The Maharashtra government has been paying close to Rs 8 per unit for power from the Enron-promoted Dabhol power station, one of the first private power projects to get counter-guarantee and a power purchase agreement (ppa) from the state. Strapped for cash and buyers, the Centre is now scouting for deficit states to pick up the excess power and allow mseb to optimise despatch.
In Andhra Pradesh, ceo-CM Chandrababu Naidu is grappling with his most difficult reform bid yet—in the power sector. Last year, the apseb losses were roughly double the amount the state spends on health and family welfare. To cut the revenue gap of Rs 2,920 crore of unbundled transmission utility AP Transco, the state regulatory commission has threatened farmers with metering and hiked tariff for domestic consumers by 27 per cent, unleashing violent protests.
l In Orissa, the first state to begin unbundling its power board into three companies for generation, distribution and transmission in 1996, privatisation of distribution hasn't led to any surge in bill collection in the absence of a legal penalising framework. The problem: if power companies were allowed to supply to only the credit-worthy, who will serve the poor and far-flung areas?
These seemingly impossible situations illustrate power sector reforms in practice. In theory, though, it's all quite simple and goes thus: we don't have enough electricity for everybody because we don't produce that much. To hike power capacity and speed up development, the government called in big private producers in 1991. Investors rushed in only to realise that the state electricity boards (sebs), the only buyers for the power they'd produce since there is no market to freely buy or sell power, were running at huge losses and couldn't provide any guarantee for payment. The sebs were bankrupt because 40 to 50 per cent of the power was not paid for—it was either provided free or at nominal charges or stolen or leaked out. So, to ensure fool-proof collection, separate the three areas of generation, transmission and distribution, and privatise distribution first—transmission and distribution (t&d) having been opened up recently. Then fix realistic tariff rates and a transparent subsidy system if you must, improve the finances of the companies, establish a national grid and watch the producers troop in.
But then why have power sector reforms been caught in a time-warp for the last 10 years? Why is it that the Central Electricity Regulatory Commission (cerc) has powers only to fix bulk and transmission tariff but no teeth to get them enforced? Why have only about 12-odd private projects been able to achieve financial closure and produced 2,000-odd MW? And why have most of the projects located only in four states—Gujarat, Tamil Nadu, Andhra Pradesh and Maharashtra—met with success?
It's reality check, of course. Says S.L. Rao, cerc chairman: "The government has demonstrated its inability and incompetence in running the power sector. It should get out completely." Adds Urjit R. Patel, executive VP, Infrastructure Development Finance Corporation (idfc): "What did the country do 30 years ago but depend on private power? Look at cesc in Bengal or bses in Maharashtra. Look at the past evidence inside India or abroad. Private distributors can easily manage t&d losses of only 9 per cent."
Strapped for cash and sometimes with help and pressure from funding agencies like the World Bank, states like Uttar Pradesh, Haryana, Karnataka, Andhra Pradesh and Orissa are all queueing up for seb reform and some have even hiked or are planning to hike power tariff by 20 per cent on average. Twelve states already have regulatory commissions in place. It's a different matter, however, that some of them remain toothless. But it's a tough battle, with vested interests in the boards stone-walling privatisation, electricity workers striking for fear of job loss and consumers bitterly protesting being penalised for thievery and systemic inefficiencies.
The bitter truth is that most consumers have been protected for too long. And that includes households, especially those in remote areas. Technically, power supply is costliest to most retail consumers. But the average price of electricity for them is 131 paise, higher than what it is for farmers at 30 paise. The subsidy to both these groups are recovered from commercial establishments, which pay a stupendous 345 paise, and the railways, which pays close to Rs 4. Industry too pays a high 297 paise and it's understandable why big manufacturing industries and shops often go for captive generation, which has the highest share in the world.
Even at this low rate, only about 20 per cent of the households are metered. And theft is rampant—out of 35 per cent t&d losses in Maharashtra, 20 per cent easily goes in theft. Says Deepak Parekh, chairman, idfc: "The need of the hour is to privatise urban and industrial areas as fast as possible, so that theft could be isolated." Commercial losses of sebs and state generating companies, which account for 70 per cent of power supply, is about 1 per cent of India's gdp and continues to rise. Although the total declared energy losses (t&d) are about 24 per cent, compared to only 7 per cent in China and Malaysia's 13 per cent, real losses in some states are closer to 40 per cent—a popular accounting trick in agrarian states is to push such losses under agriculture where supply is unmetered. In Orissa, for example, privatisation and the resultant efficiency drive have bared real t&d losses at 46 per cent. In Gujarat, the state erc has even ruled out a tariff hike, confident that the gap can be minimised by cutting out seb inefficiencies.
As a result, energy shortfall is conservatively estimated at 11 per cent and 18 per cent during peak hours—total energy capacity is a little less than 1 lakh MW. But subsidy issues won't be solved in a hurry if governments reforming the power sector want to retain their seats in the next assembly because subsidies are still seat-buying tactics. Why else are farm subsidies the highest in some of the richest states—power is free in Punjab and Tamil Nadu and dirt-cheap (38 paise) in sugarcane-growing Maharashtra? Nationally, farmers consume 33 per cent of total power supply, while paying only 2.5 per cent of the total revenues! In fact, the late power minister R. Kumaramangalam, a strong votary of reform, was fond of recounting how in his constituency of Salem-Dharmapuri in Tamil Nadu free power had resulted in the water table going down 2,000 ft and water being sold at Rs 5 a litre!
Apart from throwing the complete infrastructure of a region off balance, such misguided subsidies often end up pushing the cause of reforms by almost a century. True, in a welfare state if power supply is too costly for some, the government has the discretion to select groups eligible for subsidy. But the subsidy should be awarded in a transparent manner as part of the annual budget via stamps or coupons. For instance, in Andhra Pradesh, which has evolved one of the best power tariff orders, the state openly reimbursed Transco for the subsidy.Few know that the Electricity Act, 1948, has such a provision for compensation but it was never utilised by governments.
Says Rao: "It was a madness to think that by merely opening up t&d, foreign investment would flow in." In Andhra, Transco, which is now implementing revised tariff orders, is accused of charging ordinary consumers for unchecked profligacy. But Transco has kept the tariff for the poorest 40 per cent of its consumers at the same level of a minimum monthly bill of Rs 50, while promising substantial savings. A way out has also been shown by Karnataka (see box). For instance, the independent power producer (ipp) experience has shown that foreign producers must factor in the cost of political risk in the price of power, which in a functioning market situation must be absorbed by the government. In Karnataka, the government has chosen to bear the risk and support the interim cost of privatisation. Clearly, reforming sebs is pivotal to their privatisation and would be necessary even if foreign investors were absent from the industry. Adds Patel: "We should thank the ipps for making the governments realise that power must be paid for!"
Most foreign or domestic power projects are hung precisely on this issue of funding and guarantees—even the domestic financial institutions are aware of the precarious cash-flow situations of the sebs and continue to wrangle over terms and conditions which delay financial closure. As of now, 20 big projects, including those of Reliance, bpl and the Birlas, are awaiting such closure, which may well take another six months. While the finance ministry has ruled out counter-guarantees—rightly so because they just add to the deficit—escrow covers (earmarking of revenues from specific areas to meet debt service obligations in case of default) have proved debilitating for sebs.
The India Infrastructure Report 2001, released last week, actually comes out against mnc-assisted mega power projects. It argues that private generators, when operating on cost-plus basis, have little incentive to make the correct choice of technology or fuel. Also, private parties, with ipps and ppas in their pockets, would be averse to reforming sebs. Therefore, risk mitigation, not the shifting of risk, is the key and the real solution to large-scale privatisation. That is impossible without basic reform of tariffs, collections and other incentives.
But the draft Electricity Bill 2000, waiting to be tabled in Parliament, seeks to promote power markets when there are hardly any buyer. A market with several exits but no entry! As Rao says: "Like the laws of physics, electricity will move along the path of least resistance." A simple fact that continues to stun, not encourage, the administrations.