register their peak demand at the same time and day of the year), the performance of the power sector will come out as even worse.

 While these figures are damning, the Power Ministry has been busy doctoring the statistics. Thus, if we go by the figures of the Government, the power sector is producing more power, its availability is going up and the only reason for poor financial state of the State Electricity Boards is the subsidy to agriculture and the domestic consumers. In this scenario, that the cost of grid power is much higher than the cost of power from alternate sources — DG sets, captive coal based power stations – does not find a mention. In the Power Ministry’s view, if we split the SEB into pieces and set “remunerative tariffs” for agriculture and domestic consumers, then the power sector will turn healthy and can be privatised. This will get rid of the loss making Boards and generate a tidy sum from the sale of these assets for all those involved.

The reality of the power sector is quite different. Contrary to the arguments advanced by both the World Bank and Government of India experts, the agricultural sector subsidy is grossly inflated. It is inflated in two ways. One is that as it is unmetered, a large part of the transmission and distribution losses are loaded on to the agricultural sector. If we look at the figures of agricultural pump sets given by the SEBs, we find that the consumption of units per pump set has been continuously inflated: according to the SEBs, it has increased by two or three times in the last ten years. While we can understand that some increase is possible due to lowering of the water table, an increase of this magnitude is nothing but straightforward jugglery with facts. The second is that agriculture generally is given power at night and other off-peak periods; the cost of off-peak power cannot be equated to the cost of peak power.

In the early nineties, the finances of the SEBs were becoming more precarious; the Central Government was also cutting down on the plan allocations for the power sector. At that stage, instead of looking at the finances of the Boards and ways to raise capital for the power sector, the Congress Government under Narasimbha Rao decided to induct private power into the Indian grid. To do so, huge concessions were offered to international capital. The consequence was the induction into the Indian grid of power plants such as Enron’s that today are selling power to Maharashtra State Electricity Board at Rs. 4.95 per unit. This is against the cost of Rs.1.80 to Rs.2.20 from alternate sources of power: from NTPC, Tata Electric or BSES. The result has been the postponing of decisions regarding the reforms that the SEBs needed to carry out and driving them even further in the red by forcing them to buy costly power.

The reasons for taking such a disastrous policy were two fold. One was that without effectively bankrupting the SEBs, it was difficult to sell the idea that the SEBs should be dismembered and privatised. The second and not an unimportant one either, was the money to be made from such deals. The Enron deal with its “education” costs is already quite infamous. It was instructive that while BJP shouted from the rooftops about Congress Ministers “graduating” from the Enron School of Business Management, they had no hesitation in enrolling there once they came into power in Maharashtra. The Shiv Sena-BJP Government in Maharashtra increased the size of the plant from 700 MW negotiated by the Congress Government (Phase I) to 2000 MW (Phase II). If MSEB and Maharashtra Government are already bankrupt with the First stage (700 MW), their fate can be well imagined after the plant has attained 2000 MW.

The Central Government is currently wedded to the so-called reforms that are currently being implemented in Andhra. Though the Congress has joined the agitation in Andhra, it still refuses to take a national position on these reforms. In this period, it has passed legislation in Rajasthan for dismembering the Rajasthan Electricity Board. The Rajasthan Government has also availed itself of a restructuring loan from the World Bank on similar terms as Naidu did in Andhra and has made similar commitments regarding raising of power tariffs and privatisation of the Board.

In all this, there are further storm clouds. Vajpayee’s visit to the US has been capped by an agreement that India has signed with the US. In this agreement, an US led consortium has agreed to set up 4000 MW of private power. Power Grid Corporation has agreed to the total off-take of this power and has also decided which state will take how much power. Missing from all this, is the cost at which Power Grid is going to distribute this power. Presumably, under the BJP dispensation, the states today have no right to refuse to buy costly power from US multinationals, even if they can produce it much more cheaply.

The other extraneous cost element that is being introduced into the power sector is again through Power Grid. This central undertaking is building 800KVA/500KVA HVDC lines at enormous costs. They are also spending huge amounts for monitoring power flows. While the existing transmission and distribution network cannot be improved for a lack of money, there is no dearth of funds for Power Grid. The total investments are projected to be of the order of Rs.50,000 crore, all of which will add very little in terms of additional capacity or removing losses in the existing network. The consumer will finally pay for this huge investment in terms of additional wheeling charges, further inflating the power tariffs.

S.N.Roy, in a recent article has warned “The proposals to take up large numbers of Mega power generation project and primary transmission system may turn out to be non-performing assets as such schemes suffer from unscientific planning and are not all technically justified. Such projects have been planned without any planning on mere speculative projections of growth. One can question the rationale of mega projects and 800 KV AC / 500 KV DC transmission when the country is already experiencing surplus energy of about 40% for some of the time. It is obvious that such projects may not get commissioned and may become idle and non-performing assets to the detriment of the national interest. It may be revealing to know that USA is setting load centre gas based power stations as cost of transmission has been found to be extremely high as compared to transport of gas through pipes.

In the last one decade of reforms has only benefited the rich at the cost of the poor. The average power tariffs in India has increased two and half times after liberalization and may further double in the next 2-3 years time. Even at present a domestic urban consumer spends 6-8% on energy as against only 4% elsewhere. Can the policy makers fix benchmarks for expenditure on energy related to income?

The future power scenario is extremely grim, dangerous and explosive as sustained economic growth cannot be achieved unless corruption at all levels is weeded out and the cost of power brought down within the paying capacity of the consumers. The policy makers should read the writing on the wall and not wake up after disaster has overtaken the nation”.

Andhra is wake-up call. The policy planners elsewhere better take heed