The Hindu Business Line : Power sector reforms: Generating a viable model

AFTER a `reality-check' on the power sector, the Planning Commission has admitted that though there have been a number of experiments in State electricity boards (SEBs) reform, including the one fashioned by Dr Montek Singh Ahluwalia himself, none of them has yet established "a viable model".

While conceding that electric power is the single largest cause of concern to the economy, as progress in this field has clearly been `disappointing', the panel comes out with the standard cliché: "Populism by State governments continues to be an impediment to following a rational electrification strategy".

This is only half the truth. In the early 1990s, when power sector reforms were being deliberated by the donor agencies, there were two schools of thought as to the basic approach to be adopted in initiating and pursuing the reform. The issue was whether it should be `efficiency'-driven or `restructuring'-oriented.

Managers who knew the Indian realities suggested that energy efficiency should lead the process, supported by structural changes. Their contention was based on a joint report prepared by the American Council for an Energy-Efficient Economy and the National Productivity Council of India in November 1991 outlining an energy saving potential of 167,727 GWh and peak generation saving of 61,616 MW respectively by 2004-05.

Had this cost-effective, short-gestation option been adopted, India's power sector today would not be a ``cause of concern to the economy". But this was not to be!

In the mid-1990s, certain `reform zealots' with a different agenda managed a fresh study by two US consulting companies, funded by USAID. This report suggested restructuring and dismantling of the SEBs and creation of `independent organisations' with `unbundled functions'. These organisations were to be turned into `privately owned firms' which would provide much of the growth of the power sector since "the quest for profit will motivate their activities, and they will have a greater commercial orientation than most Government-owned organisations".

The `profit' approach prevailed over the `efficiency' approach and a cost-intensive, high-investment, supply-side `Restructuring Model' came to be adopted as the basis for power sector reforms. Energy efficiency and conservation were relegated to mere embellishments with hardly any investment flowing there.

The cardinal elements of the Restructuring Model are: Dismantling and unbundling of SEBs; privatisation; market-driven tariff, and elimination of all subsidies to the farming and other sectors. In short, it was prescribed that the massive inefficiencies of the SEBs would be removed through physical restructuring and these entities made viable and profitable by a free wheeling market mechanism.

As an ideal ``model in theory'' this cannot be faulted. But, in practise, such a straitjacket approach floundered on several fundamental flaws. The "Indian Infrastructure reality," with its enormous wastages and inefficiencies, does not allow such a model to succeed.

Besides, in a low-performing and low-efficiency situation, promoting reforms through a tariff-centred approach to private participation can raise barriers to improved services to low-income groups where the levels of service are already dismal.

Realising that the Restructuring Model-led reform failed to trigger the market, the Electricity Act 2003 brought in the `open access' mechanism to achieve this end. Under this, theoretically, any generator can sell to any consumer and any consumer can buy from any generator.

The philosophy of `open access' is contained in the Report of the Expert Group on Restructuring of SEBs (2001) headed by Mr Ahluwalia: "This (open access) would bring electricity at par with other goods and services where competition and market forces determine efficiency levels, investments and pricing."

The E-Act mandates the regulator to provide non-discriminatory open-access to all consumers where the power requirement exceeds one megawatt, within five years from the commencement of the Act on payment of a surcharge in addition to the wheeling charges, to meet the current level of cross-subsidy within the supply areas of the distribution licensee. Going by the current level of cross-subsidy and the political environment in the country, complete elimination of cross-subsidy is unlikely. In effect, open access will be a non-starter as far as the consumer is concerned, according to Mr G. P. Rao, former Chairman, Andhra Pradesh Electricity Regulatory Commission.

Besides, the contention that "open access" would make "market forces determine efficiency levels, investments and pricing" is a fallacy because being incapable of product/service differentiation, electricity cannot respond to "competition and market forces" comprising consumers with vastly varying capacity to pay, most of whom being marginal.

Both the `restructuring' and `open access' models are meant to pursue a private benefit agenda of ``quest for profit''. The former favoured privatisation and Independent Power Projects (IPPs). The latter facilitated IPPs to `cherry-pick' high tariff paying customers, leaving the others in the lurch.

No wonder, with the kind of socio-economic milieu that India has, both these models turned out to be unviable.

What, then, is the way out? How does one remedy the power sector, which has become ``the single largest cause of concern to the economy'' and bring about viable reforms?

The possible answer is to realise that donor agency-dictated, format-based restructuring of the SEBs in the name of reforms, tinkering with its physical shape, and giving ``open access'' to a small segment of consumers will not work.

Instead a holistic reform model based on a public benefit agenda of efficiency and sustainability needs to be designed, structured and pursued. Such a model would aim to augment SEB/utility cash flow, generate electricity through savings, reduce the subsidy burden, involve stakeholders and address environmental issues.

The Prime Minister, Dr Manmohan Singh, hit the nail on its head when he said: "The experience of the last decade shows that we may have placed the cart before the horse by encouraging private investment in generation without adequately addressing questions of pricing and distribution."

The cart can be reset through an innovative distribution policy that would reconfigure SEBs and DISCOMs on the basis of `revenue stream' adopting the `small/viable utility' concept. Inefficiencies, theft and wastages should be ring fenced and converted into opportunities instead of liabilities.

This can be done by replacing the lumpy T&D syndrome, which hides wastages and inefficiencies, with a commercial Distribution and Delivery system. Renewable Energy and Decentralised Generation will play an important role in this scheme.

Demand side management and energy conservation should be mandated as a core activity of the SEBs/utilities and given equal status as that of generation. This will facilitate flow of big investment in this area that has the potential to `generate' 30 per cent of electricity demand through `savings' within short gestation.

Subsidy is the greatest bugbear of the power sector and needs to be faced frontally instead of being wished away. It is defined as a financial contribution by a government or any public body, which confers a benefit that is regarded as being in the public interest.

The benchmark to define a subsidy is: "Efficient solution that maximises welfare." Economic objectives of subsidy are stimulating development, protecting sectoral employment or investments and reducing susceptibility of economy to external shocks. Social objectives are supporting poor population groups or providing access to basic living conditions.

In the Indian context, subsidy to agricultural consumers fall under the former category while domestic consumers comes under the latter. In the event, it is rational to subsidise these two consumer groups. But free power is plain and simple dole, not a subsidy. Though rational, the subsidy burden on India's power sector is heavy and is spiralling mainly due to mismanagement.

Uncovered subsidy has touched Rs 36,000 crore now compared to Rs 5,800 crore in 1996-97. Subventions by State governments hardly cover 20 per cent of this burden. Cross subsidy from commercial and industrial sectors (as a percentage of effective subsidy) is also steadily falling and is only around 15 per cent. With the Electricity Act exempting captive generation from the purview of cross subsidy this will further decline.

Subsidies have their downside also. The Prime Minister was not off the mark when he observed: "The free/highly subsidised supply of power in rural areas has the effect of not only encouraging excessive use of power when it is in on offer, but also of encouraging the wasteful use of ground water.

In many parts of our country, ground water levels have been falling at an alarming pace and the excessive application of water is encouraging irrational cropping pattern as well."

Subsidies cannot be eliminated, they have adverse environmental impact and cross-subsidy is tenuous. What needs to be done is proactive and prudent management of subsidies.

An innovative Subsidy Management System should be designed and built into the reforms. Such a system should have policy initiatives and implementation plan targeting the subsidised segments - agricultural and domestic.

Environmental concerns can be addressed by promoting renewable energy as catalyst for the rural economy, structuring a Rural Energy System for the purpose.

For power reforms to be successful, the Central and State governments should frame long- and medium-term goals to encompass sustainable development objectives with meaningful stakeholder involvement; broaden participation within to include Ministries; implement reforms through public-private participatory process and ensure mechanisms for public feedback, consultation and adjustment during reform and post-reform period and mandate public benefits as part of capabilities and culture of regulatory institutions within goals set at political levels. Donor agencies, private sector and civil society should play their part in funding, investing and supporting such a reform process.

A review of the Electricity Act, promised in the Common Minimum Programme and taken up by the Prime Minister, offers a good opportunity to look at this alternative reform model with a public benefit agenda and make it work. But this is a question mark, as evidenced in Punjab in mid-2003 soon after the passage of the E-Act when the State was rushing in to the Restructuring Model with `open access' as the flag bearer.

Sensing the potential damage, the Punjab State Electricity Board Engineers' Association came out with its own proposals and organised a well-attended seminar in Chandigarh to articulate the same.

None other than Dr Manmohan Singh chaired the seminar in which the author had the privilege of presenting the alternative model. This was appreciated, but soon the Chief Ministerproclaimed his faith in the Restructuring Model for adoption in Punjab! The search for an alternative ended there.

There seems to be still a chance for `public benefit' to prevail over private agenda! There is nothing in `private benefit' per se. Only that while private benefit can `trickle down' from a public agenda, it normally does not happen the other way round.

(The author is a former Chairman of the Kenyan Electricity Board.)

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