The Hindu Business Line : Short-circuiting power reforms

The root cause of the power crisis facing the country today is the failure of successive governments to carry out the reforms. Repeated efforts to improve the finances of SEBs by reducing heavy cross-subsidies have failed to bear fruit mainly because of the lack of political will and fiscal prudence. Even after more than a decade, power sector reforms continue to be short-circuited by political parties and vested interests, says S. D. Naik.

THE worsening power situation in the country is threatening to affect the growth prospects of the economy. Maharashtra, the country's most industrialised State, is experiencing a severe power shortage with nine-hour-a-day power cuts in rural areas and load shedding for four-five hours in urban areas. The State has a peak hour energy deficit of 4,000 MW. Twelve other States, including UP, Madhya Pradesh and Bihar, are also heading for major power shortages. The overall energy deficit in the country already exceeds 13,000 MW.

What is worse, the power situation may deteriorate further because of inadequate availability of coal for many thermal power stations in different parts of the country. It is feared that some 22 thermal power stations with generation capacity of 24,000 MW may face closure if the problem of coal shortage worsens further.

This is a clear case of bad management. With 80 billion tonnes of proven reserves, there should be no shortage of coal in the country if only production is properly managed.

Belated efforts are now being made to import coal to overcome the aggravating shortages; contracts for import of some 13.5 million tonnes of coal have been signed so far. The Government should not hesitate to import more coal till such time, as the domestic production bottlenecks are not removed.

Addressing the States' power secretaries in Shimla recently, the Prime Minister, Dr Manmohan Singh, expressed grave concern over the deteriorating power situation and stressed the need to reform the power sector to ensure that it becomes the engine of growth. He rightly stressed

that a key element underlying reforms in many States was the unbundling of State Electricity Boards (SEBs), whereby the generation, transmission and distribution is to be handled by different companies. He further added that giving free power to farmers would not help in achieving self-sufficiency in power generation.

Evidently, the root cause of the power crisis facing the country today is the failure of successive governments to carry out the power sector reforms. The repeated efforts made over the past decade to improve the finances of SEBs by reducing heavy cross-subsidies, a pre-requisite for reforming the ailing power sector, have failed to bear fruit mainly because of lack of political will and fiscal prudence.

Even after more than a decade, power sector reforms continue to be short-circuited by political parties and vested interests.

It may be recalled that way back in 1996, a conference of Chief Ministers had adopted a common minimum national action plan in which it was agreed that no sector would pay less than 50 per cent of the average cost of supply.

It was also agreed upon that power tariff for the farm sector should not be less than 50 paise per unit and that the same would be raised to 50 per cent of the average cost of supply in not more than three years.

Unfortunately, this pragmatic resolution has remained on paper all these years. With an eye on the vote-bank, many States promised free electricity to the farm sector at the time of state elections and quite a few States did provide free power to the sector, resulting in huge losses to the SEBs and the exchequer.

Consequently, the power development programmes also suffered badly because of the precarious finances of SEBs.

The latest example was that of Maharashtra, where political parties — both ruling and opposition — promised free power at the time of state elections. However, after providing free power for about a year, resulting in huge losses and aggravating power shortages, the State government had to run for cover.

Finally, it was forced to stop free supply of power to the farm sector and unbundle the State electricity board into four independent companies — the MSEB holding company, The Maharashtra Power Generation Company, Maharashtra State Transmission Company, and the Maharashtra Power Distribution Company.

Currently, 28 of the 29 SEBs have been losing money; most of them operate below their capacities and lose heavily because of gross mismanagement and unacceptably high transmission and distribution (T& D) losses.

While official figures show national level T&D losses at 28 per cent, the actual losses are estimated at not less than 40 per cent and experts term most of them as theft and dacoity losses. In addition, about 15 per cent of the revenue is lost on account of non-billing of consumers.

Thus, though India now has 110,000 MW of installed capacity, which should generate about 77,000 MW of electricity at 70 per cent plant load factor, the actual available for distribution is only about 46,000 MW after making allowance for the so-called T&D losses. With 15 per cent of the revenue being lost on account of non-billing, the actual revenue earning generation is much lower than 46,000 MW.

At the current rate of billing, the revenue generated per MW of electricity works out to about Rs 2.63 crore. Hence, the T&D losses ranging from 23 per cent to 75 per cent in different parts of the country and averaging around 35-40 per cent for all India result in colossal revenue losses to SEBs.

The rate of return for SEBs has now come down to minus 28 per cent from minus 12.7 per cent in 1991-92. Consequently, the SEBs could neither invest in new power generating capacities nor pay their dues to their clients in full.

Against this backdrop, the industry leaders and energy experts have rightly emphasised that the most viable short-term solution to overcome the prevailing power shortage is to bring down the T&D losses. In 2002, the global consulting firm, McKinsey & Company, had estimated that India could save $12 billion by 2005 merely by improving transmission and distribution bottlenecks, as it would cut the new capacity requirement drastically.

Unfortunately, the emphasis of the policy-makers is mostly on planning and creating new power generating capacities and little attention is being paid to minimise the so-called T&D losses and phasing out unsustainable levels of cross-subsidies.

The Power for All by 2012 programme launched by the Ministry of Power (MoP) in 2003 envisages addition of 100,000 MW of generating capacity by 2012.

It may be noted that going by the latest estimate of the Power Ministry, the actually capacity addition during the Tenth Plan period (2002-07) will be only 37,000 MW against the target of 41,110 MW.

During the next Plan period, capacity addition of 61,000 MW will be needed to meet the peak demand but going by the past record, this kind of capacity addition is unlikely to materialise by 2012.

Even if the policy-makers succeed in attracting sufficient public and private investment in the sector and achieve the ambitious power generation target set for the Eleventh Plan period, the losses will further mount to over Rs 60,000 crore per annum unless the T&D losses are brought down drastically from the present 40 per cent to around 16 per cent.

While some effort has no doubt been made towards reforming the power sector, it is far from adequate to tackle the chronic problems afflicting the sector.

So far, ten States have unbundled their SEBs into separate generating, transmission and distribution companies. Others will have to do so over the next six months as per the new power policy. Also, independent regulatory authorities have been set up at both the central and state levels.

However, these measures have not been able to bring down the losses of SEBs so far to any significant extent. The technical and commercial losses in Orissa, for instance, are at 45 per cent even six years after privatisation; in Delhi such losses are over 40 per cent even three years after privatisation. This is because the private companies that took over from SEBs were unable to recover huge accumulated dues from distribution companies and the State governments withdrew abruptly and no support was given to new companies for cash losses incurred in the initial period owing to non-recovery of past dues.

According to a latest assessment by the Plan panel, the country's power sector is saddled with several shortcomings, and the sector remains an area of serious concern.

The assessment points out that although power sector reforms in the country have been underway for over a decade, with a few milestones reached in crucial areas, the sector remains locked in a situation that is fundamentally unsustainable.

It points out that the power sector remains internationally uncompetitive and the poor quality power imposes a heavy burden on trade and industry. The assessment further adds that the 14-16 per cent guaranteed post-tax returns offered to Central PSUs under a cost-plus tariff regime on a non-competitive basis are unique to India and cannot be sustained with the extant high level of accumulated technical and commercial (AT&C) losses.

Under the circumstances, the accent should clearly shift to competition and efficiency in the generation and distribution of power. To achieve this, there should be more investments in the distribution sector over the next few years.

The Plan panel's report points out that so far generation and transmission investments continue to dominate with a share exceeding 90 per cent of the total investment.

Under the Accelerated Power Development and Reform Programme (APDRP) drawn up by the Plan panel some time back, it was proposed to bolster distribution reforms in the states through increased investment. But the programme failed to achieve this objective so far.

Hence the Panel report says: "it would be best if at least 40 per cent of the Plan outlays are earmarked for distribution over the next 7-10 years." It is reckoned that an investment exceeding Rs 100,000 crore could easily be absorbed in the short-to-medium term to improve distribution efficiency.

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