Recharging the power sector

By V. Jayanth

AT A time when the Centre was giving a determined push to the power sector and coaxing State Governments to undertake major reforms of their electricity boards, a change of guard came about in the Union Power Ministry. With the untimely passing of Rangarajan Kumaramangalam, Mr. Suresh Prabhu has taken over the reins. It will take some time for him to come to grips with the crisis and push ahead with critical reforms.

The problems are both political and financial. Unless politicians gather the courage to take hard decisions now, the efforts to substantially enhance power generation at least in the Tenth Plan period could be undermined. To accelerate growth and correct regional imbalances in development, power is one of the prime requisites. The Eighth Plan envisaged a capacity addition of 40,000 MW but ended up providing hardly 24,000 MW. After a mid- term review of the Ninth Plan, the Government again scaled down its target. Against an original projection of 40,245.2 MW, it is now considered feasible to add only 28,097.2 MW by 2002.

At present, the installed capacity in the country is just over 95,500 MW (72 per cent thermal, 24 per cent hydel and the remaining nuclear and wind energy). Perspective plans by the Central Electricity Authority estimate a requirement of about 2,40,000 MW of installed capacity by 2011-12 for self- sufficiency. Even now, there is a shortage of between 5 and 8 per cent in supply. Though the process of reforms was set in motion in 1992 and the Centre volunteered to provide counter-guarantees for some mega power projects cleared in the initial rush of investments, only a few have gone on stream. A majority of the private projects remain in the pipeline, held up by bottlenecks - financial or environmental.

Kumaramangalam took a series of initiatives to push reforms and get the States to take the lead in increasing power generation. The Electricity Regulatory Commissions Act, 1998, was the first concrete step to reform the sector and provide an escape route for politicians ruling the States from the `tariff trap'. Apart from setting up a Central Electricity Regulatory Commission (CERC), the Act enabled the States to set up their own Commissions - SERCs - for depoliticising pricing of power. The SERCs are supposed to rationalise tariff, introduce transparency about subsidies and promote efficient and environmentally benign energy policies. The CERC was set up in 1998 and since then at least 14 States have gone through the formalities of establishing the SERCs, but some of them (Tamil Nadu, for instance) are still not functional.

After several formal and informal consultations, the Centre called a Power Ministers conference in February this year, getting the Prime Minister, Mr. A. B. Vajpayee, to inaugurate it and impress on the States the urgency of reforms and the need for putting the State Electricity Boards (SEBs) in order. Though a complete consensus on thoroughgoing reforms was elusive, a broad agreement was reached. Basically, the Ministers agreed on an energy audit at all levels, a time-bound programme to install meters for all consumers by December 2001, reduction and ultimate elimination of power theft, and strengthening/upgradaing of sub- transmission and distribution systems by taking the sub-station as a unit on a priority basis.

The Centre recommended the `unbundling' and corporatisation of the SEBs, benchmarking through separate distribution profit centres and promotion of competition in the power industry. The preferred model was the trifurcation of the SEBs into generation, transmission and distribution corporations. An attempt to introduce a common, Central legislation - the Electricity Act 2000 - is still being resisted by some political parties and many State Governments. But the Centre is trying to initiate a debate and build a consensus on it.

While working on the Ninth Plan, the Centre approved an outlay of Rs. 1,24,526.41 crores, of which Rs. 53,299.41 crores would come under the Central sector itself. The States were supposed to pool in Rs. 71,227 crores. But a major portion - 43 per cent - of the targeted capacity was to come up in the private sector, while multilateral agencies such as the Asian Development Bank and the World Bank were also approached for financing.

But the basic precondition for private, foreign or multilateral investment was reform of the power sector. Any investor wanted `fair pricing' of electricity and the Centre even offered a 16 per cent return on investment, when the SEBs could not earn any profit after decades. Since the SEBs were the only agencies involved in transmission and distribution, they had to guarantee the purchase of all power generated. A Power Purchase Agreement (PPA) was to be signed and escrow provided, and finances were to be tied up for `financial closure' of the proposed private projects. Unfortunately, many producers have not been able to achieve even the financial closure stage. Of the 57 private projects cleared till June 2000, only nine have been fully commissioned and 11 are under construction.

Ultimately, the problem boils down to the financial viability and sustainability of the SEBs. Together, the SEBs owed the National Thermal Power Corporation (NTPC) - one of the leading producers of power - Rs. 14,744 crores including a surcharge of Rs. 5,371 crores - as of June 2000. Bihar tops the list with an outstanding of Rs. 2,663 crores, followed by Delhi and Uttar Pradesh with over Rs. 2,500 crores. Though the NTPC threatened to shut off supplies to the defaulting States and resorted to token cuts, nothing much was achieved because of the politics involved. So the Centre cleared a special scheme to recover these dues. This debt would be `securitised' - converted into tax-free bonds, which would be issued either to the undertakings or other bidders which have the counter-guarantee of the State Governments.

If the SEBs are not in a position to pay even the Central sector undertakings such as the NTPC, which supply power at reasonable rates (Rs. 2 plus a unit), how can they ever afford to pay the private producers who will charge anything upwards of Rs. 3.40? Most, if not all, of the SEBs are running at a loss and depend on the State Governments to reimburse the subsidies - of free power to farmers, highly subsidised energy to the poor and partly subsidised electricity to domestic consumers. The Centre wants the States to trifurcate the SEBs, budget the subsidy and introduce competition in the transmission and distribution sectors as well. Above all, the key to financial viability lies in cutting down drastically on transmission and distribution (T&D) losses so that the SEBs can earn more from the generated power.

Apart from Mizoram and Jammu and Kashmir , which have a T&D loss of 47 per cent, Delhi reported a loss of 46.86 per cent (1997- 98), Andhra Pradesh 31.76 per cent and Assam and Arunachal Pradesh over 30 per cent. About half a dozen other States lost between 20 and 25 per cent. Hence the importance of containing T and D losses, the bulk of which is caused by vested interests in the industrial and commercial consumers category who allegedly steal power, with the connivance of some officials.

So, the responsibility finally devolves on the States to accept power sector reforms. If they continue with the short-sighted policy of populist schemes with an eye on elections, they could be left behind in growth and development. Even Andhra Pradesh, which corporatised its SEB, is stiff facing problems because of a political agitation against tariff revision. As different parties rule the various States, it will be better to depoliticise the power sector and let the SERC handle the ticklish tariff issue.

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