State electricity boards: Darkness at noon

TRUE TO the spirit of a social-democratic state, India evolved its power development policy. Though State electricity boards (SEBs) were statutorily required to function as autonomous service-cum-commercial corporations, they, in effect, became agents of the governments to subserve the socio-economic policies of a State, and hence never felt the need to break-even and even contribute to capacity expansion.

This non-accountability culture led to gross inefficiency at all levels - technical, institutional and organisational, as well as financial. As a result costs remained above revenues which were constrained by an irrational subsidised pricing practice. With SEB losses mounting, the field was ripe for some new ideas and practices at the turn of the Nineties. With economics reforms came restructuring of power sector and an informed atmosphere of debates and discourses.

However, little light has been thrown on the significant aspect of inefficiency costs involved in the forced functioning of SEBs that warranted reforms. We report here the main findings of a study on the functioning of the SEBs. We have estimated, on some very plausible assumptions, the avoidable cost of inefficiency at a few amenable levels and found it to represent about one-third of the reported cost of electricity supply in India in 1997-98. And this is regardless of many other inefficiency sources.

While the growth of the power sector in India looks impressive, it conceals many innate inadequacies of the system and the capacity build-up, lagging far behind the growing demand, has plunged the country into a chronic shortage situation. Still worse, the per capita consumption of electricity at around 360 units remains one of the lowest in the world. It is only half that of China.

A number of forces has been behind this plight of shortages. For one thing, in no Plan period could the target for installed capacity, the cumulative slippage between target and achievement remaining well over 20 per cent. Secondly, poor capacity utilisation has substantially corroded the system performance. Thirdly, the performance over the last four decades indicates an elasticity of energy sales with respect to energy generated of just 0.843. This highlights high levels of auxiliary consumption and high transmission and distribution (T&D) losses. Adding to these infirmities have been the financial failures arising from other factors such as irrational pricing practices and over- manning, politicised subsidies at the cost of efficiency, and an overarching professional inefficiency (or what economists call 'X-inefficiency'), that contributes to and reinforces the whole malady.

The pervasive enthusiasm for power development in the States that marked the 1970s was soon to die out for want of resources. The share of power sector in total plan outlay has been on the decline for quite sometime. In addition, a gradual shift in capacity addition from the States to the Central sector, along with an avoidable under-utilisation of the existing capacity itself, has made 'power purchase' an inescapable agenda in the daily functioning of SEBs. Still worsening the situation have been high levels of T&D loss, a soft euphemism covering a substantial part of theft of power, committed in connivance with officials and under political patronage. With a reported T&D loss of 22 per cent, India stands well above international standards; China reports a T&D loss of just seven per cent.

Even the so-called T&D losses are underestimates that find a suitable cover-up in overestimates of agricultural consumption. In most States, agricultural consumption is largely unmetered, and the SEBs, in their eagerness to record reduced transit losses, find this situation a convenient 'dump' for a good part of the unaccounted-for energy. Our study has shown that agricultural consumption in India is an overestimate by 30 to 40 per cent. The actual unaccounted-for energy inclusive of this thus amounts to 30 per cent.

Such high levels of unaccounted-for energy only point to the vast scope for improving revenues. For instance, after allowing for an average T&D loss of 15 per cent (Maharashtra's average), the reported national loss in 1997-98 represents a potential for additional sales revenue of Rs. 4,247 crores. Since one unit energy saved is equivalent to one (extra) unit generated, this also means a saving in capacity addition. Estimates show that if the T&D system in India could restrict the energy loss to at 15 per cent, it could help obviate the need for adding about 4,000 MW to the installed capacity. That these savings are in addition to the potential increase in sales revenue by more than Rs. 4,000 crores per year brings out the gravity of the problem.

Besides these constraints on technical efficiency are the institutional and organisational factors. Though the Electricity (Supply) Act, 1948, requires the SEBs to function as autonomous corporations, their actual position is as good as that of a government department. Excessive interference by State governments has resulted, in one case, in over-employment in the SEBs, especially in the administration section. The number of employees per million units of energy sold in India in 1990-91 was about 5, as against less than 2.5 in China, Philippines and Indonesia. Other institutional factors breeding inefficiency are the lack of professional management. A steady erosion of competitive management values has sapped the institutional texture.

All these inefficiencies are reflected in an inflated proportion in the cost of electricity supply, the main components of which are expenses on power purchase and establishment and administration (E&A) and interest payments.

Power purchase is the largest component in the cost of electricity supply. As pointed out, a major part of this is the cost of avoidable under-utilisation of the capacity and transit loss of energy, that is, the cost of inefficiency.

This means that there is considerable potential for cost reduction. Our study shows that with a reasonably operating efficiency and 15 per cent T&D loss targets, the power purchase cost in 1997-98 of all the SEBs, at the same sales level, could have been reduced by about 50 paise per unit sold. For Delhi, such operational efficiency improvement would reduce the unit supply cost by as much as 117 paise, and for Kerala, by 40 paise per unit.

Another possible source of cost savings is improved labour productivity. If labour productivity increases to, say, 2 employees per MU of electricity sold, it would yield a unit cost saving of 11 paise. For Kerala, with an average E&A cost of Rs. 1.44 lakhs per employee in 1997-98 (the highest in India, about 1.8 times the State sector average), the unit cost saving turned out to be 20 paise, and for Delhi, about 10 paise per unit sold. High interest charges are a big problem for many States. By converting part of Government loans into equity, this burden can be eased. Ideally, a 1:1 debt-equity ratio accounting practice would reduce the interest charges by one-half, such that, for instance, in 1997-98, the unit interest cost in the State sector would be reduced to 15 paise per unit sold. For Kerala, the benefit of reduction in unit interest cost would be 23 paise/unit sold. If these three cost reduction measures were effected, then the savings in cost per unit would be 33 per cent (for all SEBs in 1997-98) and the reduced unit supply cost would give a commercial surplus with the same average revenue realised. To this extent the reported commercial loss of the SEBs, attributed to the so-called unit-cost-unrecoverable average revenue, turns out to be nothing but inefficiency-caused loss.

Scope for rational tariffs

However, this is not meant to justify the present unscientific tariff setting. A rational tariff structuring should, among others, aim to help the SEBs earn a reasonable return over and above the total costs, that differ at different voltage levels, once the effect of distribution loss factor also is accounted for. That revenue realised from sales must be sufficient at least to recover costs of supply is the basic prerequisite for the health of any industry. Starting from this premise and comparing revenue realised with cost incurred in the power sector serve the purpose of highlighting the parlous financial position of the SEBs. The cost-revenue deviation or commercial loss of the SEBs in 1997-98 came out to be Rs. 12,700 crores.

Such commercial loss suggests that if the total revenue earned by the SEBs had been enough to cover the total costs, an additional amount of say, Rs. 12,700 crores would have been available in 1997-98 for reinvestment. That an accumulated amount of about Rs. 50,000 crores would have been available with the SEBs during six years from 1992-93 for ploughing back in the sector, had the total cost been recouped, brings out the extent of the colossal loss the SEBs suffer over time. Such additional revenue could have been used for capacity expansion and for improving the performance of the existing assets. This would have also reduced the burden of the State governments' having to provide the SEBs with subvention. That all these would have been possible every year leaves one cynical at the morbid sector. Now read along with this the implications of our findings that the supply cost could have been slashed by way of improved performance.

Government interference in price determination favouring the agricultural and domestic sectors has usually been accused of sinking the SEBs in the red. However, as we have found, around 30 to 40 per cent of what is usually reported as agricultural power consumption in fact represents unaccounted-for energy. This means that a good part of the huge amount of `subsidy' claimed to be provided to agriculture does in fact represent the cost of inefficiency in not operating and maintaining the T&D system properly. If the T&D system could be managed efficiently, this 30 to 40 per cent of the agricultural consumption (liberated from misclassification as above) would be available for sales instead of being thieved away. This could help yield some additional savings in power purchase costs or additional sales revenue. Our estimates show that the cost, from this perspective, of the 'cover up' alone comes out to be Rs. 10,000 crores.

Unlike the agricultural sector, however, little economic justification is found in subsidising the household sector as a whole (supply to which typically imposes higher costs on the system in terms of peak time requirements, extensive distribution network, and losses). The fact that in general households without electric connection belong to the poorest of the society questions the justification, if any, of such subsidy to this sector, that too across the board. Social and welfare regards would require special treatment to low income groups by means of a `life-line tariff' applied to the lowest consumption slab only. Any cross subsidisation required should be tapped from other consumers in the same (domestic) sector, such that the sector as a whole remains subsidy-cost-free.

The upshot of the analysis is that there do remain sufficient quarters for remedial exercises, meant to remove problems that stand in the way of the SEBs' improved performance. Basically, the whole system could be spared from the present dilemma, if the Government interference were kept to a minimum and the SEBs were allowed to function as autonomous commercial-cum-service corporations, as required by the E(S) Act. We have seen that if some minimum, affordable standards of efficiency were maintained at the technical, and institutional/organisational levels in the functioning of SEBs, considerable cost savings could be achieved and this, coupled with a rational pricing practice, could win the system a very comfortable position. It could work even otherwise; if the Government fully compensated the SEBs for its induced inefficiencies regularly and in time, the industry could still sustain its survivability, (provided the SEBs do not tend to make unfair use of the compensation facility by laying their own inefficiencies in the exchequer's net). That is, what the system badly requires is essence-specific reforms, not structure- specific ones.

K. P. Kannan & N. Vijayamohanan Pillai

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