The Indian power sector had reached the absolute dead-end by the 1980s. The total losses of the SEBs without subsidy had crossed Rs. 3000 crore. There was little hope of any cure unless some drastic measures were taken. The sector was facing peaking shortages in various parts of the country and severe financial burden was imposed on the State Governments because of the performance of the SEBs.
In 1989, the World Bank had stated that request from the electricity sector from developing countries added up to $100 billion and only about $20 billion was available from multilateral sources. The message was that not much of funding would be available from the World Bank. Furthermore, there were no surpluses left within the sector for investment purposes.
However, nothing really happened till 1991 when the existing electricity laws were amended to provide for private participation in generation. Specifically, the Electricity Laws (Amendment) Act of 1991 was enacted to encourage the entry of privately owned generators. The change in policy coincided with the fact that India was facing its worst ever balance-of-payments crisis and was on the verge of defaulting which would have reduced India’s bond rating in international credit markets.
Further amendments were carried out in 1998 when the transmission sector was also opened for private investments subject to the approval of the Central Transmission Utility (CTU). It was the Government’s view point that if additional generation capacity could be created with the assistance of the private sector, the malaise could be rectified.
In order to encourage private sector participation, several other policy measures were also undertaken. The private investors were offered a guaranteed 16 percent return in equity with a full five year tax holiday. The required debt-equity ratio was also kept at 4:1. These projects were also given sovereign guarantees and escrow benefits in case there were defaults on part of the SEBs.
By 1995, there were about 189 offers to increase capacity by over 75 GW involving a total investment of over US $100 billion. Eight projects were brought on the fast-track route where Government approvals were quickly expedited. Escrow, however, could not be granted to all projects as there clearly was a limit, given the revenue stream of the SEBs. In fact, some of the banks like the State Bank of India, which gave overdraft facilities to the SEBs, refused to lift its lien on the receivables of the SEBs.
The IPPs faced all kind of problems, right from securing coal contracts to getting wagons from the railways for movement of their coal. There were other reasons also as to why this Policy failed, for example, litigation in case of some projects, inability to secure funding from financial institutions since power projects required long pay-back periods, etc.
The private investors also realized that by providing incentives for additional capacity addition, the basic problem that is the bankruptcy of the SEBs does not get addressed. In fact, the problems would multiply as power from the new plants, if they do come up ultimately, would be a lot more expensive than the existing plants of the SEBs. Some economists have stated that the energy cost from these projects frequently turned out to be one-and-a-half to two times more than that of comparable NTPC and SEB projects.
The high tariff was because of assured high PLF, high return on equity, high capital cost of plants, high variable costs due to management fee, testing fee, insurance charges, etc.
In the meantime some kind of political consensus was taking shape regarding reforms in the power sector. It began in 1991 when a Committee was set up for the establishment of a common minimum agricultural tariff. The matter gained momentum when in 1996, the Chief Ministers conference proposed that agriculture tariffs should be at least 50 paise per unit which should be increased to at least 50 percent of the average cost of supply within a period of 3 years. It is another matter, however, that no state implemented it.
The Indian agricultural community in fact was prepared to higher tariffs in exchange for a better quality of power. The small farmers, in any case, maintained that low agricultural tariffs only helped the big farmers who had access to power driven irrigation facilities. There is one study which states that the agricultural community was, in fact, capable of paying higher tariffs and gain by the incremental productivity.
World Bank and Reforms
During the 1980s and early 1990s, the World Bank lending had been influenced by what is known as the Washington consensuses. According to this, the development processes were hindered less by capital shortages, and more by economic policies that hindered market forces. The Bank, therefore, began approaching privatization as a serious policy option.
The World Bank, incidentally, had assisted various power sector projects, especially at the time the NTPC was set up in 1974. It is felt that the World Bank was interested in the creation of the NTPC because the Bank felt that their loans were better assured as the NTPC projects were expected to be better managed as compared to SEB projects.
Over time, however, the World Bank was desirous of moving away from generation because of environmental issues. Since coal was the primary fuel for power generation which gave rise to environmental de-gradation, the Bank wanted to support projects which envisaged restructuring of the sector, namely reforms. From this point of view, hydro projects were welcome. Orissa was the first State to get assistance from the World Bank for restructuring.
In Orissa, the generating plants were running at 36 percent PLF in 1993-94, transmission and distribution losses were at 43 percent and the proportion of bills collected was only 17 percent. The entire Orissa project was in three parts and the total cost of the project was US$ 997.2 million. The World Bank provided $350 million and the Overseas Development Agency of the UK provided $110 million.
There were reasons as to how it all started in Orissa. It is said that the World Bank was already negotiating a loan for the development of a hydro project. Assistance for the project was linked to reforms in the sector, leaving the State Government with no other alternative. Further, Orissa was ideally suited for reforms because its agricultural share in sales was only 6 percent (compared to 40 percent in some other states) which meant that there was no lobby which could derail the reform process.
Typically, the "Orissa Model" as it came to be called involved restructuring of the monolithic SEB into separate generation, transmission and distribution sub-sectors. Specifically, the distribution segment of the Orissa State Electricity Board (OESB) was divided into four regional utilities and later on privatized. The transmission assets remained under public ownership with the Grid Corporation of Orissa (GRIDCO). The existing hydro generation assets were vested with the Orissa Hydro Power Corporation (OHPC) and the thermal capacity of the OSEB had to be transferred to the NTPC to settle the dues of the OSEB with the NTPC. This restructuring was made possible through the Orissa Electricity Reforms Act 1995.
Second Phase of Reforms - ERC Act, 1998
While Orissa was the first state to enact their own reforms act, it was followed by other states like Haryana (1997), Andhra Pradesh (1998), Uttar Pradesh (1999), Karnataka (1999), Rajasthan (1999), Delhi (2000), Madhya Pradesh (2000) and Gujarat (2003). Each of these states, after passing their reforms act, unbundled their SEBs into separate entities of generation, transmission and distribution. The only difference was in the case of Orissa and Delhi which went a step further and privatised their distribution sector as well.
In the meantime around the mid-1990s, the Government of India too had come to realise that the distribution sector will have to be addressed first and if the problems in the distribution sector can be addressed, investments in the generation sector will automatically flow. The Government of India passed an Ordinance which later culminated as the Electricity Regulatory Commissions Act 1998. It paved the way for setting up of the Central Electricity Regulatory Commission. The states could also rely on this Act to set up their own State commissions or enact their own legislation for this purpose.
The functions of the CERC and the SERCs were clearly demarcated. While the CERC was responsible for all Centrally owned stations and other stations having an inter-state role, the SERCs were responsible for stations within their own state only. The primary intention for setting up of regulatory commissions was to ensure that tariffs were determined according to economic principles and that the entire process be free from any political interference. The role of the Government was only that of a facilitator and catalyst which would lay down broad principles of policy.
The enactment of the Electricity Regulatory Commissions Act 1998 was only a partial step towards reforms. The Government of India had been mulling over a comprehensive
reform act which would repeal all other existing electricity laws. The first draft of the Bill was made in 2000 though there were some other steps taken by the Government during this time period to improve the functioning of the distribution sector. Three major steps were taken by the Government for improving the performance of the power sector.
The first was the initiation of the Accelerated Power Development Program (APDP) in 2000-01 which focused on giving a composite loan or grant for improving the infrastructure of the electricity utilities. In 2002-03, under the recommendations of the Deepak Parikh Committee, the structure of the scheme was changed and an incentive component was added as well. The name of the scheme was changed to the Accelerated Power Development and Reforms Program (APDRP) and the funding was made extremely liberal.
The second major step taken was the constitution of the Expert Committee for making recommendations for one-time settlement of outstanding dues of all SEBs towards central public sector undertakings and for suggesting a strategy for capital restructuring of the SEBs. This committee was chaired by Sh. Montek Singh Ahluwalia, the then Member (Energy), Planning Commission. The committee recommended that 50 percent of the surcharge or interest on delayed payments be waived. The rest of the dues along with full principal amount aggregating to about Rs. 33,600 crore be secured through bonds issued by the respective state Governments. The bonds were to be issued through the RBI at a tax-free interest rate of 8.5 percent per annum.
The third initiative taken by the Government was to sign Memorandum of Understanding (MoU) with the State governments with the intention of accelerating the process of reforms. The state governments were encouraged to set up their own electricity regulatory commissions, undertake 100 percent metering, conduct energy audits at 11 KV level, impose minimum agricultural tariff as decided in the Chief Ministers’ Conference, pay subsidies on time, etc. In return, the Central government promised to increase the share of the State concerned from central generating stations, upgrade the inter-state transmission lines through APDRP funding, extend help for the State’s rural electrification program and provide other financial benefits. By 2005, the Central Government had signed MOUs with all of India’s 28 states.
The Electricity Act, 2003
The Electricity Act (EA) 2003 came into being in June 2003. This Act repealed all the existing electricity laws, such as, the Indian Electricity Act 1910, the Electricity Supply Act 1948, etc. but saved the various reform acts of some of the states which were already in operation. The preamble of the EA 2003 states the following:
"An Act to consolidate the laws relating to generation, transmission, distribution, trading and use of electricity and generally for taking measures conducive to development of electricity industry, promoting competition therein, protecting interest of consumers and supply of electricity of all areas, rationalisation of electricity tariff, ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benign policies, constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto"
The primary objective of the EA 2003 has been to promote competition in order to enable the consumers to have the best possible price and quality of supply. In order to have competition, one needs a large number of sellers and buyers and this is exactly what the EA 2003 has attempted through its various provisions.
The EA 2003 mentions that all SEBs have to be unbundled into separate entities of generation, transmission and distribution (Section 131 and 172). In order to enhance generation, licensing has been done away with completely except that techno-economic clearance would be required for hydro projects (Sections 7 and 8). Captive generation has been promoted and in fact, the definition for captive has been kept very wide, making it easier for the industry to opt for captive power plants (section 9).
Open access in distribution, to be introduced in a phased manner, has been recognized wherein a bulk consumer can access power from any other source provided certain technical constraints are met (Section 42). The EA 2003 also recognized the existence of two or more distribution licensees in the same geographical area, with the proviso that each will have its own set of wires (Section 14).
On the issue of pricing, the provisions of the Sixth Schedule of the Electricity Supply Act 1948 has been done away with and the job of price determination has been handed over to the regulatory commissions. The constitution of the state regulatory commissions was mandatory (Section 82). Power trading has been recognized as a distinct activity with the safeguard that regulatory commissions are authorized to fix ceilings on trading margins, if necessary (Sections 12, 79 and 86).
For the benefit of consumers, certain institutions like the consumers redressal forum and their appellate body, the Ombudsman, has been envisaged (Section 42). There are other safeguards as far as the consumer is concerned with special emphasis on performance standards (Sections 57 to 59). At the same time, in order to plug revenue leaks, 100 percent metering has been made compulsory (Section 55) and provisions relating to theft of energy have been made very stringent (Sections 135 to 150).
Unbundling of SEBs
Though the SEBs have been unbundled, the sector is still in public hands except in the case of Delhi and Orissa where the distribution sector has been privatised. In Delhi, while there are three private distribution utilities, in Orissa, there were four distribution utilities. The private utilities in Delhi came into being in July 2002 and in the case of Orissa, the private utilities have been functioning since 1999.
Apart from these two states who have privatized their distribution sector, there are a few other private utilities which are functioning elsewhere in the country, for example, BSES and TATA Power in Mumbai, CESC in Kolkata, Torrent in Ahmedabad, and Noida Power in Noida, etc. Wherever the SEBs have been unbundled, the primary structure was initially of a "single buyer model" though the utilities were free to purchase power from other sources as well.
The percentage of such transactions was a small fraction of what was being routed through the transmission company. Over time however, the states have reassigned the Power Purchase Agreements (PPAs) directly to the distribution companies concerned, leaving the transmission company as a pure "wire company" only.