Short circuits in the reforms generator

As India’s growth accelerates, the unmet demand for electricity is rising. The Ministry of Power estimates that an additional 100,000 MW of generating capacity will be needed to provide power for all by 2012. At current prices, this means an additional Rs 9 trillion of investment will be needed, not including the costs of restructuring state utilities and taking care of past liabilities as well as working capital and other expenses during the transition period.

• On the generation front, a fundamental feature is the persistence of mismatch between supply and demand of power.

As of January 2003, India had 107,533 MW of installed capacity, an increase of about 44% over the level at the start of the Eighth Plan in 1993. Even this rapid growth in generation has not been sufficient to meet the demand for electricity at current prices: overall demand was between 8-11% higher than supply over the 1990s. The gap between supply and demand increased steadily from 1998-99 (5.9%) to 2002-3 (9.1%), but dropped to 7.1% this past year. Unmet demand for peak power has been more severe, but has also declined more noticeably over the decade. The shortage was 20.5% in 1992-3, but only 11.2% by 2003-04. It is unclear how much of this shortage is due to inflated demand or related to existing low prices.

• On transmission, there is an aging, unreliable, un-integrated transmission network.

India has five regional transmission grids, with little interchange between grids: inter-regional transmission accounts for only about 30% of total power transmission. Links between the West and South, providing 1,300 MW of transfer capacity, are the best developed, while East-West links offer only 450 MW of transfer capacity. The Ministry of Power plans to build up transfer capacity to 29,500 MW by 2012. Connecting the grids would be expensive without greater normalisation of operating parameters. Aging regional grids are also vulnerable to failures; a single substation failure can cause a regional blackout. Consumers suffer daily power interruptions, and a single substation failure can take down an entire regional network affecting millions of people.

• In the area of distribution, the distribution network is dominated by financially weak State-owned distributors.

State Electricity Boards (SEBs) currently distribute most of India’s electricity. These entities have been financially weak for decades, but their losses (and the consequent drain on State Government finances) have increased sharply over the 1990s in particular. Losses were nearly 1.5% of GDP in 2002-2003.

The rising cost of power has been one contributing factor in the SEBs’ losses. Increases in wage bills after the increases in civil service pay recommended by the Fifth Pay Commission have also played a role. The historical roots of the weakness, however, are in under-collection of tariffs. At the end of the 1990s, only 55% of total power generated was billed and even less, 41%, was actually paid for. An average of 60% of the cost of service is recovered from domestic consumers, and less than 10% of the cost of service from agricultural users. SEBs’ average cost recovery through tariffs was only 74% in 1999-2000, 6% lower than in the beginning of the decade. Although important progress has been made in installing at least 11KV meters, metering is inadequate in many areas. Transmission and distribution losses, including theft, of electricity have also been recurring problems: amounting, by some estimates, to 40-50% of power sent out from the generating stations.

• The Policy Trajectory over the 1990s has undergone several changes.

The initial strategy for reform in the power sector focused on attracting investment in generation. The Central Government’s strategy was to offer ‘‘fast track’’ guarantees of 16% rate of return to some private companies in order to offset the disincentive created by the fact that the SEBs could not be relied upon to pay for power. The mechanism effectively insulated private generation companies from risk, at government expense and did not address underlying weakness in power sector.

The mid-1990s brought more comprehensive reforms at the State level. Orissa was one of the first to unbundle its SEB and form a State Electricity Regulatory Commission (ERC) with legislation in 1995, but several other States including Andhra Pradesh, Haryana, Rajasthan, and Uttar Pradesh followed suit. The Central Government created an enabling environment for these reforms and the Central ERC came into being with the Electricity Act of 1998.

The evolution of the reforms in the later 1990s and 2000s, however, shows greater promise.

Expert Commissions have studied the problem of a one-time resolution of SEB arrears, the potential for IT to improve management of the grid and the distribution sector, and the potential ways to improve the financial health of the distributors.

The Accelerated Power Development Programme (APDP), transformed into the Accelerated Power Development and Reform Programme (APDRP) in the 2002-03 budget, has motivated substantial changes in policies. Twenty-eight States have signed Memoranda of Understanding (MOUs) with the Central Government, in which the Central Government provides upgrades to inter-State transmission lines, more power supplied from central generating stations, and grants-in-aid, loans on favourable terms, and other benefits in exchange for meeting reform targets. As of early 2004, 19 States have constituted SERCs and 17 of these have issued tariff orders. Fourteen States have universal 11KV metering and three others have more than 90% coverage. Ten States have unbundled SEBs and others are on the verge of doing so. Two have privatised distribution. Many States are also moving toward more transparent accounting of the cost of subsidies by including compensation to SEBs as an item in the budget.

• Electricity Act of 2003.

The Electricity Act of 2003 (EA 2003) marks a watershed in Indian electricity policy. Among other things, the Act opens the sector to private participation in generation, transmission and distribution, mandates open access to transmission and (over time) distribution grids, and establishes a new regulatory framework in which pricing is to be based on competitive bidding. The recently notified (April 2004) CERC tariff policy sets policy in the meantime as these new regulatory principles are worked out. It moves toward greater regulatory clarity with a 5-year control period, and also motivates improved performance by substituting normative parameters for actual costs in determining rates of return.

The Act also provides general guidelines for restructuring of SEBs to create greater competition in the generation sector. Finally, the Act follows up on some of the conditions emphasised in the APDRP incentive schemes: it requires that subsidies be paid out of State budgets, mandates that all States form State Electricity Regulatory Commissions, requires universal metering, and increases punishment for electricity theft. The Electricity Act of 2003 also increases consumer protection.

The article is based on a paper, entitled ‘‘Some light at the end of the tunnel’’, presented by N K Singh, former Planning Commission member, and Jessica Wallack at the recent Conference on Indian Economic Reforms held at Stanford University from June 3-5. Singh can be contacted at nandu@nksingh.com.

PART I