Too Fast To Succeed

THE Union Government is in a tearing hurry to change the face of the crisis-ridden power sector. And hence the rash of policy pronouncements meant to give a free hand to states in clearing power projects to facilitate private sector participation in generation, transmission and distribution.

A great scheme ostensibly. But one that is not backed by solid groundwork and, worse, has no institutional framework. Result: the far-reaching policy statements have only added to the tangle of crossed wires and feeling of uncertainty among independent private power producers.

Private power companies are not enthused about the sweeping policy initiatives, energy experts are critical about the hasty manner of introducing reforms, and even the Central bureaucracy is sceptical about the Centre’s proposed short-term panacea for power shortages.

The main thrust of the new proposals is to give states the power to clear competitively bid projects of all sizes and do away with the mandatory Central Electricity Authority (CEA) techno-economic clearance. On August 20, the Power Ministry exempted power projects with investments up to Rs 1,000 crore from CEA clearance.

But in a bid to accelerate the pace of reforms, Prime Minister H.D. Deve Gowda had said at the conference of chief ministers and power ministers last month: "Why should we limit the exemption to Rs 1,000 crore? You give a free hand to the states, whether it is Rs 4,000 crore or Rs 5,000 crore or Rs 10,000 crore; let them do it. Why should the state governments come to Delhi? Are they not responsible to the people of the state or the people of the country?" Taken along with the Centre’s moves to amend the archaic Indian Electricity Act, 1910 and Electricity Supply Act, 1948 to facilitate private sector participation in transmission and eventually distribution (proposals for amendments to both Acts are before the Union Law Ministry), it would seem that private power companies have all they were asking for. But paradoxically, it is the frenzy of power reforms that is frightening.

 "Introducing power reforms is not like firing a rocket. Investors should first be made to feel confident that their money is safe. Hence, we are not exactly jumping with joy at the new policy statements. Independent power producers have greeted them, at best, with cautious optimism," says Harry Dhaul, director general, Independent Power Producers Association of India (IPPAI).

More than five years after the private sector was invited to participate in the Indian power sector, the country still seems to be at the beginning of the learning curve, feels V. Raghuraman, ASSOCHAM secretary general. "The Centre seems to be going round and round in circles and making policy announcements without any logical thought processes. The only fast track private power project that has gone on stream is GVK in Andhra Pradesh. What is lacking is stability in policy without which no investor would want to pump in money."
 Adds S.K.N. Nair, former CEA member: "It appears that the Prime Minister has been driven to take hard and quick decisions. He wants to save time upfront by scrapping the CEA. But mere delegation of power to the states will not automatically ensure speed. It makes no sense to make sweeping policy changes just because there is a power crisis. It’s a rather precipitate response to what needs long-term solutions. Policy changes have to stand the test of time." And until such time that state governments have their institutions in place to clear power projects, feels Dhaul, the CEA’s role is still relevant in terms of objectivity.

Agrees Rajendra K. Pachauri, Director, Tata Energy Research Institute: "Before burying the CEA, the Centre should have come out with alternative institutions like independent regulatory commissions in each state. Why throw the baby out with the bathwa-ter? Instead, the CEA should have been converted into a corporate." Most state governments do not have the expertise to give techno-economic clearance, says Pachauri. Some states know how to evaluate power purchase agreements and project proposals, but a vast majority don’t. Most also lack expertise to give environmental clearances.

The states have been put in an unenviable position, as they have not been given enough time to prepare for the tough task of clearing power projects, argues Pachauri. "The Centre is asking the baby to jump into the water and start swimming immediately, without even teaching it to swim." P. Abraham, Union power secretary, admits that the major task now is the setting up of independent regulatory commissions in each state. Orissa has already gone ahead and set up such a commission. Uttar Pradesh, Haryana and Rajasthan have also recently sent draft legislations on their independent regulatory commissions to the Union Power Ministry. These are being examined by the Centre and will be cleared soon.

The regulatory commissions would take over the functions of fixation of tariff, granting of licences, even planning for the power sector—where you should have power stations and transmission lines. The state governments and their respective state electricity boards have been executing these functions so far. But the most important function of the commissions, says Abraham, would be tariff fixation, which will be based on cost of generation, transmission and distribution. Each commission would be headed by a judge, retired or serving and its members would include an economist, a power expert and an administrator.

BUT what Abraham did not say was that four states do not constitute the entire country. Obviously, most of the states have yet to put their act together. Nair points out that the process of setting up a regulatory commission is not such a simple affair. After the draft legislation, it has to be passed in the state legislature and then sent to the President for assent. The chairman and its members have to be selected and it’s important that the right people get in. Do we have the required number of experts for commissions in all the states of India and would they be willing to serve on them, given the critical nature of the job? Nair feels that it will take a year or two for the state regulatory commissions to be set up.

And what happens in the interregnum? Confusion, chaos, uncertainty, instability. The Centre should have first done its homework and prepared states to take over, rather than announce a sudden policy change, stresses Pachauri. The policy may be a move in the right direction, but could misfire in the short run, he feels. The question remains: whether state autonomy should be granted immediately or in phases. Ideally, there should have been a period of transition before the states took over and a time-bound strategy worked out. For, the states are confused about what they should make of this newly delivered freedom and how they should proceed in the new dispensation. "Can the Centre say by what date the states will be able to be act on their own?" Pachauri asks. Nair feels that the Prime Minister has put the cart before the horse. He observes that states with strong SEBs with good records, like Maharashtra, Tamil Nadu, Andhra Pradesh or Madhya Pradesh, may manage to put their institutions in place, but what of states like Bihar, Assam, Himachal Pradesh? These will fall behind in privatisation, leading to regional disparities. "The Centre seems to be storing up problems for the future," he adds.

The dangers of giving blanket powers to the states are many. Politicians are likely to play games with power projects, opines Nair. The reopening of the Dabhol power project is one such classic example. There is the inherent risk of every new state government reopening a power project cleared by its predecessor, he says. There are many technical and financial parameters that go into the evaluation of a project. In private power projects awarded through competitive bidding, there is multiple financing and international lending. Then there is the responsibility to ensure the best technology in terms of engineering and design. Who will monitor all this? If the job is left to the states, it is bound to raise much political controversy, feels Nair.

And the one big problem that the Centre has failed to address is that of fuel linkages, points out Pachauri. The states don’t have a clue about where the fuel is going to come from. Coal has to be provided by the Centre as Coal India is a Central enterprise. The availability of naphtha and other liquid fuel is another big question mark, given the precarious condition of the country’s supply position. Points out ASSOCHAM’s Raghuraman: "The state governments went on signing contracts for liquid fuel-based power projects involving a capacity of 30,000 MW. But now the Petroleum Ministry says they can ensure supply for generation of only 8,000 to 10,000 MW."
 Adds Nair: "The Centre seems to be glossing over the fact that states are not stand alone entities, but form part of a region. States generally pool their generating capacity, making monthly adjustments of give and take. For instance, a decision on power by the Maharashtra government will have an impact on Gujarat and Madhya Pradesh, also in the western region. If each state is given autonomy in power, it could open a Pandora’s box: Whose decision will prevail in case a regional issue crops up?" Hence, it makes better sense to also have a Central regulatory authority which is autonomous and backed by expertise, advises Nair. In its enthusiasm to speed up power reforms, New Delhi has missed this vital point.

The Centre has also not reckoned with the possibility that many SEBs will put up stiff resistance to the new regime. Says Raghuraman: "SEBs wouldn’t like the private sector to come in and threaten their hegemony. Given the clout of SEBs, private power firms may have to face an uphill task as has been the experience with private airlines." As Union Minister of State for Power, S. Venugopalachari admitted at the chief ministers’ conference: "The entry of private investment in the states has been affected due to their apprehensions on the security and returns on their investments.

Despite expressions of interest for investment of over Rs 280,000 crore for an installed capacity of 75,000 MW by private entrepreneurs, only 3,500 MW capacity is under execution. The solutions are not simple and straightforward." Meanwhile, the grim power scenario continues to worsen. The power secretary, not one to hide facts, admits that the peak demand power shortage, at a dangerous 20 per cent in 1996-97, will reach an alarming 30 per cent next year. It’s a lesson we never seem to learn, but it’s increasingly evident that there are no short-term and quick-fix solutions to the power famine in India.