Power Distribution Reforms in India – A journey from Monopoly towards Competition. Case Objective: Power a basic human need is the critical infrastructure on which modern economic activity is fully dependent. Only 55% households in India have access to Electricity. Most of those who have access do not get uninterrupted reliable supply. In this era of globalization, it is essential that electricity of good qualities is provided at reasonable rates for economic activity so that competitiveness increases, which is essential for higher GDP growth per annum, employment generation and poverty alleviation.

Legacy scenario prior to enactment of Electricity Act 2003: Electricity distribution in India had been primarily a Regulated Monopolistic Market where Power in individual state were being supplied by State Electricity Boards (SEB’s), Licensed to operate by the respective state governments. There were a few exceptions of private players in states like West Bengal, Gujarat and Maharashtra. Thus essentially consumers have no other alternatives, but the option of purchasing electrical power from SEB’s / Single Licensees.

Electricity Transmission and Distribution losses in India during were extremely high and varied between 30 to 45%. Theft of electricity, common in most parts of urban India, amounted to 1. 5% of India’s GDP. The financial health of SEB’s had become a matter of grave concern. The gap between Average Revenue Realization and Average Cost of Supply had been constantly increasing. The major factors responsible for financial sickness of SEB’s were: • Skewed tariff structure leading to Unsustainable Cross Subsidies by State Government. • Huge T losses, largely due to outright theft and un-metered supply.

It has been estimated that theft alone caused loss of about Rs. 20, 000 crores annually. • Lack of Accounting and Accountability in power distribution. • Large man power – 27 to 30% Revenue was used for establishment charges. • Outdated rules, regulations, management structure and practices. • Aging and poorly maintained system, low demand side management (DSM) initiative, corporate governance challenges and lack of skilled resources.. . . Burning issues: • Subsidies SEB’s provided electricity at subsidised rates or even free to some sections of population.

This included Agricultural usage and for consumption by Backward classes. The subsidies were mainly Cross-Subsidisation, where users such as Industries and Private Commercial Consumers were paying the deficit caused by the subsidised charges collected. Such measures have resulted in financial weakness of the SEB’s. • Power Theft & Politics of Power Power Pilferage & lack of Political will to carve it. Often Politicians regard laxness about revenue collection as a vote-winner. The political aspect is probably most blatant in rural areas.

The powerful farmers’ lobby is hard for politicians to ignore in a country where majority of the population still makes its living from agriculture. A key challenge for power companies was reducing theft by India’s poor. The problem started likely to getting worse as rapid Economic Growth lead to Greater Energy Demand. The Effect: This approach to governance in the power sector led to Prices of Electricity being fixed on Political Considerations and not on Costs. As a consequence, the SEB’s were unable to achieve the targeted Capacity Addition to take care of the Growing Demand. Further, the increase in dues rom the SEB’s to the Central Power Sector Undertakings (CPSU’s) on account of Power Purchase Cost compounded the problem of capacity addition in the sector, as even the CPSU’s were stretched to meet the targets. This led to a situation where the Supply–Demand Gap of Electricity consistently widened over the years and most of the States in India started facing acute Electricity Shortage. The Energy Deficit increased to 11. 5% and peak deficit to 18% by 1990-91 (GOI, 2002b). The Annual Commercial Losses (without subsidy) also showed a spiraling trend increasing to over Rs 330,000 million during 2001-02, which was equivalent to about 1. % of India’s GDP. Gross subsidy which was Rs 202,100 million in 1996-97 nearly doubled to about Rs. 430,000 million in 2000-2001(GOI, 2002c). The Average Rate of Return (without subsidy) of the SEB’s reduced to minus 44. 1% in 2001-2002 from minus 12. 7% in 1992-93(GOI, 2002c). The gap between the Average Cost of Supply and Average Tariff increased from 50 paisa/kWh in 1996-97 to 110 paisa/kWh in 2001-02 thereby entailing huge losses to SEB’s (GOI, 2002c). All of these resulted in endemic power shortages, unsatisfactory operational efficiencies, poor quality of services etc. The state Govts. ap had to allocate more funds to mitigate the deficiencies of the state run utilities. These additional allocations of funds to support the political motivations of Cross-subsidy and inefficiency of the politically inclined bureaucracy had its sourcing by imposition of Taxes on the common people (consumers). Since the SEB’s as per Schedule VI of the Electricity Supply Act 1948 , were not allowed to whimsically hike tariff to bridge the gap between Average revenue realization and Average cost of Supply, in order to pay the subsidy, Government raised money through taxation, which involved its own deadweight losses.

Power Sector Reforms – A step towards Competitive Market. • The first phase of reform began in 1991 with the introduction of Independent Power Producers paradigm allowing private sector to ‘‘supply and distribute energy in a specified area, (even without ownership of generating station) and foreign ownership up to 100%. • The National Development Council was set up in 1993 to steer reform process and made following recommendations: 1. Re-orientation of Power Industry to be accountable to consumers. 2.

Reform in state power sector to restore the autonomy of State Power utilities distancing the Goverment from the management of the SEB’s to enable them to function as corporate bodies. 3. Minimum tariff gradually to be increased so that it is not less than 50% of the Average cost of Generation and Distribution of electricity during the year. 4. Scheme of private sector participation in the power sector to attract domestic and foreign investment in a competitive environment so that the consumer of the retail may get power at the least cost. 5.

Stringent measures for unauthorized use and theft. • Reforms at the central level initiated in 1998, through enactment of Electricity Regulatory Commissions Act, which resulted in setting up Central Electricity Regulatory Commission (CERC) and state level (SERC). This Act was primarily enacted to distance the government and also to introduce professionalism in tariff determination through an independent agency. • Finally came The Electricity Act, 2003. Reformative points related to Power distribution are: 1. Open access in distribution to be introduced in phases. – Power

Distributors and bulk consumers to have choice of selecting Power Generators resulting in Competitive Power purchase cost. 2. Provision for license-free generation and distribution in rural areas and provision for management of rural distribution by Panchayats, Cooperative Societies, NGOs, etc. – Provision for Captive generation, Franchisees, Micro franchisees all leading to Competition amongst Power Generators and Distributors. 3. Multiple licensing in distribution. – Consumers given the choice of selecting their Licensee. e. g. In Mumbai – Tata Power & Reliance, In Seraikela Jharkhand- JUSCO & JSEB etc. ) – Competitive Market. 4. Provision for cross-subsidy surcharge on direct sale to consumers – In essence if large bulk consumers avails open access mechanism to procure power, they have to pay surcharge to licensee to whom they primarily belong, so as to poise a balance in tariff for the rest of the consumer. 5. Power Trading recognized as a distinct activity with ceilings on trading margins to be fixed by the Regulatory Commissions. Open Market Policy for bulk power purchase facilitating competitive bidding process to reduce Power Purchase Cost. 6. Setting up Appellate Tribunal to hear appeals against decisions of CERC and the SERC’s. – Structured mechanism for consumer grievance redressal & Tariff determination. Also to control Govt. influence on licensee operation and finally the entire process subjected to third party audit, to ensure fair judgment for both consumers and Licensee. 7.

The Tariff determination process (Pricing of commodity): • Process guided by Section 61 and 86 of the Act and National Tariff Policy has following major components – Filling ARR, Public hearing & Consultation, issuance of Tariff order. • Business to run on commercial principles and factors to encourage competition, efficiency, economical use of the resources, performance and optimum investments. • Tariff to progressively reflect the cost of supply of electricity (Marginal cost) and also reduces and eliminates Cross – Subsidies. • Minimizing the gap between tariff and cost. Average Tariff to be within +/-20% of Average cost of supply – Safeguarding consumers’ interest & Competition. • Focusing Energy conservation & Incentivising Reduction of Losses. – Taking care of National interest. For any reduction in loss Licensee & Consumers are allowed to share the advantage 50% each. • Allowing Capital investments for infrastructure growth, Repair & Maintenance expenses for better service delivery, and Administrative and General expenses with prior approval by SERC’s, all subjected to independent audit, as a pass through cost in determining consumer pricing. Assuring reasonable return on Equity (14% to 15%) – Ensuring Licensee to remain in business. Also any profit higher than that being allowed by Commission will be passed on to Consumers in the form of reduced tariff in the forthcoming year. Result so far:- • State wise Loss figures [pic] • Multiple Licensees in certain states allowing consumer to have choice of selection and resulting in competition. • Competitive market scenario in Power generation with lot of foreign investment resulting power distributors to have competitive pricing in purchasing Electricity resulting in Competitive tariff in retail sector. Lots of Capital investments in power infrastructure, fostering economic growth. Journey Ahead • Though certain objectives have been achieved, yet a lot is left to be covered in attaining the goal of perfect competition. In particular, requirement of retail sector needs to be further addressed. Through Business model and Technological innovation, advantages of open access could be made available to them with at reasonable cost, if possible at marginal cost. • Further unbundling of state run utilities has to be done allowing more participation of private corporate and creating more number of distributors.. Franchisee & Micro Franchisee business models started in certain areas like Bhiwandi, Kanpur and Agra has to increase in every state with multiple Licensee options to make the Power Utility business a perfect competitive market. • Setting up of more Captive Generation units to decrease Demand & Supply gap. References: 1] GOIa:Working of State Electricity Boards and Electricity Departments, Annual Report Planning Commission, Government of India, April 1999. 2] GOIb:Working of State Electricity Boards and Electricity Departments, Annual Report Planning Commission, Government of India, June,2001. ] GOIc: Working of State Electricity Boards and Electricity Departments Annual Report Planning Commission, Government of India, May 2002. 4] GOId : Approach Paper to the tenth five year plan (2002-07), Planning Commission, Government of India, September 2001. 5] GOIe :Tenth Five Year Plan, Planning Commission, Government of India, New Delhi, 2002. 6] Ahluwalia, S. M, “Power sector reforms: a review of the process and an evaluation of the outcome” NCAER, Delhi, March 2000. 7] General Review 2001-02, All India Electricity Statistics:, Central Electricity Authority, Ministry of Power, Government of India, New Delhi. ] General Review 2005, All India Electricity Statistics:, Central Electricity Authority, Ministry of Power, Government of India, New Delhi, January, 2005. 9] General Review 2006, All India Electricity Statistics:, Central Electricity Authority, Ministry of Power, Government of India, New Delhi, March, 2006 10] Dossani, “Reorganization of Power Distribution sector in India,” Energy Policy, vol. 32, pp. 1277-1289, 2004. 11] Integrated Energy Policy- Report of Expert Committee , Planning Commission, Government of India, August, 2006 12] www. mercindia. org. in {Maharashtra Electricity Regulatory Commission (official website)} 13] www. infra. com Reliance Infrastructure (official website 14] www. cercind. gov. in {Central Electricity Regulatory Commission (official website)} 15] Web site of Ministry of Power: www. powermin. nic. in. 16] The Electricity Act, 2003 17] Law of Electricity in India – Justice L. P. Singh NAME: ANJAN MITRA BATCH: PCBM-20 SMS ID: 2407568 SID : DB11118 NAME OF THE TOPIC: Power Distribution Reforms in India – A journey from Monopoly towards Competition NAME OF THE FACULTY: PROF VISHWA BALLABH NAME OF THE STUDY CENTER: Hughes Net, Jamshedpur – Northern Town