To attain the targeted GDP growth of 6-7 per cent per annum, India needs approximately 60,000 MW of additional capacity by 2002. The Government expects private producers to contribute half of this capacity. However, this is unlikely to happen without a major change in policies with regard to this sector.
Post 1991, power sector reforms have focused on attracting investment in generation through Independent Power Producers (IPPs) who would sell power to monopoly distribution entities, the State Electricity Boards (SEBs). However this process has failed to yield the desired results because of the extreme financial weakness of the SEBs.
SEBs are financially weak for three main reasons: (1) Average tariffs are well below costs due to subsidies to agricultural and domestic users. (2) Collection is poor, leading to an average receivables position of 30 per cent of revenues. (3) Transmission and distribution (T&D) losses are extremely high - as much as 21 per cent, mainly due to theft.
The three major recommendations of the Group seek to remedy this situation, thereby ensuring availability of reliable power. They are spelt out in the following sections.
1. Shift Focus of Reforms from Generation to Distribution
Attempts to encourage investment in generation will not succeed unless SEBs are made financially viable. The focus of reforms must therefore shift from generation to distribution. Accordingly, the Group recommends that States restructure the power sector on the following lines.
(a) Set up State Electricity Regulatory Commissions (SERCs)
(b) Restructure the SEBs
Phase I: Corporatise the SEBs and separate generation from transmission and distribution
States should separate the SEBs into independent operating companies for generation, transmission and distribution.
The operating companies should be professionally managed, without political appointees at senior levels. The management team should be held accountable for the performance of the corporatised entities.
The generation companies and IPPs should sign Power Purchasing Agreements (PPAs) with the transmission and distribution companies for off-take of their power. Transmission would be a unified, regulated monopoly; distribution could comprise regional monopolies in different parts of the State. The area of operation of the distribution companies should be defined to include a suitable mix of industrial and rural loads. Power dispatch should also be unified based on the marginal cost of delivered power.
This step of the restructuring process has already been implemented in Orissa. Annexure 3.1 describes Orissa's successful restructuring of SEBs.Phase II : Privatise the unbundled companies
To ensure operational independence and improve efficiency, the State Governments should divest at least 51 per cent of their stake in the corporatised generation and distribution companies to private investors through a transparent bidding process. The SERC would mandate efficiency improvements, such as reduction in T&D losses, that the distribution entities must achieve and set tariffs based on the achievement of these efficiencies.
The profitability of the privatised distribution entities would depend on the actual efficiency improvements they achieve. This would create a strong incentive for efficient management, and help eliminate the problem of theft that plagues SEBs. Orissa plans to implement this step by the end of 1998.
(c) Introduce competition by allowing large users to buy directly from generating companies(d) Set up a Power Trading Corporation in each State
2. Take Measures to Attract Investment and Improve Asset Utilisation The comprehensive reforms outlined above would cure the major ailment of the power sector: the weak financial position of the SEBs. However, to ensure the optimal development of this sector, the following measures must also be undertaken simultaneously:
(b) Simplify the project clearance process
(d) Increase availability of generating stations to release 4500 MW of capacity
The average Plant Load Factor (PLF) of thermal power plants in the country is just 64.4 per cent compared to over 80 per cent internationally. This is mainly due to the poor availability of plants. Poor availability, in turn, is primarily due to the poor condition of equipment. Therefore, the Power Finance Corporation should fund the renovation and modernisation of generating stations on a priority basis to make available about 4500 MW of generation capacity. This would lead to a rise in PLF to about 70 per cent. Creating this capacity would cost about Rs. 1 crore/MW.
(e) Reduce receivables of SEBs to 15 per cent of revenues
Most SEBs face a high receivables position and bad-debt losses. The average receivables position of SEBs is 30 per cent of revenues. Improving collection effectiveness and bringing down the receivables level through measures such as prepaid meters would help raise funds for investment in system upgradation. States should also ensure that distribution utilities are permitted to act against Government owned bodies that default on payments. The objective should be to bring receivables down to a maximum of 15 per cent of revenues, This will lead to a gain of Rs. 2,750 crore.
3. Restructure the Delhi Vidyut Board (DVB) as a "Showcase Project"
The DVB is currently one of the poorest performing SEBs. Delhi faces a peak power shortage of 7 per cent. Its losses in 1997-98 were Rs. 839 crore, providing a return on capital of - 45.1 per cent. T&D losses were 43 per cent in 1997-98 compared to about 12 per cent for BSES in Mumbai. The DVB also has outstandings of over Rs. 1500 crore with central utilities such as NTPC and PGC. Given the poor financial condition of the DVB, it is highly unlikely that Delhi will attract private investment without drastic restructuring.
The Government should, therefore, embark on radical reform of the DVB through the following process. Generation should be unbundled from transmission and distribution. Distribution should be privatised into one or more utilities. An SERC should be set up in Delhi to regulate the operations of these utilities. The SERC should set targets for reducing T&D losses and improving collections. The State Government should provide legal support to these privatised utilities to curb theft of power. The Centre should contribute towards the investment required to reduce T&D losses and improve collections.
T&D losses in Delhi should be brought down to Mumbai levels of about 12 per cent leading to savings of Rs. 1,000 crore per annum at the current tariff level of Rs. 2.4 per unit. This would turn power distribution in Delhi into a profitable business. Successful restructuring of the power industry in the national capital would clearly demonstrate the benefits of reform, and spur restructuring in other States.
The three main recommendations in the Power Sector are summarised below:
This will call for the following actions:
As part of its World Bank-supported power sector reforms, Orissa has designed an unbundled organisation and passed State-level legislation to support the restructuring of its SEB. The major steps in this restructuring are depicted in the next page.
The main features of the legislation enabling restructuring and privatisation are:
As part of this reform, the SEB has been divided into three entities: (1) Orissa Power Generation Corporation (OPGC), which controls the thermal units in the State; (2) Orissa Hydel Power Corporation (OHPC), which controls hydel generation; and (3) Grid Corporation of Orissa (GRIDCO), which controls transmission and distribution.
OPGC has been privatised through the sale of a 49 per cent stake to AES of the USA through a competitive bidding process. A further 25 per cent stake would be divested at a later stage.
The distribution function under GRIDCO has been divided into four zones operated by subsidiary companies of GRIDCO. One of these zones was handed over to a private utility, BSES, for operation through a management contract. However, BSES pulled out of this contract following disputes with the regulator. The four distribution subsidiaries are being privatised through a bidding process.
Orissa has thus implemented the first step of the recommended restructuring process, and is currently implementing the second step.
Orissa Power Reform
Argentina has successfully transformed a highly inefficient power sector into a model one.
Before restructuring commenced in 1992, the Argentine power industry was bedevilled by many of the problems that afflict the Indian power industry. Most utilities were vertically integrated and owned by the Government. Tariffs were politically set and not based on real costs. Shortages were on the increase and investment in the sector had almost stopped.
Efficiency was extremely poor; thermal plant availability was just 45 per cent and T&D losses were about 30 per cent. This led to high prices (between 6 and 12 US cents per unit), despite heavy subsidies. The largest distributor was losing as much as US $ 2 million per day.
To remedy this situation, Argentina followed a power sector reform process similar to that recommended in this document. The sector was unbundled into separate entities for generation, transmission and distribution. These entities were then privatised. Prices were set based on marginal generation costs. Competition was then introduced, starting with very large users (above 5 MW), and gradually moving to encompass all users above 0.1 MW. All players were guaranteed equal access to the transmission and distribution grid. Transmission and distribution functioned as regulated monopolies subject to a price cap mechanism.
This restructuring has dramatically transformed the situation in Argentina. The key benefits of this program are shown below. Prices of electricity have decreased by about 30 per cent. Theft has been curbed, and T&D losses have been reduced to 15 per cent in three years. Reliability of service has improved. Despite the drop in prices, the profitability of major players in the industry has increased. Consequently, investment in generation, as well as in the T&D network, has increased.
Restructuring has thus met its objective of delivering reliable power supply at a reasonable cost to consumers.
Key Benefits of Restructuring
Key facets of this restructuring process are as shown in the next page.