Let There Be Light

All that the recent reforms in the power sector have managed to achieve is to arrest the slide. What is needed now are measures that move the sector forward.

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What is common between the nondescript town of Azamgarh in Uttar Pradesh (UP), the country's capital Delhi and the Leftist stronghold of Kolkata? Little except that bootlegged power is available in several parts of these cities for a price. In a sense, this describes the unmet aspiration of the common man, who cannot afford the luxury of private 'back-up' power. Industry, on the other hand, has little choice but to live with it, having to subsidise farm power that draws its concession from populist moves that the politician of the day indulges in to shore up his vote bank. Not only that, the law abiding consumers across segments end UP subsidising theft, which often enjoys the patronage of the political class. The outcome of this regress is that the near monopolistic state-run power distribution utilities have gone bankrupt. And so, the market refuses to quench the burgeoning demand, shying away from the risks of the sector, where paying power bills is a serious issue. The issue has indeed metastasised-the domestic coal sector, for instance, has not matured.

Given that, this survey looks at four broad issues: the efficacy of the reform prescriptions currently under implementation; issues facing the goverment's attempts to kick-start the generation capacity addition programme; the irritants in fuel supply, which is key to affordable electricity, and finally the politics of power. After all, it is finally our political leaders, at the Centre and states, who can drive the reform process.

Reform Prescription Or Placebo?

Notwithstanding the various issues facing the sector, the pall of gloom is beginning to clear, with interventions occurring at various levels. All the states have set up regulators and a significant number of them have gone about raising farm tariffs and reducing industry tariffs; the Centre, on the other hand, has injected sizeable funds into the state power sector, improving the technical health, since the states themselves have little money of their own to do so.

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Evidently, the sector's downward slide has been arrested. The question now is whether the pace of reforms in the power sector is adequate? Or, are we just about running to stay in the same place? After all, on the face of it, the losses incurred by the state power utilities are not decreasing (see The Black Hole). Says an optimistic Union Power Secretary, R.V. Shahi: "The ongoing reforms are irreversible and the APDRP (Accelerated Power Development and Reform Programme) scheme, the Centre's key reform initiative, has been a success story."

Launched in 2000, the APDRP scheme has so far provided the state distribution sector a grant of around Rs 3,800 crore and a loan of around Rs 1,500 crore. This has enabled them to achieve a cash loss reduction of around Rs 3,000 crore over the last four years. During this period, the haemorrhaging of the utilities has been just about stemmed. Four years ago, they were losing as much as Rs 29,000 crore annually, rising at around 10 per cent per annum. During 2004-05, the collective losses fell to Rs 21,667 crore, though in the previous year, it was even better at Rs 19,502 crore.

Evidently, the APDRP scheme is only one of the many factors that have enabled this containment. Argues Power Trading Corporation (PTC) Chairman and Managing Director, T.N. Thakur, who was earlier in charge of Power Finance Corporation (PFC), which is the agency coordinating the apdrp programme: "There is a need for more institution-based reforms that are carried out without any conflict of interests and with a singular focus." PFC is a power sector specific financial institution. It coordinates with other central power sector utilities like National Thermal Power Corporation (NTPC) and Power Grid Corporation of India. This approach is quite unlike that in the roads sector, where the National Highways Authority of India (NHAI) is the nodal agency.

Another criticism of the PFC-led APDRP is that the gains of the programme remain unsecured and under-leveraged-the 'carrot and stick' programme conceived a few years ago has been significantly watered down. The obligations on the states to undertake reform measures have been diluted. As a result, the central government has no control on the additional revenues arising from the APDRP-induced improvements. Therefore, an errant administration can fritter away the gains rather than plough them back into the sector. Admits Shahi: "The APDRP programme will be restructured shortly based on improvements suggested by a few government-appointed expert committees."

The Regulator And Reforms

Another key reform driver is the regulator. While state regulators have ensured tariff rationalisation over the last seven years-altering tariffs for different consumer segments in a manner that they reflect the cost of supply-the pace of development here is debatable. Furthermore, it is not as if the regulators have behaved as mere calculating machines, using economic principles to arrive at tariffs. Several of them have actually indulged in an undesirable habit of creating 'regulatory assets'-a euphemism for procrastinating tariff hikes-thus blunting the very tool that can drive the political system to aggressively undertake measures like theft control (such losses are as high as 15 per cent in several states), or deployment of more funds to reduce the technical losses that are between 15 and 20 per cent. If the technical and theft-related losses were to be quickly addressed, hefty hikes would not be required.

Power Secretary Shahi: Is optimistic about reforms and feels that the ongoing ones are irreversible

There is, however, one area where the state regulators have failed to seize a key opportunity to accelerate reforms. The recently enacted electricity law, Electricity Act, 2003, allows the state regulators to implement 'open access'-that is, allow bulk consumers to escape the tyranny of the existing supplier, the state distribution utility, which burdens him not only with the farm and domestic subsidy bills, but also the inefficiencies of the system. However, there is a price to pay, namely a surcharge equivalent to the prevailing cross-subsidy burden. Still, there is adequate flexibility provided in the computation of this surcharge, and rather than enabling the migration, most of the regulators have devised formulae that render migration unviable.

Even in cases where the industrial consumer is migrating from the utility supplier to his own captive unit (and which is also feeding a sister industrial unit), the regulator has been able to do little about the 'vindictive' attitude of the utility. In some cases, the utilities, upset about losing customers, have refused to offer 'back-up' power in case the captive units fail or undertake scheduled shutdowns for maintenance. One such case in West Bengal went to the High Court and was decided in favour of the consumer. But it is learnt that the utility is planning to approach the Supreme Court. This unwillingness on the part of the utility to let go reflects its dependence on bulk consumers.

Not surprisingly, then, industry continues to add captive capacity. So far, of the 40,000 mw-odd capacity added (that's a third of the utilities' generation capacity), a significant portion operates on expensive fuels like naphtha. With the result, close to 30 per cent of this capacity is idling. Having learnt it the hard way, industry is now setting up domestic coal-based captive capacity.

PTC's Thakur: Feel more institution-based reforms are needed, but without any conflict of interests

Short-circuiting Reforms

While the state regulators have reined in populist measures like free power, milder forms of populism continue to be perpetuated. How else does one explain the expensive, short-term power purchases by power deficit states like up, where consumers do not even pay their ordinary bills. While in most states, the utilities are able to afford the annual power purchase costs, fact remains that the short-term, high-cost purchases that cannot be recovered from the consumer soaks into the gains that are realised by Central measures like APDRP. For instance, up has purchased power at as high as Rs 5 per unit, while its peak tariff is a little over Rs 4 per unit.

Fortunately, at present, such power is only around 2.5 per cent of the total power sold in the country. However, in time to come, this loophole needs to be plugged. But not in the manner that the central regulator has gone about it. Instead of letting market forces of demand and supply operate, the central regulator has capped the trading margins at 4 paise per unit, apparently in an attempt to keep the consumer tariff in check. Clearly, the answer to the ills of the sector lies in reforming the state distribution sector at a furious pace, and that means reducing theft through strict regulations that are implementable, and upgrading distribution assets in a manner that the highest standards of monitoring are adopted. And, to achieve this efficiently, the sector requires to be quickly depoliticised.

Further, to ascend the reform scale, data is a critical tool. Interestingly, Centre's data collation efforts on the state power utilities is representative of this issue. While the Centre has collated the subsidy paid by the state governments and gone on to show that the burden has dropped-from Rs 14,595 crore in 2001-02 to Rs 11,016 crore in 2004-05-indicating that consumers are beginning to pay what it costs to serve them, this does not represent the total picture. The statistics do not factor in the indirect subsidy (termed 'tariff compensation') paid by the state governments to specific consumer segments such as the farm and domestic sectors. With around 30 per cent of the consumer base (read: farmers) not being metered, but charged a flat rate based on the power of the pump sets, data integrity remains a serious casualty.

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While there is little to argue on the issue of 'repair or replace', in the context of distribution sector reforms, clearly privatisation is not a panacea for the sector's ills. Orissa's attempt to privatise its distribution utility was marred by the risks posed by the regulator. At the end, AES Corporation, a global power major, exited the business a few years ago. Says Anil Sardana, Managing Director, North Delhi Power Limited (NDPL): "It is important to recognise that the 'one-size fits all' approach cannot be adopted in the distribution business. Depending on the profile of the distribution zone, the correct option needs to be exercised. It could be the franchisee model, cooperative model, or something else."

In fact, a few years ago, NTPC attempted to take over the Kanpur distribution zone in up. However, a change of heart happened after it took stock of the law and order situation. For, key to commercialising the power business lies in putting an end to the sizeable extent of theft. For, instance, 'commercial' losses in Delhi were 35 per cent when NDPL took over a part of the distribution business four years ago. Today, this figure has been pared to 15 per cent. Technical losses, on the other hand, were 18 per cent at the time of privatisation. Currently, it is around 15 per cent. "Key to privatisation is the need to bring about political consensus across party lines on the issue," says Sardana. Two years ago, Karnataka, Haryana and Rajasthan were actively considering the possibility of privatising the distribution utilities, but subsequent changes at the helm-either leadership or party-have put the process on the back-burner.

Evidently, as far as reforms are concerned, we are still running to stay at the same place. Time we moved on.