BUSINESS ENVIRONMENT

POWER SECTOR REFORMS

Mohd. Arkam Shobha Sharma Devyani Roshni Sachin Yadav Vivek Parmar

B-32 B- 57 B-21 B-48 B-68

Pre-Reform (1991) Structure

In 1947, the power generating capacity was 1,362 MW. 1948: Electricity (Supply) Act : industry developed rapidly in the State Sector and created State Electricity Boards (SEBs) December 1950 : 63% of the installed capacity in the Utilities was in the private sector and 37% was in the public sector

Pre-Reform (1991) Structure

1956 : Industrial Policy Resolution envisaged the generation, transmission and distribution of power almost exclusively in the public sector. 1975: National thermal Power Corporation (NTPC) and National Hydro-electric Power Corporation (NHPC) were setup 1976: North-Eastern Electric Power Corporation (NEEPCO)

Indian Power Scenario Overview

1,362 MW in 1947 Installed Capacity 1,74,911.40MW (As on 30-05-2011 Source: CEA) Total installed capacity
Sector State Sector Central Sector MW 82,452.58 54,412.63 %age 47.13 31.10

Private Sector

38,046.19
Total 1,74,911,40

21.75

Indian Power Sector Institutional Framework

Indian Power Sector - Contribution

Fuel Total Thermal MW 113859.48 %ages 65.09

Coal Gas
Oil Hydro (renewable) Nuclear RES** (MNRE) Total

94,953.38 17,706.35
1,119.75 37,817.40 4,780.00 18,454.52 1,74,911.40

54.28 10.12
0.68 21.62 2.73 10.55 100.00

Renewable Energy Sources (RES) Include SHP, BG, BP, U&I and wind energy SHP = Small Hydro Project, BG= Biomass Gasifier, BP= Biomass Power, U & I= Urban and industrial waste power, RES= Renewable Energy Sources

Issues for Reforms

Utilities still dont function like business entities o SEBs used for political patronage, social engineering o Part of the privatization process included deals with the devil over labor security High employee costs, perhaps greater institutional cost o Andhra Pradesh has over 65,000 employees for about 6,200 MW Connecticut has just a several thousand employees for similar capacity! In a loss-making system, who has first rights to cash flow? o Earlier policies favored generators over other segments o What of cherry picking for privatization (viable, urban areas)? Are there enough players, and does size matter?

State Reforms Three Example

Andhra Pradesh Seen as one of the most successful reformers (1999 Reform Act)
o Corporatization only (privatization is some time away) o Strong Govt. support Shortfalls are paid by AP Govt. (budget) paid out to DistCos o Some issues with the process ERC allows Transco to charge varying Bulk Supply Tariffs t the 4 DistCos, based on their economic situation Not grounded in economic efficiency Burdens privatization efforts

Delhi Innovative - Learning from past mistakes (2000 Act)

o Distribution was privatized (in 2002) based on loss reduction bids Improvements above targets split between pvt. companies and consumers Indicates importance of benchmarking for privatization

Transco will receive the subsidy to cover difference

State Reforms Three Example

Orissa The Front Runner (1996 Reform Act) o Unbundled and then privatized distribution Strong World Bank influence (design and finance) Considered a failure - Consumers and utilities have both suffered o Losses (kWh and economic) both increased Many causes of failure o Unrealistic assumptions and goals Losses Paying Customers o Lack of government support Dampened enthusiasm for reforms, especially privatization

Nuclear power
Nuclear power is the fourth-largest source of electricity in India after thermal, hydroelectric and renewable sources of electricity. As of 2010, India has 20 nuclear reactors in operation in six nuclear power plants, generating 4,780 MW while 5 other plants are under construction and are expected to generate an additional 2,720 MW.

India's nuclear power industry is undergoing rapid expansion with plans to increase nuclear power output to 64,000 MW by 2032.
India has a flourishing and largely indigenous nuclear power program and expects to have 20,000 MWe nuclear capacity on line by 2020 and 63,000 MWe by 2032.

Nuclear power
It aims to supply 25% of electricity from nuclear power by 2050. In the year to March 2010, 22 billion kWh was forecast, and for the 201011 year 24 billion kWh is expected. India now envisages to increase the contribution of nuclear power to overall electricity generation capacity from 4.2% to 9% within 25 years. The per capita electricity consumption figure is expected to double by 2020, with 6.3% annual growth, and reach 5000-6000 kWh by 2050.

The Reforms
Opening up Generation (1991) Paralleled overall reforms and liberalization in the economy o Triggered by a Balance of Payment Crisis o Change of Central Government Generation was opened to private participation o 8 Fast Track Projects were chosen, including Enrons Dabhol o IPPs encouraged through attractive norms o PPA-based tariffs (often, no bidding) o Main regulation was through CEA (techno-economic clearance) Why the focus on generation? o Easy to implement (states already had outside suppliers) o Worldwide trend Players and structure (rise of IPPs) Rise of natural gas combined cycle power plants Limited capacity added o Private power was much more expensive than SEBs own power

The Reforms (cont.)

Structural Changes (mid 1990s) o Establishment of independent Electricity Regulatory Commissions o Came, like most changes, under legislative cover o Intent to unbundle the SEBs o Some states began in the mid nineties; Center reformed in 1998 Began even before realization of shortcomings of generation reforms Significant push from Multi-Lateral Agencies Distribution Reforms (APDRP) (2001) Current Thrust o Consensus realization that without fixing distribution, all other reforms will throw good money after bad Significant funding available o About $1.5 Billions dollars per year - Mix of grant and loan, and some domestic development body funding Combination of carrots and sticks (from Center to States)

Electricity Regulatory Commissions (ERCs)

Are key to the reforms o Set tariffs (bulk supply as well as retail) Separates price-setting from operations Any tariff-driven shortfall must be met through explicit government payments Central and State ERCs o States purview is for all purely in-state transactions o Diminishing the role of the CEA to technical approvals ERCs are reasonably independent o Minimum 55 years age requirement Commission members often have a govt. background (?) a negative as it perpetuates business-as-usual mentalities

ERCs (cont.)
Utilities attempt to ignore their orders o Often are challenged in court Especially by govt. bodies or SEBs Have won virtually all their cases Their Tariff Philosophy remains important o Have disallowed large hikes for some classes of consumers o Make (sometimes untenable) assumptions E.g. on simultaneity of loads Aggressively pushing for loss reduction

Reasons Extended for Unbundling of SEBs

SEBs are commercially unviable so need to be corporatised & privatised & should be run as commercial ventures SEBs are monolithic and unmanageable. Enables reduction in Transmission & Distribution losses Unbundled entities would attract private investment particularly in distribution Unbundling would generate competition leading to higher efficiencies. Generation would be a profit making segment which will attract huge investment

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AGENDA/RESOLUTIONS
passed in the CMs conference on 3rd March 2001

Maximizing Generation Capacity Addition of 1,00,000MW by 2012. Distribution reforms

o Full metering by December 2001 o Commercial viability through any or all of the following
Creating Profit Centers Handing over local distribution to Panchayats/local bodies/Franchisees/ User Association Privatisation of Distribution Or any other means

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AGENDA/RESOLUTIONS
passed in the CMs conference on 3rd March 2001

Completing Electrification of all Villages and Houses

o Rural electrification may be treated as basic minimum service under PMGY. o Rural electrification must be completed by the end of 10th plan i.e. by year 2007. o Full coverage of the households may be targeted for the end of the 11th plan i.e. by 2012

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POWER SECTOR REFORMS contd.

Initiatives of Govt. of India:
(As per resolutions passed in Chief Minister/ Power Ministers Conference on 3rd March 2001)

Noted the challenges confronting the Power sector. Agreed that there is an urgent need to depoliticize power sector reforms and speed up their implementation. Support of Govt. of India to States o To achieve definite milestones o Interest rate for PFC and REC would be brought down. o One time settlement for all past dues of SEBs/Utilities to CPSUs In this context MoUs were signed by Govt. of India with respected States.
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Electricity Act 2003

The Central Government appointed the 10th day of June, 2003 for Electricity Act, 2003.

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FEATURES OF ELECTRICITY ACT 2003

The main features of the bill are as follows: 1. Power generation delicensed and captive generation freely permitted. 2. Hydro projects still need approval of the State Government and clearance from the Central Electricity Authority. Transmission Utility at the Central as well as State level, which would be a Government company The load dispatch function could be kept with the Transmission Utility or separated. In the case of separation the load dispatch function would have to remain with a State Government organisation/company.
Contd.
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3.

4.

5.

There is provision for private transmission licensees.

6.

Distribution licensees would be free to undertake generation and generating companies would be free to take up distribution licensees.
The State Electricity Regulatory Commissions may permit open access in distribution in phases with surcharge.
For rural and remote areas stand alone systems for generation and distribution would be permitted. For rural areas decentralized management of distribution through Panchayats, Users Associations, Cooperatives or Franchisees would be permitted.
Contd.
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7.

8.

9.

11.

There is provision for a transfer scheme by which company/companies 'Can be created by the State Governments from the State Electricity Boards. The State Governments have the option of continuing with the State Electricity Boards which would be a distribution licensee and the State Transmission Utility which would also be owning generation assets.

12.

An Appellate Tribunal has been created for disposal of appeals against the decision of the CERC and State Electricity Regulatory Commissions for speedy disposal of matters.

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Present Status of SEBs in country

In all there have been 21 SEBs & 8 EDs in the country PUNJAB Out of 21 SEBs, 13 SEBs stands unbundled and 2 Nos. privatised. BIHAR MEGHALYA As per proviso under section 172(a), HPSEB has been granted extension up to 31.05.08(though verbal) JHARKHAND WEST BENGAL HPSEB is one of the 8 SEBs which are bundled at the moment
HP

KERALA

TAMILNADU
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States where SEBs have been unbundled so far

Orissa (Privatized) Haryana Andhra Pradesh Karnataka U.P. Uttrakhand Rajasthan Delhi (Privatized) M.P. Assam Gujarat Maharashtra West Bengal 1996 1999 1999 1999 2000 2001 2001 2002 2002 2004 2004 2005 2007
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Reality of Reforms

Were reforms achieved what they intended to ?

Assumption No. 1
After Corporatisation, Companies would work on commercial principles and financial viability of the sector would be ensured.
UNBUNDLING & COMMERCIAL VIABILITY Profit/Loss without subsidy(Rs. Cr.) Subsidy paid by state govt.(Rs. Cr.)

Unbundled States
Haryana A.P. Karnataka Rajasthan U.P. M.P. Assam

Prerestructuring
1996-97 -635 -939 -652 -498 -3378 -464 -224

After restructuring
2005-06 -1688 -1241 -1141 -1651 -3951 -952 -1081

Prerestructuring
1996-97 641 850 705.8 560.8 1557 300.4 0

After restructuring
2005-06 1252 1537 1140 1629 915 270 70

* According to 2009-10 IIPA Report

Assumption no. 2
STATE ELECTRICITY BOARDS ARE HUGE ORGANISATIONS AND THUS INEFFICIENT UNBUNDLING WILL LEAD TO BETTER MANAGEMENT REALITY:
PUBLIC COMPANY Tamil Nadu SEB HPSEB Loss %* 16-18% 15.5% PRIVATE COMPANY BSES Yamuna GESCOM Loss %* 50% 53%

* According to 2009-10 IIPA Report

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Rural Electrification:- A Victim of Reforms

During 8th and 9th plans (1992-2002) the rural electrification was totally ignored with no specific scheme launched to fund the rural electrification projects. During these 10 years, only about 8000 villages were electrified in the country. As per 2001 census, there were still more than 1,50,000 un-electrified villages. Ulimately, Central Government introduced Rajiv Gandhi Grammin Vidyutikaran Yojna (RGGVY) in April 2005 with 90% grant to the states to electrify all 1,25,000 unelectrified villages and 7.8 Cr. households including 2.34 Cr BPL households at an estimated cost of Rs 16,000 Cr. (38875 villages & about 18 lac households have been electrified in two years under this scheme. )
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CONCLUSION
It is not the size of the organization but the manner in which these are managed which make it efficient or manageable. Even small companies are badly managed whereas integrated SEBs like TNEB, HPSEB, PSEB are performing far better than these companies. So, the reform must be there but it must be in a proper way and in the working of the enterprises as a whole whether it is public or private or a mixture of both.

Thank You !!!