Reform and restructuring

3 September 2003

India's large power-sector, spread over its 29 States and, until lately, comprising mostly government-owned utilities, has been going through a long and tortuous process of reforms and restructuring, which I M Sahai says may hold many lessons for other developing countries with a similar energy structure.

THE Federal government in India embarked on structural reforms in the country's power sector after it was clear the State Electricity Boards (SEBs) and other state-owned utilities were not able to cope with their increasing responsibilities. Uneconomic tariffs, induction of politics into the SEBs, interference by government, over-staffing and operational inefficiencies had gradually led to SEBs slipping into the red. From the 1980s, both commercial and financial losses were being incurred annually by most SEBs leading to constraints on their ability to raise funds from external sources. The maintenance of existing assets and expansion plans both suffered. The first push towards power reforms, which began in the early 1990s, stemmed from this. The initial steps were hesitant and not backed by sufficient political will. The progressive privatisation of the power-sector in India began in 1991 with the introduction of private power in generation. As IPP power was to be sold to SEBs, their overall health and ability to pay for that power was of concern to potential investors. By 1993 the Federal Government, supported by funding agencies such as the World Bank, realised drastic remedies were required including restructuring of the vertically-integrated SEBs, and deregulation.

The structural reforms in India's power-sector, initiated in the last ten years, were generally to comprise the following main features:

• The break-up of the existing SEB in the states.

• Creation of new, function-based separate utilities or generation, transmission and distribution.

• The gradual privatisation of these utilities.

• Formation of an independent regulator to license new utilities and set tariffs.

The federal government initiated certain reforms through its own policies. Having made a start with generation, private participation was gradually permitted in the renovation of old plants, renewable energy, captive and cogeneration projects, transmission and (more freely) in distribution. In due course, an independent Central Electricity Regulatory Commission (CERC) was set up at the federal level to license and set tariffs for federal generation utilities and inter-state transmission.

However, it was difficult to get the States to fall in line with the power-reforms programme. As Ajay Shankar, Joint-Secretary in India's Ministry of Power, said, this posed 'a complex and difficult challenge in India. The need, therefore, was to evolve consensus on reforms.' Initially, only four States Orissa, Haryana, Rajasthan and Andhra Pradesh agreed to pass and implement legislation on power reforms and restructuring. These were among the States whose diagnostic studies had been conducted by World Bank-funded consultants. Certain other States agreed to take up just one of the reform measures.

Multi-level strategy

In order to bring about the desired objectives, the federal government formulated a new strategy for power reforms. This involved taking initiatives at six different levels from top downwards: National, state, utility, distribution-circle, supply-feeder, and consumer levels. The National-level intervention included provision of a legal framework for reforms, particularly in distribution (such as licensing local distributors, third-party sale of power, removal of cross-subsidies, full metering and stringent penalties for power-thefts). The recently-passed Electricity Act is part of such an initiative by federal government.

At the State-level, the State governments were being asked to sign a separate memorandum of understanding (MoU) with the federal Ministry of Power to implement reforms and restructuring programmes. At the end of July 2003, 27 out of 29 States had signed such MoUs. Twenty four states had signed tripartite agreements (TPA) for liquidating past dues to the federal utilities. Nineteen had constituted State Electricity Regulating Commission (SERC). Among the latter, 15 had begun operations and had set tariffs. Lesser success was seen in the break-up of the SEBs only nine out of the existing 21 SEBs had been dismantled.

At the level of SEBs, they were being required to sign separate memorandum of agreements (MoA) with the Ministry of Power to carry out distribution reforms. This was expected to lead to increased accountability, the introduction of commercial accounting, setting-up of online management information systems, reduction of losses, and devising parameters to cover consumer satisfaction and system stability. Until now, 27 state utilities/governments had signed such MoAs. The States were also expected to introduce stringent laws against power thefts.

At the three field levels, the interventions were meant to improve the quality of power supplied, and to ensure a fair deal to the consumer. To begin with, full metering of all feeders of 11kV load had to be taken up. Simultaneously, progressive metering of all power consumers was to be initiated, to be completed in a period of two years (see Table 1).

Even the creation of SERCs has been on course: Of the ten States that have not done so until now, it is proposed to have a joint power regulator for five to six small States in the north-east, for the sake of administrative and operational convenience.

However, greater speed is required in unbundling SEBs to privatise power distribution, and to bring about field-level reforms and improvements in distribution which would directly affect the millions of power consumers in the country.

The federal government is hoping this would be aided by the funds it is giving to states under the Accelerated Power Development and Reforms Programme (APDRP). This crucial programme was started in the fiscal year 2000-01 (modifying an earlier, on-going financial scheme). Under it, funds of up to Rs.400B (about US$8.6M) would be given to the States over the next five years out of the federal budget. Of these, Rs.200B (US$4.3M) would be given to finance projects for strengthening and upgrading of sub-transmission and distribution systems in the States. The balance would be used as an incentive grant to SEBs to reduce their financial losses.


The financial health of SEBs had been of increasing concern. Financial losses had occurred due to unrealistic tariffs, aggravated by the inadequate recovery of dues, transmission losses, power-thefts and other such factors. It was estimated out of the total power generated by them, only about 55% was being billed and only about 41% of it realised. On average, for every kWh of energy sold, a SEB lost about RS.1.10 (around 2.38 US cents). The cumulative losses of SEBs had already reached Rs 260B and, as per a World Bank estimate, they would rise to Rs.400B (US$8.6B) within five years. Due to such high losses, the SEBs and other State utilities were not able to pay their dues to the federal utilities and other companies.

The federal government set up a panel to suggest a way out. Based on its report, the panel signed a tripartite agreement in March 2003 with 24 States and the Reserve Bank of India (RBI). It envisaged a one-time settlement of Rs.374B (US$8.16B) (the aggregate amount of SEB dues, as in September 2001). Under it, the entire principal amount of those dues and 40% of accumulated interest would be securitised in the form of 15-year Bonds to be issued by the RBI on behalf of the respective States and carrying a tax-exempt 8% rate of interest; and the balance 60% interest (and surcharge on it) would be waived off. The current dues would have to be cleared in full by the SEBs, as per agreements to be signed separately.

Performance rating

A recent move by the federal government has been to complete a rating of the power sector in the various Indian States. It has been undertaken by two independent, domestic credit-rating agencies CRISIL and ICRA. This was undertaken for two main reasons to get an independent assessment done of the present strength of the power sector in a state and its progress in reforms and restructuring and, secondly, to help the federal government in determining its own power policy towards that state.

The federal government occasionally offers a set of incentives and assistance to the various states in their power sector. Lately, it has been utilising this to encourage States to speed up their power-reform process. The federal incentives to the States include sharing in electricity generated by the federal utilities, location of new power projects by the latter, assistance in rural electrification programme, and funding (often at concessional rates) by federal financial institutions in the power sector. The rating would enable the federal government to appropriately tighten the screw on non-performing States. It would also give valuable reference data to the other stake-holders such as IPPs, funding agencies and multilateral financial .

The CRISIL-ICRA rating (which is to be a regular feature in the future), was undertaken late last year for 26 States. It looked at a State power-sector in respect of its ability to become commercially viable, propensity to absorb investment, and ability to service the latter by ensuring an optimum utilisation of assets and maximising operational efficiency.

Based on the data obtained from the various States up to August 2002, the report of that first rating was given to the federal government in January 2003. Out of a maximum 100 marks, the score-sheet of the 26 rated States is given in Table 2.

Federal utilities

While efforts had been made to reform and restructure the States' power-sector, nothing had been done in regards to the Federal power utilities. Giant public-sector electricity corporations with country-wide operations, such as the National Thermal Power Corporation (NTPC) and NHPC, are not only continuing in their existing form but are being strengthened through increasing doses of federal budgetary funds. The possibility of divesting the federal equity in NTPC was considered in the mid 1990s by a Government panel, but not recommended due to the increasing responsibilities entrusted by the federal government to NTPC for capacity expansion. NTPC has since diversified into hydro generation, and is now seeking projects abroad.

The federal government alone would not be able to meet the increasing demand for funds by its wholly-owned power utilities, which are now being encouraged to tap the domestic equity market. This was disclosed by the Secretary of the Indian Power Ministry in a presentation made to the World Bank in June 2003. The Power Finance Corporation has already drawn up plans to make an initial public offering (IPO) of its equity during the current fiscal year, as has the Power Trading Corporation (PTC), set up a few years ago by three federal power utilities. In the meantime, a portion of PTC's equity has already been bought by the private-sector Tata Power, and also by some major domestic financial institutions.

With the formation of the Central Electricity Regulatory Commission (CERC) in the late 1990s, the regulatory powers of the federal government exercised over its own generation and transmission utilities have passed on to an independent, autonomous regulator. The duties and responsibilities of CERC (along with the SERCs) have been firmly put on the statute-book by the Electricity Act 2003.

Electricity Act 2003

A major step in power reforms and restructuring was taken in May 2003 with the introduction of the Electricity Act by the Indian Parliament, after 20 months of deliberation (See IWP&DC, August 2003, pp18-20). As explained in its preamble, the new Act is quite comprehensive in its coverage. It seeks to consolidate the existing electricity laws, including one going back almost a hundred years.

Comprising 185 sections, the Act was officially introduced on 10 June 1993. However, the federal power minister had assured the Parliament he would introduce a set of amendments to some of its provisions, in light of suggestions made by the Members during the debate. These may be seen during the course of this year.

Another consequence of the Act is national policies on Electric Power, on Rural Electrification and on Tariffs. Certain other issues have to be issued by the federal government. The Minister of Power and Secretary for Power have given assurance this would be done, mainly before the end of this year.

Some early effects of these initiatives are already visible. On 28 June 2003, the federal-owned Power Grid Corporation of India (PGCI) announced a tie-up with the private-sector Tata Power for a Rs.19.8B (US$425M) transmission project. It is to be constructed to evacuate power from the 1020MW Tala hydroelectric project, coming up in the neighbouring country of Bhutan with India's financial assistance. This is the first public-private partnership for inter-state transmission in India.

Effects on hydro

The Indian Government has recently launched an initiative to add 50,000MW of hydro power over the next two decades. A quicker implementation of the reform and restructuring programme would be essential to get this initiative going.

The Electricity Act began on a wrong foot with regards to hydro, by excluding it from its provisions for the delicensing of generation. All new hydro-generation schemes having capital expenditure above a certain limit still have to be put up to CEA for clearance. CEA in turn would consult all concerned agencies, including the State Government, before giving its concurrence. Previous experience

has shown that CEA clearance is a time-consuming process. Added is the time taken obtaining other statutory clearances required to get licence for a hydro project. During the introduction of the Electricity Act, it was suggested to the Indian Power Minister that the provisions in the Act be suitably amended to limit CEA

concurrence to only the very big hydro projects. Whether that will be done remains to be seen.

On the plus side are the provisions in the new Act which greatly improve the economic feasibility of hydro power projects. The present ills of uneconomic tariffs and difficulty in the realisation of power-bills from cash-strapped SEBs are sought to be tackled in the Act through a series of steps, including:

• The power regulators have been put on a firm, autonomous footing, generally insulated from extraneous elements such as the political and local interests.

• With metering becoming compulsory in future, it would be quite difficult for any category of consumers to evade power dues, either with the connivance of the field staff of the distributor or otherwise.

• Non-payment of power tariff to a generator, or long delays in doing so, could make the distribution company liable for suspension/revocation of its licence.

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