The Hindu Business Line : New power regime — Positive developments, grey areas

There have of late been several welcome changes in the power sector, including the freedom that the new Act gives the private sector to transmit, distribute and trade in power. While these will help the Government realise the ambitious goal of adding 1 lakh MW of generating capacity by 2012, more needs to be done by way of attracting private investment into the sector, says S. D. Naik.

AFTER a decade of unprecedented upheaval and a marked deterioration in physical as well as financial performance, the tide finally seems to be turning for India's power sector. And the passage of the Electricity Bill 2003 has contributed in no small measure to the change in sentiment and the outlook for the sector, though some grey areas still persist.

The most significant changes introduced by the new Act are the dismantling of the monopoly power of State Electricity Boards (SEBs), allowing the private sector not only to generate but also to transmit, distribute and trade in power.

These changes hold out the hope that the Government will be able to realise the ambitious goal of adding 1 lakh MW of power generating capacity by 2012 besides providing electricity to all villages by 2007 and all dwelling units by 2012.

As mandated by the new Electricity Act, the Central Electricity Regulatory Commission (CERC) has allowed open access in transmission with effect from November 17, 2003. Henceforth, all transmission service providers, including the Power Grid Corporation, are expected to provide non-discriminatory open access for inter-State transmission to any distribution company, captive plant or any permitted consumer.

The CERC is also in the process of finalising a proposal for setting up an exchange where one can buy and sell power, bypassing the middleman.

The emergence of power trading as a viable business venture has already attracted a number of new players. Reliance Energy Trading and Amalgamated Transpower have applied to the CERC for trading licences. Reliance Trading has sought permission to trade in electricity in all States, except J & K.

Meanwhile, Global Energy Ltd, another private player, has initiated power trading between Goa and Delhi. Till recently, trading in power was the exclusive prerogative of the state-owned Power Trading Corporation (PTC).

With all these welcome changes, there has been a surge in new investment proposals, including revival of some of the old proposals that were stalled for a number of reasons. After a gap of three years, the Hinduja group is set to revive the 1040 MW Visakhapatnam power project in Andhra Pradesh.

The project was earlier to be jointly developed by Hinduja group and National Power of the UK but it failed to kick off on account of cost issues at the State level even after the Central Government offered a revised counter-guarantee in 1999. The Hindujas have now conveyed to the Government that they are ready to go it alone and implement the project by 2008.

In addition, as many as 18 private sector power projects, with a capacity of over 8,000 MW, are expected to achieve financial closure by the end of this fiscal. An additional capacity of 3,000 MW has also been targeted for financial closure by June 30.

The financial institutions and banks have agreed to review the tenor of loans for private power projects, besides softening the interest rate regime. The FIs have also agreed on funding of power projects with a gestation period of 4-5 years followed by 14-15 year repayment period and not to insist on government guarantees.

The Reliance group has recently announced its plan to set up a 3,500 MW greenfield power project in Uttar Pradesh at an estimated cost of Rs 10,000 crore. The group is also looking beyond Uttar Pradesh for making more investments in the power sector.

The group, which currently generates only 500 MW of power from its plant in Dahanu, Maharashtra, is sourcing 4,500 MW of power from outside to serve its five million customers in Delhi, Mumbai and Orissa. With its gas reserves from Krishna Godavari basin sufficient to generate 20,000 MW of power, the group is well placed to invest in additional power generating capacity.

The state-run National Thermal Power Corporation (NTPC) has drawn up ambitious plans to add 20,000 MW power capacity by 2012, thus raising its total generating capacity to 56,000 MW and achieving an annual turnover of Rs 1,40,000 crore.

It has decided to tap both domestic as well as overseas markets to raise Rs 50,000 crore in order to meet its target of adding 20,000 MW capacity. Its corporate plan also includes carrying out 20 million tonnes of coal-mining annually for running its power plants.

The resolution of the problems related to the long-stranded Dabhol power project, in which Indian lenders have sunk more than Rs 6,200 crore, is also within sight, following the commendable work done by the Naresh Chandra Committee.

The Union Cabinet has indicated its willingness to extend a whole host of sops to revive the operation of the Dabhol plant, ranging from waiving of Customs dues, providing income-tax concessions and benefits under the new LNG policy, and waiving of excise duty on naphtha.

The Maharashtra Cabinet has also agreed to provide a number of concessions such as exemption in sales tax on purchase of new equipment, waiver of stamp duty on transfer of assets to the new promoter on LNG lines, State government guarantee for various liabilities to be borne by the Maharashtra State Electricity Board (MSEB) and waiver in collection of local taxes.

With these concessions, the State government is hopeful that the MSEB would be able to draw 1,124 MW of power from the DPC at per unit tariff of Rs 2.50 to Rs 2.75. The State Cabinet has also reportedly given its consent to MSEB to write off funds to the tune of Rs 905 crore towards its 15 per cent equity stake in the beleaguered DPC.

Dabhol phase-I (658 MW) remains closed since May 2001 after MSEB suspended power purchase from the company citing high tariffs. Phase-II (1,444 MW) is 93 per cent complete. The hectic efforts to resolve the Dabhol mess are the result of a growing realisation that the overriding public interest lies in resuming the operation of the plant at the earliest as Maharashtra State is facing a huge power deficit of 2,100 MW. Among the companies that have shown interest in taking over the DPC are Reliance Energy, Tata Power and four foreign power majors.

All these are, no doubt, positive developments. But there are still problem areas that will have to be tackled if the performance of the sector is to match the promise. For instance, there is still a lot of confusion over the crucial issues relating to subsidy, cross-subsidy and tariff fixation norms to be followed by private power producers.

The new legislation requires all cross-subsidies to be removed over the next five years or so. And during the transition period, the State is expected to pay out the subsidies. Assuming an average subsidy of Rs 5,000 crore per State, the subsidy pay out for 20 States would work out to a staggering Rs 1,00,000 crore, or Rs 20,000 crore per year. It is not clear from where this money will come from.

Unfortunately, the N. K. Singh panel on national power policy, which recently submitted the first part of its report, has only added to the confusion over these issues even while making some sensible suggestions. While acknowledging that recovery of costs from consumers is a critical area, the committee also dwells on the importance of the government extending a minimum level of support (subsidy) to make electricity affordable for the lifeline consumer category.

On the issue of cross-subsidy and its elimination as per the requirements of the new Electricity Act, the panel recommends three methods: The average cost method; embedded cost of service for consumer category method; and the long-run incremental cost method.

At the same time, it also points out the difficulties involved in each method and says that the tariff policy should strike a balance between feasibility and simplicity. It further adds that the Centre should review these policies after five years and initiate further measures to eliminate cross-subsidies.

The Committee's suggestions to allow post-tax return on equity of 14 per cent for generation and transmission projects and 16 per cent for distribution companies and cost-plus formula for tariff fixation are not only controversial but also imprudent.

At a time when we are finally moving towards an era of competition in the power sector, concepts like assured post-tax return on equity and cost-plus formula are totally uncalled for. Let us not forget that the Dabhol fiasco was mainly on account of the cost-plus pricing and a promise of guaranteed off-take of power by MSEB.

Incidentally, under the new Electricity Act, tariff fixation is the job of the Central and various State Electricity Regulatory Commissions and they are already on the job of doing so.

That they have made some good progress in this regard is evident from the fact that the cash losses of 11 State Electricity Boards came down by over Rs 8,500 crore in 2002-03 compared to the previous year. This is the result of the regulators pushing the State governments to crack down on power thefts.

In 2002-03, such States as Madhya Pradesh, Punjab and Tamil Nadu did away with free power to farmers under pressure from the State Electricity Regulatory Commissions. In many parts of the country, farmers are now willing to pay for electricity in the hope that the quality of power supply will improve.

Another equally imprudent suggestion of the Committee is that the state-owned NTPC, which has been doing a commendable job, be split into four competing regional entities. Thanks to its scale of operation and good management, NTPC has emerged as a major generator and supplier of power in the country at competitive rates.

Splitting the entity will affect its ability to raise funds on a massive scale for its corporate plan. Not surprisingly, both the CMD of NTPC and the Union Minister of State for Power, Ms Jayavantiben Mehta, have opposed the proposal. The Task Force would do well to avoid going into areas entrusted to the Central and State electricity regulatory commissions. In the second part of the report, it should concentrate on ways to attract more private investment into the sector and to bring down the per unit cost of power generation.