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EVOLVING PERSPECTIVES IN THE DEVELOPMENT OF

INDIAN INFRASTRUCTURE
EVOLVING PERSPECTIVES IN THE
DEVELOPMENT OF INDIAN INFRASTRUCTURE
Volume 1
Infrastructure Development Finance Company Limited
ORIENT BLACKSWAN PRIVATE LIMITED
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Infrastructure Development Finance Company Limited 2012
First published 2012
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CONTENTS
List of Tables, Figures and Boxes vii
Foreword by Rajiv B. Lall xv
Acknowledgements xvii
Introduction xix
List of Abbreviations xxiii
ENERGY
1 Power Sector Reform: Policy Decisions in Distribution 3
2 Power Sector in India: A Summary Description 13
3 Power Sector Reform in Argentina: A Summary Description 22
4 Orissa Power Sector Reform: A Brief Overview of the Process 31
5 Power Sector Financing: A Note on Conditionalities 40
6 Six Steps to Accelerated Privatisation of Electricity Distribution 52
7 Regulation of Petroleum Product Pipelines 70
8 Incentives, Ownership and Performance in
Power Sector: The Case of UP 108
9 Discussion Paper on Developing Power Markets 124
10 Captive Coal Mining by Private Power Developers:
Issues and the Road Ahead 143
11 Power Distribution Reforms in Andhra Pradesh 163
12 Power Distribution Reforms in Maharashtra 181
13 Power Distribution Reforms in Gujarat 202
14 Barriers to Development of Renewable Energy in
India and Proposed Recommendations: A Discussion Paper 222
15 Power Distribution Reforms in Delhi 273
16 Power Distribution: Being Driven to
Insolvency by a Governance Crisis 290
17 India Solar Policy: Elements Casting Shadow on
Harnessing the Potential 334
TELECOMMUNICATIONS
18 Telecom Sector Reform: Restructuring
Telecommunications as if the Future Mattered 363
19 Transitioning from Administrative Allocation of
Spectrum to a Market-based Approach 372
LIST OF TABLES, FIGURES AND BOXES
Tables
Table 3.1 Total production of electricity and the share of
different types of generation 22
Table 6.1 Timeline for accelerated privatisation of distribution 68
Table 7.1 Supply/demandpetroleum products (in mmt) 74
Table 7.2 Supply/demandnatural gas (in mmscmd) 76
Table 7.3 Gas demand estimates of different government agencies 78
Table 7.4 Total gas supply potentialTenth Plan (in mmscmd) 79
Table 7.5 Total gas supply potential post KG Basin find (in mmscmd) 80
Table 7.6 Projections for POL consumption 20012008
(in 000 metric tonnes) 97
Table 7.7 List of LNG terminals 97
Table 7.8 List of crude pipelines 98
Table 7.9 List of gas pipelines 98
Table 7.10 List of refineries 99
Table 7.11 List of oil product pipelines 99
Table 7.12 List of ports handling oil/petroleum products 100
Table 8.1 Cumulative commercial losses of consolidated UPPCL 111
Table 8.2 Performance parameters 112
Table 8.3 Performance of UPRVUNL generating stations 114
Table 8.4 Reduction of AT&C loss in North Delhi Power Ltd 117
Table 8.5 Collection efficiency (%)governmental and
non-governmental categories 119
Table 9.1 Recommended loan conditions 132
Table 9.2 Trading margins 136
Table 10.1 Coal blocks identified for the power sector 144
Table 10.2 Criteria for allocation of coal blocks 146
Table 10.3 Pre-production approvals for allottees of coal blocks 147
Table 10.4 Comparison of mining leases in Australia, Canada and India 151
Table 10.5 Normative time limit ceilings as provided in guidelines
for allocation of captive blocks and conditions of allotment
through the screening committee, Ministry of Coal 156
Table 10.6 Minimum time frame of process 159
Table 11.1 Steps taken for power sector reforms in Andhra Pradesh 168
Table 11.2 Investment in infrastructure 172
Table 11.3 AT&C losses (%) of distribution companies 174
Table 11.4 Collection efficiency (%) of distribution companies 175
Table 11.5 Subsidy received 175
Table 11.6 Profit with and without subsidy 176
Table 11.7 Peak deficit and energy deficit in AP 177
Table 11.8 Subsidy received by distribution companies 178
Table 11.9 Sales mix (%) of distribution companies 179
Table 11.10 Revenue mix (%) of distribution companies 179
Table 11.11 Expenses as (%) of total cost for distribution companies 179
Table 12.1 Progress of Single Phasing Scheme 188
Table 12.2 Power scenario in Bhiwandibefore and after franchising 192
Table 12.3 Profits of MSEDCL 196
Table 12.4 MSEDCLs arrears 196
Table 12.5 Sales mix (as percentage of total units sold) 200
Table 12.6 Revenue mix (as percentage of total revenue) 200
Table 12.7 Expenses as percentage of total expense 201
Table 13.1 AT&C losses for distribution companies 213
Table 13.2 Distribution losses of discoms 213
Table 13.3 Collection efficiency of distribution companies 214
Table 13.4 Subsidy received by distribution companies 215
Table 13.5 Gap between ARR and ACS for distribution
companies without subsidy 216
Table 13.6 Profits of distribution companies without subsidy 216
Table 13.7 Profits of distribution companies with subsidy 216
Table 13.8 Gujarat state peak deficit and energy deficit 217
Table 13.9 Quality of Service parameters for discoms 218
Table 13.10 Sales mix of distribution companies 219
Table 13.11 Revenue mix of distribution companies 219
viii | Indian Infrastructure: Evolving Perspectives
Table 13.12 Expenses as percentage of total cost for
distribution companies 219
Table 14.1 RE potential and target cumulative capacity addition (in MWeq) 225
Table 14.2 Mismatch between RE capacity envisaged under policy and capacity
addition targeted 229
Table 14.3 Policy instruments for promotion of RE 232
Table 14.4 Regulatory framework for promotion of RE 234
Table 14.5 Penalties for non-achievement of RPO 235
Table 14.6 Status of RPO across Maharashtra 235
Table 14.7 RET capacity added across states with tariff orders/FiTs 236
Table 14.8 Year-wise wind power capacity addition in
Andhra Pradesh (in MW) 236
Table 14.9 Salient features of the schemes proposed under the solar power
purchase policy of JNNSM 248
Table 14.10 Summary of RPOs at state level for select states 264
Table 14.11 FiTs for wind energy and assumptions for FiTs across states 266
Table 14.12 FiITs for solar power across states 267
Table 14.13 FiTs for SHP and assumptions for FiTs across states 268
Table 14.14 FiTs for biomass and bagasse and assumptions for FiTs across states 269
Table 15.1 Accepted bid loss rejection trajectory; minimum
bid loss rejection trajectory 276
Table 15.2 Profits 280
Table 15.3 QoS parameters 281
Table 15.4 Peak and energy deficit 282
Table 15.5 Loan to Transco 282
Table 15.6 Expenses break-up of discoms 284
Table 15.7 Capital expenditure by discoms 287
Table 15.8 AT&C loss reduction by discoms 287
Table 15.9 Sales and revenue mix 288
Table 16.1 States exhibiting increases in losses from distribution business 292
Table 16.2 States exhibiting profits or decrease in losses
from distribution losses 293
List of Tables, Figures and Boxes | ix
Table 16.3 Most utilities have shown considerable reduction in AT&C losses
between 200506 and 200809 294
Table 16.4 Agricultural consumption continues to remain unmeteredstatus
in select states 296
Table 16.5 Level of agricultural consumption in select states in 200809 297
Table 16.6 Status of implementation of select distribution reform initiatives
as of April 2010 298
Table 16.7 Cost recovery in 200809 301
Table 16.8 Status of tariff revision in states/union territories
at the end of 2009 307
Table 16.9 Increase in revenue gap without subsidy for utilities
between 200506 and 200809 309
Table 16.10 Consumer tariffs as percentage of Average Cost of Supply approved
by SERCs in FY 200809 311
Table 16.11 Funding of revenue gap of utilities in Uttar Pradesh 315
Table 16.12 Means of financing the revenue deficits of utilities (indicative) 318
Table 16.13 Outstanding bank loans and government guarantees
in select states (Rs crore) 320
Table 16.14 Interest expenses disallowed by ERCs primarily on account
of short-term loans taken by distribution utilities 323
Table 16.15 Estimated financial losses of utilities in 201213 325
Table 16.16 Tariff trends in UMPP bids 327
Table 17.1 Projected deployment of funds in SPSA 340
Table 17.2 List of projects selected under migration scheme of JNNSM 353
Table 17.3 List of projects selected under JNNSM for bundling scheme 354
Table 17.4 Allotment of solar capacities in Gujarat 356
Table 19.1 International experience in spectrum trading 379
Table 19.2 Example of spectrum trading with revenue share payments 384
Table 19.3 Example of revenue neutral differential pricing between SSUs 386
Table 19.4 Allocation of spectrum in other countries 388
Table 19.5 Allocation of spectrum in Indian telecom circles 389
Table 19.6 Public spectrum registryexample of contents 390
x | Indian Infrastructure: Evolving Perspectives
Figures
Figure 2.1 Institutional structure of the Indian power sector 14
Figure 3.1 Restructuring of the Argentine electricity industry
(federal assets) 24
Figure 3.2 Estimate medium monomial contract price in the market 26
Figure 3.3 Argentinas transmission system 27
Figure 3.4 Evolution of capacity and energy prices 28
Figure 3.5 Outages as a per cent of energy demand 29
Figure 7.1 Growth of GDP versus POL consumption 75
Figure 7.2 Aggregate supply/demand POL 200102 76
Figure 7.3 Main consumers of natural gas 77
Figure 7.4 LNG prices, US gas prices and crude oil prices 81
Figure 7.5 Comparative transportation costs for road,
rail and pipeline modes 84
Figure 7.6 Influence of amortization for a 12 diameter pipeline 85
Figure 7.7 OPEC supply/price dynamics 101
Figure 10.1 PERT chart for coal mine development 149
Figure 10.2 Flowchart of mining proposal approval process 158
Figure 11.1 Cost of power supply, average tariff and gap 164
Figure 11.2 Power sector: Structure pre- and post-reforms 169
Figure 11.3 AT&C losses 173
Figure 11.4 Collection efficiency 174
Figure 11.5 Subsidy received 175
Figure 11.6 ACS, ARR (without subsidy) and gap over the years 177
Figure 12.1 Average cost and realization of power in 200001 182
Figure 12.2 Restructuring of MSEB 185
Figure 12.3 AT&C losses 194
Figure 12.4 Collection efficiency 195
Figure 12.5 Subsidy from state 195
List of Tables, Figures and Boxes | xi
Figure 12.6 Average revenue realised (ARR), average cost of supply (ACS)
and the gap between them over the years for Maharashtra 196
Figure 12.7 Average revenue realised (ARR) without subsidy, average cost
of supply (ACS) and the gap between them over the years
for Maharashtra post-reforms 197
Figure 12.8 SAIFI 197
Figure 12.9 SAIDI 198
Figure 12.10 CAIDI 198
Figure 13.1 Average revenue realisation in Rs/kWh for
various consumer categories 203
Figure 13.2 Restructuring of GEB 205
Figure 13.3 Improvement in cash collections over the years 210
Figure 13.4 AT&C losses 213
Figure 13.5 Subsidy received 214
Figure 13.6 ARR, ACS and gap between them over the years 215
Figure 14.1 Role of RE in Indias power generation capacity
as on 31 March 2009 223
Figure 14.2 Technology-wise grid-interactive RE capacity in India
as on 31 October 2009 224
Figure 14.3 Events influencing RE development and
RE capacity addition 228
Figure 14.4 Bundling mechanism for sale of solar
power under JNNSM 247
Figure 14.5 Time frame for completion of migration scheme
under solar power purchase policy of JNNSM 247
Figure 14.6 Time frame for completion of scheme for new
projects under solar power purchase policy of JNNSM 247
Figure 15.1 T&D losses and commercial losses pre-reforms 274
Figure 15.2 AT&C losses 280
Figure 15.3 ARR & ACS 281
Figure 16.1 Losses without subsidy for distribution utilities
have risen sharply in 200809 291
xii | Indian Infrastructure: Evolving Perspectives
Figure 16.2 Cash losses before subsidy received for distribution
utilities have trebled between 200506 and 200809 291
Figure 16.3 All-India AT&C losses are below 30% 295
Figure 16.4 Gap between ARR (without subsidy) and ACS at
the all-India level has increased 300
Figure 16.5 In recent years, tariff increase has not kept pace
with increasing ACS 302
Figure 16.6 Power purchase costs have increased 303
Figure 16.7 Procurement of short term power is increasing 303
Figure 16.8 Short-term power prices have shot up 304
Figure 16.9 Peak and energy deficit in India 304
Figure 16.10 Purchase of short-term power in select states (MU) 305
Figure 16.11 Coal imports for power plants have doubled
between 200506 and 200809 306
Figure 16.12 Trends in price of imported coal 306
Figure 16.13 Increase in employee costs for distribution utilities in India 307
Figure 16.14 Subsidies booked by distribution utilities are rising
but payment by state governments is inadequate 312
Figure 16.15 Top 10 states exhibiting the maximum increase
in subsidy booked 312
Figure 16.16 States not paying full amount of subsidy to utilities 313
Figure 16.17 Distribution losses in Punjab 316
Figure 16.18 Distribution losses in Madhya Pradesh 316
Figure 16.19 Employee costs of PSEB 317
Figure 16.20 Debtors for sale/transmission of power for state-owned
generation, trading and transmission companies 323
Figure 16.21 Private sector will lead future capacity addition in India 326
Figure 19.1 Variations in use of spectrum across circles and operators 378
Figure 19.2 Example of standard spectrum unit 381
List of Tables, Figures and Boxes | xiii
Boxes
Box 1.1 Take-or-pay in Indonesia 4
Box 1.2 Power sector reform in Argentina 9
Box 3.1 Objectives of CAMMESA 25
Box 3.2 Objectives of ENRE 25
Box 4.1 Timeline of key events in power sector reforms in Orissa 38
Box 6.1 Privatisation of generation assets of SEBs 56
Box 6.2 Limitations of the mixed-zone structure 57
Box 6.3 Disadvantages of the single-buyer model 62
Box 7.1 New Exploration Licensing Policy 71
Box 7.2 Definition of petroleum products 73
Box 7.3 Impact of OCC on oil product prices 88
Box 7.4 Contract carrier versus common carriage carrier 90
Box 7.5 Main conversions used in the petroleum industry 102
Box 8.1 Memorandum of Understanding with GOI 113
Box 8.2 Noida Power Company (NPCL)
a successful distribution company 120
Box 8.3 KESCO privatization 121
Box 11.1 APSEBs performance review 164
Box 12.1 MSEBs performance review 183
Box 12.2 White paper on Maharashtra power sector reforms 184
Box 12.3 Load management 187
Box 14.1 Salient features of JNNSM 246
Box 14.2 Urjankur Nidhi Fund in Maharashtra 262
Box 14.3 Detailed provisions of National Solar Mission 271
Box 15.1 Computation and treatment of over/under
achievement of target AT&C loss levels 275
Box 17.1 Solar Power: International Experience 348
Box 19.1 The spectrum is finally attached to the licence 374
Box 19.2 Defining spectrum trading units in Australia 381
Box 19.3 Ofcoms proposed process for transacting a spectrum trade 382
xiv | Indian Infrastructure: Evolving Perspectives
FOREWORD
Infrastructure Development Finance Company Limited (IDFC) was set up at the initiative
of the Government of India with the mandate to lead private capital to commercially viable
infrastructure projects in India. Over the fifteen years of our existence, we have witnessed
the share of private capital grow from an insignificant proportion to the current levels of
almost 40 per cent of the total infrastructure investment. In the Twelfth Plan, the share of
the private sector is expected to grow even further to 50 per cent of the investment. All
through this period, IDFC has been actively engaged with governments, independent
regulators, private developers, banks, financial investors and other stakeholders in the process
of advocating and developing appropriate policy, and legal and regulatory frameworks for
this purpose. We would, therefore, celebrate our fifteenth anniversary, later this year, with a
great deal of satisfaction, now that private investment has become an important mode of
investment across various infrastructure sectors.
From the beginning, the role envisaged for IDFC was not limited merely to funding, but to
lead private investment to this sector. In any case, there were very few private sector projects to
finance in 1997. Leading capital to projects required intense preparatory work and active
engagement with the government in policy formulation, in the preparation of legal and
regulatory frameworks, and in the development of transparent procurement processes, objective
evaluation criteria and equitable concession documents. IDFC, both through its policy advocacy
and advisory services teams, provided inputs through a series of interventions. Some of these
inputs were through specific advisory services transactions, for instance, in major ports and
national highways. In power and telecom, inputs were often provided in response to the
consultative process initiated by the regulator or government but were also through notes and
opinions conveyed on specific issues. We believe that IDFCs role was very useful and often
pivotal in shaping opinion and in leading private investment to infrastructure.
In fulfilment of its mandate to develop infrastructure, a large body of written material has
been prepared over the years. These include sector studies, policy recommendations for
resolving some of the difficult issues, overviews of emerging trends, outlines of good practices
and issues in financing. Some of these find a place in the thematic India Infrastructure Report
that is published every year. A few others have been published elsewhere, covered in IDFCs
quarterly policy reviews, or released as occasional papers. Many have remained in private
domain. This publication is an anthology of some of the papers prepared by IDFC over the
last fifteen years, and reflects its emerging views in the quest of nation building. It is a
representative collection and not an exhaustive one.
Last year we set up IDFC Foundation under Section 25 of the Companies Act 1956, as a
wholly owned subsidiary of IDFC. IDFCs development agenda is now being carried out
through the IDFC Foundation. It is fitting that on the first anniversary of the Foundation,
we are able to release this publication as a testament of IDFCs contribution to infrastructure
development in India.
RAJIV B. LALL
March 2012 Managing Director and CEO
ACKNOWLEDGEMENTS
It is always difficult to acknowledge all those who have contributed to a publication of this
nature, which includes papers and notes written over a fifteen-year period. All the papers
have received inputs of different kinds from various sources. The inputs include views,
opinions, critical feedback, discussions, encouragement and sometimes just the opportunity
to share ideas. In that sense, it would be impossible to acknowledge all the contributors.
At the outset, it would only be fitting to acknowledge the Government of India and the
various state governments that have, over the years, used IDFC as a sounding board for
policy and regulatory advice. Within the organisation, at a strategic level, we would first of
all acknowledge the encouragement and support of Deepak Parekh, Chairman, IDFC, Rakesh
Mohan, who briefly served as Vice-Chairman, and its first two Managing Directors,
D. J. Balaji Rao and Nasser Munjee. This support has been strongly continued by Rajiv B.
Lall, the present Managing Director and CEO of IDFC, under whose stewardship the IDFC
Foundation was set up. Acknowledgements are also due to Anil Baijal, Chairman, IDFC
Foundation; Urjit R. Patel, who headed the policy group at IDFC for the first ten years; and
Ritu Anand, who oversees it at present. The inputs received from the various members of
IDFCs Policy Advisory Boards from time to time, have certainly helped to clarify perspectives
and shape policy opinions. For this, we thank each and every one of them.
Where the papers already include the names of the authors, credits have been given at the
end of the respective papers. Nevertheless, the following writers, too, need to be acknowledged:
Rajiv B. Lall, Urjit R. Patel, Ritu Anand, Cherian Thomas, Partha Mukhopadhyay, Srikumar
Tadimala, Anupam Rastogi, Nirmal Mohanty, P. V. Ravi, Saugata Bhattacharya, Piyush
Tiwari, Sambit Basu, Shishir Mathur, Manisha Gulati, Kaushik Deb, Sunaina Kilachand,
Aditi Jagtiani, Kunal Katara, Neeraj Sansanwal, Bhagyathej Reddy, Ashish Agarwal,
Pritika Hingorani and Ranesh Nair. Their valuable contributions have gone into the
compilation of these volumes, which provide both historical and current perspectives and
could be useful points of reference in all our future efforts at nation building.
Our thanks are due also to Orient BlackSwan, the publishers of this volume, who have been
consistent in maintaining quality while accommodating the sometimes exacting demands
made on them.
Finally, we would like to thank all our colleagues at IDFC, past and present, whose consistent
feedback and varying perspectives on the various themes have been of immense value. While
we have taken care to include everyone who helped us in compiling this report, any omissions
are unintentional and we hope that they would be construed as such.
INTRODUCTION
Evolving Perspectives in the Development of Indian Infrastructure (in two volumes) is a
compilation of several papers written by IDFC over the last fifteen years on the themes of
infrastructure development and financing. It is not an exhaustive summary of all of IDFCs
work in infrastructure policy and regulation during this period. Much of IDFCs policy
contribution has been through inputs provided to the many task forces, working groups
and high-level committees constituted by central and state governments from time to time,
in which IDFCs officials have been (or are being) represented. In many other instances,
recommendations have been provided to governments and regulators as part of the
consultative process followed while seeking views of stakeholders in these sectors. Some of
IDFCs development work has also been through specific outputs in the form of reports and
documents prepared as part of advisory service transactions for governments. Another visible
output that is published year after year is the India Infrastructure Reporta thematic report
that discusses issues of contemporary concern across the infrastructure space. In some ways,
this anthology captures some of IDFCs emerging views over this period, which may be
reflected in its recommendations and inputs in the activities listed above.
This publication consists of two volumes. The first volume has two sectionsenergy and
telecommunications. The second volume deals with transport, urban and other infrastructure,
and infrastructure development and financing. It comprises 45 papers on a range of topics
on various aspects of policy and financing. These cover the period from May 1998 to
January 2012. The papers are of varying lengths, depending on the specific context in which
they were written and the need sought to be addressed. Some of the issues debated in the
earlier papers and the recommendations may still be relevant in the current context, and
these volumes would have more than a historical significance. The power sector, not
surprisingly, has the most number of paperssince it is the biggest of the infrastructure
sectorsand these papers are reflective of the various emerging issues in the sector. A section-
wise summary of the two volumes is set out below.
The initial papers in the power sector (written 19982001) set out the issues and challenges
for private investment in the sector. Drawing from international experiences in Argentina
and Indonesia, right from the outset, IDFC highlighted the need to focus on reforms and on
restructuring the sector with a view to increase efficiency and reduce losses. The suggestions
for creating a more competitive market structure conducive to private sector participation
unbundling the monolithic electricity boards and creating independent regulatory authorities,
separating network business from supply, and establishing power trading as a separate licensed
activitywere forerunners to many subsequent changes, such as the introduction of open
access. Equally noteworthy are the suggestions for private sector investment in power
distribution, initially through franchising dense urban areas. The relative success of the
franchisee model (in Bhiwandi and other places) in improving distribution efficiencies and
collections reflect the merits of this suggestion. The separation of urban and non-urban
areas and the development of a transparent mechanism for payment of subsidies will continue
to be issues that engage us as the reform process in the sector moves ahead.
Some of the papers review the reforms and progress of the sector in the states of Orissa
(February 2000), Uttar Pradesh (February 2005), Andhra Pradesh, Delhi, Maharashtra and
Gujarat. The review includes an assessment of the gains made so far, as well as the
shortcomings and the challenges ahead for each of these states. The most recent paper on
the power distribution sector clearly highlights the severity of the losses in power distribution,
the looming risk of insolvency of these utilities, and the urgent need for good governance to
enable future capacity addition and to restore the overall health of the financial system.
The wide gamut of subjects covered include the regulation of petroleum product pipelines,
the conditionalities in power sector lending, and the challenges in implementing the captive
coal mining policy. The section also includes a discussion paper on renewable energy and a
specific paper on solar energy.
The telecom section is rather small since much of the policy input was provided by IDFC as
part of the consultative process in this sector with the government and the regulator. The
initial paper on the sector (December 1998) set out some of the sectoral challenges, keeping
in mind the new telecom policy that was to be announced. The second paper covered the
principles for allocation of spectrum and also the issue of spectrum trading. The wisdom of
using the market-based approach has been clearly vindicated by the subsequent events that
have overtaken the sector.
The second volume begins with a section on issues related to the transport sector. Much of
the work done by IDFC in the transport sector was as Secretariat to the Task Force on
Infrastructure and through specific advisory assignments in major ports and national
highways sectors, in the initial years. The paper on ports sector reforms (December 1999)
argued that there is little need for immediate additional public investment in the sector, but
suggested a focus on efficiency in port services by private providers subject to competitive
pressures. It also recommended a push to reform port labour, the need for strengthening
hinterland connectivity, and that of putting in place a pro-competitive and stable regulatory
system. All these represent a continuing agenda in the sector. A subsequent paper
(November 2000) highlighted the need to integrate coastal shipping with the surface
transport network. This is a challenge that has largely been ignored for several decades
and could assume increasing importance given the enormous environmental benefits and
lower transport costs that could accrue from increased coastal movement of goods.
A paper on railways sets out the opportunities for publicprivate partnerships in the sector,
and includes the experience of the HassanMangalore railway project in Karnataka. Papers
on the roads sector include a status note on the National Highway Development
Programme (NHDP), a review of the challenges of financing highways, and, the most
recent one, on the challenges for NHAI in financing the NHDP.
The first paper in the urban sector covers the water sector. The paper (March 2001)
highlighted the need for independent regulation, rational tariff setting and the appropriate
role of the private sector. This is followed by a paper on special economic zones (SEZs)
which argued that SEZs are more in the nature of band aid fixes and that the focus of the
policy should move from augmenting infrastructure facilities for export production to an
overall focus on higher-quality infrastructure, growth and employment. A selection of papers
xx | Indian Infrastructure: Evolving Perspectives
from IDFC policy quarterly research notes covers the issues of land pooling, bus rapid transit
systems, green buildings, sewage water recycling for industrial use, and municipal borrowings
using pooled finance mechanisms. The base note prepared on urban financing (for the High
Powered Expert Committee) provides a comprehensive review of the financing for urban
infrastructure. A paper on private healthcare in India (December 2002) broadly reviewed
the key challenges of the sector at that point and identified a few business models for healthcare
investment in future.
The last section of the second volume includes papers on various cross-cutting issues in
infrastructure development and financing. The earliest paper (May 1999) briefly reviewed
the challenges of reforming the debt market in India, some of which still remain.
A detailed paper on competitive bidding (August 2000) argued that competitive bidding
provides the most efficient and cost effective method for procurement of infrastructure
servicesa lesson that has become systematised practice over the last decade across sectors.
Two papers deal with the issue of regulation. The January 2005 paper reviews regulation
across sectors and argues that regulation is one piece of the infrastructure puzzle and has to
be complemented with an industry structure that aligns operators incentives towards pursuit
of value for money. The more recent paper on regulation looks further at the future of
regulation in India. Papers on financing comprise two independently written reviews:
domestic financing and the role of IDFC, and infrastructure financing and the role of non-
banking finance companies. Other papers include a short note on infrastructure development
in India (prepared for the World Economic Forum), an analysis of the political economy of
infrastructure development (which concludes that political logic would drive decisionmakers
to deliver improved infrastructure with a greater reliance on private provision of these
services), and a detailed comparison of infrastructure creation in China and in India. The
last paper identifies some of the lessons that can be learnt from the Chinese experience, such
as using improved technology, pursuing financially sustainable solutions, and improving
efficiency and accountability in the government while pursuing solutions that are more
implementable in our context.
All in all, it is hoped that this publication would give the readers an insight into some of the
evolving policy perspectives and recommendations that have emerged in the last fifteen
yearsa period when infrastructure development has received more focussed attention than
at any time since Independence.
Introduction | xxi
LIST OF ABBREVIATIONS
A$ Australian Dollar
ACA Australian Communications Authority
ACCC Australian Competition Consumer Council
ACS Average Cost of Supply
ADB Asian Development Bank
ADF Airport Development Fees
ADRD Alberta Department of Resource Development
AEC Ahmedabad Electricity Company
AEE Autorita per l'Energia Elettrica e il Gas
AERA Aviation Economic Regulatory Authority
AGCOM The Communications Regulatory Authority
AGR Adjusted Gross Revenue
AIM Alternative Investment Market
AIP Administrative Incentive Pricing
AMC Ahmedabad Municipal Corporation
AP Andhra Pradesh
APDRP Accelerated Power Development and Reform Programme
APERC Andhra Pradesh Electricity Regulatory Commission
APL Adaptable Programme Loan/Lending
APM Administrative Price Mechanism
APPSRP Andhra Pradesh Power Sector Restructuring Programme
APSEB Andhra Pradesh State Electricity Board
ARR Annual Revenue Requirement
ARR Average Revenue Realised
ASEAN Association of Southeast Asian Nations
ASP Activated Sludge Process
AT&C Aggregate Technical and Commercial
ATE Appellate Tribunal for Electricity
ATF Aviation Turbine Fuel
AUDA Ahmedabad Urban Development Authority
BBCD Bare-Boat-Charter-cum-Demise
bbl Barrels
BCC Beneficiary Capital Contribution
BCC Base Construction Cost
bcm Billion Cubic Metres
BCM Book Consolidation Module
BEE Bureau of Energy Efficiency
BEST Brihan Mumbai (Bombay) Electric Supply and Transport Undertaking
BG Broad Gauge
BIAL Bengaluru International Airport Limited
BKCC B. K. Chaturvedi Committee
BLD Billion Litres per Day
BLT Build, Lease, Transfer
BOD Biological Oxygen Demand
BOLT Build, Operate, Lease, Transfer
BOO Build, Own, Operate
BOOM Build, Own, Operate, Maintain
BOOST Build, Own, Operate, Share, Transfer
BOOT Build, Own, Operate, Transfer
BOQ Bill of Quantities
BOT Build Operate Transfer
BP British Petroleum
BPCL Bharat Petroleum Corporation Limited
BRPL Bongaigaon Refinery and Petrochemicals Limited
BRTS Bus Rapid Transit System
BS basic service
BSES Bombay Suburban Electric Supply
BSF Bond Service Fund
BSNL Bharat Sanchar Nigam Limited
BTS Bangkok Mass Transit System
BUA Built-up Area
BWSSB Bangalore Water Supply and Sanitation Board
BYPL BSES Yamuna Power Limited
xxiv | Indian Infrastructure: Evolving Perspectives
CA Constitutional Amendment
CAA Constitutional Amendment Act
CAA Civil Aviation Authority
CAA Cost under the Annuity Approach
CAGR Compound Annual Growth Rate
CAIDI Consumer Average Interruption Duration Index
CAM Common Area Maintenance
CAMMESA Compaa Administradora del Mercado Mayorista Elctrico
CAT Consumer Analysis Tool
CBDT Central Board of Direct Taxes
CCA Cost under the Conventional Approach
CCI Competition Commission of India
CDB China Development Bank
CDMA Code Division Multiple Access
CDs Certificates of Deposits
CEA Central Electricity Authority
CEPZ Cochin Export Processing Zone
CERC Central Electricity Regulatory Commission
CESC Calcutta Electric Supply Company
CESCO Central Electricity Supply Company
CFC Consumer Facilitation Centres
CFS Centre for Sight
CGD City Gas Distribution
CGHS Central Government Health Scheme
CGWB Central Ground Water Board
CIL Coal India Limited
CLF Credit Local de France
CMIE Centre for Monitoring Indian Economy
CMS Cellular Mobile Service
CMT Comisin del Mercado de las Telecomunicaciones
CMTS Cellular Mobile Telephony Service
CMW Chennai Metro Water
List of Abbreviations | xxv
CNE Comisin Nacional de Energa
COAI Cellular Operators Association of India
CONCOR Container Corporation of India
CONEA Coalition of North East Association
CP Commercial Paper
CPCB Central Pollution Control Board
CPPs Captive Power Plants
CPSU Central Public Sector Unit
CPT Chennai Port
CPUC California Public Utilities Commission
CREF Credit Rating Enhancement Fund
CRG Crisis Resolution Group
CSE Centre for Science and Environment
CST Concentrated Solar Thermal
CSUs Central Sector Undertakings
CTC Competitive Transition Charge
DALY Disability Adjusted Life Years
DBFO Design Build Finance Operate
DELs Direct Exchange Lines
DEPB Duty Entitlement Pass Book
DERC Delhi Electricity Regulatory Commission
DESU Delhi Electric Supply Undertaking
DF Distribution Franchisee
DFID Department for International Development
DFIs Development Finance Institutions
DFRC Duty Free Replenishment Certificate
DGH Directorate General of Hydrocarbons
DIAL Delhi International Airport Limited
DIMTS Delhi Integrated Multimodal Transit System
discom/distco Distribution Company
DJB Delhi Jal Board
DM De-mineralisation
xxvi | Indian Infrastructure: Evolving Perspectives
DMRC Delhi Metro Rail Corporation
DoT Department of Telecommunications
DSCR Debt-Service Coverage Ratio
DSM Demand-Side Management
DSR Debt Service Requirement
DT/DTR Distribution Transformer
DTA Domestic Tariff Area
DVA Distribution Value Added
DVB Delhi Vidyut Board
DVP Delivery versus Payment
DWT Decentralised Wastewater Treatment
EA 03 Electricity Act 2003
EA Energy Audit
EC European Commission
ECB External Commercial Borrowings
ECBC Energy Conservation Building Code
EDENOR Empresa Distribuidora y Comercializadora Norte S.A.
EDZ Economic Development Zone
EIRP Equivalent Isotropically Radiated Power
ENARGAS Ente Nacional Regulador del Gas
ENRE Ente Nacional Regulador de la Electricidad
EoD Event of Default
EOU Export Oriented Unit
EPC Engineering, Procurement and Construction
EPZ: Export Promotion Zone
ERC Electricity Regulatory Commission
ESC Essential Services Commission
ESIS Employees State Insurance Scheme
ETDMA Extended Time Division Multiple Access
ETOSS Ente Tripartito de Obras y Servicios Sanitarios
EU European Union
EUA Electricity Utilities Act
List of Abbreviations | xxvii
EUB Energy and Utilities Board
EWS Economically Weaker Section
FAA Federal Aviation Administration
FAR Floor Area Ratio
FCA Fuel Cost Adjustment
FCC Federal Communications Commission
FDI Foreign Direct Investment
FERC Federal Energy Regulatory Commission
FIE Foreign Invested Enterprises
FIPB Foreign Investment Promotion Board
FIs Financial Institutions
FiT Feed-in Tariff
FM Frequency Modulation
FO Furnace Oil
FOB Free-on-Board
FOR Forum of Regulators
FP Future Plot
FPPPA Fuel and Power Purchase Price Adjustment
FRP Financial Restructuring Plan
FSA Fuel Supply Agreement
FSA Financial Services Authority
FSI Floor Space Index
FTCs Foreign Trade Companies
FY Fiscal Year
GACL Gujarat Ambuja Cements Limited
GAIL Gas Authority of India Limited
GARR Guaranteed Average Revenue Realisation
GBI Generation-based Incentives
GBWASP Greater Bangalore Water Supply and Sanitation Project
GDP Gross domestic product
GIC General Insurance Corporation of India
GNCL Gujarat NRE Coke Limited
xxviii | Indian Infrastructure: Evolving Perspectives
GNCTD Government of National Capital Territory of Delhi
GNIDA Greater Noida Industrial Development Authority
GOG Government of Gujarat
GOI Government of India
GOK Government of Karnataka
GOM Government of Maharashtra
GQ Golden Quadrilateral
GRIDCO Grid Corporation of Orissa
GRIHA Green Rating for Integrated Habitat Assessment
GSDP Gross State Domestic Product
G-Secs Government of India Securities
GSM Global System for Mobile Communications
(formerly, Groupe Spcial Mobile)
GSPC/GSPCL Gujarat State Petroleum Corporation (Limited)
GSPL Gujarat State Petronet Limited
GTPUDA Gujarat Town Planning and Urban Development Act
GU Geographic Unit
GUVNL Gujarat Urja Vikas Nigam Limited
GWCL Ghana Water Company Limited
ha Hectare
HBEPL Hanzer Biotech Energies Private Limited
HBJ Pipeline Hazira-Bijaipur-Jagdishpur Pipeline
HCBS High Capacity Bus System
HCCL Hindustan Construction Company Limited
HERC Haryana Electricity Regulatory Commission
HFCL Himachal Futuristic Communications Limited
HIDRONOR Hidroelctrica Norpatagnica Sociedad Annima
HMRDCL Hassan Mangalore Rail Development Company Limited
HNIs High Net-Worth Investors
HP Himachal Pradesh
HPCL Hindustan Petroleum Corporation Limited
HR Human Resources
List of Abbreviations | xxix
HSD High Speed Diesel
HUDCO Housing and Urban Development Corporation
HVDS High Voltage Distribution System
IAAI International Airports Authority of India
IARR Implied Average Revenue Realisation
IAT Independent Assessment Team
ICICI Industrial Credit and Investment Corporation of India
ICRA (formerly) Investment Information and Credit Rating
Agency of India Limited
ICTSL Indore City Transport Services Limited
IDBI Industrial Development Bank of India
iDeCK Infrastructure Development Corporation (Karnataka)
IDFC Infrastructure Development Finance Company Limited
IFCI Industrial Finance Corporation of India
IGBC Indian Green Building Council
IGIA Indira Gandhi International Airport
IGL Indraprastha Gas Limited
IIBI Industrial Investment Bank of India
IIFCL India Infrastructure Finance Company Limited
IL&FS Infrastructure Leasing and Financial Services
IOC IndianOil Corporation
IPGCL Indraprastha Power Generation Company Limited
IPPs Independent Power Producers/Projects
IR/IRC Indian Railways (Corporation)
IRA Independent Regulatory Agency
IRBI Industrial Reconstruction Bank of India
IRDA Insurance Regulatory and Development Authority
IRR Internal Rate of Return
IRRA Indian Rail Regulatory Authority
IT Information technology
ITU International Telecommunications Union
IUP Intended Use Plans
xxx | Indian Infrastructure: Evolving Perspectives
I-WIN ICICI-West Bengal Infrastructure Development Corporation Limited
JCC Japanese Cocktail Crude
JICA Japan International Cooperation Agency
JNNSM Jawaharlal Nehru National Solar Mission
JNNURM Jawaharlal Nehru National Urban Renewal Mission
JNPT Jawaharlal Nehru Port Trust
JV Joint Venture
KERC Karnataka Electricity Regulatory Commission
KESCO Kanpur Electricity Supply Company
K-G Basin Krishna-Godavari Basin
KINFRA Kerala Industrial Infrastructure Development Corporation
K-RIDE Karnataka Rail Infrastructure Development Corporation
KUIDFC Karnataka Urban Infrastructure Development and
Finance Corporation
KUWASIP Karnataka Urban Water Supply Improvement Project
KUWSBD Karnataka Urban Water Supply and Drainage Board
KWSPF Karnataka Water and Sanitation Pooled Fund
LEED Leadership in Energy and Environmental Design
LIC Life Insurance Corporation of India
LNG Liquefied Natural Gas
LoI Letter of Intent
LPCD Litres per Capita per Day
LPR Land Pooling and Readjustment/Reconstitution
LPVR Least Present Value of Revenues
LSHS Low Sulphur Heavy Stock
M&A Mergers and Acquisitions
MADP Maximum Alternative Distribution Payment
MAGP Maximum Alternative Generation Payment
MASTS Mobile Assignment Technical System
MATS Monitoring and Tracking System
MBR Membrane Bio Reactor
mBtu/mmBtu Million British thermal units
List of Abbreviations | xxxi
MCA Model Concession Agreement
MCB Miniature Circuit Breaker
mcm Million Cubic Metres
MCs Municipal Corporations
MDF Municipal Development Fund
MEPZ Madras Export Processing Zone
MERC Maharashtra Electricity Regulatory Commission
MFL Madras Fertilizers Limited
MG Metre Gauge
MMC Madurai Municipal Corporation
MMDR Act Mines and Minerals (Development and Regulation) Act
MMRDA Mumbai Metropolitan Regional Development Authority
mmscmd Metric Million Standard Cubic Meters per Day
Mmt Million Metric Tonnes
Mmtpa Million Metric Tonnes per Annum
MNRE Ministry of New and Renewable Energy
MoCA Ministry of Civil Aviation
MoD Ministry of Defence
MoP Ministry of Power
MoPNG Ministry of Petroleum and Natural Gas
MoR Ministry of Railways
MoRTH Ministry of Road Transport and Highways
MoST Ministry of Surface Transport
MoU Memorandum of Understanding
MoUD Ministry of Urban Development
MP Madhya Pradesh
MPE Mumbai-Pune Expressway
MPSC Model Production Sharing Contract
MRTS Mass Rapid Transit System
MS Motor Spirit
MSB Minimum Subsidy Bidding
MSEB Maharashtra State Electricity Board
xxxii | Indian Infrastructure: Evolving Perspectives
MSEDCL Maharashtra State Electricity Distribution Company Limited
MSRDC Maharashtra State Road Development Corporation
MT Million Tons
mt Metric Tonnes
MTNL Mahanagar Telephone Nigam Limited
MYT Multi-year Tariff
NABARD National Bank for Agriculture and Rural Development
NBFCs Non-Bank Financial Companies
NBFI Non-Bank Financial Institution
NCR National Capital Region
NDPL North Delhi Power Limited
NDRC National Development and Reform Commission
NELP New Exploration Licensing Policy
NEN National Expressway Network
NEPZ Noida Export Processing Zone
NESCO Northern Electricity Supply Company
NFAP National Frequency Allocation Plan
NHAI National Highways Authority of India
NHDP National Highway Development Project
NHPC National Hydroelectric Power Corporation
NLD National Long Distance
NMMC Navi Mumbai Municipal Corporation
NMP National Mineral Policy
NMPT New Mangalore Port Trust
NPAs Non-performing Assets
NPCL Noida Power Company Limited
NPV Net Present Value
NSDL National Securities Depository Limited
NSE National Stock Exchange
NS-EW North South-East West
NTHS National Trunk Highway System
NTPC National Thermal Power Corporation
List of Abbreviations | xxxiii
NUIF National Urban Infrastructure Fund
NUTP National Urban Transport Policy
NWP National Water Policy
NWRC National Water Resources Council
NYSPSC New York State Public Service Commission
NZ$ New Zealand dollar
O&M Operation and Maintenance
OA Open Access
OCC Oil Coordination Committee
OECD Organisation for Economic Co-operation and Development
OECF Overseas Economic Cooperation Fund
OERC Orissa Electricity Regulatory Commission
OFAPs Operational and Financial Action Plans
OFCOM Office of Communications
OFGEM Office of Gas Electricity Markets
OFWAT Office of Water Services
OHPC Orissa Hydro Power Corporation
OIL Oil India Limited
OMT Operate, Maintain, Transfer
ONGC Oil and Natural Gas Corporation of India
OP Original Plot
OPEC Organization of Petroleum Exporting Countries
OPGC Orissa Power Generation Corporation
ORR Office of the Rail Regulator
OSEB Orissa State Electricity Board
OSN Obras Sanitarias de la Nacin
OUR Office of Utilities Regulation
P&O Peninsular and Oriental Steam Navigation Company
PBOC Peoples Bank of China
PBR Private Business Radio
PCS Personal Communications Services
PDCOR Project Development Company of Rajasthan
xxxiv | Indian Infrastructure: Evolving Perspectives
PE Private Equity
PFC Power Finance Corporation
PFDF Pooled Finance Development Fund
PFDS Pooled Finance Development Fund Scheme
PFI Private Finance Initiative
PfP Payment for Performance
PFs Provident Funds
PGCIL Power Grid Corporation of India Limited
PIDB Punjab Infrastructure Development Board
PIL Petronet India Limited
PIL Public Interest Litigation
PLF Plant Load Factor
PMCs Project Management Consultants
PMT Panna Mukta Tapti
PNGRB Petroleum and Natural Gas Regulatory Board
POL Petroleum, Oil and Lubricants
PPA Power Purchase Agreement
PPCL Pragati Power Corporation Limited
PPFCA Power Purchase Fuel Cost Adjustment
PPIAF Public-Private Infrastructure Advisory Facility
PPP Public-Private Partnership
PSA Port of Singapore Authority
PSA Power Sale Agreement
PSC Production Sharing Contract
PSC Public Sector Comparator
PSEB Punjab State Electricity Board
PSP Private Sector Participation
PSU Public Sector Undertaking
PTC Power Trading Company
PTIM Pre-tax Investment Multiple
PwC PricewaterhouseCoopers
PWLB Public Works Loan Board
List of Abbreviations | xxxv
QoS Quality of Service Parameters
QoSS Quality of Supply and Service
R&D Research and Development
RAPDRP Restructured-Accelerated Power Development and
Reforms Programme
RCF Rashtriya Chemicals and Fertilizers Limited
RE Renewable Energy
REBs Regional Electricity Boards
REC Renewable Energy Certificate
RERC Rajasthan Electricity Regulatory Commission
RET Renewable Energy Technology
RFP Request for Proposal
RFQ Request for Quotation
RFQ Request for Qualification
RLDCs Regional Load Dispatch Centres
RMC Rajkot Municipal Corporation
RoC Regulation by Contract
ROE Return on Equity
ROR Rate of Return
ROT Rehabilitate, Operate, Transfer
ROW Right of Way
RPOs Renewable Purchase Obligations
SAA Simultaneous Ascending Auction
SAIDI System Average Interruption Duration Index
SAIFI System Average Interruption Frequency Index
SBR Sequential Batch Reactor
SCADA Supervisory Control and Data Acquisition System
SCI Shipping Corporation of India
SCM Subsidies and Countervailing Measures
SEBI Securities and Exchange Board of India
SEBs State Electricity Boards
SEDs State Electricity Departments
xxxvi | Indian Infrastructure: Evolving Perspectives
SEEG Socit d'Exploitation des Eaux de Guine
SEEPZ Santa Cruz Electronic Export Processing Zone
SEGBA Servicios Elctricos del Gran Buenos Aires
SERC State Electricity Regulatory Commission
SEZ Special Economic Zone
SFC State Finance Commission
SFCD State Finance Commission Devolution
SGAs Specialised Government Agencies
SGI Solicitor General of India
SHP Small Hydro Power
SKO Superior Kerosene Oil
SLAUs Special Land Acquisition Units
SOE State-owned Enterprise
SONEG Socit National des Eaux de Guine
SOUTHCO Southern Electricity Supply Company
SPD Solar Power Developer
SPFE State Pooled Finance Entity
SPV Special Purpose Vehicle/Company
SPV Solar Photovoltaic
SSI Small Scale Industry
SSUs Standard Spectrum Units
STD Subscriber Trunk Dialing
STP Sewage Treatment Plant
STU Standard Trading Unit
STW Sewage Treated Water
SWM Solid Waste Management
T&D Transmission and Distribution
TA Technical Assistance
TACID Tamil Nadu Corporation for Industrial Infrastructure Development
TAMP Tariff Authority for Major Ports
TAT Tourism Authority of Thailand
TBA To Be Announced
List of Abbreviations | xxxvii
tcf Trillion Cubic Feet
tcm Thousand Cubic Metres
TDRs Transfer of Development Rights
TDSAT Telecom Disputes Settlement and Appellate Tribunal
TD-SCDMA Time Division Synchronous Code Division Multiple Access
TEA Tirupur Exporters Association
TERI The Energy and Resources Institute
TEU Twenty-foot Equivalent Unit
TFC Thirteenth Finance Commission
TIMS Transformer Information Management System
TN Tamil Nadu
TNEB Tamil Nadu Electricity Board
TNERC Tamil Nadu Electricity Regulatory Commission
TNUDF Tamil Nadu Urban Development Fund
TNUIFSL Tamil Nadu Urban Infrastructure Financial Services Ltd
TNWSPF Tamil Nadu Water and Sanitation Pooled Fund
TOU Time of Use
TPAs Third Party Administrators
TPC Total Project Cost
TPO Town Planning Officer
TRAI Telecom Regulatory Authority of India
Transco Transmission Company
TSS Total Suspended Solids
TTRO Tertiary Treatment and Reverse Osmosis Plant
TVEs Township and Village Enterprises
UASL Unified Access Services License
UDF User Development Fee
UI Unscheduled Interchange
ULBs Urban Local Bodies
UMPPs Ultra Mega Power Projects
UMTS Universal Mobile Telecom Service
UPERC Uttar Pradesh Electricity Regulatory Commission
xxxviii | Indian Infrastructure: Evolving Perspectives
UPPCL Uttar Pradesh Power Corporation Ltd
UPRVUNL Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited
UPSEB Uttar Pradesh State Electricity Board
US$ United States Dollar
USAID United States Agency for International Development
USF Universal Service Fund
USFA Universal Service Fund Administrator
VAT Value Added Tax
VfM Value for Money
VGF Viability Gap Funding
VPT Village Public Telephone
VSNL Videsh Sanchaar Nigam Limited
WB West Bengal
WBSEDCL West Bengal State Electricity Distribution Company Limited
WESCO Western Electricity Supply Company
WLL Wireless Local Loop
WPC Wireless Planning and Coordination Wing
WPI Wholesale Price Index
WS&S Water Storage and Supply
WSA Water Service Agency
WSP Waste Stabilisation Pond
WSPF Water and Sanitation Pooled Fund
WSS Water Supply and Sewerage
WTO World Trade Organization
WUA Water Users Association
WWD Water Works Department
List of Abbreviations | xxxix
1. INTRODUCTION
The investment needed in the power sector in the next five years is estimated to
be in excess of Rs 200,000 crore (US$50 billion), largely in new generating plants.
Over a longer term, 75,000 MW of new generating capacity is being contemplated
in the form of mega power plants. Since each MW of generating capacity installed
by an independent power producer requires an estimated commitment of about
Rs 1.5 crore per annum (6000 MWhrs, at Rs 2.5 per kWh), the payment liability
for this generating capacity would amount to Rs 112,500 crore (US$28 billion)
per year. Considering that the total revenue of all electricity boards in the country
is only around Rs 40,000 crore per annum, the additional liabilities are
unmanageable under the current regime of revenue mobilisation.
The government has provided many incentives to independent power producers
(IPPs). These include a guaranteed rate of return of 16 per cent, counter guarantees
from the central and state governments, escrow accounts for assured payments, etc.
As a result, over 250 MoUs have been signed. However, the success rate from MoU
to financial closure has been low. Only a few projects have been implemented in the
past seven years. The primary hurdle in implementation is now recognised as the
poor financial health of the electricity boards, who are currently the sole purchasers
of electricity from the IPPs. In turn, this is attributable to the poor state of
distribution, characterised by low quality of service, rampant theft, high subsidies
and poor revenue recovery.
Therefore, in order to make these planned MWs a reality, a substantially increased
revenue generation from the distribution system assumes the highest priority.
Additional megawatts can only be generated if more megawatt hours are delivered
POWER SECTOR REFORM:
Policy Decisions in
Distribution
May 1998
1
4 | Indian Infrastructure: Evolving Perspectives
and paid for, that is, either the number of paying consumers has to increase or the
consumption of the currently paying consumers must rise. An efficient revenue
generating system would also obviate the need for sovereign guarantees, escrow
accounts and take-or-pay contracts, and permit the development of the sector on
commercial lines. The consequences of ignoring additional revenue generation can
lead eventually to major national problems, similar to that being currently
experienced in Indonesia (see Box 1.1).
Box 1.1: Take-or-pay in Indonesia
In a situation very similar to that of India, the paucity of investible funds led Indonesia
to invite the private sector to construct power plants. With optimistic growth forecasts,
the National Power Corporation, PLN, set itself ambitious targets and signed 26 take-
or-pay power purchase agreements with private IPPs. In most contracts, the price,
which was linked to the US dollar, ranged from 5.7 to 8.5 US cents per kWh. The
recent Southeast Asian currency crisis saw the Indonesian rupiah depreciate by over
70 per cent and the GDP growth rate turn negative. The growth in electricity demand
slumped to zero and the dollar equivalent of the tariff fell sharply. At the prevailing
exchange rate, PLNs tariff rates are less than 2.0 US cents per kWh. Its liability for the
next 15 years is estimated at US$43 billion, which it has no means to honour. PLNs
take-or-pay contracts are now a major national problem.
2. CHARACTERISTICS OF SEBs
State Electricity Boards (SEBs) in India are beset with numerous problems. They are
characterised by huge financial losses, high transmission and distribution losses
comprising technical and non-technical components, unsatisfactory quality and
low reliability of supply, undelivered and misdelivered bills, poor collection and
unresponsiveness to consumers requirements.
Financial losses: The annual commercial losses of the electricity boards in the
country have increased from Rs 1565 crore in 198586 to nearly
Rs 10,000 crore in 199697 (Planning Commission 1997). The average revenue
collection per unit sold is 158 paise, against the average cost of
208 paise. A desirable scenario where the electricity boards can undertake a
sustainable expansion programme would require surplus generation of about
Rs 10,000 crore,
1
which in effect means that the current shortfall in revenue is close
to Rs 20,000 crore per year.
Transmission and distribution losses: The transmission and distribution losses
for the country were reported to be 21.2 per cent in 199495. However, it is widely
believed, and substantiated by spot surveys, that the level of losses is considerably
higherin the range of 40 to 50 per centin many electricity boards, with a large
Power Sector Reform | 5
degree of regional variations. It is alleged that lower losses are shown by falsely
attributing higher energy consumption to unmetered consumers. In fact, the so-
called losses are more likely to be due to uncalibrated and unsatisfactory meters,
theft of energy by unauthorised connections, tampering of meters, and collusion
between consumers and board staff to reduce the billing.
Poor quality of service: The quality of service in electricity supply can be measured
by the frequency, voltage and continuity of supply. On all these scores, the Indian
distribution system rates extremely low. Frequency variations of 2 per cent are
quite common on Indian grids, whereas internationally even a 0.2 per cent
variation is considered unacceptable. Voltage variations here regularly exceed 10
per cent, whereas international norms prescribe 5 per cent as the maximum
permissible range. Consequently, agricultural and industrial electrical equipment
and domestic electrical appliances suffer from frequent breakdowns. Continuity
of service, that is, receiving uninterrupted power supply, is quite rare in India.
Restoration of service after an unplanned or forced interruption is generally greatly
delayed. The consumer response to the situation is the proliferation of gensets,
involving significant investment in a relatively inefficient mode of power
generation using scarce liquid fuels.
3. REASONS FOR THE PRESENT STATE OF SEBs
The factors that have contributed to the present state of electricity boards can be
broadly classified under two headsmanagement failure and inappropriate policies
on the part of state governments. The potential for corruption in this highly capital-
intensive sector has only added to its woe.
Lack of management attention: The management of distribution facilities are not
up to desired standards in terms of investment, manpower allocation and
technological innovation. The share of transmission and distribution in the plan
outlays has been only 26 to 28 per cent since the second five-year plan, against a
desirable level of about 40 to 50 per cent. Generation projects requiring large
investments, higher technological content, well-defined objectives and greater
potential for job satisfaction and rewards have traditionally attracted more resources.
Inappropriate emphasis: In distribution, the emphasis has been on extensive
development rather than intensive development. Since targets focus on quantity
rather than quality, the tendency has been to spread a low-cost and low-standard
distribution network to as many households, villages and agricultural pump sets as
possible, within the constraints of the budget. After construction, relatively little
attention is devoted to preventive maintenance, as most distribution staff are engaged
in new constructions.
6 | Indian Infrastructure: Evolving Perspectives
Metering, billing and collection practices: The present collection system causes
large revenue losses. It is characterised by lack of proper customer information
and reliance on antiquated billing and accounting systems that do not provide
timely information. Existing labour policies provide no incentive for staff to
produce results. Added to this is the persistent inability to take disciplinary action
against defaulting consumers, many of whom are state and local government
organisations or influential industrial and commercial consumers. This has led to
estimated revenue arrears, receivable by electricity boards, of over Rs 13,000 crore
in 199596 amounting to 37.5 per cent of the total annual revenues (Planning
Commission 1997).
Government subsidy policies: The governments policy of supplying electricity
to favoured consumers at lower costs is estimated to have resulted in a revenue
loss of Rs 19,228 crore in 199697 (Planning Commission 1997). State governments
are required to compensate the electricity boards for such losses. To the extent
that this is done, it has a debilitating effect on state finances. Often though, the
state government does not make the necessary budgetary transfers, resulting in
paucity of funds for operation, maintenance and capital work. Apart from the
revenue loss, a worse long-term consequence of this policy is the loss of incentive
for electricity boards to meter such consumers, affecting the very basis of the
revenue generation infrastructure.
Cross-subsidisation: Electricity boards try to recover a part of the above revenue
loss by charging higher tariffs to other sectors, such as industrial and commercial
consumers. However, over-reliance on this mechanism results in unduly high
tariffs, which affects industrial competitiveness and also drives industries to set
up their own generation, through captive power plants.
4. SOLUTIONS
To reiterate, in order to add additional megawatts to the sector, it is imperative
that additional revenue be generated from the distribution system. Currently, the
SEBs, who run the system, are characterised by massive financial losses, large
transmission and distribution losses and poor quality of supply. They are not in a
position to increase the resources mobilised from electricity consumers. In order
to accomplish this task, it is thus necessary to remedy the fundamental causes of
SEB failure, that is, ineffective management and inappropriate policies, as described
above. The recommendations that follow seek to do just that.
Separate the distribution system: The distribution system must be separated from
the generation and transmission systems, and formed into commercial companies.
This separation is essential to insulate the revenue-generating portion of the power
Power Sector Reform | 7
sector from external pressure. It would also lead to more attention being paid to
distribution issues, through a focused management.
2
Privatise the management: The only way to incentivise the separated distribution
system to mobilise additional resources is to ensure that it bears responsibility for
its losses. The most credible manner of enforcing such a hard budget constraint is
to privatise the management. This can be done in a variety of ways, such as
management contracts, leases, joint ventures and outright disinvestment. The
method is not as important as the principles on which such management control is
transferred. The two crucial aspects are:
Transfer, whether by management contract or lease or any other method, must
be for a long period (for example, 30 years), enough to make new investment
remunerative.
The private management must have complete autonomy in all commercial
decisions, subject to oversight due to the continuing monopoly status.
Create an independent regulatory authority: Once management is transferred to
private hands, there is a strong need for independent state-level regulatory
commissions to monitor the private managements decisions in matters of tariff,
investments, etc. They should be empowered to approve tariffs that will permit the
licensees to earn a reasonable return on their investment, if they are operating
efficiently. In addition, the commissions will provide a useful and necessary forum
to resolve disputes between the government and the new private managers.
Strategies to attract private investment: In the current environment, it may not be
easy to induce private firms to take over the management of distribution companies,
due to several perceived hurdles. These include the presence of mandated customers
in distribution zones; a relatively low rate of return; absence of long-term incentives;
unreliable power supply from the electricity boards; difficulty in carrying out asset
valuation; and continued interference from the government and electricity board
bureaucracies, leading to difficulty in dealing with the existing staff. In order to
accelerate the process of improvement in distribution management and revenue
mobilisation through private sector participation, these problems need to be
addressed quickly. One way of doing so is outlined below.
Offer urban franchise areas: The object of privatising the management of distribution
is to generate efficiency gains leading to additional resource mobilisation. The franchise
areas should be chosen to maximise these efficiency gains. For this, the area must have
two properties. It must have a customer base of sufficient size, with the capability to
pay, and it must have physical infrastructure in reasonable condition. It is, therefore,
recommended that private investors should initially be offered dense urban areas,
and other areas that satisfy the above properties, like industrial estates, for distribution.
3
8 | Indian Infrastructure: Evolving Perspectives
Since urban demand is over 50 per cent of the total demand in the country, the ultimate
scope of the proposed strategy will be large. In these areas, licensees would not be
burdened with social obligations, nor would there be subsidisation of any consumers
in the licence area. In view of the highly successful operation of licensees in urban
centres, like Ahmedabad, Surat, Mumbai and Kolkata, it would be much easier to
attract private investment in such centres. In order to provide sufficient incentive for
licensees to meet inevitable urban expansion, a process must be simultaneously put in
place for transferring contiguous urban agglomerations and other new concentrations
of consumers to private management.
Give full management autonomy: Since the thrust of this strategy is to increase
resource mobilisation by reaping efficiency gains, it is essential that managements
have complete autonomy over commercial decisions, including those relating to
employment. Without such autonomy, managements cannot be held fully
responsible, and this would dilute the incentives for efficient operation. Since the
urban areas employ only a fraction of the total labour force of the SEBs, the problems
of staff transfer need not form a bottleneck, and if required, the electricity board
should retain the staff in the interim.
Provide a reasonable rate of return: The permissible rate of return to private
investors in distribution as per the Indian Electricity Act is set at RBI Bank Rate plus
5 per cent, which currently works out to 14 per cent. This is lower than the 16 per
cent permitted to IPPs at 68.5 per cent Plant Load Factor (PLF). With an incentive
bonus of 0.7 per cent for each per cent increase in PLF, IPPs can expect to earn
returns of 22 to 23 per cent. Operation and maintenance of distribution facilities in
India involve greater effort and greater degree of risk than what is involved in setting
up generating plants. This skews the investment incentives towards generation. There
is, therefore, a need to free the private investors in distribution from the provisions
of the Electricity Act and permit the state regulatory commissions to determine
tariffs to recover higher rates of return when warranted. Eventually, this could lead
to a system where prices are regulated, instead of rates of return, and bulk consumers
can strike customised deals with distributors and generators.
Enable wheeling: In order for the distribution licensees to supply quality power,
they need to be free from the vagaries of supply from unreliable generators. The
simplest way would be to allow the distribution licensees access to efficient and
reliable generators through wheeling, that is, by permitting the transport of power
from a generating station in one area to a consuming centre in another area using
the transmission network of the grid operator (SEB/Transmission Company/Power
Grid Corporation). Permitting wheeling will also enable cost-effective captive
generation plants to sell their surplus power to other consumers and expand their
capacities to serve consumers in contiguous areas. This will add experienced
Power Sector Reform | 9
producers to the pool of power generators.
4
In the short term, however, lack of
transmission capacity may prevent this from happening. This should not be a
reason to hold back on the urban distribution strategy.
Power trading corporation: A power trading corporation like the MEM in Argentina
(see box below), which is a virtual spot market for power, could facilitate the process
of wheeling considerably. By enabling efficient generators to supply electricity to
creditworthy distributors at competitive rates, by enforcing commercial discipline
on the distribution licensees and by excluding them from the market for non-
payment, it creates a powerful force to generate additional revenues, thus bringing
in extra megawatts.
It is understood that there is a proposal to create Power Trading Companies
(PTCs)
5
for handling power wheeling. Furthermore, these are to act as long-term
buyers of power and to sell it to existing HT consumers. However, unlike the
example above, this is similar to escrowing the HT consumers for the IPPs that
sell power to the PTC. This approach does not increase the total resource
mobilisation from the distribution system, since the identified HT consumers are
already paying customers. As such, it does not generate additional revenue from
the distribution system, which is imperative in order to add additional megawatts.
Box 1.2: Power sector reform in Argentina
In the late 1980s, the Government of Argentina (GOA) reformed its power sector
to achieve efficient pricing and sufficient investment levels. The reform process
comprised unbundling, privatisation and regulation. The reform strategy simulated
competition in natural monopoly segments, such as distribution and transmission,
through regulation, award of concessions and the creation of a wholesale market
for electricity.
In distribution, the federal government broke up the Buenos Aires distribution area,
which accounts for almost 60 per cent of Argentinas electricity consumption, and
awarded three exclusive concessions. To facilitate competition, a spot wholesale market
for electricity, called the MEM, was created. Large consumers as well as distribution
entities are free to negotiate power contracts directly with generators or fulfil their
needs through the MEM. A National Regulatory Entity for Electricity (ENRE) was set
up to ensure fair access to transmission and distribution networks and oversee all facets
of the sector, including service quality. ENRE also sets maximum tariffs for transmission
and distribution services under a price cap system (RPI-X), with the cap reset every
five to eight years.
Since the advent of the reform process in 1992, EDESUR, one of the major suppliers
to the Buenos Aires area, has decreased its energy losses from 21 per cent to 12 per cent
and reduced its outages from 39 to 6 hours per year. During the same period, the spot
10 | Indian Infrastructure: Evolving Perspectives
price of electricity on the MEM has decreased from 4.2 to 2.2 US cents per kWh, and
thermal availability has increased from 48 per cent to 70 per cent. In transmission,
forced outages have declined from 1000 to 300 hours.
The privatised distribution companies have also made substantial investments in the sector.
For example, the consortium owning EDENOR invested US$380 million till 1995, and is
expected to invest an additional US$500 million by 2000. Private sector investment in
the entire electricity sector is projected to reach US$7 billion by the year 2001.
Revenue implications for remaining areas: The strategy being proposed can be
accused of cherry picking the lucrative areas for private management. The
question naturally arises as to how the remaining distribution will be handled by
the SEBs, in the absence of the profitable urban areas. At the outset, it is necessary
to realise that many urban areasfor example, Lucknow and Bhubaneshwar
are not presently profitable. In fact, the suggested strategy focuses on dense urban
areas because they have significant potential for efficiency gains. Their transfer
will reduce losses to the boards and augment their revenues. In addition, bulk
supply to urban licensees, wheeling charges and additional revenues in terms of
taxes and excise duty on the sale of electricity, as being currently practised in
cities like Ahmedabad and Mumbai, will also augment the SEB/government
resources. These additional resources arising out of the expected efficiency gains
will result in more revenue, not less, which can be used to support distribution in
the remaining areas.
Decentralised distribution and generation: Over time, other approaches will have
to be explored to solve the problem of developing extensive distribution networks
in far-flung areas and consumers with limited capability to pay. A model worth
consideration is the one being thought about by West Bengal, that has created the
Rural Energy Development Corporation, that will be responsible for the distribution
of power under 11 kV to all rural areas (Gupta 1998). Decentralised distribution
coupled with decentralised generation may be an answer to this problem. This
approach could also use non-conventional energy sources, which are
environmentally beneficial. Even if the generation cost is higher, this may be
compensated by direct cost-savings on building long-distance transmission linkages
and lower transmission losses.
5. NEXT STEPS AND CONCLUSION
This section lays out the next steps to be taken in order to implement the identified
strategy for improving resource mobilisation in the distribution systems of the Indian
power sector. The first two are absolutely necessary, while the third helps to
substantially increase efficiency.
Power Sector Reform | 11
Selection of centres: The first priority is to select twenty or so centres to start the
process. To begin with, areas contiguous with urban zones currently under private
license, like Ahmedabad and Kolkata, can be offered. Urban centres in states that
have completed their unbundling exercise are the next natural target. Their size
would vary from region to region, but indicative examples are Pune and Nagpur in
Maharashtra, Vadodara and Rajkot in Gujarat, and Hyderabad and Visakhapatnam
in Andhra Pradesh. Industrial estates with sufficient power consumption can also
be included.
Mode of transfer to private management: The actual mode can be determined on
a case-to-case basis (as noted on page 7: Privatise the management) using a
transparent process like international competitive bidding. Transfer of assets, when
necessary, should take place on the basis of the revenue stream it can be expected to
generate. In all cases, management autonomy must be guaranteed.
Facilitating wheeling: The Indian Electricity Act will need to be amended to permit
wheeling transactions, and electricity boards and the Power Grid Corporation will
have to be obligated to permit the use of their network for a charge to be determined
on a case-by-case basis by the central or state regulatory commissions. This, however,
is not a precondition for successful transfer to private managements and can be
done in tandem with the above processes.
Conclusion: In the above paragraphs, we attempted a quick review of the
characteristics of the distribution system as it exists today, and the causes that
have led to this situation. More to the point, we have outlined a strategy that is
based upon increasing the size of the financial cake produced by the distribution
system, rather than quarrelling over who gets the larger slice. The strategy relies
upon transferring urban areas and other such dense concentrations of consumers
to private management, and implementing appropriate arrangements for the
remaining distribution areas. We feel this can be quickly implemented, and that
this can revitalise the Indian power sector by enhancing distribution efficiency,
thereby generating additional revenues to bring in extra megawatts, without
sovereign guarantees and take-or-pay contracts.
12 | Indian Infrastructure: Evolving Perspectives
REFERENCES
1. Annual Report on the Working of State Electricity Boards and Electricity
Department by Planning Commission (November 1997).
2. A Concept Note on Power Trading Corporation by T. L. Sankar (undated).
3. Energising Power Sector: Light at the End of the Tunnel by R.K. Pachauri,
Times of India (1 May 1998).
4. PFCs Initiative on Power Sector Reform by Power Finance Corporation
(undated).
5. Privatisation of Distribution in India: Issues, Options and Lessons from Other
Countries by International Resource Group Ltd (8 December 1997).
6. Report of the Committee on Private Sector Participation in Power
Distribution by S.J. Coelho (March 1998).
7. Separate Power Corporation for Rural Sector in Bengal by Gautam Gupta,
Economic Times (29 April 1998).
NOTES
1. This is based on a rough calculation. An annual increase of 8000 MW in capacity, at
Rs 4 crore a megawatt, requires Rs 32,000 crore of investment. A 70:30 debt equity ratio
would imply that SEBs should be able to commit around Rs 10,000 crore.
2. Studies conducted for various SEBs over the past few years have led to nearly similar
reform structures. They all recommend the separation of the distribution system
from the generation and transmission systems, and the establishment of commissions
to set tariffs, license activities and perform other regulatory functions (Power Finance
Corporation, PFCs Initiative on Power Sector Reform; Coelho 1998).
3. The current approach is to create zonal distribution companies. The franchise areas
include a mix of paying consumers and mandated customers, who are supplied electricity
at subsidised or free rates. Each zone has a mix of urban and rural areas, with far-flung
distribution networks, high cost of supply, and agricultural and irrigation loads from
which recovery has traditionally been weak. The currently defined franchise areas thus
add additional costs and social responsibilities that private investors are ill equipped to
shoulder. Such privatisation needs transparent and guaranteed mechanisms for flow of
subsidy from the state government to the licensee, which complicates the process and
detracts from commercial orientation.
4. Some estimates indicate that there is about 15,000 MW of captive generating capacity
which will be decaptivated by the wheeling provision (Sankar, A Concept Note on
Power Trading Corporation).
5. Based on the Annual Report on the Working of State Electricity Boards and Electricity
Department by Planning Commission (1997) and newspaper reports.
Power Sector in India | 13
1. INTRODUCTION
Since Independence, in 1947, the Indian power sector has been mainly dominated
by the public sector. As of 31 March 1997, about 95 per cent of the total installed
capacity of 85,919 MW was owned by the central (32 per cent) and state (63 per
cent) sector undertakings. In terms of fuel-type mix, thermal, hydro and
nuclear capacities account for 72 per cent, 25 per cent and 3 per cent respectively.
During the year 199697, the total generation in the country was about 394
billion units.
Legislation: Under the Indian constitution, electricity is on the concurrent list
meaning that it comes under the purview of both the central (federal) and state
(provincial) governments. The Indian Electricity (IE) Act 1910 and the Electricity
Supply (ES) Act 1948 are the key Central Acts, under the broad ambit of which
individual states have enacted their own laws. The IE Act 1910, which was enacted
while India was still under the British rule, defines the obligations, powers and
responsibilities of licensees in the electricity industry. Few such licensees exist today.
The ES Act of 1948, passed soon after India achieved independence, set out the
framework for establishing the Central Electricity Authority (CEA), the State
Electricity Boards (SEBs) and generating companies. The first SEBs were established
in the early 1950s, soon after the legislation had been enacted. The industrial policy
resolution adopted in 1956 provided that generation and transmission of electricity
would be reserved exclusively for the public sector. Accordingly, the law stated that
no person or firm shall engage in the business of supplying energy to the public
except with the previous sanction of the state government. Although the central
government is apparently competent to give permission to generating companies
POWER SECTOR IN INDIA:
A Summary Description
November 1998
2
14 | Indian Infrastructure: Evolving Perspectives
to sell energy, it can only do so for the sales aimed at SEBs or State Electricity
Departments (SEDs).
2. INSTITUTIONAL STRUCTURE
Although policy, generation and transmission activities are undertaken by both the
central and state governments, distribution and supply of electricity to the final
consumer and the associated tariff setting are exclusively under the purview of the
state governments. A pictorial representation of the institutional structure of the
Indian power sector is provided in Figure 2.1.
Figure 2.1: Institutional structure of the Indian power sector
Central level: At the federal level, the Ministry of Power and Non-Conventional
Energy Sources is responsible for power policy as well as the generation and
transmission capacity in the central sector undertakings (CSUs).
Policy: In policy setting, the ministry is assisted by the Central Electricity Authority
(CEA), which was formed in 1948 as the industrys regulatory body.
1
In addition to
contributing to national power policy, CEA also undertakes other coordinating
activities such as conducting appraisals of projects, granting clearances and issuing
guidelines for setting tariffs.
Generation: The generating capacity in the central sector accounts for about 30 per
cent of the countrys total generating capacity. This capacity comes mainly from the
National Thermal Power Corporation (NTPC) and the National Hydroelectric
Power Corporation (NHPC). SEBs draw their share of power from these CSUs, and
each CSU is entitled to a tariff that is an aggregate of three componentsfixed cost
Government
of India
Central Electricity
Authority (CEA)
State
Governments
State Electricity
Boards (SEBs)/
Departments (SEDs)
Department
of Energy
Private sector
licensees
Ministry
of Power
Department of
Atomic Energy
National
Development
Council
Planning
Commission
Nuclear
Power Corporation
National Thermal
Power Corporation
(NTPC) and others
Generating utilities
Power Grid
Corporation of
India Ltd (PGCIL)
Transmission utility
Regional
Electricity Boards
(REBs)
Power Sector in India | 15
(capacity charge), variable cost (energy charge) and incentive. With a capacity of
16,795 MW, NTPC is the largest power generating utility in the country, contributing
about 20 per cent of the total installed capacity in the country. In terms of Plant
Load Factor (PLF), NTPC achieved a PLF of 77 per cent in 199697 as against the
national average of 64 per cent.
Transmission: In recognition of the need for greater integration of the transmission
system, five regional electricity boards (REBs) were established in 1964, covering
the northern, western, southern, eastern and north-eastern regions. These REBs
co-ordinate system operations within each regional grid through regional load
dispatch centres (RLDCs). In 1989, the Power Grid Corporation of India Limited
(PGCIL) was established for managing the national transmission and dispatching
system. As of March 1997, PGCIL was operating about 27,853 circuit kilometres
(CKMs) of transmission lines, distributed over 54 substations with 23,331 MVA
of transformation capacity. PGCILs performance in terms of overall average
availability of its transmission linesat above 98 per centis comparable to
international standards. About 30 per cent of the countrys total installed
generating capacity (81,500 MW) is connected to its network. Currently, PGCIL
is in the process of linking regional grids, through a series of high voltage direct
current (HVDC) interconnections. On the successful completion of this process,
PGCILs network would have the capacity to transfer 1000 to 1500 MW of power
from any one region to another.
State level: State governments are exclusively responsible for the supply of power to
final consumers located in the state, along with associated tariffs. In the states, the
policy for the power sector is looked after by the departments of energy of the
respective state governments and the generation, transmission and distribution
facilities are owned and managed through the respective SEBs/SEDs. Although the
legislation provides for financial autonomy to the SEBs, most of them work under
the administrative control of the respective state governments and state ministries
and are under the technical control of CEA, REB and RLDC.
Much of the expansion of the electricity industry in India since the early 1950s has
been carried out by the SEBs, which account for 63 per cent of the countrys
generating capacity. Two-thirds of this capacity comes mainly from eight states
Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Punjab and
Tamil Nadu. Following their formation in 1948, SEBs established independent
transmission networks to supply power within each state. However, most of the
states have a very low HT:LT ratio and, hence, suffer high technical losses and non-
technical losses (theft of electricity). Most of the states charge agricultural and
domestic consumers tariffs that are far below the cost of generating electricity and
seek to make up for this by charging higher tariffs to industrial consumers.
16 | Indian Infrastructure: Evolving Perspectives
Private sector: Although private sector utilities and local authorities provided around
80 per cent of the public supply in India prior to Independence, the state subsequently
took over most licensees when their licences expired, and after 1956, no new licences
were granted. Five private utilities remain in existence: Bombay Suburban Electric
Supply Company, Tata Electric Companies, Ahmedabad Electricity Company, Surat
Electric Company and CESC Ltd (formerly Calcutta Electric Supply Corporation).
These five have a generating capacity of around 2800 MW. In addition, there exists
about 12,000 MW of captive power capacity, which largely comprise coal-based
plants (about 6000 MW) and diesel generating sets (about 4000 PW). Coal-based
plants are owned mainly by power intensive industries like aluminium, steel,
fertilisers, cement and petrochemicals. Diesel-based plants are used as a standby
source of power in the event of non-availability of grid power.
3. PERFORMANCE
Over the past five years, the physical performance of both the central and state
sector utilities has either improved or held steady at the previous levels. On the
other hand, the financial performance of the sector has deteriorated considerably,
and the sector has failed to achieve the targeted additions to its capacity. It is
important to note that the following paragraphs on performances are based on
aggregates at the national level and there could be significant performance variations
across different states.
Physical performance: During 199297, the overall deficit in electricity supply
(energy) increased from 8.3 per cent to 11.5 per cent, whereas peak-shortage has
shown a marginal improvement from 20.5 per cent to 18 per cent. The sale of
electricity increased from 213 billion kWh in 199293 to 275 billion kWh in 1996
97, representing an annual growth rate of 6.6 per cent. Inadequate transmission
infrastructure is regarded as one of the main reasons for the shortage of peaking
power. In the absence of adequate transmission capacity to transfer power across
the regions, there is limited scope for exploiting the differences in the time of
occurrence of peak demand in various regions.
Plant Load Factor (PLF) and plant availability: The PLF of thermal power plants
increased from 45 per cent in 198081 to 64.4 per cent in 199697. However, it is
significantly lower than the international standard of about 7075 per cent. The
lower PLF is mainly attributed to the lower availability of coal-based power plants.
The average availability of Indian power plants is about 7580 per cent. The PLF of
power plants owned by the centre, the SEBs and private companies show significant
variations. The central and private sector plants have consistently shown a higher
PLF as compared to the plants owned and managed by the SEBs. Also, on an average,
private and central sector plants have higher plant availability as compared to the
Power Sector in India | 17
SEB-owned plants. The central sector plants supply power to more than one state
in a region, which protects them from the reduction in demand from one of the
states and enables them to maintain a high output level.
Transmission and distribution losses: Of the electricity generated, about
2122 per cent is lost in the process of transmission and distribution. A significant
portion of these losses is attributable to inadequate metering and theft of electricity.
The difference in the amount of electricity supplied and the amount actually metered
is usually reported as T&D losses. In most of the states, the electricity supplied to
agriculture is unmetered and is charged on the basis of the connected load. As the
amount of electricity consumed by this sector is usually overestimated, actual T&D
losses may be significantly higher than those reported. In addition, there is large
scale theft of electricity through unauthorised connections. The main reason for
high T&D losses in the Indian power system is the transmission and distribution of
a large amount of power at low voltagesless than 11 kV or Low Tension (LT).
Capacity addition: During the five-year plan period that ended in
March 1997, only 16,742 MW of capacity could be added as against the target of
30,858 MW.
Financial performance: The commercial losses of SEBs, without subsidy,
have increased from Rs 45.6 billion (US$1.1 billion) in 199293 to Rs 98.0 billion
(US$2.3 billion) in 199697, and these are projected to increase to Rs 101.65 billion
(US$2.4 billion) in 199798. The Rate of Return on Capital, after taking into account
the subsidy from the government, has deteriorated from (-)7.6 per cent in 199293
to (-)11.6 per cent in 199798. Without subsidy, the situation would have been far
worse at (-)16.4 per cent in the year 199798.
Subsidies and shortfall in tariffs: During 199197, the average unit cost increased
from Rs 1.17 to Rs 2.08, whereas the tariff per unit increased from
Rs 0.89 to Rs 1.58. Thus, the direct shortfall in revenue remained at about
24 per cent, which indicates that only three-fourths of the costs are being recovered
through tariffs. Such shortfall is much more significant in the case of agricultural
and domestic consumer categories. Due to political reasons, the tariffs for agricultural
and domestic consumers have been very low in most of the states, at an average rate
of Rs 0.22 per kWh and Rs 0.89 per kWh respectively, in 199596. In order to subsidise
agricultural and domestic consumers, commercial and industrial consumers were
charged much higher tariffs, at an average rate of Rs 2.24 and Rs 2.35 per kWh
respectively, in 199596. According to an estimate, the effective subsidy for these sectors
is expected to increase from Rs 159.5 billion (US$3.8 billion) in 199596 to
Rs 192.3 billion (US$4.6 billion) in 199697 and Rs 217.9 billion (US$5.2 billion) in
the following year. Cross-subsidisation of agricultural and domestic sectors is becoming
an increasingly difficult proposition because the share of agriculture in the total
18 | Indian Infrastructure: Evolving Perspectives
consumption increased from 17.6 per cent in 198081 to about 30 per cent in
199394, even as that of industry declined from 58.4 per cent to about 39.6 per
cent in the same period.
Revenue arrears and outstanding dues: The outstanding dues to be paid by SEBs to
their central sector suppliers of electricity, equipment, finance and energy inputs
are reported to be over Rs 122.5 billion (US$2.92 billion) as on 31 March 1997. On
the other hand, as on March 1996, SEBs were to receive from their customers an
amount of Rs 116.8 billion (US$2.78 billion), which accounts for 3033 per cent of
their annual sales turnover.
4. REFORM EFFORTS AND PRIVATISATION
Since the economic liberalisation in 1992, both the central and state governments
have sought to increase private sector participation in the provision of infrastructure
services, including power. Initially, the focus of the reform was on encouraging
private participation in generation. In response, nearly 127 expressions have been
registered, aggregating Rs 2500 billion (US$59.5 billion) investment for setting up
69,000 MW. However, how many of these expressions would turn into reality
remains a moot question, considering that only a handful of private projects have
come into being over the past six years and most of the other projects are struggling
to achieve financial closure. Private investors and lenders are wary of supporting
power projects that have to rely exclusively on financially weak SEBs for evacuating
their power. Hence, the state governments are gradually shifting the focus of their
efforts to areas such as SEB-reform and regulation, whereas the central government
has been focusing on the areas of regulation, transmission-privatisation, setting up
of multi-state mega projects and power trading companies. Salient points of the
reform and privatisation efforts undertaken by the central and state governments
are summarised below.
Private participation in generation: The reform policy introduced in 1991 allowed
the private sector to set up companies to act as licensees, generating and distributing
power, or simply as generators. Up to 100 per cent foreign equity participation was
permitted, with a maximum debt to equity ratio of 4:1. The return on foreign equity
was protected in foreign currency, and a number of tax concessions were also made.
In order to determine the tariff for the purchase of power, a notification, which laid
down the guidelines for a two-part tariff, was issued. The main features of the
notification were:
The tariff would constitute two partsa fixed part comprising return on equity
(RoE), interest on loan capital, depreciation, operations and maintenance costs
(O&M); and a variable part comprising fuel costs.
Power Sector in India | 19
A maximum of 16 per cent RoE was allowed to be included in the tariff (this
was protected against fluctuations in the exchange rate).
Fixed cost could be recovered at a PLF of 68.5 per cent (equivalent to 6000
hours of operations) in the case of thermal plants, and at an availability
factor of 90 per cent in the case of hydroelectric plants. The normative PLF
for thermal plants was revised to 75 per cent in February 1997.
As an incentive, a maximum of 0.7 per cent additional RoE could be given for
every 1 per cent increase in PLF or availability.
Clearances and approvals: In order to clear a thermal project, the CEA requires an
approval from the state government and the electricity board concerned, clearance
of water availability and fuel linkage approval from the petroleum and natural gas
ministry or from the coal ministry. Projects also require environmental clearance
and chimney height clearance from the National Airports Authority of India.
Fuel supply and transportation: Fuel supply has become a contentious issue as the
supply of coal, naphtha and natural gas is controlled by public sector units (PSUs).
The PSUs are not willing to enter into agreements for assured supply, mainly due to
lack of experience with such contracts, particularly with regard to the evaluation and
quantification of the associated risk and premium. Further, the Indian Railways, the
principal carrier of fuel, is unwilling to assure uninterrupted supply. The IPPs insist
that the penalty for supply interruptions should cover the loss of revenue (fixed cost
component of tariff) attributable to the default in fuel supply; some of them suggest
that the penalty could be on the basis of additional cost incurred in procuring fuel
from alternative sources. PSUs and the Railways, however, contend that it should be
related to the value of the fuel not supplied. In the absence of any satisfactory resolution
to this problem, financial closure is getting delayed because the lending institutions,
understandably, are reluctant to bank on a risky fuel supply agreement (FSA).
SEB restructuring and reform: Some of the state governments are taking steps to
introduce comprehensive reform legislation that could, eventually, lead to (a)
unbundling of generation, transmission and distribution segments;
(b) setting up of independent regulatory institutions; and, in a few cases,
(c) privatisation. For instance, in the state of Orissa, the government has decided to
limit its own role to policy making and regulation. Under a scheme endorsed by a
council of ministers in 1994, the Orissa SEB is to be unbundled into new generation,
transmission and distribution companies. Hydropower will remain in state
ownership, as will transmission, but thermal generation has already been partially
privatised and distribution is expected to pass into private hands by the middle of
1999. Similarly, in the case of Andhra Pradesh, the reforms envisaged include
restructuring of the Andhra Pradesh SEB into a series of subsidiaries including the
20 | Indian Infrastructure: Evolving Perspectives
AP Power Corporation, the AP Transmission Corporation and a number of regional
distribution companies. The transmission company would remain in public
ownership while the distribution companies would be privatised gradually; full
privatisation of the distribution companies was expected by 200001. Initially, the
generating company would also remain in the public sector but operate as a
commercial organisation.
Regulatory commissions: The Indian Parliament recently enacted the Electricity
Regulatory Commissions Act 1998, which provides for the setting up of independent
regulatory commissions at the central and state levels. The independent regulatory
commissions are expected to ensure that the industry develops on a sustainable
basis. It is expected that the regulatory commissions, being independent of the
government, would be able to effect tariff rationalisation, which is normally a
politically sensitive and unpalatable decision for the governments. While the central
and a few state governments such as Orissa and Haryana have already set up
regulatory commissions, a few other states are in the process of setting up the same.
The Ministry of Power (MoP) is assessing the need to redefine the role of the CEA
as its role overlaps with that envisaged for the Central Electricity Regulatory
Commission. Further, since power is a concurrent subject (under the jurisdiction
of both the states and the centre), the respective roles of the central and state electricity
regulatory commissions in the development of the power sector, especially with
regard to the approval of large projects, need to be clarified.
Transmission bill: The Electricity Laws (Amendment) Bill 1998 provides for the
setting up of central and state transmission utilities for undertaking inter-state
and intra-state transmission respectively. Under license from the respective
electricity regulatory commissions/governments, transmission licensees can
construct, maintain and operate transmission (inter-state or intra-state) systems
under the direction, control and supervision of respective transmission utilities.
Multi-state mega projects and power trading company: The Ministry of Power,
Government of India, has been actively pursuing the concept of setting up mega
power projects in the private sector, to (a) harness the economies of scale and
locations associated with large pit-head plants; (b) take advantage of the low prices
prevailing in the international markets for power equipment; and (c) quickly make
up for the shortfall in capacity addition in the private sector at the state level.
Considering that these projects would be of about 1500 to 2000 MW capacity, the
output is expected to be shared by more than one state; so these projects are also
referred to as multi-state mega projects. Private investors, however, have been
reluctant to enter into multiple Power Purchase Agreements (PPAs) with several
states and have indicated that they would prefer to deal with a single agency. In
response, the Ministry of Power is considering setting up an intermediarythe
Power Sector in India | 21
Power Trading Company (PTC)that will undertake to buy all the power from
the mega projects. PTC, in turn, will sell that power to State Electricity Boards,
using the transmission network of PGCIL and arrange to collect the payments
from them. To enhance PTCs operational flexibility in evacuating power across
various states and to shore up its stature, the shares of PTC are sought to be held
by PGCIL (the national transmission utility), NTPC, SEBs and major Indian
financial institutions.
5. CONCLUSION
Clearly, the Indian power sector is undergoing a crucial phase of transition. Reform
efforts to increase generating capacity have exposed the inadequacies in the
remaining segments of the sector. Both the central and state governments are
actively engaged in finding viable solutions to achieve sustainable development
in the sector. As of now, regulation, rapid capacity addition and SEB-reform,
with a specific focus on improving revenues from the distribution segment, are
emerging as important areas of concern.
NOTE
1. India has recently set up the Central Electricity Regulatory Commission, as another
regulatory authority, which is discussed later.
22 | Indian Infrastructure: Evolving Perspectives
1. INTRODUCTION
The debt crisis of the 1980s severely impacted the Argentine economy, leaving it
with a legacy of high inflation, low growth, a deteriorating infrastructure and limited
resources available with the government. Argentinas electricity industry, like many
others, was completely state-owned. Its generation capacity was balanced between
thermal and hydroelectric resources, some of which were shared with neighbouring
countries like Uruguay and Paraguay. The nuclear programme, started in 1950,
provided about a tenth of the energy needs (see Table 3.1). Immediate attention
needed to be given to the efficiency and resource problems of the sector, if it was to
develop further.
Table 3.1: Total production of electricity and the share of different
types of generation
Year Thermal Hydro Nuclear Total (mn kWh)
1985 41% 47% 12% 43,587
1990 49% 37% 14% 48,945
1995 44% 46% 10% 65,720
Status prior to privatisation
Argentina set up its first fully state-owned utility, AYEE, in 1947 in an attempt
to provide more capital to the sector. At the beginning of the 1990s, the industry
was completely state-owned. In 1991, immediately prior to privatisation,
Argentina had four federal (equivalent to the central sector) utilities, 19 provincial
(equivalent to the state sector) utilities and two binational bodies controlling large
POWER SECTOR REFORM IN
ARGENTINA: A Summary
Description
November 1998
3
Power Sector Reform in Argentina | 23
hydroelectric projects jointly owned by Argentina and Uruguay, and Argentina
and Paraguay respectively. The federal utilities owned a large proportion of the
generation, including all the nuclear generation plants and transmission assets
nationwide, and the distribution assets for the capital, Buenos Aires, and its
surrounding region. The provincial utilities owned nearly all distribution assets
outside the region around the capital. By the time of reform, the system had
deteriorated badly and was characterised by considerable operational and
financial problems. The cost of electricity was high (around US$60 per MWh),
there were large commercial losses due to theft and non-payment and periodic
threats of blackouts, aggravated in times of low rainfall by a large dependence
on power from hydroelectric stations.
2. NATURE OF ELECTRICITY REFORM IN ARGENTINA
Objective
The goal of the reform process was to have an electricity industry that was capable
of ensuring the economy sufficient energy at the best price that reflected the economic
costs of maintaining and expanding the activity. It was also driven by the increasing
inability of the government to service the public debt and the need to attract private
investment to the sector.
In January 1992, the electricity privatisation law was passed. The reform was based
on principles of open access to the wholesale capacity, energy pool for generating
facilities and least cost centralised dispatch. A national regulatory body, Ente Nacional
Regulador de la Electricidad (ENRE), and a national wholesale market for electricity,
CAMMESA, were established. Transmission and dispatch were mandatorily
separated from generation and distribution, and no generator was allowed to control
more than 10 per cent of the systems capacity.
Restructuring
Prior to privatisation, three federal companies,
1
SEGBA, AYEE and HIDRONOR,
were restructured by separating their generation, transmission and distribution
activities (see Figure 3.1). Companies to be privatised were sold through auction,
using a two-envelope process. This included a qualifying technical offer and a
competitive financial offer. Usually, at least a bare majority (51 per cent) was
offered for sale, and sometimes much more. For example, 98 per cent of a 448
MW hydroelectric plant was sold to a domestic aluminum company, retaining
2 per cent for the employees.
2
In transmission and distribution, long-term
concessions were awarded. The first of SEGBAs generators was sold in
April 1992, followed by two more in May and August. Two distribution companies
were sold in September, followed shortly by a high-voltage transmission
24 | Indian Infrastructure: Evolving Perspectives
company. The success of the privatisation depended to a great extent on
the regulatory and commercial environment as determined by ENRE and
CAMMESA.
Figure 3.1: Restructuring of the Argentine electricity industry (federal assets)
ENRE
The national regulator is responsible for all stages of the industry, with particular
emphasis on transmission and distribution. It mediates disputes between electricity
companies and enforces federal laws, regulations and concession terms. It also
oversees the wholesale market, establishes service standards that must be met and
sets the maximum price (price-cap) for transmission and distribution services.
Generation is not subject to price regulation, as it is deemed to be a competitive
activity with free entry.
CAMMESA
An independent nonprofit operating agency, CAMMESA is directed by a board
composed of two representatives of the federal government, power generators,
transmission companies, distribution companies and large users. It has three
primary tasks: dispatching power, determining fixed fees to be added to energy
prices to cover capacity charges and the cost of transmission, and ensuring adequate
reserve capacity in the system. CAMMESA dispatches power to the national grid
by sending the cheapest power first, until current demand is satisfied. The payment
to each generator is based on the highest cost producer whose power is dispatched.
SEGBA
(Servicios Electricos del Gran
Buenos Aires)
6
Thermal
generation
companies
3
Distribution
companies
AYEE
(Agua y Energia Electrica)
1
National high
voltage (500 kV)
transmission
company
6
Regional lower
voltage (220 kV)
transmission
companies
22
Thermal generation companies
4
Hydroelectric generation
companies
5
Hydroelectric
generation
companies
HIDRONOR
(Hidroelectrica
Norpatagonica)
Power Sector Reform in Argentina | 25
CAMMESAs budget is limited to 0.65 per cent of the total transactions in the
wholesale market. Salaries, for around 150 staff members, represent almost
three-quarters of its expenditure.
Box 3.1: Objectives of CAMMESA
Dispatch energy optimally by minimising the total operation cost.
Maximise the security of the system and the quality of the electricity supplied.
Plan energy needs and forecast market prices.
Calculate economic transactions between market agents.
Bill, collect and make payments in the Wholesale Electricity Market.
Supervise option market operation and carry out technical dispatch of contracts.
Guarantee transparency and equity of Wholesale Electricity Market decisions.
Box 3.2: Objectives of ENRE
Determine basis and criteria for assigning concessions.
Publicise and enforce regulatory structure, contracts and public service obligations.
Issue regulations on safety and technical procedures and monitor compliance.
Monitor billing, control, meter use and service quality.
Define basis for calculating tariff and ensure compliance.
Regulate sanction proceedings, impose penalties and take relevant issues to court.
Issue an annual report and recommend policy actions to the executive as needed.
Prices
Demand and supply determine energy prices. The supply side of the wholesale market
is composed of independent power producers, privatised generators, publicly owned
generators and imported electricity. The demand side of the market is made up of
private and public distribution companies, large users (currently more than 100 kWh
annually) and foreign consumers. There are three main types of prices: contractual,
seasonal and spot. Transmission and distribution prices (for supplies through
distribution companies) are regulated.
Contractual prices differ from contract to contract. They are negotiated between
generators, distribution companies and large users for a minimum period of one
year. Seasonal prices are determined by CAMMESA twice a year, based on
parameters like forecasted demand, power availability, fuel prices, reservoir
capacity, etc. Distribution companies purchasing power in excess of contracted
amounts from the market pay the seasonal price. Spot prices vary hourly and are
26 | Indian Infrastructure: Evolving Perspectives
paid by generators who cannot supply power they have contracted to sell, and
large users who contracted for less power than they need. Generators who have
power in excess of their contractual obligations, distribution companies and large
users who have contracted to buy more than they currently require can sell power
in the spot market. Obviously, price trends in the spot market affect the price
paid for contracted power.
Figure 3.2: Estimate medium monomial contract price in the market
Generation
Argentina allows free entry into the generating market. Current and prospective
generators make their own judgements, take their own risks on demand growth,
investment levels, fuel market trends, etc. like producers of any other commodity.
As noted above, there is no surety of dispatch and the price for energy dispatched
depends on the highest cost producer whose power is dispatched. Full cost
recovery is thus not guaranteed. Generators receive two types of payments from
the marketone for the dispatched electricity and the other for the capacity
offered to the grid. The capacity payment is sufficiently low so that generators
have a dual incentive to reduce costsfirst, to have their electricity dispatched
and second, to increase their margins from electricity sales.
Generating companies are prohibited from controlling more than 10 per cent
of the systems capacity, and cannot own majority shares in transmission
facilities. However, they are assured open and equal access to the national grid.
There are currently about 40 companies in Argentina, of which about 10 are
still owned by federal and provincial authorities. These effectively act as
independent power producers, selling their power through the wholesale market.
40
38
36
34
32
30
28
26
U
S
$
/
M
W
h
A
p
/
9
2

J
n
/
9
4
F
b

A
p
/
9
4
M
y

J
l
/
9
4
A
g

O
t
/
9
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v
/
9
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9
5
A
g

O
t
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/
9
5

J
n
/
9
6
Power Sector Reform in Argentina | 27
Transmission
In contrast to generation, transmission is closely regulated. Firms enter after
successfully bidding for a fixed-duration concession for a particular area and can
charge no more than a regulated maximum price, providing an incentive to reduce
costs. Currently, the concessions have been awarded for 95 years but the controlling
shareholders package is rebid every 10 years. The charges have two components
one based on availability and the other on use. Concessionaires are required to
allow third parties open access to their transmission network. They are not allowed
to buy or sell electricity. The revenues of the transmission company are collected by
the wholesale market through a surcharge on energy prices.
The high-voltage (500 kV) transmission network was built by combining the
transmission assets of the federal utilities into a single entity called TRANSENER.
TRANSENER also operates one of the lower voltage regional systems. It serves 14 of
Argentinas 24 provinces, carrying most of its power. In addition, there are five
other lower voltage (220 kV) regional systems (see Figure 3.3), of which three have
been partially privatised.
Figure 3.3: Argentinas transmission system
Generators are required to provide new transmission facilities. A new transmission
facility is being commissioned by a consortium of eight privatised electricity
28 | Indian Infrastructure: Evolving Perspectives
companies, each of whom is legally prohibited from holding a majority share. They
will fund the construction and award the concession. The project is expected to cost
US$250 million. In addition, the same consortium is also planning a capacitor project.
Distribution
Like transmission, firms may enter distribution only by bidding for a concession.
They also have regulated prices and a commitment to allow open access to third
parties. The price caps are reset every five years; in the interim, the regulated company
can avail of the benefits of cost reduction. Large users can, however, choose to be
supplied directly by the generators or buy directly in the spot market, instead of
through the distribution company. The number of large users in the wholesale market
has risen rapidly. As distribution companies must supply to large users at the same
rate they charge other customers, this helps to keep prices under control. While all
federal distribution assets have been privatised, many provincial distribution
companies remain in the public sector.
3. EFFECT OF REFORMS
Lower prices and higher reliability
Following the reform process, electricity prices fell sharply. After a period of
turbulence, they stabilised at around half the pre-privatisation levels (see Figure 3.4).
The extent of outages also reduced considerably (see Figure 3.5). In EDENORs
distribution areas, outages fell from over 20 hours to around 5 hours a year.
Generators were fitted with power system stabilisers, which permitted minimal
disconnection of generating capacity while addressing transmission faults.
Figure 3.4: Evolution of capacity and energy prices
50
45
40
35
30
25
20
15
10
5
0
1992 1993
US$/MWh
1994 1995
Capacity
Energy
Power Sector Reform in Argentina | 29
Figure 3.5: Outages as a per cent of energy demand
Increased efficiency
Electricity loss for non-technical reasons, such as faulty billing and theft, came
down and generation availability increased considerably. For example, the La
Plata distribution company increased its customer base by over 20 per cent.
Similarly, the availability of Costanera, a generator near Buenos Aires went up
from 30 per cent to 75 per cent.
Increased investment
Substantial investments were also made in upgrading the assets bought from the
government. EDENOR, for instance, made capital investments of US$380 million
over 1992 to 1995, and plans an additional US$500 million until the year 2000. It
is anticipated that the total investment in the electricity sector by 2000 will be
around US$7 billion.
4. CONCLUSION
The Argentine experience demonstrates that it is possible to effect measurable
changes in a state-owned electricity sector suffering from lack of funds and
inefficient management within a reasonably short time frame. A number of the
problems that plagued Argentina, such as high distribution losses and low
generator availability, are similar to what India faces today. The Argentine power
system is much smaller and has a better hydrothermal mix when compared to
the Indian power system as a whole,
3
but it may prove profitable to examine the
700
600
500
400
300
200
100
0
J
u
l
-
8
8
J
a
n
-
8
8
J
u
l
-
8
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8
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9
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-
9
5
J
a
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-
9
5
J
a
n
-
9
6
GWh
16% of demand
30 | Indian Infrastructure: Evolving Perspectives
Argentine experience to see whether it would help with the design of reform
in India.
NOTES
1. The fourth, CONEA, was the nuclear energy utility, which was not privatised.
2. Prices could vary substantially. For example, a 20 MW oil and gas-fired generating plant
was bought by a paper manufacturer for US$8.5 million.
3. The Argentine system is about 16,000 MW, of which nearly half is hydroelectric capacity.
This compares favourably with some of the regional grids in India, though it is only a
fifth the size of the national system.
Orissa Power Sector Reform | 31
In India, Orissa is the first state to have undertaken comprehensive reform of its
power sector. Initiated in 1996, the programme is still under implementation.
1
In
fact, the crucial step of privatising distribution occurred only in 1999. Any attempt
to evaluate the programme to determine its success or otherwise would therefore be
premature at this juncture. Nevertheless, the reform experience to date has
underscored several important lessons, which could be of value for other states that
are seeking to reform their own power sectors.
1. SALIENT FEATURES OF THE ORISSA MODEL
The salient features of the reform programme included the unbundling of
transmission, distribution, thermal power generation and hydel power generation
into separate businesses; the establishment of an independent regulatory commission;
and the subsequent partial divestment of equity in the thermal power generation
and distribution business units to the private sector.
As part of the first transfer scheme, effective from 1 April 1996, the State Electricity
Board was split into three entities, viz., the Orissa Power Generation Corporation
(OPGC for thermal power, the Orissa Hydro Power Corporation (OHPC), for hydel
power and the Grid Corporation of Orissa (GRIDCO) for transmission and
distribution. GRIDCO was to function as the single buyer of power within the state,
for onward supply to the distribution companies. Under this transfer scheme, the
state government also revalued the transmission and distribution (T&D) assets.
2
According to GRIDCO, this was done in order to:
(a) create a positive capital base for the new companies expected to raise substantial
debt for making T&D investments;
ORISSA POWER SECTOR
REFORM: A Brief
Overview of the Process
February 2000
4
32 | Indian Infrastructure: Evolving Perspectives
(b) set off some of the dues from the state government to the Orissa State Electricity
Board (OSEB); and
(c) raise some reasonable revenues from the sale of assets.
A 49 per cent stake in OPGC was subsequently divested through an international
competitive bidding process. Messrs AES Corporation bought the stake for
Rs 603 crore.
As part of the Second Transfer Scheme, effective from November 1998, the
distribution-related assets, liabilities, proceedings and personnel of GRIDCO were
transferred to four wholly owned subsidiary companies. These companies were
subsequently privatised through the sale of 51 per cent GRIDCOs equity to the
private sector. Of these four distribution companies (distcos), three were bought by
Bombay Suburban Electric Supply (BSES) in April 1999, whereas a joint venture
between Jyoti Structures and M/s AES Corporation bought the fourth one in
September 1999.
The procurement as well as sale of power by various business units is regulated by
the Orissa Electricity Regulatory Commission (OERC). The commission, while
regulating retail tariffs, takes into account various parameters, including the cost of
power procurement, capital base, reasonable return, acceptable level of losses,
employee cost, interest and depreciation.
2. EXPERIENCE TO DATE
The reform experience in Orissa to date has been rather painful.
GRIDCOs operating balance is turning out to be inadequate to service even present
working expenses, leave alone servicing the past dues/liabilities which were loaded
onto it at the time of disinvestment and restructuring. The cash deficit of GRIDCO
is likely to increase from Rs 360.67 crore in 199899 to around Rs 500 crore in
19992000. This, in part, is due to GRIDCOs arrangements with the distribution
companies for deferred paymentswhich were accepted by GRIDCO in order to
conclude their sale.
On the distribution front, BSES, which bought three distribution companies,
expects the combined loss figure in these companies to be about Rs 174 crore at
the end of their first year of operation. The financial distress is mainly on account
of discrepancies between the information provided in the Information
Memorandum at the time of privatisation, the basis adopted for the regulatory
decisions, and the reality.
For instance, BSES finds that its subsidiaries operations are not viable at the tariffs
fixed by OERC, which were based on a T&D loss level of 35 per cent, because the
actual losses are higher at 45 per cent to 47 per cent. While the actual losses are
Orissa Power Sector Reform | 33
about 5 to 6 per cent higher than the distribution losses indicated in the
Information Memorandum, OERC has fixed tariffs based on a lower T&D loss
level. According to OERC, this was done with a view to provide strong incentives
to reduce T&D losses.
Similarly, it is reported that GRIDCO, in its enthusiasm to show lower
distribution losses, estimated higher billings that are not based on meter readings.
These became part of current assets transferred to the distcos at the time of
handover. According to BSES, its companies would not be able to realise these
doubtful receivables.
Even if the regulatory commission is willing to accommodate the demand of the
distcos to base tariffs on a more realistic estimation of losses and receivables, the
scope for a drastic upward revision of tariffs is limited. Unless some of these issues
are resolved, the distcos are bound to start with an inevitable sickness.
3. IMPORTANT LESSONS FROM THE ORISSA EXPERIENCE
On the face of it, the reform programme in Orissa appears to have had all the
ingredients, such as unbundling and privatisation, which were present in the
successful reform efforts in other countries.
3
A closer examination, however, reveals
certain limitations, which offer important lessons from the Orissa experience.
3.1 Distribution should be privatised early on in the process
Until recently, for all practical purposes, the Orissa model was almost a
continuation of the previous SEB regime. The GRIDCO performed both
transmission and distribution activities from April 1996 to November 1998, that
too under state-ownership, with the attendant lack of incentives for improving
efficiency. Moreover, allowing GRIDCO to perform both transmission and
distribution complicated the process of separation further down the line, as one
had to revisit the issue of apportioning the losses arising during this period of
combined operation to the successor entities. A complete separation of
transmission and distribution functions at the time of corporatisation would have
helped the new entities to start with a clean slate.
An analysis of the power sector reveals that losses have been heaviest in the distribution
segment, the cash-generating end of the business, underscoring the significance of
privatising distribution as soon as possible. Any interim arrangement such as creating
a combined transmission and distribution company would not help stem the rot.
3.2 Pitfalls to avoid in the process of privatising distribution
The process of distribution privatisation itself was fraught with several pitfalls such
as regulatory uncertainty, information asymmetry and prior escrow commitments.
34 | Indian Infrastructure: Evolving Perspectives
At the time of privatising distribution zones, the private operators bid in an
environment where they were uncertain about the regulators view regarding the
valuation of the existing asset base, the likely profile of prices or performance levels.
Some operators made their bids under the presumption that the regulator would
use the sixth schedule of the Electricity (Supply) Act 1948 and accept the
governments overvaluation, whereas others did not put in their bids as they found
the regulatory risk to be unacceptable. Understandably, those who bid did not see
any apparent reason to contest the overvaluation of assets, and assumed that it would
be reflected in the subsequent tariff.
Similarly, the data provided in the Information Memorandum at the time of
privatising distribution zones does not appear to conform with reality. The following
observations of BSES indicate the extent of information asymmetry between the
Memorandum and reality:
Since authentic data on assets, receivable, etc., was not available, a full-
fledged MIS was developed by consultancy agencies. Now, it is quite clear
that the world of MIS and reality are significantly different. An unrealistically
better picture of the distribution companies was presented through these
information memorandum and documents. The future projections made
on the basis of MIS are not only unrealistic but also too difficult to achieve
within the time period set out. Perhaps if the consultants had done a better
job, the exercise would have turned out to be more realistic and reliable,
and the interest of privatisation process would have been better served.
BSES Limited
4
However, bidders took into account the assumption contained in the Information
Memorandum since the government had set an implicit reserve price equal to the
par value of the share, which was arrived at based on those assumptions. The
combination of regulatory uncertainty, over-valuation and information asymmetry
limited the number of bidders for the distribution companies.
In addition to these problems, the cash flows of the Central Zone in Orissa were
escrowed to meet power purchases from OPGC, where AES was a 49 per cent joint
venture partner. Added to the other problems of the Central Zone, this pre-emption
of cash flows affected investor sentiment so adversely that no responsive bid was
received for the Central Zone.
5
Finally, after a re-bid, the zone was sold to another
AES joint venture in September 1999.
In terms of the original reasons for revaluation, the government has benefited by
being able to set off its dues to the erstwhile OSEB. It also managed to sell these assets
for the stated book value. The revaluation has not made the distribution companies
any more able to raise debt (if anything, it has made them less creditworthy).
Orissa Power Sector Reform | 35
Post-privatisation, the regulator has been left to tackle the consequences of
overvaluation of assets and the poor quality of data contained in the Information
Memorandum. Not surprisingly, BSES, the successful bidder which took over three
privatised distribution companies, and AES have already started raising these issues
for consideration by the regulator.
In this context, the government should appreciate that by opting to arbitrarily
overvalue assets, it will be harming the process of privatisation.
6
The primary aim
of privatisation should be to improve the performance of the sector so as to provide
quality power to consumers at economic prices, and not to increase revenues for
the government. Accordingly, the government should resist any temptation to
seek rents from the process of privatisation. One way of doing this is to encourage
bids based on the potential of the assets being privatised for generating future
cash-flows.
In view of the above, privatisation of distribution should be preceded by a clear
statement from the regulatory commission, detailing its regulatory approach and
including its views regarding what constitutes an appropriate valuation of rate base,
likely profile of prices and expected performance levels. The governments reserve
price, if any, should be arrived at based on the same transparent regulatory
framework; this information should be available to all potential bidders.
Such clarity would encourage serious private operators to participate, conduct
due diligence of the existing assets, and submit a realistic bid. Otherwise, bids
based on imperfect information and assumptions, though successful, are bound
to create regulatory tussles and demands for re-negotiation and additional
support. In addition, a clear advance indication of regulatory intent would help
in preventing overzealous governments from excessively overvaluing their assets
just prior to privatisation, with the hope to prevail upon the regulator to
grandfather such decisions.
One might argue that it is the sole responsibility of the bidders to conduct their own
due diligence rather than relying on the Information Memorandum. Nevertheless,
in the interest of achieving successful and smooth privatisation, it would perhaps
be more pragmatic to create appropriate conditions for encouraging more rational
bidding in the first place.
3.3 Need for continuing financial support from the state government
As any expectation for dramatic improvement in performance immediately after
privatisation is unrealistic, one would have expected the government to continue
with its support to the sector, which it had been providing in the form of mandatory
subsidies to GRIDCOs predecessor, OSEB. Instead, the government promptly
withdrew its support, even though the hopes of GRIDCO to raise a structural
36 | Indian Infrastructure: Evolving Perspectives
adjustment loan from the World Bank on soft terms, to tide over the problem of
anticipated cash shortfall, did not materialise. GRIDCOs problems were
compounded by the fact that even at the time of privatising the distcos, it was asked
to retain huge liabilities on its books in order to make the distcos financially attractive.
An informal understanding of GRIDCO with the World Bank and the Department
for International Development (DFID), to ensure its viability by a separate scheme,
is yet to materialise.
The above experience underscores the importance of a structured time-bound
financial support mechanism, which should taper off over time, based on targeted
improvements in revenue collection. It is important to provide such support to
distribution companies to ensure specific targeting and to enable benchmarking
performance across different distcos. Otherwise, providing financial support through
a combined transmission and distribution company would weaken the incentives
to improve performance at the distribution level.
3.4 Limitations of the single-buyer model
The privatised distribution companies in Orissa are not free to source power from
generating companies of their choice. GRIDCO, the state-owned transmission
company, acts as the sole procurement agency on behalf of the distribution
companies. This option is bereft of competitive pressures and leaves little scope for
achieving procurement efficiency.
The experience of power sector restructuring in countries such as Argentina, England
and Wales squarely underlines the importance of competition. It is competition in
power generation, coupled with the choice given to major consumers to source
from the supplier of their choice, which has driven the wholesale prices of electricity
in these countries.
7
In order to facilitate competition, the unbundling of the natural
monopoly segments (that is, transmission and distribution) from the segments that
are amenable for competition (that is, generation) is necessary; but it is not enough.
Hence, the distribution companies should be allowed to procure power from
the generators of their choice or set up their own generating capacity, and the
role of GRIDCO should be limited to providing transmission-related services
only. Further, until the distcos have monopoly franchise for supply to consumers
in their geographical areas, the regulator could oversee their procurement to
ensure efficiency.
4. CONCLUSION
While it might be a little premature to judge power sector reform in Orissa, the
experience to date, however, clearly underscores a set of dos and donts for other
states which are engaged in the reform process. In summary, these are:
Orissa Power Sector Reform | 37
Dos:
Separate distribution from transmission and generation and privatise it early
on in the process of reform.
Provide regulatory certainty prior to privatisation in order to encourage serious
bidders and to avoid regulatory problems later. In particular, the regulatory
commission should spell out its regulatory approach, including its views
regarding the appropriate valuation of asset base, likely profiles of prices and
expected performance levels.
The reserve price, if any, should be based on a clearly spelt out support that is
likely from the government and a transparent regulatory framework; this
information should be available to all potential bidders.
The government should continue its financial support to the sector over a
limited time period. It is important to provide this support directly to
distribution companies.
Plan for a quick transition away from a single-buyer model, which prevents
distribution companies from procuring power from the generators of their
choice, to an open-access model, where distribution companies and large
consumers can source their own supply.
Donts:
Do not revalue assets prior to privatisation. This is, however, intimately tied to
the regulators approach on tariff setting and the nature of relationship between
asset-value and expected tariffs, i.e. whether it will use Schedule VI, which
requires an asset base.
Do not escrow revenues from the distribution zones prior to privatisation.
NOTES
1. A timeline of key events in the restructuring is provided in the Annexure.
2. The state government took over the transmission and distribution assets of the
Orissa State Electricity Board (book value plus capitalised expenses and interest
at Rs 1200 crore) and revested them with GRIDCO after upvaluing by an additional
Rs 1194 crore (additional 134 per cent).
3. For example, Argentina, England and Wales.
4. Vide a letter dated 27 October 1999, addressed to Special Secretary (Power), Government
of India.
5. Tata Electric Company, which was selected as the partner for CESCO, did not pay the
equity to GRIDCO, despite numerous extensions to the deadlines.
38 | Indian Infrastructure: Evolving Perspectives
6. Normally, the various valuation options available to the government include book
(historic) value, replacement value, re-valued value, or business value based on the
potential for generating future cash-flows.
7. Following privatisation, Argentine wholesale electricity prices fell about 60 per cent from
the pre-privatisation level of US$60 per megawatt hour in August 1992.
ANNEXURE
Box 4.1: Timeline of key events in power sector reforms in Orissa
Month and year Event
November 1993 Power reforms programme announced by
Chief Minister.
April 1994 Reforms formally approved by the Council
of Ministers.
April 1995 Government issued a formal statement of its
power policy.
November 1995 State assembly approved the Orissa Electricity
Reforms Act 1995.
April 1996 The Orissa Electricity Reforms Act 1995 and the
restructuring of the industry became effective.
April 1996 The first Transfer Scheme. Assets, liabilities,
proceedings and personnel of the Orissa State
Electricity Board were transferred to Orissa Hydro
Power Corporation (OHPC, for hydel generation)
and the Grid Corporation of Orissa (GRIDCO, for
transmission and distribution).
August 1996 The Orissa Electricity Regulatory Commission
(OERC) became functional. All three members
took oath of office.
March 1997 The Orissa Distribution and Retail Supply License
and the Orissa Transmission and Bulk Supply
License were issued to GRIDCO. These licenses
became effective on 1 April 1997.
March 1997 OERC issued an order on retail electricity tariffs
for all types of consumers, effective from
1 April 1997.
Orissa Power Sector Reform | 39
November 1998 The second Transfer Scheme. Distribution related
assets, liabilities, proceedings and personnel of
GRIDCO were transferred to four wholly owned
companies of GRIDCOCESCO, WESCO,
SOUTHCO and NESCO (Central, Western,
Southern and Northern Electricity Supply
Companies, respectively).
November 1998 OERC issued its Orders on Retail Electricity
Tariffs and Bulk Electricity Tariffs, effective from
1 December 1998.
January 1999 BSES emerged as the top bidder for WESCO,
SOUTHCO and NESCO.
April 1999 BSES took over management of WESCO,
SOUTHCO and NESCO, through acquisition of a
51 per cent stake.
July 1999 Permission was granted to AES Transpower, for
acquiring a 51 per cent stake in CESCO.
September 1999 AES Transpower took over control of CESCO.
December 1999 OERC issued Tariff Orders for retail supply for
CESCO, WESCO, NESCO and SOUTHCO
respectively and a Tariff Order for bulk supply and
transmission for GRIDCO for 19992000.
Box 4.1: Timeline of key events in power sector reforms in Orissa (contd...)
Month and year Event
40 | Indian Infrastructure: Evolving Perspectives
1. BACKGROUND
Since 1991, when the power sector was opened to private investment, financial
institutions (FIs) and banks have sanctioned assistance of Rs 39,853 crore to
57 independent power projects (IPPs) with an aggregate capacity of 21,393 MW
in 15 states. Typically, these projects are financed on the strength of their power
purchase agreements (PPAs) with the State Electricity Boards (SEBs) and are
supported by a 3-tier security mechanism consisting of a letter of credit, escrow
cover on SEB receivables, and state government guarantees.
However, the progress of implementation of these projects has been rather slow.
As many as 37 projects with an aggregate capacity of 14,618 MW are yet to achieve
financial closure.
1

One of the main reasons for this slow progress, as identified in
previous meetings of the Crisis Resolution Group (CRG), is the non-availability of
escrow cover. Most of the State Electricity Boards either have no capacity to offer
escrow support to IPPs or have exhausted their escrowable capacity. At the meeting
of the CRG on May 16, 2000, the Union Minister for Power suggested that the only
alternative left is to link the security mechanism with reform, by setting up credible
milestones. Strict adherence to reform milestones by state governments will, in
due course, result in improved revenue realisation, which would improve security
for lenders.
It was therefore decided to derive a set of conditionalities including, but not limited
to, reform milestones, which could be used by FIs and banks as a basis for investment
in the Indian power sector. This note analyses the factors affecting the cashflow
and viability of investments in the sector, with a view to establishing a set of
POWER SECTOR
FINANCING: A Note on
Conditionalities
June 2000
5
Power Sector Financing | 41
conditionalities. It also draws upon prior experience with conditional lending, in
order to identify possible pitfalls in the process.
2. FACTORS AFFECTING THE VIABILITY OF THE INDIAN POWER SECTOR
This section draws upon the factors affecting the viability of the sector to delineate
two types of conditionalities. The first is a set of prior actions (or pre-conditions)
that are critical to establishing the governments commitment to reform, while the
second set of arrangements is required to attract private investment and participation
in the sector.
2.1 Conditions precedent
A recent World Bank Policy Research Report
2

concludes that conditionality is
unlikely to bring about lasting reform if there is no strong domestic movement for
change. Therefore, it is necessary to ensure that the state is committed to reform
before embarking on a conditionality-based borrowing programme. This
commitment of the state can be measured by its willingness to meet certain
preconditions before disbursement.
2.1.1 Independent regulation
The monopoly nature of transmission and distribution makes it possible for the
business to exploit monopoly power, and also makes it vulnerable to interference
by the state in view of the essential nature of the service. An independent regulator
could address both these issues. The establishment of a credible regulatory institution
is a critical requirement for sector reforms.
2.1.2 Unbundling
The existing vertical integration extends the natural monopoly characteristic even
to those segments that are amenable for competition, such as generation.
Unbundling of generation, transmission and distribution is a pre-requisite for
achieving competition-induced efficiencies.
2.1.3 Funding of existing liabilities
The SEBs have a number of existing liabilities, many of which are unfunded, such
as pensions, provident fund etc. They also have dues to central sector generating
units, Coal India Limited, Railways, and other such organisations, along with
receivables of doubtful quality, including payments from various state government
bodies. It is necessary that these liabilities and assets be clearly provided for by the
government, who is the owner of the SEB. One way of achieving this could be to
segregate the proceeds from privatisation
3

in a separate fund to meet these liabilities
before it is used for general budgetary support.
42 | Indian Infrastructure: Evolving Perspectives
2.1.4 Market structure
A competitive market structure in both generation and supply is essential in order
to confer benefits to the consumer. Avoidance of this issue merely increases
uncertainty with respect to the timing of introduction of competition, which affects
the bidding process for both generation and distribution assets. It is necessary for
the government to spell out a time frame for the introduction and the extent of
competition through the creation of a bulk market for power and the institution of
open access arrangements for the grid.
2.1.5 Distribution privatisation
Theft of power is currently the single most important cause of financial bankruptcy
in the sector. Privatisation of distribution is considered to be the only credible
alternative that can provide sufficient incentive to contain it. Accordingly,
distribution privatisation is essential for improving cash flows in the sector.
2.1.6 Employee-related issues
Significant over-manning in the sector appears to be one of the principal sources
of inefficiency in the sector. Currently, resistance from the employees appears to
be related to the lack of reassurance regarding payment of pensions, provident
fund and other liabilities, which need to be provided for as mentioned above. In
order to establish a viable power sector it will be necessary to allow flexibility in
rationalising manpower. In addition, divestment proceeds can be used to make
provisions for severance payments.
2.2 Conditionality for disbursement
Apart from the conditions precedent detailed above, there is a need for an
additional set of conditionalities in order to sustain the viability of the sector
through appropriate allocation of risk among various stakeholders. The
remaining part of this section looks at the broad risks in the sector, proposes
an allocation of those risks and then suggests conditionalities aimed at achieving
that allocation and, if possible, mitigating those risks. It focuses on distribution
and generation investments.
4
2.2.1 Distribution investments
Distribution companies need to be reassured that if they manage an efficient
distribution business, i.e., reduce distribution losses and avoidable outages, they will
earn a reasonable return on investment. Viability of the distribution business is critical
to ensure the growth of the sector. In broad terms, this will be affected by the following:
(a) valuation of liabilities and assets handed over at the time of privatisation
(b) level of distribution lossesactual and allowable
Power Sector Financing | 43
(c) tariff level
(d) extent of subsidy support from the government
(e) timing of introducing choice to different classes of consumers
Of these, to the extent that the liabilities and assets being handed over at the time
of privatisation are clearly defined, the distribution company can be deemed to
have control over their valuation. After all, it is free to conduct due diligence and
incorporate its assessment of the impact of these assets and liabilities into its bid.
Further, the distribution company can be expected to have considerable control
over the actual level of distribution losses. On the other hand, the distribution
company is unlikely to have control over the other items, viz., tariffs and allowable
loss levels, which depend on the regulator, and subsidy support and timing of
introducing choice, which depend on the government. A degree of certainty on
these matters can be achieved through a combination of conditionalities
and guarantees.
2.2.2 Regulatory certainty
The level of tariffs and the allowable level of distribution losses are prone to
uncertainty since they fall under the purview of the regulatory body, which is still
an evolving institution.
5

Such uncertainty could be reduced if the regulator spells
out its regulatory approach ex-ante, i.e., at the time of privatisationwith a
medium-term five-year tariff profile, conditional on levels of performance such as
distribution losses. It is possible to build in annual regulatory reviews in such a
process in order to ensure that significant deviations from the assumptions
underlying the tariff and performance profiles are accounted for. In case the
government fails to convince the regulator to offer such certainty, an alternative
route could be for it to offer a tailored guarantee to protect the distribution company
against the risk of inadequate tariff being allowed by the regulator. A suggested
structure is given in Annexure 1.
2.2.3 Subsidy commitments
The responsibility of fulfilling subsidy commitments within a predetermined time
frame should rest squarely with the government. In view of the possibility of non-
fulfilment of such commitments, given the fiscal situation of most states, the
commitment to make subsidy payments will need to be guaranteed by a credit-
worthy body, such as the Government of India or the World Bank.
2.2.4 Timing of introducing retail choice
The need to announce this at the time of privatisation has already been mentioned
as a condition precedent, for the reasons mentioned therein.
44 | Indian Infrastructure: Evolving Perspectives
2.3 Generation investments
The generating plant has three primary concernswhether it will be dispatched,
whether it will be paid and how much it will be paid.
6

The first relates to the overall
demand and relative cost of the plant (assuming a merit order dispatch scheme),
while the last two are intimately related to the viability of the distribution business
and the structure of the power market, such as PPAs, bulk markets, etc. This section
focuses on the first concern, as the remaining concerns are expected to be suitably
alleviated with improvements in the viability of the distribution business and the
freedom to enter into commercial contractual arrangements with each other.
2.3.1 Dispatch risk
The dispatch risk can be further separated into two parts, namely, risk of overall
demand realisation and risk of not being in the merit order. In the former, the risk
is that the plant, which is built in anticipation of demand growth, may not be
dispatched because growth in demand is lower than demand forecasts. In the latter,
even if the growth in demand is as per the forecast, there may be less expensive
sources of supply that would be able to meet the demand.
7

Ideally, both these risks
should remain with the private sector, if they are allowed to make decisions on
capacity and technology, etc.
However, there may be a case for sharing the risks of non-realisation of demand, if
the buyer (in the current scenario, the SEB and its owner, the government) insists
on adding capacity that is higher than what the investor considers prudent. This
risk may be mitigated to the extent that the power from the plant could be sold to
buyers in other regions. The residual risk, if any, could be mitigated through a
guarantee from the buyer (preferably, the state government), which would become
effective only when the total allowed power purchase (by all distribution companies)
by the regulator is less than the demand forecasted by the government. A suggested
structure for this guarantee is attached in Annexure 2.
3. EXPERIENCE WITH CONDITIONAL LENDING
This section examines the experience with employing the conditional lending
approach, especially from the perspective of financial institutions and banks.
3.1 Multilateral conditional lending
The concept of conditional lending is often employed by aid agencies, such as the
World Bank, to foster reform, by making financing conditional on the adoption of
certain policies. According to the World Bank Policy Research Report mentioned
earlier, about a third of the World Banks adjustment loans fail to meet their reform
objectives. In many cases loans were disbursed even though policy measures were
Power Sector Financing | 45
not carried out. It also quotes a recent study that indicates that the number of
conditions or resources devoted to preparation and supervision had no significant
effect on the probability of success or failure of reform. In fact, it appears that the
approach of the donor agencies in the past to buy reform by offering assistance
to government, that were not otherwise inclined to reform, has failed.
According to the report, the primary benefit of conditionality-linked loans is
that they provide a means by which reform-minded governments can publicly
commit to policy measures and send a signal to the private sector that the reform
programme is credible.
3.2 Conditional lending in India
In the Indian power sector, the World Bank and the Power Finance Corporation
(PFC) have tried out the conditional lending approach. The efficacy of their
approach can be gauged by the following assessment of the World Bank:
8
Operational and Financial Action Plans (OFAPs) from 1989 through
1997 (with Bank support under Ln.3436-IN from 1992) attempted
revitalization of APSEB but could not stop its rapid decline into insolvency.
It is perhaps too early to draw any meaningful conclusions on the effectiveness of
the World Banks Adaptable Programme Lending (APL) approach in the states of
Haryana and Andhra Pradesh. One of the salient features of the APL approach is
that it provides a stop-loss opportunity for the Bank at different stages of the
project. In other words, the Bank can stop further disbursements if the government
fails to achieve/fulfil the reform-linked milestones/conditionalities. This has
happened in Haryana.
3.2.1 Possibility of replicating the conditional-lending approach of
multilateral agencies
Although tempting, it may be counterproductive for FIs/banks to replicate the
conditionalities imposed by agencies such as the World Bank. These institutions,
after all, differ significantly from the World Bank in more ways than one.
First, it is important to note that the responsibility for repayment of World Bank
loans is with the primary borrower, i.e., the Government of India (GOI) and not
the state government. By contrast, the FIs/banks typically provide finance directly
to public or privately owned utilities, whose creditworthiness is not backed by
the GOI. The limited scope for sound state government guarantees is also
fast disappearing.
Second, the risk-absorption capability of the FIs/banks is more limited than that of
agencies such as the World Bank, which operate on a much larger, more diversified
and secure portfolio.
46 | Indian Infrastructure: Evolving Perspectives
Third, the success of the lending by FIs and banks is determined by the commercial
performance of the loan, while the success of financing in the case of developmental
projects supported by the World Bank encompasses a much broader definition of
economy-wide impact, including social benefits.
Fourth, they have to be satisfied with a lesser degree of leverage in order to effect
their conditionalities as compared to aid agencies, who provide access to grant
finance and long term low interest developmental loans, through windows such as
the International Development Association.
3.2.2 Need for more caution
It is clear, based on the experience and possibility of replication, that FIs/banks
have to be more cautious while opting for conditionality-linked loans, as compared
to multilateral agencies. This is especially so given the time-inconsistent nature
of conditionalities, whereby the government can cease adhering to them, after
having committed to them. The FIs would then be faced with accepting losses on
disbursements already made to a project, or renegotiating with the state
government from a weak position. Viewed from this perspective, the FIs/banks
should insist on irreversible reform steps before committing their investments.
Hence, a careful assessment of the states based on their commitment and capability
to undertake reform should precede any attempt to structure a conditional lending
programme. This is the basis for requiring prior action, based on the conditions
precedent mentioned above. Concomitantly, the conditional lending programme
should have the approval and commitment of the state legislature.
4. SUGGESTED CONDITIONALITY FOR POWER SECTOR FINANCING
Conditional lending appears to be providing a window of opportunity for FIs/banks
to facilitate private sector participation in the Indian power sector. However, in
view of the low degree of leverage available to them and their low tolerance for risk
of failure, they should be extremely cautious in choosing the states to which they
would like to offer the conditional lending option. A suggested structure for
conditional lending is given below.
Conditions for lending to distribution companies
Prior action
1. Formation of SERC
2. Unbundling of SEB
3. 100 per cent metering at 11 kV
4. Assumption of existing liabilities of the SEB by the state
5. Clearance or assumption (by the state government) of overdues of the SEB
Power Sector Financing | 47
6. Creation of a fund to segregate divestment proceeds
7. Announcement of the time frame for introducing choice to consumers
8. Announcement of a medium-term tariff and loss profile by the regulator or
execution of an average revenue realisation guarantee by the state, backed by
the GOI or the World Bank
9. Privatisation of distribution
Conditionality
1. Creation of a fund to meet payment of subsidies or execution of Guarantee
for payment of subsidies, backed by the GOI or the World Bank
2. Privatisation of generation
Additional conditions for lending to IPPs
1. Allowing IPPs to determine their plant capacity or execution of overall
demand realisation guarantee by the state,
9
backed by the GOI or the
World Bank
2. Allowing use of transmission lines for wheeling of surplus power
3. Announcement of the time frame for establishing a bulk market
Further conditions for lending to state-owned generating plants
1. Improvement in plant availability
ANNEXURE 1
Average revenue realisation guarantee (limited to debt)
Objective : To mitigate the risk of inadequate tariff being allowed by
the regulator.
Trigger : In the event that the average tariff allowed by the regulator is lower
than a pre-specified level.
Condition : The distribution company should meet pre-specified distribution
loss levels.
Explanation : This guarantee is triggered only if the cash flows of the distribution
company are not sufficient to make debt service payments to
lenders. In such an event, the following calculations and payments
would be made:
Method : a) Pre-specify a certain consumer ratio among various tariff
categories and an overall level of Guaranteed Average Revenue
Realisation (GARR), in rupees per unit.
48 | Indian Infrastructure: Evolving Perspectives
b) Multiply the tariff allowed by the regulator with the pre-
specified consumer ratio and calculate the Implied Average
Revenue Realisation (IARR), based on the power demand
approved by the regulator.
c) Deduct the IARR from the GARR to arrive at the ARR shortfall.
d) If the ARR shortfall is positive, multiply the power
demand approved by the regulator with the ARR shortfall
and call this the Maximum Alternative Distribution
Payment (MADP).
e) Make payments to each distribution company based on the
amount needed to cover the minimum debt service or MADP,
whichever is lower.
Example:
Years 1 2 3 4 5
1. Approved demand (MU) 32400 34800 37800 41400 45000
2. GARR (Rs per unit) 4.20 4.41 4.63 4.86 5.10
3. IARR (Rs per unit) 4.30 4.30 4.60 4.80 5.00
4. Target distribution loss (%) 35 30 30 25 20
5. Actual distribution loss (%) 36 32 28 24 20
6. ARR shortfall (Rs per unit) 0.11 0.03 0.06 0.10
7. MADP (Rs crore) 113.4 248.4 450
8. Debt service (Rs crore) 50 100 500
9. Guarantee payment (Rs crore) 100 450
Note: In year 2, the distribution loss target is not achieved and hence there is no guarantee
payment. In year 3, there is no debt service and hence there is no guarantee payment.
In year 4, payment is made to the extent of debt service. In year 5, the debt service is
higher than the MADP, but payment is limited to the extent of MADP.
10
ANNEXURE 2
Overall demand realisation guarantee (limited to debt)
Objective : To mitigate the risk of non-realisation of overall demand
projections.
Trigger : In the event that the overall power procurement allowed by the
regulator is lower than the forecasted power demand.
Power Sector Financing | 49
Explanation : This guarantee is triggered only if the cash flows of the IPP are
not sufficient to make debt service payments to lenders. In
such an event, the following calculations and payments
would be made:
Method : a) Compare the pre-announced forecast of power demand with
the actual power procurement allowed by the regulator.
Determine the extent of shortfall.
b) Allocate the shortfall on a merit order basis to the various plants
that are available for dispatch and with which guarantees have
been signed.
c) Multiply the allocated shortfall to each plant by the tariff of
the highest cost plant in the list of procurements approved by
the regulatory commission. Call this amount the Maximum
Alternative Generation Payment (MAGP)
d) Make payments to each plant based on the minimum amount
needed to cover debt service or the Maximum Alternative
Generation Payment, whichever is lower.
Example : There is an existing capacity of 5000 MW that supplies power at
Rs 1.50 per unit. Additional capacity is expected to be added
through Plant A (1000 MW starting from 2nd year supplying at
Rs 2.50 per unit), Plant B (1500 MW starting from 4th year at
Rs 2.00 per unit) and Plant C (1500 MW starting from 5th year at
Rs 2.20 per unit). While Plants A and B have PPAs backed by overall
demand realisation guarantees with the state government, Plant
C is a merchant plant without similar guarantee cover.
Years 1 2 3 4 5
1. Total installed capacity 5000 6000 6000 7500 9000
2. Demand projected by
government (MW) 5500 6050 6655 7320 8000
3. Demand allowed by
the regulator (MW) 5400 5800 6300 6900 7500
4. Gap between projected and
allowable demand (MW) 100 250 355 420 500
Merit order dispatch
5. Existing (5000 MW
@ Rs 1.50 per unit) 5000 5000 5000 5000 5000
50 | Indian Infrastructure: Evolving Perspectives
6. Plant B (1500 MW
@ Rs 2.00 per unit) 1500 1500
7. Plant C (1500 MW
@ Rs 2.20 per unit) 1000
8. Plant A (1000 MW
@ Rs 2.50 per unit) 800 1000 400 0
9. Undispatched capacity
of Plant A (MW) 200 600 1000
10. Allocation of shortfall to
Plant A (MW) (lower of 4 and
9, subject to merit order) 200 420 500
11. Allocation in million units
(@ 6 MUs/MW) 1200 2520 3000
12. Tariff of the costliest plant
dispatched (Rs/unit) 1.50 2.50 2.50 2.50 2.20
13. MAGP (Rs crore) 300 630 660
14. Debt service (Rs crore) 300 750
Guarantee payment (Rs crore)
(lower of 13 and 14) 300 660
Note: In year 2, there is no debt service and hence no guarantee payment. In year 3, Plant A
is fully dispatched. In years 4 and 5, payments are limited to the gap between projected and
allowable demand and also to the burden of debt servicing. In year 5, although 500 MW of
Plant C also remains undispatched, it will not get any compensation, as it does not have
guarantee agreements like Plants A and B.
NOTES
1. To date, 10 projects (aggregate capacity of 3,359 MW) have been fully commissioned,
1 project (420 MW) has been partly commissioned, and 9 projects (3,402 MW) are
under various stages of implementation.
2. Assessing Aid: What Works, What Doesnt and Why published by the Oxford
University Press (1998). A fuller discussion of the distinction between conditional
multilateral lending and lending by FIs is given in Section 3.
3. Going by the dire financial condition of the sector, it would be a matter of surprise if
the government could raise positive revenues from the process of privatisation of
distribution. If it indeed does, it could be only on account of either expectation of a
Years 1 2 3 4 5
Power Sector Financing | 51
genuine turnaround, or sheer bravado on the part of the bidders or in anticipation
of favourable re-negotiation with the government/regulator. The bulk of proceeds
from privatisation should therefore be expected to come from privatisation of the
generation segment.
4. The need for additional investment in transmission cannot be denied. However, in the
initial phase of reform it is expected to remain with the state and the investment
requirements would become clearer as the distribution and generation businesses evolve.
5. Similarly, the regulator may impact the valuation of liabilities and assets handed over
at the time of privatisation depending upon the extent to which they are accommodated
in tariff setting, either as pass-throughs or in the ratebase.
6. The equity investor is assumed to bear construction and technology risks, as is the
current practice. Fuel supply risk is being ignored at this point, since the focus is on the
state government, and because it is primarily a commercial risk to be borne by the
equity investor, in the case of fuels such as imported coal.
7. This may come from new plants, renovated older plants or supply from other regions
made possible by a more integrated grid.
8. The World Banks Project Appraisal Document on a proposed loan to India for the
Andhra Pradesh Power Sector Restructuring Project, 25 January 1999.
9. This requires the state government to determine the supportable capacity in order to
structure the guarantee (see Annexure 2).
10. There may be a case here to capture the MADP due in earlier years into a notional
reserve account in order to meet such contingencies. This would be a stronger guarantee
than the one proposed in the note.
52 | Indian Infrastructure: Evolving Perspectives
1. INTRODUCTION
The power sector in India is facing a breakdown. Revenue arrears of State
Electricity Boards (SEBs) grow by the hour, as consequently do their dues to
central sector units like National Thermal Power Corporation Limited (NTPC)
and Coal India Limited. Even in states like Karnataka, which are relatively well
managed fiscally, the burden of power sector subsidies has grown to over a third
of their fiscal deficit. Faced with this situation of a bankrupt SEB and a fiscally
parlous state government, private independent power producers (IPPs) dare
not invest and even if central sector units like NTPC make investments they are
equally unlikely to be paid for the power they produce. Soon, power will become
a binding constraint on our ability to maintain high growth rates. The need for
reform in the power sector is therefore unarguable, especially in the distribution
segment where the losses have been the heaviest. The estimated T&D losses, as
is being demonstrated by the orders of State Electricity Regulatory Commissions
(SERCs), in various states is closer to 40 per cent! This is true across the country,
in states as varied as Andhra Pradesh, Gujarat, Haryana, Maharashtra, Orissa
and Uttar Pradesh.
Remedying this situation calls for the provision of adequate incentives and the
transfer of risk along with reward that is, today, unfortunately not possible under
public ownership in India. In order to leverage the accountability that is now possible
as a result of the greater regulatory transparency, it is necessary to privatise the
power sector, especially the customer end, i.e., distribution. This process of
privatisation provides an opportunity to allocate the various risks in the power sector
optimally, to the entity that can best control them.
SIX STEPS TO ACCELERATED
PRIVATISATION OF
ELECTRICITY DISTRIBUTION
January 2001
6
Accelerated Privatisation of Electricity Distribution | 53
Privatised distribution is not an alien concept in India. Today, private distribution
licensees continue to operate in the cities of Mumbai, Calcutta, Ahmedabad and
Surat. Some of these licensees also own generating assets. For instance, Bombay
Suburban Electric Supply (BSES) sources about 50 per cent of its electricity
requirements from its own plants. Similarly, the Ahmedabad Electricity Company
(AEC) and the Calcutta Electric Supply Company (CESC) own generating capacity
of 550 MW and 945 MW respectively. The fact that the tariffs of BSES, which
caters to 19.8 lakh consumers in an area of 384 sq km, are competitive, and that
its distribution losses are now only about 10 per cent, aptly underscores the superior
performance of distribution under private ownership. Their successful track record
highlights the possibility that privatisation of bundled distribution-cum-
generation companies can be a viable and relatively quick option for privatising
the power sector in India.
1.1 Need to accelerate the pace of privatisation
Unfortunately, despite the need for privatisation of distribution in the reforming
states and the impressive track record of private licensees, it is not taking place at
the desired pace, for various reasons. On the one hand, reforming states are
expending enormous time and effort in configuring distribution zones for
privatisation, in the name of asset-valuation and in achieving the elusive right
balance between the subsidised and subsidising categories of consumers. For
instance, in Orissa, the first state to have undertaken comprehensive restructuring
of its power sector, although reforms were initiated in 1996 (in fact discussions
started as early as 1992!), the crucial step of privatising distribution occurred only
in 1999. Even in other reforming states such as Haryana, Andhra Pradesh and
Uttar Pradesh, the privatisation of distribution is slated to take place only three to
four years after the initiation of the restructuring process. On the other hand, as
evidenced in Orissa and in the privatisation of Kanpur city in Uttar Pradesh, private
investors are wary of participating in distribution privatisation, as they perceive
several risks ranging from regulatory uncertainty to unreliable commitments on
the part of the state governments.
1.2 A one-year timeline
The adverse consequences of the delay in distribution privatisation are already
visible in the continuing accumulation of losses in the SEBs and in the growing
reluctance of investors to set up new generation capacity. Given the alarming
pace of decay in the distribution systems and their management, quick privatisation
of distribution is a sine qua non for the success of the reform process. Against this
backdrop, this paper delineates a set of six inter-related steps for the successful
and quick privatisation of distribution. It is our contention that it is possible to
54 | Indian Infrastructure: Evolving Perspectives
privatise distribution within a year, through a diligent execution of the steps
outlined below. An indicative timeline for this accelerated process is provided
in Table 6.1.
2. SIX STEPS TO PRIVATISATION OF DISTRIBUTION
Distribution privatisation is a difficult task in the best of times. It will be even more
difficult in the current situation, given the low average tariffs and the decrepit
distribution network. The private sector, when it enters the distribution business, is
also required to make large investments. It makes these investments in the expectation
of earning a fair return on these investments over the future. The private sector will
not bring in investment unless there is a secure foundation for these expectations.
This does not imply that the private sector needs to be protected from all risks. It
does however imply that they should be provided with an environment that allows
them to evaluate the various risks and price them accordingly.
Like in any other financial transaction, in distribution privatisation too, success
depends on the efficient allocation of risks. In the context of privatisation, the
distribution business is fraught with several risks arising out of the following factors:
Existing commitments by SEBs, such as escrows and long-term power purchase
agreements (PPAs) with IPPs
Unfunded liabilities from the past such as dues to suppliers of power and fuel
and employee pension commitments
Regulation of tariffs, expected performance levels and allowable returns
Government support to meet subsidy commitments and
Market structure (input prices, competition and choice to consumers)
In order to be effective, a distribution privatisation strategy should satisfactorily
address these concerns. This is the purpose of this paper.
2.1 Step 1: Notify a policy eschewing escrows and long-term PPAs
2.1.1 Effect of escrows and long-term PPAs
An escrow facility involves dedicating a stream of revenue from specified customers
or regions into an escrow account maintained by an agent bank in order to meet the
power purchase payment obligations of an IPP. This security mechanism was resorted
to because the SEBs were perceived as poor credit risks. The primary claim on the
revenue stream was therefore transferred from the distribution system to the IPP.
In a situation where most of the privatised distribution regions would in any case
be expected to have cash losses in the initial years, an additional pre-emption of
cash flows would make it very difficult to run the distribution business. This negative
effect of an escrow on the already low cash flow stream that would be received by
Accelerated Privatisation of Electricity Distribution | 55
the prospective buyer makes it difficult to privatise a region that has been escrowed,
as was seen recently with the Central Zone in Orissa.
The escrow facility is also associated with very long-term power purchase agreements,
extending up to thirty years, which were needed since the SEB was the sole buyer of
power. In the context of transferring such contracts to a privatised distribution
system, one solution that has been advanced is to retain a single bulk buyer, such as
the transmission company. Here the experience of GRIDCO in Orissa indicates
that such a measure may fail because the GRIDCO is unlikely to be a good credit
risk, and the government would have to again step in to support the contract.
1
Clearly, it is inappropriate to burden prospective private owners of distribution
zones with fresh contracts, especially where they are not a party to the decision.
More importantly, under the emerging market structures, such long-term contracts
have a deleterious effect on competition as they prevent distribution companies
from accessing the most competitive supplier of energy.
2.1.2 Breaking the vicious circle
As long as the distribution business does not generate sufficient revenue and
there remains a single buyer of power, there will continue to be a demand for
escrows and long-term PPAs. This will continue until distribution is privatised
and IPPs are allowed to enter into direct contracts with distribution companies
and large consumers. At the same time, escrows and long-term PPAs adversely
affect the attractiveness of the distribution zones and thereby obstruct the process
of privatisation.
The government should break this vicious circle and clearly opt for improving
security through privatisation of the distribution business and eschew escrows and
long-term PPAs by making a public notification of such policy. Newly privatised
distribution companies should not be burdened with the erstwhile escrow
arrangements and PPAs. Instead, they should have the freedom to enter into their
own voluntary contracts, and develop other routes to reduce energy purchase costs.
2.2 Step 2: Financial restructuring
2.2.1 Retain unfunded liabilities to realise better value
The SEBs have a number of existing liabilities, many of which are unfunded, such as
pensions. In addition, they have dues to central sector generating units, Coal India
Limited, Railways and other such organisations, along with receivables of doubtful
quality, including payments from various state government bodies. In order to realise
the best value for the business, these liabilities need to be retained by the current
owner, i.e., the state government, under whose ownership they have been
accumulated. Apart from the moral obligation not to transfer ones sins onto others,
56 | Indian Infrastructure: Evolving Perspectives
it also makes financial sense. In cases where the amount is undisputed, any transfer
would result in an equivalent direct deduction from the bid amount. In cases where
the liability is uncertain, such as future contractual commitments and pensions, the
private sector would have a higher degree of risk aversion, given that they cannot
control these risks. Transferring these liabilities to them will only result in a lower
bid, which would be reduced by an amount greater than what the government
believes to be the extent of the liability. Hence, as part of the Financial Restructuring
Plan (FRP) prior to privatisation, these liabilities and assets should be clearly vested
with the government, who is the owner of the SEB, and should not be passed on to
the newly formed private companies. By retaining them, the government would
improve the bid valuation, and can use a portion of the privatisation proceeds to
meet the liabilities as described below.
Box 6.1: Privatisation of generation assets of SEBs
Privatisation of generating stations is necessary to ensure that the generation capacity
of the SEBs, which is around three fourths of the installed capacity in the country, is
utilised to the maximum possible extent. The current lack of appropriate incentives
for good management in the public sector affects their investment and operating
efficiency. As of date, the PLF (Plant Load Factor) for SEB plants is well below what is
possible, even after accounting for the age of these plants. Improving their utilisation
will enable an increase in the power supply that would mitigate the effects of the slower
addition to new capacity.
Generating stations often do not receive regular payments for the energy they supply.
Their continued government ownership weakens the commercial environment in the
power sector. There is no reason to continue to divert state resources to a commercially
viable activity. As the distribution sector is privatised and begins to generate enough
resources to permit financially sound arrangements for power purchase, these plants
will gain in value. The value of these generating stations could be realised by selling the
existing plants and the resources used to reduce the subsidy burden and finance the
unfunded liabilities in the sector. Without their sale, it is unlikely that it will be possible
to fully finance these liabilities.
2.2.2 Plough-back proceeds of privatisation
In order to provide a secure financial source to meet the deferred payments to
workers and creditors mentioned above, government should plough back all the
proceeds realised by privatising the power sector, including those related to the sale
of generation assets (see Box 6.1 above). In this manner, the government will be
able to defray part of the liabilities assumed by it, on account of past dues, contractual
obligations, pensions, etc. To meet the shortfall, if any, the government should use
the low-interest long-term support from multilateral institutions. Indeed the
Accelerated Privatisation of Electricity Distribution | 57
appropriate use of such multilateral funds should be for such purposes rather than
to finance investment in physical assets, which can be undertaken by the private
buyer through the local financial markets.
2.3 Step 3: Separate urban and rural zones for effective privatisation
As of now, almost all the reforming states are seeking to privatise distribution
zones as a mix of subsidising and subsidised categories of consumers. This leads
to long delays as enormous time and effort is spent in configuring distribution
zones for privatisation, in achieving the elusive balance between the subsidised
and subsidising categories of consumers. It also increases uncertainty, given the
lack of information about the distribution system in the non-urban areas. A
private entrepreneur looking to buy the zones is concerned that his paying
customers will turn to captive plants, driven away by high tariffs needed to raise
revenue to meet the social obligation of supplying non-paying consumers. In
addition, this mixed-zone structure is fraught with several limitations (see Box 6.2).
By contrast, separation of urban and industrial zones from rural zones can not
only result in a faster pace of privatisation; it also addresses the main reason for
privatisation of distribution, which is to reduce the extent of theft and
inefficiency, as explained below.
Box 6.2: Limitations of the mixed-zone structure
A distribution company with mixed zones will have two revenue streams, one from
consumers, who pay their own user charges and the other from the government in
the form of subsidy support, which would be determined by the regulator. The
presence of a subsidy-stream provides an avenue for the company to camouflage
theft and inefficiency, by over-reporting consumption under subsidised categories,
which are often not metered in full and sometimes not at all, as seems to be the
current practice in SEBs. Faced with the arduous task of improving the efficiency of
collection from a large number of consumers, even the private distribution company
may find it a more attractive proposition to try and convince the regulator that larger
subsidy flows are called for, instead of expending effort to eliminate theft. Thus, the
management of a mixed zone company, whether public or private, would have
little or no incentive to meter agricultural consumption, since it would take away
the ability to camouflage the theft of power. Even if the regulator is aware of this
problem, it can only address it through a burdensome exercise of verifying actual
consumption through a programme of compulsory metering, which will take a
substantial amount of time. Further, if the mixed zone distribution company
succeeds in its strategy of over-reporting subsidised consumption, the subsidy burden
on the government will increase to that extent. A strategy of privatisation through
segregated zones will curb this problem.
58 | Indian Infrastructure: Evolving Perspectives
Accelerated loss reduction: Apart from Delhi, even in other places, where there
has been a certain degree of substation metering, such as Karnataka and Andhra
Pradesh, it is evident that the extent of commercial losses in the urban and
industrial areas is very high. Consequently, it can be inferred that pilferage and
theft is concentrated in these areas. The privatisation of distribution in these areas
along with regulatory stability
2
through a medium-term tariff regime, as discussed
in the next section, will provide strong incentives to distribution companies to
find thieves and make them pay, since the reduction in theft, with stable tariffs,
directly enhances profits.
Faster pace of privatisation: If urban and industrial areas are offered for sale, the
process of privatisation can proceed faster, as the need to discover the elusive
balance between the subsidised and subsidising categories of consumers will no
longer exist. This must however be done in conjunction with a stable regulatory
regime and with realistic expectations, as outlined in our previous analysis of the
delay in the privatisation of the Kanpur Electricity Supply Company (KESCO).
3
The Request for Qualification (RFQ) can be issued as soon as the zoning is
completed, as shown in Table 6.1.
Improved revenue realisation and better bidders: The third strong reason to separate
urban from rural zones is to improve the sale value for the government. As long as
one of the revenue streams is from the government, a private bidder will expect that
these payments to be delayed and will accordingly discount their availability, and
reduce the value of its bid. By removing the uncertainty associated with subsidy
support, the government can realise better value for urban and industrial zones at
the time of privatisation. It will also attract companies whose expertise is distributing
electricity and not those whose primary competence may be in persuading the
government and the regulators to release subsidies.
2.3.1 Effect of segregation on the rural zones and subsidy bill
It is now widely recognised that urban theft is often misreported as agricultural
consumption, which inflates the amount claimed under agricultural subsidy.
Separation of urban zones from the rural areas removes the incentives to camouflage
theft and inefficiency under subsidised consumption since the distribution company
serving the urban and industrial zones would not have any access to subsidy flows.
It allows identification of the actual amount of subsidised consumption and permits
a more accurate estimation of theft. The increased detection of theft, as a result of
separating urban and industrial zones, would reduce the extent of such fraudulent
subsidy claims. Combined with the better estimate of true non-urban consumption,
this is likely to reduce the subsidy bill, and thus make it more likely that the state
would be able to finance the subsidy.
Accelerated Privatisation of Electricity Distribution | 59
The privatisation of urban and industrial areas does not at all imply that rural zones
would be worse-off. Stand-alone urban zones will separate those now considered
unable to pay, such as the rural poor, from those considered able to pay. In case the
government wants to continue subsidies, it can do so through direct budgetary
allocations. If the budget still comes up short, government can impose an across the
board surcharge on electricity consumption of the urban and industrial zones and
use the resultant revenues for subsidy payments. The transparency of such a charge
will soon generate the countervailing political pressure necessary to ensure that
those judged unable to pay are truly incapable of paying.
2.4 Step 4: Ensure stable regulation for risk mitigation
Traditionally, around the world, regulation in the electricity sector meant an intrusive
cost-based regulation of vertically integrated utilities. In India, this is reflected in
Schedule VI, which tries to assure a specific rate of return to the utility, which also
involves a detailed and frequent examination of its costs. This regulatory regime is
undergoing transformation, as it is now possible to subject more of the sector to
competition. In a number of countries today, generation tariffs are completely
deregulated, as also the tariffs for large consumers. Tariff regulation remains in
place for the use of transmission and distribution wires, as well as for tariffs charged
to smaller consumers.
In India too, most of the central elements that affect the viability of the distribution
business fall under the purview of regulatory commissions. These regulated elements
include input prices, tariffs, allowable returns, and expected level of performance in
terms of technical and commercial losses. Thus, under the current arrangements,
allocation of risk to distribution companies is determined, to a large extent, by the
regulatory philosophy and tariff orders of the SERCs. The release of a regulatory
philosophy document, being only a statement of intent, only partially meets the
objectives of providing information about risk allocation. The realisation of the
stated intent is found in the tariff order. For this reason, prospective bidders for
distribution zones often request that the process be deferred until the issue of a
tariff order by the SERC. However, the Request for Proposals (RFP) can be issued
and the process of due diligence can begin as soon as the tariff submissions are
made for each separate zones.
2.4.1 Effect of recent tariff orders and risk allocation by the SERCs
Almost all SERCs have realised that tariff increases alone are not the answer to
solving the problem of SEB viability. Indeed, most SERCs have determined that it
would be unfair to shift the burden caused by high T&D losses and low collection to
billing ratios, i.e., a lack of efficiency on the part of the utility, completely onto the
consumer by raising tariffs. SERCs have also realised that it is counterproductive to
60 | Indian Infrastructure: Evolving Perspectives
charge higher tariffs that take the price of grid power well above the cost of generating
captive power. Consequently, they have limited the extent of cross-subsidy from
industrial and commercial consumers to other consumers, who are charged below
the cost of supply. The owners of the SEB, i.e., the state governments, are now
required, albeit partially, to come up with the requisite funds from the state budget
to compensate the SEB, if they wish to charge tariffs below cost of supply. This
direct impact on the budget, in contrast to earlier practice, has made many
governments realise the financial unsustainability of insisting on tariffs that recover
only a small fraction of the supply cost.
This approach has however resulted in a difficult position for prospective private
owners, who are now expected to bear the financial burden caused by the high T&D
losses, low collection to billing ratios and limited extent of cross-subsidy, until such
time as they can bring them down. While this admittedly provides a very strong
incentive to the private company to reduce losses, coupled with the regulatory
uncertainty caused by annual tariff orders, it also results in a degree of uncertainty
that may be severe enough to drive investors away from the sector.
It is thus necessary to devise a regulatory regime to balance the need to provide
incentives to improve efficiency with the need to reduce the discouraging effect of
regulatory uncertainty. This assumes additional importance in the current situation,
when the process of transition from public to private ownership is about to take
place and where sizable investments are necessary for systemic improvements. In
effect, the regulator has twin roles, viz., an oversight role as well as an investment
promotion role. It should therefore ensure a stable and sensible regime that will
provide an environment conducive to such investments, without compromising
the interests of consumers.
2.4.2 The need for medium-term tariff orders
This balance is possible by instilling confidence in prospective investors, by giving
them a degree of stability with respect to risk allocation. A good way to achieve this
is to announce a medium-term, for example, five-year, tariff profile based on an
associated loss profile, which provides tariff stability in the years immediately
following privatisation, along with incentives to improve efficiency. For this, the
government should ensure that a submission for medium-term tariff determination
is made to the SERC, separately for each zone.
The basis of determining this tariff profile would be the SERCs judgement about
the base case for improvement. In arriving at this judgement, regulatory
determinations on three variables are critical, viz.,
1. The distribution losses that will be incurred.
2. The demand growth that will take place.
3. The investment that will be required.
Accelerated Privatisation of Electricity Distribution | 61
While the first two of the above parameters would determine the amount of power
purchase costs that the utility will be allowed to recover through the tariff, the
third parameter would provide the utility with information about the regulators
view as to the extent of investment that will be needed. In order to develop a
credible base case, the regulator should ensure that these parameters are pegged
at realistic levels.
As regards the quantum of distribution losses, the regulator should rely mainly on
the implied T&D loss, which is the difference between the amount of energy input
into the distribution zone and the amount of revenue collected (deposited in the
bank) from the distribution zone. In the existing system, these are the only hard,
credible data points, as these are easily verifiable. The regulator and government
should avoid spending time and effort in arriving at detailed but unverifiable
estimates of a variety of losses, which, in any event, are not likely to be believed by
potential bidders. Similarly, considering the decrepit distribution system and the
other difficulties emanating from the change of ownership, loss reduction targets
should be fixed at reasonable levelssay, none for the first year, followed by increased
reductions from the second and third years. Finally, improving performance needs
massive investments for system upgradation. These should be estimated and included
in permissible investment.
The power purchase and investment costs together constitute a large proportion of
the controllable costs of the distribution company. Hence, an order specifying these
costs provides the investor with a clear signal as to the expectations of the regulator
regarding the kind of performance that is expected in order to earn a reasonable
return. Based on such a profile over the next five years, a bidder for the distribution
business, after due diligence, can arrive at his own judgement with regard to the
reasonableness of the tariff profile. If it feels that it can do better than expected by
the regulator, it will bid aggressively, in expectation of higher profits. On the other
hand, if the regulators perspective is perceived as being too stringent, it will bid
lower, since he would not expect to make large returns.
Here, it is important to note that in case the initial regulatory order is too favourable
to the private bidder, a portion of this will be recaptured in the higher price paid by
the winning bidder, and thereby prevent excessive profits. Second, and more
important, the returns to the investor are conditional on good performance. The
investor makes more money only if he does better than expected, in terms of reducing
losses, undertaking investments efficiently and increasing demand, e.g., by attracting
high-tension users back to the grid. It is critical to acknowledge and reward such
performance by assuring the investor that he would be able to retain such
performance-linked driven profits. These returns are the very basis of the
accountability that privatisation of distribution seeks to induct.
62 | Indian Infrastructure: Evolving Perspectives
Tariffs based on distribution value-added (DVA) charge: In case the regulator is
reluctant to provide a medium-term profile of tariffs for want of adequate
information, it could separate the costs associated with distribution servicesthat
is, distribution value-added (DVA)which is essentially a charge for using the
distribution wires, and announce a medium-term profile only for that component.
Under this arrangement, the remaining costs related to power purchase and
transmission could be allowed as a pass-through, after appropriate regulatory
scrutiny. Such a system would be compatible with an eventual structure of the sector,
where a competitive power market determines power purchase costs. In the interim,
this system would insulate private distribution companies from the vagaries of the
bulk power market.
4
2.5 Step 5: Market structure: avoid the single-buyer model
The value of the various businesses in the power sector depends on the future cash
flows that they generate. The extent and sustainability of these cash flows would
depend critically on the market structure that is adopted. Given the international
trends and the pointers in the proposed Electricity Bill 2000, India too will eventually
witness the emergence of bulk power markets, merit-order dispatch, choice to
consumers and open access to the transmission and distribution wires. Each of these
is essential for the success of privatisation, as they form the very basis for competition.
The single-buyer model is often sold as a transitional arrangement, justified in
order to maintain uniform prices across the state and form one agency responsible
for honouring the existing PPAs entered into by the state. However, apart from its
many disadvantages (see Box 6.3 below), its adoption instead increases the likelihood
that, under pressure from vested interests, the next step toward liberalised electricity
markets will be indefinitely delayed.
5
This approach restricts distribution companies
and large consumers from buying from the generators of their choice. Such
restrictions reduce the scope for efficiency gains in the short term and vitiates the
process of developing a healthy power sector in the long run.
Box 6.3: Disadvantages of the single-buyer model
The single-buyer model has major disadvantages, particularly in situations with high
degree of corruption and low payment discipline. First, and most importantly, the
single-buyer model weakens the incentives for distributors to collect payments from
customers. The state-owned single buyer is often reluctant to take politically unpopular
action against a delinquent distributor, and its aggregation of cash proceeds from
distributors allows it to spread the shortfall caused by a poorly performing distributor
among all generators. When distributors see that paying and non-paying distributors
are treated alike, their motivation for cutting off non-paying customers weakens across
Accelerated Privatisation of Electricity Distribution | 63
the board, vitiating the very reason for privatisation. Second, decisions about adding
generation capacity are not made by distribution companies, who would have to
bear the financial consequences of their actions. Instead government officials and
experts, who do not have a direct commercial stake, have to make these decisions,
and often find it difficult to resist powerful interest groups pushing for state-
guaranteed capacity expansion. Third, PPAs create a contingent liability for the
government, which is expected to step in if the state-owned transmission company
is unable to honour its obligation to the generator. Loading the state-owned
transmission company with all the agreements when it is hardly equipped to take
on the risk arising from failure of the PPAs often leads to its financial ruin, as in
the case of GRIDCO in Orissa. To the extent that these PPAs are a net cost, it is
better that they be addressed directly rather than be hidden under the wraps of the
state-owned transmission company. Fourth, the single-buyer model responds
poorly when electricity demand falls short of projections (such as the recent
experience with Dabhol). Ideally, electricity prices should fall, stimulating demand.
6
Under the single-buyer model, however, wholesale electricity prices rise because
take-or-pay quotas (or fixed capacity charges) must be spread over a shrinking
volume of electricity purchases. When these high prices cannot be passed on to
final consumers, taxpayers must bear the losses. Fifth, the single-buyer model
hampers the development of electricity trading across state borders, by leaving it
to the single buyer, a state-owned company without a strong profit motive, to
enter into such arrangements.
Based on The Single-Buyer Model: A Dangerous Path Toward Competitive Electricity Markets by
Laszlo Lovei, Public Policy for the Private Sector Note No. 225, the World Bank, December 2000
2.5.1 Effect on distribution privatisation
The choice of market structure has an impact on the cashflows of the distribution
business. For example, a distribution business that enjoys a local monopoly, i.e., whose
consumers cannot buy their power from other suppliers, would have a different
valuation as compared to a business whose consumers have the option of purchasing
from alternative sources. Similarly, a distribution company that can source its power
requirement from a competitive bulk power market would have a different valuation
as compared to one that has to buy from a single high cost supplier. Hence, the
government should spell out the timing of introduction of the bulk power market as
well as the choice to consumers at the time of privatisation. This will enable investors
to factor in risks arising out of these developments into their bids.
An illustrative schedule for introducing choice to consumers could be as shown
below. Since permitting such transactions would require appropriate improvements
in the areas such as billing software, interconnection and metering, the responsibility
for such expenditure needs to be clearly and appropriately allocated between the
distribution company and the transmission company.
64 | Indian Infrastructure: Evolving Perspectives
Illustrative time frame for introducing choice to consumers
1 year 3 years 4 years 5 years 7 years
Above 10 MW Above 5 MW Above 3 MW Above 1 MW All
2.5.2 Own-generation and vesting contracts
As noted before, the proposed Electricity Bill 2000 envisages open access to the network
and the development of a bulk power market in the medium term. In a power market,
there is usually a single market price for power, which may vary over the dayfrom
hour to hour or at even finer intervals. In such a situation, the transmission company
is responsible only for the transmission of power and not for bulk purchase of power
for onward supply to distribution companies. Different distribution companies thus
face the same price for power purchased from the market.
7
However, in an environment of power shortage, either through the lack of sufficient
capacity or due to transmission constraints, distribution companies are apprehensive
about being held to ransom by generation companies and need assurance of power
supply. The bargaining power of the generator is higher in the short term when the
distribution company needs energy to meet its obligations and has little recourse to
alternatives. In order to mitigate this uncertainty, distribution companies should
be allowed to set up their own generation capacity or be sold bundled together with
an existing generation facility.
Alternatively, distribution companies may, at the time of privatisation, be vested
with a contract that allows them to source power from a designated generation
facility, at a pre-specified price, and for a relatively short period such as five years.
Such a vesting contract enables the distribution company to have contractual access
to the energy produced by the designated generator in the immediate aftermath of
privatisation. It also enables easier sale of the generating station by assuring that it
has a ready off-take in the initial years.
2.5.3 Caveat on market structure choices
While making market structure choices, care needs to be taken to ensure that the
timing of these choices is realistic. Excessively zealous targets would only harm the
process of privatisation. Understandably, private investors would be extremely
reluctant to make the massive investments required in system improvement today,
if their consumer base dents too soon and if they are not sure about the terms of
open access. Similarly, one should avoid a mindless pursuit of the unbundling
doctrine, especially with regard to the existing, well-functioning private licensees,
as we might end up wrongly fixing what is not broken in the first place. In order to
prevent such errors, the proposed Electricity Bill 2000 should permit the existing
private licensees to maintain their status quo.
Accelerated Privatisation of Electricity Distribution | 65
2.6 Step 6: Actual sale of the distribution business
At the conclusion of Steps 1 to 5, the following should be in place:
The SEB has been unbundled into different generation units, a transmission
company and different distribution zones, where urban and industrial zones
have been separated from non-urban zones.
All commitments arising out of the previous PPAs, including escrow
arrangements, are vested with the government and are isolated from the process
of distribution privatisation.
All unfunded liabilities such as dues to power and fuel suppliers and employee
pension commitments are retained with the government and arrangements
are put in place to plough-back the proceeds from privatisation to meet these
commitments.
A medium-term tariff order from the regulator, specifying a tariff schedule for
the next five years, based, inter alia, on a benchmark profile of reduction in
T&D losses.
The government, in consultation with the regulator, has instituted a mechanism
to meet subsidy commitments through explicit budgetary allocations and, if
necessary, through imposition of a transparent surcharge.
A time frame for open access to the transmission and distribution company
wires has been announced.
2.6.1 Multiple-round ascending auction for urban and industrial zones
At this stage the zones are ready for bidding. As noted above, the process of sale
and due diligence can and should begin earlier. It is however important that the
bidding for the zones be conducted appropriately. While it is not the intent of
this paper to go into details, it should be noted that a single-round sealed bid
auction is not necessarily the best option for bidding, since it does not generate
sufficient information. An alternative method is the multi-round ascending
auction. In this system, the bidders submit a sealed bid, which is then opened for
all bidders. All bidders then have the option of revising their bid upward in the
second round and resubmitting their bid. This method has recently been proposed
by the Telecom Regulatory Authority of India (TRAI) for auctions to allocate the
fourth cellular license.
This method makes sense, especially in the current situation with paucity of
information, because with each round of bidding new information will be revealed.
While each bidder has its own estimates about the kind of investment that will be
required and loss reduction that would be possible, all bidders are also trying to
estimate the growth in the market size. The bids of the other bidders give each
66 | Indian Infrastructure: Evolving Perspectives
bidder some information about their estimates of the growth in the market size,
which in turn affects its own estimates in this regard. However, it is important to
note that this may not be true in all situations.
8
2.6.2 Minimum subsidy bidding for non-urban zones
As regards non-urban zones, private sector efficiency in delivery can be exploited
by bidding out subsidised zones for supply by private companies and cooperatives,
with stringent but realistic improvements in performance parameters as regards
quality of supply, as long as they demand lesser subsidy than what it currently costs
the SEB. This will lead to a further reduction in the subsidy bill. More importantly,
isolating these zones would help government in adopting a radically different
approach to non-urban supply, which has its own special needs.
9
Such interventions,
for example, could range from allowing distribution through alternative ownership
structures such as co-operatives to promoting appropriate, decentralised generation
options such as photovoltaics and micro-turbines.
3. CONCLUSION
In order to be successful, as well as politically feasible, it is essential that consumers
benefit from the process of power sector reform. Concomitantly, the private sector
must be able to earn adequate returns, commensurate with the risks of the
distribution business. Most importantly, this process must take place quickly. This
paper seeks to provide a set of six specific steps for accelerating this process, while
balancing these two objectives.
The first step is to notify a policy eschewing new escrows and long-term PPAs. They
only add to the troubles of the SEB and make it even more difficult to undertake
distribution privatisation, which is a fundamental reform. The second is to retain
the existing liabilities with the current owner, i.e., the state government. These include
existing financial and contractual commitments, e.g., past dues to the suppliers of
power and fuel and existing long-term PPAs and, most importantly, deferred
payments to workers, such as pensions. The proceeds realised by privatising the
power sector, including the sale of generation assets, should be ploughed-back to
meet these retained liabilities. The third step is to separate the distribution segment
of the SEB into distinct urban and non-urban distribution businesses to obtain full
benefit of private participation and quickly isolate and curb the rampant theft and
pilferage in urban areas that is currently camouflaged as subsidised consumption.
As opposed to the current practice of hidden cross-subsidy between consumers,
government should make explicit budgetary provisions to meet subsidy
commitments and, in case of shortfall, it may impose a transparent surcharge on
urban and industrial zones. The fourth step is to ensure that the regulatory regime
Accelerated Privatisation of Electricity Distribution | 67
provides sufficient incentive to private entrepreneurs by allowing it to retain profits
earned as a result of improvements in efficiency and bearing of risk. This is best
done through a medium-term, rather than an annual, tariff determination process.
The fifth step is to avoid the single-buyer model and spell out the market structure
in terms of the timing of introducing markets for bulk power and choice to
consumers. In order to contain the possible market power of generation companies
owing to supply shortages in the short run, private distribution companies should
be allowed to set up their own generation capacity or sold bundled together with an
existing generation facility. Alternatively, they may be vested with supply from a
designated generation facility, at a specified price for a short period of five years.
Finally, the urban and industrial distribution zones should be sold through a process
of multiple-round ascending bid auctions. The non-urban or subsidised zones should
also be privatised on the basis of a minimum subsidy bid, through a process designed
to attract co-operatives, in addition to large and small private entrepreneurs. This
entire process can be accomplished within a year, as shown in Table 6.1.
As these steps are intrinsically inter-related, employing them selectively will not
yield the intended results. However, taken together, they have the potential to
transform our ailing power sector in a short span of two years. Further delay will
only prolong the agony and lead to a slowdown in our overall economic growth.
Either we act now or face more blackouts. Frankly, the choice couldnt be starker!
68 | Indian Infrastructure: Evolving Perspectives
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Accelerated Privatisation of Electricity Distribution | 69
NOTES
1. The disadvantages of the single-buyer model are further elaborated upon later in the
paper, in Section 2.5.
2. Under a medium-term tariff order, part of this recovery of stolen power by the private
distribution companies and the associated increase in revenue would already have been
accounted for by the SERC while deciding consumer tariffs and the benchmark T&D
loss reduction profile. Additional reduction in T&D losses, over and above this
benchmark, would thus result in higher profits for the distribution company, which is
precisely the incentive for the distribution companies to control theft.
3. See Privatisation of Kanpur Electricity Supply Company (KESCO)A Case Study, prepared
by Infrastructure Development Finance Company Ltd, December 2000.
4. Given the perception of supply shortages, one can reasonably assume that a bulk power
market would witness several price spikes in the initial phase of its operation.
5. Prima facie, while it is possible to de-license generation and institute a merit order
dispatch regime almost immediately, it may not be possible to implement open access
provisions as quickly, as it requires a reasonably reliable transmission and distribution
network and a transparent energy accounting system for its implementation.
6. Revenue losses would be borne by private financiers, who are best equipped to manage
market risks.
7. This is not strictly true, since there may be other products that are traded, such as reserve
power. In addition, it may differ at different points of the grid, in case there is a nodal
system for transmission pricing, which attaches different prices for transmission services
when off-take is from different points of the grid.
8. For example, this method does not make sense for a situation where the bid does not
depend on others information, e.g., when a construction contract is awarded. In this
case, each bidder knows the design and physical inputs required, and forms its own
estimate about the cost. Knowing the bids of other bidders provides no new information
that can lead to a revision of the bid.
9. Even in the mecca of capitalism, the USA, literally hundreds of cooperatives and small
companies are responsible for most of the rural electric supply.
70 | Indian Infrastructure: Evolving Perspectives
1. INTRODUCTION
The New Exploration Licensing Policy (NELP) introduced in 1997 has given
rise to an increase in proven reserves of domestic gas. The exploration of crude
oil too may turn out to be fruitful. The oil and gas blocks auctioned under
NELP I and NELP II have struck gas in significant quantity in the Krishna
Godaveri Basin (KG Basin) and some private companies have found gas onshore
in Rajasthan and Gujarat. Further auctioning of exploration blocks is on the
anvil (Box 7.1: New Exploration Licensing Policy). The Directorate General of
Hydrocarbonsthe regulator of the upstream hydrocarbon sectorhas stated
on record that there is ample geological evidence that Indias hydrocarbon
reserves can increase by two to three times.
1
A whole host of technical
innovationsincluding 3D seismic imaging, horizontal drilling, deepwater
platforms, multi-phase pumps, and tertiary recovery techniqueshave enabled
oil companies to increase exploration success, reduce development costs, boost
recoveries, cut downtime, and improve access to new exploration areas.
A pipeline is a safe, convenient, reliable and environment-friendly mode of
transport for bulk liquids. Several developments in the last fifty years, such as
the use of pigs to clean the interior of pipelines, the use of batching to transport
different petroleum products through the same pipeline, the use of cathodic
protection to reduce corrosion of pipelines, and the use of computers and
communication technologies to monitor and control pipeline operations, have
seen pipelines emerge as the preferred mode of transport for large volumes of
petroleum products. It is generally argued that in the relevant economic markets,
in which product pipelines seek to meet transportation demand, there is no
REGULATION OF
PETROLEUM PRODUCT
PIPELINES
February 2003
7
Regulation of Petroleum Product Pipelines | 71
effective competition; hence, regulatory restrictions upon the structure and
conduct of firms are required to reap benefits for society.
New refineries built after the deregulation of the sector are currently able to meet
the oil product demand of the country. The basis of industry structure of crude/oil
product pipelines has been primarily to decongest surface transport and to
complement rail transport. The access control and tariff applicable to pipeline
transportation of oil products is a result of centrally planned development of refinery
capacity, marketing and transportation of oil and oil products.
Box 7.1: New Exploration Licensing Policy
The widening gap between domestic production and consumption of hydrocarbon
products has put a serious strain on the Indian economy. Keeping in view the rising
import bill of Petroleum Oil and Lubricants (POL), GOI has taken several initiatives to
increase the pace of exploration and secure increasing participation of the private sector
in exploration and production of oil and gas. India has around 3.14 million sq km

of
sedimentary area in 26 basins. Only one-third of this area has been explored so far. The
ratio of reserves to production of oil is 17.8 while that of natural gas is 24.5 [BP (2002)].
Efforts have been made by the national oil companies and by the Directorate General of
Hydrocarbons (DGH) to open up unexplored areas by providing detailed seismic data.
The government liberalised the terms of offer for exploration blocks by unveiling the
NELP in 1997. Apart from better terms offered to bidders, an outstanding feature of
the new policy is that it offers a level playing field to national oil companies and private
sector participants. The new terms offered by the government include the following:
The possibility of seismic option in the first phase of the exploration period
No minimum expenditure commitment during the exploration period
No signature, production, or discovery bonus
No mandatory state participation
No carried interest by national oil companies
Income tax holiday for seven years from start of commercial production
No customs duty on imports required for petroleum operations
Biddable cost recovery limit up to 100 per cent
Option to amortize exploration and drilling expenditures over a period of
10 years from first commercial production
Sharing of profit petroleum, based on pre-tax investment multiple achieved by
the contractor and biddable
Freedom to contractor to market oil and gas in domestic market
Since 1997, three rounds of NELP have been made, and 22, 23 and 23 blocks have been
allocated under NELP I, II and III respectively. In MarchApril 2003, another 23 blocks
72 | Indian Infrastructure: Evolving Perspectives
are likely to be offered under NELP IV. Investments of around US$340 million
(Rs 16.25 billion) were made during the first phase of exploration in NELP I blocks till
September 2002. This exceeded the envisaged expenditure of US$250 million
(Rs 12 billion). In the second and third phase, the expenditure estimated is about
US$913 million (Rs 43.8 billion).
2
Allocation of exploration blocks under NELP I, II and III
Company/consortium NELP I
Reliance Industries & Niko Resources 12
ONGC 5
IOC & ONGC 2
ONGC & GAIL 1
OIL 1
Cairn Energy 1
Total 22
Company/consortium NELP II
ONGC 6
ONGC & consortium 10
Reliance Industries & Hardy Oil 4
Niko Resources 1
OIL 1
GSPCGAILJoshi Tech. 1
Total 23
Company/consortium NELP III
ONGC & consortium 13
Reliance Industries & Hardy Oil 9
GSPC consortium 1
Total 23
Sources: CMIE and media reports
Unlike oil products, pipeline is the only mode of transportation for large quantities of
natural gas. The HaziraBijaipurJagdishpur (HBJ) pipelinethe only natural gas
transmission pipeline in the countryis owned and operated by Gas Authority of
India Limited (GAIL). The gap between the supply and demand of gas, estimated to
be 55 metric million standard cubic metres per day (mmscmd) in Hydrocarbon
Vision 2025, and the exhaustion of existing gas resources, situated in the western oil
Regulation of Petroleum Product Pipelines | 73
fields, led the government to provide fiscal incentives to import liquefied natural gas
(LNG). This in turn guided the development of LNG terminals in the country to
supply regassified LNG through the HBJ pipeline. Natural gas from Bangladesh gas
fields, using a trans-national pipeline, will become a reality soon.
3
With substantial
gas findings in the KG Basin and a number of LNG facilities being established in the
country, many issues related to gas pipelines are coming to the forefront. Unlike
industry nomenclature to use natural gas distinctly and have separate regulation for
it, GOI has chosen to define petroleum products to include natural gas and all products
derived from it (Box 7.2: Definition of petroleum products).
Box 7.2: Definition of petroleum products
The definition of petroleum includes natural gas and refinery gas in the Petroleum
Act, 1934 (35 of 1934). The same definition is adopted in the Petroleum and Minerals
Pipelines (Acquisition of Right of User Inland) Act, 1962. The Petroleum Regulatory
Board Bill 2002 also includes natural gas in the definition of petroleum and the
expression petroleum product means any product manufactured from petroleum.
Generally, natural gas is recovered from gas lakes along with other hydrocarbons, water
and sand. Natural gas is extracted from this and refined to remove impurities like
water, other gases and sand. In its pure state, natural gas is a complex hydrocarbon
vapour. This vapour can be separated or fractionated into several components that
may be utilised as fuels or as raw materials for other products. In India too, C1, C2, C3,
C4 and C5 fractions are known by their common namesmethane, ethane, propane,
butane and other fractions respectivelyand used as fuel, feedstock for urea plants
and fuel for power plants, production of petrochemicals, LPG and industrial fuels and
solvent respectively. To all intents and purposes, legal definition of petroleum products
pipeline is inclusive of natural gas pipeline.
The purpose of this paper is to critically evaluate the demand and supply scenario
of oil products and gas emerging in the wake of the deregulation of the sector and to
suggest appropriate regulation of the pipeline industry for the benefit of consumers.
Our methodology is to focus on the economic characteristics of the pipeline industry
and their implications for the design of efficient regulatory policy. Demand for
pipeline capacity being a derived demand from the demand and supply of oil
products and gas, regulatory framework should be convergent with the regulatory
framework of oil and gas.
2. DEMAND AND SUPPLY OF PETROLEUM PRODUCTS
Hydrocarbon Vision 2025 [GOI (2000)] has played a decisive role in the
development of the hydrocarbon sector in the last few years. Its aim was to have a
free market and promote healthy competition among players and to improve
customer services.
74 | Indian Infrastructure: Evolving Perspectives
2.1 Demand for oil products
Almost all analysis starts with the demand estimates (up to 2025) of the
Hydrocarbons Group. The report suggested a large gap in the demand and supply
of oil products and assumed an income elasticity of one.
4
Table 7.1 gives the supply/
demand estimates given in Hydrocarbon Vision 2025. Almost all official documents
and expert analyses since 2000 refer to these demand estimates.
Table 7.1: Supply/demandpetroleum products (in mmt)
Year Demand (without Demand (with Estimated Estimated
meeting gas meeting gas refining crude
deficit) deficit) capacity requirement
19992000 91 103 69 69*
20012002 111 138 129 122*
20062007 148 179** 167 173
20112012 195 195*** 184 190
20242025 368 368 358 364
* Estimates given in the report. Actual crude oil consumption was 86 and 107 mmt respectively.
** Assuming 15 mmtpa of LNG import by 2007 (15 mmtpa = 57 mmscd)
*** Assuming adequate availability of gas through imports and domestic sources
Source: Report of the Group on India Hydrocarbon Vision 2025 (2000)
The report asserted that the gap will have to be met through imports and an increase
in domestic production from the existing oil and gas fields. The report did not
assume that the success of the NELP would increase supply of crude oil and gas in
the country. India has installed refining capacity of 115 million metric tonnes per
annum (mmtpa) and another 1015 mmtpa is likely to come on stream by
December 2004. Detailed estimates of oil products consumption suggest that India
will be able to meet all its oil product consumption needs from domestic refineries
(Table 7.6: Projections from POL consumption). In FY 200102, India consumed
100.4 million metric tonnes (mmt) of oil products and had a surplus of 3.8 mmt
oil products which were exported. In FY 2003, domestic consumption of oil
products is estimated to be 103 mmt with a surplus of 5 mmt. The refining capacity
is expected to increase to 162 mmtpa by 2008. The demand, on the other hand, is
estimated to grow to 128 mmtpa over this period. Refining margin in India is
US$23/bbl compared to under a dollar margin elsewhere. Hence, refineries in
India would prefer to satiate domestic demand before exporting
5
[ICRA (2003)].
Historically there has been a strong correlation between Gross Domestic Product
(GDP) growth rate and POL consumption due to the large share of the industrial and
agricultural sectors. The slowdown in the industrial and agricultural sectors and the
Regulation of Petroleum Product Pipelines | 75
phenomenal growth of the services sector, especially IT-related services, have changed
the composition of the GDP pie. For the past two years, GDP has been growing at
56 per cent and POL consumption is growing at less than 2.6 per cent per annum.
Figure 7.1: Growth of GDP versus POL consumption
Sources: CMIE and MoPNG (various issues) *Quick estimates
Figure 7.1 suggests that the demand elasticity of POL consumption has declined
rapidly, and in the first half of the fiscal year 200203, the demand of
POL consumption is likely to grow at less than 2.5 per cent compared to a GDP
growth of 4.4 per cent. The demand estimates for oil products and for gas provided
by Hydrocarbons Vision are far more optimistic than what the economy can
absorb. Many LNG suppliers, who rushed to construct LNG terminals and
regassification facilities, have shelved their plans in the absence of demand from
paying customers, such as independent power producers who abandoned their
projects (see Table 7.7: List of LNG terminals).
2.2 Regional demand and supply of oil products
The total demand of POL products is not an appropriate indicator of the pipeline
capacity required for different products and of the competitive pressure faced
by the pipeline industry. The demand for petroleum products is largest in the
north and in the west due to the extent of industrialisation and the higher
concentration of vehicles on the road. As against the above demand pattern, the
maximum supply of products comes from refineries situated in the western and
southern regions.
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76 | Indian Infrastructure: Evolving Perspectives
Figure 7.2: Aggregate supply/demand POL 200102
Source: India Infoline estimates
Figure 7.2 shows that the northern region is in a state of deficit, the southern and
eastern regions are barely in surplus, and the western region alone has substantial
surpluses.
6
The mismatch of regional demand and supply requires modes of
transport to bridge the demand and supply gap. The regional disparity is likely to
continue until refineries in the northern region are able to expand their capacity
and a new refinery in the northern region gets constructed.
7
The implication for oil
product pipelines is that pipeline capacity may not be fully utilised at all times and
that demand for oil product pipeline capacity may shrink even though demand for
petroleum product increases in the region.
2.3 Demand for natural gas
The natural gas market in India is supply constrained and the latent unmet demand
for gas has attracted unprecedented attention from the LNG industry after it was
provided fiscal incentive in Budget 2002. Natural gas in India is an intermediate
industrial product, mainly used by power generating plants and fertilizer plants.
Table 7.2: Supply/demandnatural gas (in mmscmd)
Year Demand
19992000 110*
20012002 151*
20062007 231
20112012 313
20242025 391
*Estimates given in the report. Actual consumption was 73.6 and 76.8 mmscmd respectively.
Source: Report of the Group on India Hydrocarbon Vision 2025 [GOI (2000)]
0
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Regulation of Petroleum Product Pipelines | 77
Hydrocarbon Vision 2025 suggested a surge in the demand for natural gas on the
assumption that the power sector would be a large consumer of gas and that the
fertiliser industry would substitute natural gas as raw feedstock in place of naphtha
after the deregulation of gas prices in January 2003 (Table 7.2). It asserted that the
gap will have to be met from imports, an increase in domestic production, and by
switching to liquid fuels. As against the estimated demand, the present domestic gas
supply and consumption is 76.8 mmscmd.
Figure 7.3: Main consumers of natural gas
Source: CMIE
The two biggest consumers of natural gas are power plants and fertiliser plants.
Approximately two-thirds of the natural gas produced in the country is consumed,
in equal proportion, by the power sector and by the fertiliser sector, and the
remaining one-third is used by domestic consumers, other industries, the transport
sector and by the gas pipeline industry itself. The proportion of other users has been
rising steadily through the nineties (Figure 7.3). It is expected that gas use would
spread wider into the residential, commercial, small industrial, and transport sectors
[GOI (2002a)]. The spatial analysis of gas-based fertilizers and power plants suggests
that there is a shortage of natural gas in western India, while the demand for gas on
the eastern side is minimal, as there they use coal of which there are large proven
reserves in the region. The demand for gas may not pick up if investment in the
power and fertiliser sectors does not materialise due to delay in sectoral reforms. In
the Report of the Sub-group on Natural Gas Availability, the MoPNG has
re-emphasised that the power sector and fertiliser demand would drive the gas demand
in the country in the foreseeable future. Given such uncertainties of gas demand,
1990
91
1991
92
1992
93
1993
94
1994
95
1995
96
1996
97
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s
Power Fertilisers Others
0
2,000
4,000
6,000
8,000
10,000
12,000
78 | Indian Infrastructure: Evolving Perspectives
the official estimates of gas demand vary from 135 mmscmd to 231 mmscmd
a large variation for any investor to take the financial risk of investment in gas
pipelines (Table 7.3).
Table 7.3: Gas demand estimates of different government agencies
Terminal year of
plan 200607
Gas linkage committee allocations +
potential demand by existing market 180 mmscmd
Hydrocarbon Vision 2025 231 mmscmd
ADBs Gas Master Plan 185 mmscmd
Initial assessment by user ministries + other sectors 135 mmscmd
Source: GOI (2002)
Many prospective investors in the power and fertiliser sectors have postponed
their investment in these sectors because major policy issues concerning their
viability are yet to be sorted out.
8
In addition to policy risk, gas demand is sensitive
to the delivered price and the price regime for competing alternatives. In the case
of fertilizers, there could be a make versus buy option available, and there are
strong opinions for and against the buy option. The overall economics of the
domestic production of fertilizers, fertilizer pricing, and other such factors, would
therefore need to be addressed in the context of the deregulation of oil and gas
prices [GOI (2002)]. In Hydrocarbon Vision 2025, large gas requirements have
been projected for the fertilizer sector to augment agricultural production to ensure
food security. In ADBs study on the Gas Master Plan, it was observed that it
would be relatively cheaper to buy fertilizer and/or manufacture it abroad and
import to India, rather than manufacture it domestically, based on the high
prices of imported gas [GOI (2002a)]. The demand of gas from the fertilizer
industry after the dismantling of subsidies on urea may get stunted if the import
of urea is allowed freely. The demand from other industries depends on the
long-term price of gas at the factory gate and not at the land-fall price. Many
industries can substitute fuel oil and electricity with gas as heating media, only
when it is economical.
9
The aforesaid discussion shows that natural gas is mainly an industrial product
and the future demand of natural gas depends crucially on gas price and on the
removal of subsidies in the fertilizer and power sectors. Gas pipeline capacity,
being a derived demand from the gas demand, need not show a secular increase
in demand as suggested by various government agencies and face unquantifiable
demand and market risk.
Regulation of Petroleum Product Pipelines | 79
2.4 Supply of natural gas
At present, Oil and Natural Gas Corporation of India (ONGC) and Oil India Limited
(OIL) are the main producers of natural gas in India, accounting for almost 98 per cent
of the gas produced in the country. GAIL is a dominant player in the transportation
and distribution sector, accounting for over 95 per cent of the gas sold in the country.
Gas production in the country stood at 27.9 billion cubic metres (bcm) in 200001. The
three main producing basins in the countrythe western offshore region, the Cambay
basin in Gujarat, and the Upper Assam regionare in the mature phase of exploration.
As per the projections of the Sub-group on Utilisation of Natural Gas constituted under
Hydrocarbon Vision 2025, domestic gas availability is expected to decline to about
16 bcm by 201112. Reserves at ONGCs Gandhar fields are also declining. ONGC has
informed large consumers that it may not be able to meet their entire requirements.
Concerned by the growing gap between demand and supply of gas, the government
waived the countervailing duty on LNG in Budget 2002 in order to encourage the building
of LNG terminal facilities. Several public sector units and private companies have
proposed to construct LNG terminals. An estimated 37.5 million metric tonnes per
annum (mmtpa) of LNG terminal capacity has been planned (Table 7.7: List of LNG
terminals). The first LNG Terminal at Dahej, owned by Petronet LNG, a PSU under the
administrative control of the MoPNG, is expected to become operational in the year
2004. A couple of more LNG terminals may become operational in the year 2005.
In view of the proximity to enormous gas reserves in Iran, Qatar, Bangladesh and
Burma, the option of pipeline gas is economically superior to that of LNG imports.
10
However, transnational gas pipelines hinge critically on the geo-political situation
and hence, the import of gas using pipelines is still a few years away. Keeping these
constraints in mind, the MoPNG estimated the potential gas supply by 200607 to
be approximately 140 mmscmd. Their estimates of gas supply potential between
200203 to 200607 is given in Table 7.4.
Table 7.4: Total gas supply potentialTenth Plan (in mmscmd)
Source 200203 200304 200405 200506 200607
Domestic (firm) 71.99 75.73 81.53 78.89 79.80
Domestic (firm + possible) 71.99 77.13 89.67 87.47 85.76
LNG imports 20.00 40.00 50.00
Gas imports transnational
gas pipeline 10.00
Total (domestic firm + imports) 71.99 75.73 101.53 118.89 139.80
Total (domestic firm +
possible + imports) 71.99 77.13 109.67 127.47 145.76
Source: GOI (2002a)
80 | Indian Infrastructure: Evolving Perspectives
But, the possibility of gas supply from domestic sources has changed considerably
after the gas findings in the KrishnaGodavari Basin. The in-place volume of natural
gas in D-6 Block of the KrishnaGodavari Basin has been estimated to be in excess
of 7 trillion cubic feet (tcf). The recoverable reserves have been estimated to be over
5 tcf. Once production begins in two years time, 4050 mmscmd of natural gas will
be added to the current domestic output; in 10 years, production is expected to go
up to 100 mmscmd.
11
An estimated production of 100 mmscmd in two years time
and 150 mmscmd in ten years time can only be absorbed if thermal power plants
substitute natural gas in place of coal as the primary fuel. On the basis of public
announcements of the exploration companies and DGHs confirmation, we estimate
the potential gas supply by the year 200607 to be as high as 179 mmscmd
(Table 7.5). These estimates have not taken into account the gas findings in the Bassein
(Vasai) gas field, the KG Basin, and in Rajasthan by ONGC and Cairn Energy because
these gas reserves have not yet been certified by a competent authority.
Table 7.5: Total gas supply potential post KG Basin find (in mmscmd)
Source 200203 200304 200405 200506 200607
Domestic (firm) 72 75 81 78 79
Domestic (firm + possible) 72 77 129 129 129
LNG imports 20 20 50
Total (domestic firm +
possible + imports) 72 77 149 149 179
Another development which is going to have a long-term impact on the supply of
oil and gas is the development of proven reserves of Sakhalin oil and gas fields.
These reserves were found in 1970 and are being developed now. Oil majors such as
BP and Royal Dutch/Shell group are developing these oil and gas fields.
12
Sakhalin
oil and gas are going to be important sources of energy for Japan, South Korea and
China. An LNG facility at Sakhalin, having a capacity of 9.6 mtpa, will be the nearest
LNG plant to the Japanese, Korean and Chinese market. ONGC Videsh Limited
holds a 20 per cent stake in the Sakhalin-1 project. Production of oil and gas from
these fields is expected to start in 2005 and in 2008 respectively.
2.4.1Gas prices
The business of gas has three important elementsproduction of gas, consumption
of gas and pipelines connecting gas fields to consumers. These elements are bonded
by delivered price of gas to consumers. The price of gas paid by consumers, in
turn, has three componentsprice of calorific value of gas, cost of carrying gas
from gas fields to consumers including production cost, and statutory levies and
Regulation of Petroleum Product Pipelines | 81
local taxes. It is because of the inflexibility of pipelines as a means of transportation
that investment in pipelines is a sunk cost and pipelines are laid only when producer
is assured of gas off-take over a long period of time. The necessity of upfront large
amount of money sunk in gas pipelines to enable gas to reach to consumers has led
to long-term contracts of 2530 years duration between gas producers and
consumers. On the other hand, presence of gas producers in the entire value chain,
i.e. exploration and development of gas fields, LNG plants, LNG ships and LNG
degassifcation facilities at consumerss end has led to reduction in contract period
and development of spot market in LNG.
So far, industry practice has been to link LNG prices to crude oil prices. Japan being
the largest consumer of LNG, reference price for LNG has been determined with
respect to Japanese Cocktail Crude (JCC) index as Japan used regassified LNG to
generate electric power. The dynamics of crude oil prices is based on revenue
maximisation of OPEC countries and a veiled attempt to dampen development of
alternative energy source such as natural gas (Appendix B). It should be noted that
the LNG price in Japan has been substantially higher than the US gas prices because
shipping and insurance cost from Middle East to Japan is included in this price. In
the USa significant producer and consumer of gasthe prices of natural gas have
not mimicked the crude oil prices. The natural gas prices have been market-
determined and are less volatile compared to crude oil prices (Figure 7.4). The cost
structure of natural gas production and of its transportation being different from
those of crude oil prices, many countries are choosing market-determined rates for
natural gas.
13
Hence, in India also, the linking of gas prices with crude oil prices or
fuel oil prices is not in the interest of consumers.
Figure 7.4: LNG prices, US gas prices and crude oil prices
Source: BP (2002)
1.0
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Japan (LNG cif - US$/mBtu) USA Henery Hub (US$/mBtu) Dubai (US$/bbl)
82 | Indian Infrastructure: Evolving Perspectives
2.4.1.1 Gas price scenario in India
The price of natural gas produced by ONGC and OIL are fixed by the
government. In 1997, the government linked the landfall price of gas to a basket
of international fuel oil prices with the ceiling of Rs 2850/1000 m
3
. The Gas
Pricing Committee had recommended that natural gas prices be increased
gradually so that they are at par with the import prices of LNG by 2002.
The MoPNG was to review recommendations of the Gas Pricing Committee in
April 2000 but it postponed the decision on the revision of natural gas prices.
The government was supposed to raise gas prices to 55 per cent, 65 per cent and
75 per cent of the basket price in FY98, FY99 and FY00 respectively but did not
implement it. However, with the rise in global prices the landfall prices of gas
hit the ceiling in October 1999.
14
The consumer price along the HBJ pipeline
was fixed at Rs 4000/1000 m
3
, which included a flat transportation charge of
Rs 1150/1000 m
3
.
15
Currently, the city gate price of gas is fixed and the factory
gate price includes royalty, taxes and other statutory levies.
2.4.1.2 Gas price post K-G Basin gas discovery
It has been reported that Reliance will price its KG Basin gas at US$3/mBtu on a
delivered basis. The price of $3/mBtu offered by Reliance is substantially lower
than the price of naphtha and fuel oil (a sizeable proportion of existing fertilisers
and power capacity is based on these) at about US$77.5/mBtu and US$5.5
6.5/mBtu respectively. This means that all users, irrespective of their location, will
get gas at this price. The corresponding price currently charged by GAIL for supply
of domestic gas from ONGC and other producers in the private/joint sectors is
US$1.9/mBtu to plants at landfall point/receiving on-shore gas, and US$2.5/mBtu
to plants along the HBJ pipeline. The local taxes are different in different states and
quite substantial in some states. For example, while Madhya Pradesh and Rajasthan
charge 4 per cent sales tax on natural gas or LNG, Maharashtra charges 15.2 per cent,
Andhra Pradesh wants 16 per cent and Gujarat charges 20 per cent. For imported
LNG, Petronet-LNG has indicated that its price (benchmarked to the Japanese
Cocktail Crude Index) at the Dahej terminal will be US$4/mBtu.
16
At the user point,
the price will be higher. The industries located in the hinterland may end up paying
an amount in excess of US$5/mBtu. Apart from Qatar, Australia, Russia and other
Middle East countries are ready to supply LNG to India at a competitive price.
Piped gas from Bangladesh could, perhaps, match the RIL price. Iran and Burma
are also competing to provide piped gas to India using transnational gas pipelines.
The issue of gas pipelines has been intrinsically linked to delivered gas prices.
The cornerstone of the success of the NELP is that the companies investing in
exploration and development of oil and gas fields are allowed to sell oil and gas at
Regulation of Petroleum Product Pipelines | 83
market price. The regassified LNG also can be sold at market price but the price of
the gas produced by ONGC and OIL is still controlled. The MoPNG is in favour
of deregulating the gas prices but the main user industriespower and fertilizer
have raised serious concerns. It is reported that the MoPNG would have liked to
deregulate gas prices and it has proposed to raise the ceiling on gas prices to
75 per cent of fuel oil prices by 1 January 2003 (Rs 4300 per mcm) and to 100 per cent
by 1 April 2003 (Rs 5800 per mcm) before deregulating completely in October 2003.
This was not acceptable to user industry ministries and the government constituted
a Group of Ministers Committee to recommend gas price.
17
The implication of all these developments is that gas prices linked to fuel oil prices
are not in the long-term interest of Indian consumers. The government should
abandon its existing approach of linking the price of gas to the imported price of
fuel oil. The pricing of gas should stand on its own, especially when global trade in
gas is poised to take a quantum jump. Gas prices locked at US$3/mBtu would lead
to supply of electricity at a competitive rate of Rs 2.30 to Rs 2.70 per unit and would
ensure a competitive position on the merit order of most State Electricity Boards.
18
Even the fertiliser industry stands to gain substantially when gas prices are allowed
to be market-determined [ICRA (2003)].
An important element in this development is that the producers of gas are ready to
keep the city gate price of gas same all over the country. This is at variance from
government thinking of doing away with the flat transportation charge for gas
and introducing a new distance-based charge for gas supplied through long
distance pipelines.
From the above unfolding scenario, two issues are important for the gas pipeline
industry. First, there will be a number of suppliers of gas in the country. Second,
there will be a keen competition among suppliers to supply gas at competitive rates
and they would like to lock in delivered gas price to ensure that investment in the
development of gas fields and the sunk cost in laying of pipelines yield an average
rate of return over its life commensurate with the risks assessed at the time
of investment.
3. ECONOMICS OF PIPELINES
3.1 Crude pipelines
Crude oil is the most important input for any refinery. Crude pipelines are largely
owned and operated by the refinery/oil field owner. The pipeline capacity is in line
with the refinery capacity and, therefore, it is an integral part of the refinery. These
pipelines are generally not regulated.
84 | Indian Infrastructure: Evolving Perspectives
3.2 Product pipelines
The traditional methods for inland bulk transportation of petroleum products
involve the use of road tankers, rail tank wagons and pipelines. For transporting
relatively small volumes up to 300 km, road tankers are the most cost-effective
method, even though their unit cost (ton/kilometre) is the highest among all the
above-mentioned methods. Beyond 300 km, if volumes are good enough for full
dedicated trains, rail tank wagons could be the best solution, provided there is an
existing railway system and it is efficiently managed. When the railway is competently
operated, the ton/kilometre cost of using a rail tank wagon is roughly one-half the
ton/kilometre cost of using a road tanker. Transportation of oil products via pipelines
require relatively large initial investments, and generally are attractive only for large
volumes travelling long distances. However, once the initial investment costs are
amortized, pipeline transportation offers the cheapest ton/kilometre costs in the
long term because the basic operating cost for the pipeline, without amortization
costs, is less than one-half the rail operating cost [World Bank (2001)].
Figure 7.5 compares typical petroleum transportation costs for various levels of
throughput for road, rail, and pipeline modes. As the graph shows, the specific
transportation cost via pipeline decreases with increasing transport volume, whereas
product transport by road or railway is not dependent on the transport volume.
Figure 7.5 also shows that the pipeline option becomes competitive once transport
volumes rise above 700,000 tonnes per year and that with a transport volume of
three million tons per annum the specific transportation cost of using a pipeline is
about one-fourth the transport cost of using a road tanker.
Figure 7.5: Comparative transportation costs for road, rail and pipeline modes
Note: These are economic costs and no margin for profit has been added
Source: World Bank (2001)
Pipeline
Transport volume (1000 tonnes/year)
S
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0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
Road tanker
Railway - mixed
Railway - unit
Regulation of Petroleum Product Pipelines | 85
For the pipeline, the amortization of initial capital expenditure has a major influence
in determining tariff. Once the debt repayment and capital cost depreciation is
completed, transportation of oil products by pipeline can provide a competitive
edge. Figure 7.6 shows the specific transportation cost (before and after
amortization of capital cost) for a pipeline (12 diameter). The comparison
demonstrates that even if the cost of preventive maintenance increases, the specific
transportation cost decreases by about 50 per cent as compared to the cost during
the amortization period.
Figure 7.6: Influence of amortization for a 12 diameter pipeline
Source: World Bank (2001)
Clearly transportation of large volumes of oil products favours pipelines which
are fixed point-to-point link; and over a short distance, road tankers, which are
flexible link, are economical. In the transportation of products, road tankers
are an integral part of the distribution network for any oil company to reach
demand centres.
3.3 Gas pipelines
Gas is usually transported using pipelines. For transportation of gas, transmission
lines are required to transport pressurised gas over long distances and supply lines
having low pressure are required to supply gas to end consumers.
19
Investment is
required in development of gas pipeline facilities, comprising of high pressure,
medium pressure and low pressure system and associated gas compressors,
telecommunication system, etc.
Though the economic profile of a gas pipeline is similar to that of an oil pipeline,
there are some major disparities between oil and gas pipelines which alter the
0 1 2 3 4 5 6 7 8 9
0
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2
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4
5
6
7
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specific
transp. cost
(OPEX only)
specific
transp. cost
(OPEX +
CAPEX)
Transport volume (million tons/year)
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86 | Indian Infrastructure: Evolving Perspectives
break-even point of gas pipelines. First, the unit investment in gas pipelines is
three times that of oil pipelines (without terminal facilities). Second, the life
span of gas pipelines is at least three times that of oil pipelines. Third, for oil
product pipelines to work efficiently, a large sum of investments is required in
terminal facilities including storage tanks whereas gas pipelines are designed to
take care of short-term storage requirements. Fourth, gas pipelines consume
gas to run gas pumps to push gas down the pipeline and this internal
consumption is accounted as shrinkage. This internal consumption of gas is
directly proportional to the distance over which gas is to be transported
20
[Gardel (1981)].
The sunk cost and longevity of a gas pipeline suggest that the gas pipeline industry
is one in which contestability analysis cannot be applied and these sunk costs
generally deter the entry of a new pipeline. This implies that small gas finds cannot
be commercially exploited and the life of gas pipelines may be longer than the life
of gas lakes.
4. MAIN ISSUES FOR PETROLEUM PRODUCT PIPELINES IN INDIA
4.1 Oil product pipelines
In India, prima facie pipelines would appear to have a fragmented network of
various types, thereby suggesting little planning, if any. However, when one
superimposes railways and road network on the pipeline network with the volume
of crude/products to be pushed through the transport network, the picture
becomes clearer and the product pipeline network emerges as an integral part of
transport logistics and in congruence with the economics of product pipelines.
The basis of the industry structure of crude/product pipelines has been primarily
to decongest surface transport and to complement rail transport. The access control
and tariff applicable to pipeline transportation of oil/products is a result of centrally
planned development of refinery capacity, marketing and transportation of oil
and oil products. The current utilisation of oil pipelines is between 50 per cent
60 per cent of the available capacity.
21
The main issues in product pipelines are
ownership, access and transmission charges.
4.1.1 Ownership and access
Under the Administrative Price Mechanism (APM), marketing of petroleum
products was undertaken only by public sector oil companies and directed by the
MoPNG. The existing pipelines owned by different marketing companies used to
have a hospitality arrangement to carry products of other refineries. That is, if
Regulation of Petroleum Product Pipelines | 87
refineries had a marketing arrangement with the pipeline operating company,
they had access to the pipeline. Post APM, product pipelines are being used
strategically to deny access to other refiners by the operating company and hence
the issue of access has become important.
22
Some pipelines which were product
pipelines have been converted into crude pipelines, thus leaving investments in
pipelines connected to it, but owned by other operators, stranded.
23
Product
pipelines generally carry multiple products and, therefore, tap-off points need to
have substantial investment in storage and quality control facilities.
4.1.2Transportation charges
Less economical pipelines (owing to lower volume traffic or demand) were cross-
subsidised by pipelines enjoying better economies. Once the asset was created, it
was serviced by the oil pool account administered by the government. Under APM,
pipelines complemented the railway network to reach oil products to main demand
centres. Being captive users and the transportation charges being paid from the
oil pool account, marketing companies were immune to transportation charges
paid to railways. The POL used to attract the highest rail tariff rate under the
APM.
24
But sensing tough competition from the oil pipeline, the railways has
already begun slashing freight tariff. In some sectors, the railways has reduced
rates by 20 per cent or so.
25
Post APM, the scenario has changed with transport
charges being paid by the marketing companies
26
(see Box 7.3).
The laying of product pipelines needs upfront investment; hence tariff charges
should be in two partscapacity charge and user charge. The capacity charge is
to cover the fixed cost of laying the pipeline and the user charge is a variable
charge in proportion to the volume of material carried through the pipeline.
This second part of the tariff is to cover the operational cost of the pipeline and
ancillary services.
An oil product pipeline also has business risk. Capacity augmentation of an
existing refinery in a particular region or the construction of a new refinery
changes the demand and supply scenario of oil products in the region. Minor
suppliers of oil products do not want to give a long-term take-or-pay
commitment to the pipeline company because the contingent liability of such
providers increases. A refinery having a dedicated pipeline to evacuate products,
however, has the comfort of pre-empting product demand in the region as well
as being able to meet the growing demand of oil products by augmenting the
capacity of the pipeline.
88 | Indian Infrastructure: Evolving Perspectives
Box 7.3: Impact of OCC on oil product prices
The Oil Coordination Committee (OCC) was a de facto regulator for the oil industry.
The OCC was established in 1975 to implement the elaborate oil pool account
mechanism recommended by the Oil Prices Committee. As the nodal agency for the
sector, key functions of the OCC included administration of pool accounts,
coordination of the transportation of crude oil imports for PSU refineries, inland
distribution of petroleum products, deciding on allocation of crude oil, product pattern
of refineries based on imports, exports and national/regional demands, logistics of
transportation, and other allied matters. Thus, the OCC under the administrative
control of the MoPNG, performed the functions of a planner, coordinator, advisor,
and regulator in the downstream sector.
27
The OCC performed its assigned role using
the Administrative Price Mechanism, which ensured
* orderly growth of the oil industry;
* continuous availability of petroleum products to consumers at fairly stable prices;
* continuous availability of crude oil to refiners; and
* achievement of socio-economic objectives of the government.
At the heart of the APM was the oil pool account. This is the account, where the subsidies
and contributions were netted off each other. Under the APM, refined products were
purchased from refineries and transferred to marketing companies. The refineries were
paid at international parity price of the products. The OCC decided the amount
marketed by each marketing company and allowed 12 per cent post tax return on
funds deployed by marketing companies. The oil pool deficit increased substantially
year after year.
The APM had many unintended consequences. Oil product pricing was divorced
from underlying crude prices. The prices of politically-sensitive products did not
reflect the economic costs of the products. Subsidies and cross-subsidies resulted
in a wide distortion of consumer prices and led to wastage of energy. The APM
provided little incentive for improving productivity or efficiency as returns were
guaranteed on the capital employed. Competition was stifled with marketing
companies acting as mere distribution companies. The industry is just trying to
get out of this mindset.
The administrative control of the ministry on utilisation/misutilisation of various
assets can be seen from the following anecdote: The MoPNG would like to ship crude
oil from Revva field offshore Andhra Pradesh to the Bongaigaon Refinery and
Petrochemicals Ltd (using the HaldiaBarauniBongaigaon crude pipeline) and bring
the refined products back to the northern region (using BongaigaonBarauni product
pipeline). Such a move is being opposed by AP as the crude is used by HPCLs
Vizag refinery.
28
Regulation of Petroleum Product Pipelines | 89
4.2 Natural gas pipelines
In India, natural gas pipelines mainly serve industrial consumers. The transportation
of natural gas through pipelines involves significant economies of scale and very
little inter-modal competition. The nature of natural monopoly of gas transport
calls for a set of regulations not required for oil products pipeline. However, the
issues related to gas pipelines are the same as those related to oil product pipelines,
namely, ownership, access and transmission charges. The issue of statecentre
jurisdiction will get settled when the Supreme Court pronounces judgement on the
rights of state to pass legislation related to gas.
4.2.1Ownership and access
At present, the HBJ pipeline is the only transmission gas pipeline in the country and
all the gas from ONGCs western gas fields is marketed by GAIL. But, as a number
of LNG terminals come up along the western coast, the issue of access to HBJ pipeline
will become important. Unlike oil product pipelines the tap-off point in a gas pipeline
can be easily provided as natural gas is a homogeneous product and priced on the
basis of energy content.
4.2.2 Transportation charges
Gas uses gas to transport gas and, hence, operational cost of a gas pipeline is a function
of volume of gas and distance over which the gas is to be transported.
29
But, in India,
gas is sold to users as bundled product where gas is priced according to calorific content
of gas and flat transportation charges. The MoPNG has fixed the transportation charges
as Rs 1150 per thousand cubic metres (tcm) along the HBJ pipeline, with effect from
1 October 1997.
30
While the transportation charge will remain static until the Group
of Ministers decides on decontrolling gas prices in the country, GAIL will get
compensation for cost escalation directly from the gas pool account.
31
In a supply constrained scenario, transportation charges were fixed by the MoPNG
to ensure that GAIL does not exploit its monopoly power and at the same time
earns adequate return on its investment. In a few years time, when there will be
multiple suppliers of gas, a gas transport operator could be exposed to uncontrollable
risk if producers and importers do not supply adequate quantity. On the other hand,
if flat transport charges are unremunerative, it would not be keen to increase the
pipeline capacity. Long term contracts between producer and consumers mitigate
the supply risk but expose a pipeline company to credit risk.
4.2.3 Statecentre jurisdiction
Gujarat is a key state for the gas industry. Besides exploration and production from
the western onshore and offshore gas fields, Gujarat is the gateway for gas imports
90 | Indian Infrastructure: Evolving Perspectives
in the country. The state also houses a significant number of large downstream
consumers. Consequently, the state government passed the Gujarat Gas Act to
facilitate the development of transmission and distribution (T&D) infrastructure
in the state. The Act has come in for criticism from the centre and GAIL, and it has
been referred to the Supreme Court for its opinion. Maharashtra, Andhra Pradesh,
Punjab, Tripura and Assam are also keen to expand gas distribution pipeline network
in their states but they have not shown any inclination to establish a state level
authority to regulate gas T&D infrastructure.
Potential centrestate areas of conflict relate to access and transportation charges of
inter-state transmission lines.
32
National PSUs, such as GAIL, have argued that one
company regulated by two regulatory authorities may give rise to operational
difficulty if access code and transportation charges are divergent. For example, a
gas pipeline built on contract carriage principle cannot function on open carrier
principle (see Box 7.4: Contract carrier versus common carriage carrier).
Box 7.4: Contract carrier versus common carriage carrier
Contract carriers are only obligated to provide service for those who have contracted
for their services. Under contract carriage, individual transmitters need to provide
additional facilities only where users are willing to sign firm contracts for their use. In
the case of existing facilities, transmitters are required to provide transmission services
up to the extent of any spare capacity. This means that system development generally
takes place in response to demand from users, and this in turn facilitates the financing
of new developments. The users pay for capacity on pipelines and receive in return a
defined set of rights enshrined in a contract. These rights set out in these contracts
cannot, in general, be undermined by later developments outside the control of the
contracting parties.
The main advantage to construct a pipeline on contract carrier principle is that the
pipeline company is paid for capacity and demand risk is shifted to users. Capacity is
built in line with the committed demand and this eliminates financial risk attached to
building overcapacity. Regulatory risk is also limited as contracts define transportion
charges. The disadvantage under this system is that the producer has captive consumers,
thus, reducing the choice which consumers may get in future.
Common carriers are obliged to render service to all comers on a non-discriminatory
basis and have the responsibility to reasonably anticipate future demand for their
services. If the regulator feels that the transmitter is underestimating future needs, he
may require that the transmitter put up pipelines with adequate capacity. The
transmitter would, of course, have the right to recover all costs and earn a reasonable
rate of return on all authorised assets. Mandatory open access means that the regulator
should have the power to ensure that any spare capacity in a pipeline be offered on a
Regulation of Petroleum Product Pipelines | 91
non-discretionary basis to anyone who wishes to make use of that capacity. The
regulator should also have the power to provide interconnection between existing and
other pipelines.
The key features of common carriage are that while transmission is provided on an as
required basis, users are not committed to long-term use-of-system contracts. This
means that the transmitter must construct additional capacity to cope with all
anticipated demands for its services. The transmitter, therefore, has significant demand
forecasting and investment obligations.
The main advantage is to producers and consumers as they do not have to pay or
commit for the pipeline capacity. A consumer has a choice to use an alternative supplier
of the product. In the absence of committed consumers, producers are reluctant to
sign take-or-pay contract which increases financing risk. Under the open carrier system,
a regulator determines transportation tariff and he needs detailed capacity utilisation
and financing cost to determine the tariff. Additionally, the regulator can force the
pipeline owner to increase the pipeline capacity if he feels that the capacity is inadequate.
5. POLICY AND REGULATORY DEVELOPMENTS
Instead of having separate regulatory authorities for natural gas and the downstream
petroleum sector, the MoPNG, on recommendations from user ministries, has
decided to have a single authority in the country for the natural gas and downstream
petroleum sector.
33
A bill to constitute a downstream petroleum regulatory board was introduced in
the Parliament on 8 May 2002, and has been referred to the Parliamentary Standing
Committee on Petroleum and Chemicals [GOI (2002b)]. The Bill would be tabled
in Parliament as soon as the Standing Committee approves it. In the interim period,
the union government will continue to act as the regulator.
34
5.1 The Petroleum Regulatory Board Bill, 2002
The proposed bill is to provide for the establishment of a Petroleum Regulatory
Board to regulate the refining, processing, storage, transportation, distribution,
marketing and sale of petroleum and petroleum products excluding the production
of crude oil and natural gas. The purpose of the bill is to promote competitive
markets.
The salient features of the bill related to petroleum product pipelines are
as follows:
The bill will authorise the central government to constitute a single authority
for the downstream petroleum sector for the entire country.
The regulator will have authority over new, as well as existing, pipelines.
92 | Indian Infrastructure: Evolving Perspectives
The regulator would regulate gas and oil product pipelines which have been
laid on common carrier principle. Captive pipelines and crude oil pipelines
would not come under its purview. New pipeline owners/operators would have
right of first use.
In practice, pipelines will be laid on modified contract carriage principle
and existing owners and operators of pipelines would keep the right of first
use. Only that capacity which is not being used would come under common
carrier principle. Even expansion of capacity will carry the right of first use
(see Box 7.4: Contract carrier versus common carriage carrier).
The regulatory body would have powers to declare a pipeline as common
carrier, and to authorise laying, building, operating or expanding a pipeline as
common carrier, or for establishing a liquefied natural gas terminal, or for
marketing notified petroleum and petroleum products.
Before declaring a pipeline common carrier, the owner would be given a proper
hearing and fix the term and conditions subject to which the pipeline is to be
declared as a common carrier. The entity laying, building, operating or
expanding a pipeline shall have the right of first use.
The authority would permit pipeline-on-pipeline competition and invite
open offers.
The regulator would have powers to regulate any distribution or marketing
company.
5.2 Guidelines for laying petroleum product pipelines
The Ministry of Petroleum and Natural Gas has notified a new policy for laying
petroleum product pipelines in the country through the Gazette of India
Extraordinary dated 20 November 2002 [GOI (2002c)].
The salient features of the Guidelines are as follows:
There would be three categories of petroleum product pipelines, namely,
(i) pipelines originating from refineries upto a distance of around 300 km;
(ii) captive pipelines, originating either from a refinery or from an oil
companys terminal, of any length; and (iii) pipelines exceeding 300 km in
length and pipelines originating from ports. Category (i) and (ii) pipelines
would be for the exclusive use of the proposer company and owned by the
company. Any legal entity can propose and own a category (iii) pipeline.
Three-fourths of the designed capacity of a category (iii) pipeline would be
reserved for the owner and take or pay contracts and only one-fourth of
the designed capacity would be made available for use by anyone at a
government-approved tariff.
Regulation of Petroleum Product Pipelines | 93
Through this notification, the government has taken away the monopoly of
Petronet India Limited for laying product pipelines in the country.
Contract carriage principle has effectively replaced the Common carrier
principle for pipelines.
35
The authority to grant right of use inland, i.e. to give license to lay a pipeline,
will remain with the ministry.
The Guidelines have a sunset clause. The regulatory functions of product
pipelines will be passed on to the regulatory board constituted under the
Petroleum Regulatory Board Bill 2002.
Through the bill and the guidelines, the government has tried to address the issues
of investment efficiency and operating efficiency, and tried to make the pipelines
bankable. The government has recognised that pipeline developments are long-
term investments, reliant on market growth for their viability. As a consequence,
returns are likely to be poor during the initial years of a project. For a project to
proceed and to attract investment in the sector, the estimated average rate of return
of the project over its life must be commensurate with the risks as assessed at the
time of the investment. The government recognised the nature of these risks and
their consequences and, thus, came out with the bill and further liberalised the
sector through the guidelines.
Among the classes of risk that face the developer of a pipeline project in India,
credit risk, market risk and regulatory risk predominate. All these risks have a
significant effect on the investors assessment of project viability.
The current level of credit risk is high and it needs to be mitigated and the
guidelines have given a free hand to developers to manage captive pipelines as
well as pipelines upto 300 km in length. The investor expects to accept market
risk along with construction, technological and general economic risks. Market
risk is about whether sufficient load will materialise to make the project viable.
For a greenfields project, there are two sources of loadfirst, penetration of
the existing available market, i.e. the conversion of existing consumers to alternate
fuels; and second, generation of new demand from new consuming businesses
to the region.
The bill and the guidelines have been able to take care of the market risk and credit
risk; but the bill, which has introduced regulatory risk emanating from the regulators
power to declare a pipeline as a common carrier, should be addressed by the
government and the regulatory authority.
94 | Indian Infrastructure: Evolving Perspectives
6 . THE WAY FORWARD FOR PIPELINE REGULATION
A regulatory environment must be created to encourage pipeline infrastructure
development and make an allowance for efficient market growth. The Petroleum
Regulatory Board Bill 2002 is clear that there will be a single regulatory authority to
regulate downstream oil and natural gas sector. As and when the bill becomes an Act,
the government should establish a regulatory authority for the downstream petroleum
sector under the Act which has power to regulate petroleum product pipelines.
The Guidelines to Lay Petroleum Product Pipelines has further liberalised the pipeline
sector and the sunset clause in the guidelines ensures that the authority to regulate
pipelines is automatically transferred to the regulator established under the Act.
The following major tasks in the pipeline industry should be addressed by
the regulator:
Introduce distance-based transportation charges for natural gas. This would
ensure that small onshore gas fields are viable and have access to the gas
pipeline network.
The regulator must distinguish transmission gas pipelines from distribution
and supply gas pipelines. Although, at present there is only one supplier of gas
in metropolitan cities, the scenario could change rapidly if new suppliers of
gas enter the distribution business. The distribution and supply pipelines should
be licensed on open access principle right from the beginning to ensure that
retail household consumers and the transportation sector is able to choose the
supplier of gas at a later date. The gas supply companies must be asked to
maintain separate accounts to show the cost of energy and cost of supply
and distribution.
The regulator should encourage a secondary market in the product pipeline
capacity as the market matures.
36
In pipeline regulation, there are two issues which need to be addressed to mitigate
regulatory risk. First, the possibility of mandated access adds to the regulatory risk
for investors and the pipeline owner. If the terms and conditions of any mandated
access are perceived as likely to be unduly favourable to the access seeker, the
attractiveness of investment will be reduced. Regulatory risk can be reduced
significantly if the regulatory rate of return were indicated for the life of the project
at its inception on the basis of the risks as assessed at that time.
Second, to give right of use still remains with the central government and from this
authority the government derives the power to license a petroleum pipeline [GOI
(1962)]. This power should be vested in the regulator so that the regulator has enough
teeth to ensure that interconnection and the power to declare a pipeline a common
carrier can be enforced.
Regulation of Petroleum Product Pipelines | 95
7. CONCLUSION
The petroleum product market is enjoying the fruits of economic deregulation set
in motion in 1991. Private sector investment in oil refineries has resulted in a
substantial increase in refining capacity in the last two years and the country is
running a surplus of refined oil products. Post the dismantling of APM, the
transportation of oil products, which was overlooked earlier, has acquired
importance. The failure of Petronet India Limited (PIL) to achieve financial closure
has led the government to change its regulatory practice of petroleum product
pipelines. The Guidelines to Lay Petroleum Product Pipelines has taken away PILs
monopoly over laying new product pipelines and new pipelines can be constructed
by anyone using a modified contract carriage principle rather than being compelled
to adopt the common carrier principle. The modification in the contract carrier
principle is that one-fourth of the designed pipeline capacity should be made available
on open carrier principle.
The natural gas market in India is in transition as it attempts to move from a fully
centralised, government-controlled business to one that relies increasingly upon
reduced government controls and a more market-responsive pricing climate to
encourage foreign and private investment in upstream exploration and development
of oil and gas. Natural gas pipeline projects are built on trust because nearly all of
the cost is incurred at the beginning and the revenues come only over the next
couple of decades, usually from long-term contracts signed with gas users. Pipeline
construction and development of gas fields is undertaken only after these contracts
are signed. The Petroleum Regulatory Board Bill 2002 and the Guidelines to Lay
Petroleum Product Pipelines have addressed some of these issues.
The scenario which may become a reality in a couple of years time is the supply of
gas from multiple sources using different processes having different cost structures.
In such circumstances, gas pipelines have been allowed to use contract carriage
principle as well as to lay captive pipelines. The driving force to use pipelines will be
the sunk cost and long-term contracts with the users.
37
Captive gas transmission
pipelines would not be regulated. The distribution and supply gas pipelines are
being laid by individual gas companies and should be licensed on open-carrier
principle right from the beginning to allow choice at a later date to retail consumers
and to the transport industry. Only a few metropolitan cities have started to have
piped gas for domestic use and it faces competition from bottled LPG gas which is
a notified product and would continue to be subsidised for some more time. The
Petroleum Regulatory Board Bill provides adequate power to regulate access and
the price of gas, and to regulate distribution companies and notified products.
The gas distribution and supply pipeline regulation is going to remain in animated
96 | Indian Infrastructure: Evolving Perspectives
suspension until the issue of centrestate jurisdiction over gas is decided by the
Supreme Court.
We have critically examined the Petroleum Regulatory Board Bill 2002 and the
Guidelines for Laying the Petroleum Product Pipelines which have addressed the
issue of investment and operational efficiency and also made pipelines investment
bankable. The government should get the bill through Parliament and constitute a
petroleum regulatory authority. The new guidelines point towards a great deal of
reliance on market forces to discover product prices and transportation tariffs.
Oil product pipelines already face strong competitive pressures from other modes
of transportationsuch as trucking and railways.
In order to create a regulatory environment which encourages pipeline infrastructure
development, the authority should provide an indicative rate of return for the life
of the project at the time of granting right of use to mitigate regulatory risk.
The authority to acquire land under the Petroleum and Minerals Pipelines
(Acquisition of Right of User Inland) Act, 1962, should also vest in the regulatory
authority in order to unify all regulatory and licensing powers in one authority.
Regulation of Petroleum Product Pipelines | 97
APPENDIX A
Table 7.6: Projections for POL consumption 20012008 (in 000 metric tonnes)
2001 2002 2003 2004 2005 2006 2007 2008
LPG 7021 7583 8189 8844 9552 10316 11141 12033
MS 6625 7138 7692 8288 8930 9622 10368 11171
SKO 11295 11323 11606 11896 12194 12499 12811 13131
HSD 38203 37439 38188 39906 41901 43997 46196 48506
ATF 2234 2301 2370 2441 2514 2590 2668 2748
FO/LSHS 12645 12930 13220 13518 13822 14133 14451 14776
Lubes 1027 1053 1079 1106 1134 1162 1191 1221
Bitumen 2677 2784 2895 3011 3132 3257 3387 3523
Others 6266 6391 6519 6650 6783 6918 7057 7198
Total 102000 102956 105780 109689 113997 118536 123319 128363
Overall growth rate % 0.9 2.7 3.7 3.9 4.0 4.0 4.1
Source: India Infoline Estimates
Table 7.7: List of LNG terminals
Location Capacity (mmtpa) Promoter
Dahej (Gujarat) 5.0 Petronet LNG (January 2004)
Ennore (Tamil Nadu) Petronet LNG
Mangalore (Karnataka) Petronet LNG
Kochi (Kerala) 2.5 Petronet LNG
Vizag (Andhra Pradesh) 2.0 Total/HPCL
Trombay (Maharashtra) 2.5 Total/Tata Electric (shelved)
Pipavav (Gujarat) 2.5 BG/Gujarat Pipavav Port (shelved)
Dabhol (Maharashtra) 5.0 Enron (suspended)
Ennore (Tamil Nadu) 2.5 TIDCO/Unocal (shelved)
Kakinada (AP) 2.5 CMS Energy/Unocal/GVK Industries
Kakinada (AP) 2.5 IOC/Petronas/BP
Hazira (Gujarat) TBA Mobil/Gujarat Maritime Board
Hazira (Gujarat) 5.0 Reliance/Elf Aquitaine
Hazira (Gujarat) 2.5 Shell/Essar (proposed)
Total 37.5
Source: Petroleum Economist (December 1997), media reports
98 | Indian Infrastructure: Evolving Perspectives
Table 7.8: List of crude pipelines
Pipeline Length (km) Capacity (mmtpa) Owner
NahorkatiyaBarauni 1156 5.5 OIL
SalayaMathura 1881 21.0 IOCL
AnkleshwarKoyali 95 2.0 ONGC
KalolNavagamKoyali 127 2.0 ONGC
Bombay HighUran (offshore) 203 15.0 ONGC
HaldiaBarauni 506 4.2 IOCL
Total 3968 49.7
Source: IOC Presentation, Seminar on Pipelines (2000)
Table 7.9: List of gas pipelines
Name Length (km) Owned by
Trunk Lines
HaziraBijaipurJagdishpur 2300 GAIL
GoaSangliHyderabad ~1300 Gas Transportation
VijayawadaKakinada; Spurs to (proposed) and Infrastructure Co.
Mumbai and Chiplun (Phase I) Ltd (Reliance)
VijayawadaChennaiBangalore GTIC (Reliance)
Kayamkulam (Phase II)
MumbaiDelhiKolkata ~6400 GAIL
Chennai (proposed)
DahejHaziraUran ~600 GAIL
(proposed)
Distribution lines
PaguthanVadodra 68 Gujarat State Petronet Ltd
VadodraAhmedabad 85 Gujarat State Petronet Ltd
(proposed)
Regulation of Petroleum Product Pipelines | 99
Table 7.10: List of refineries
Owner Capacity as of December 2001 (mmt)
IOC, Guwahati 1.00
IOC, Barauni 4.20
IOC, Koyali 12.50
IOC, Haldia 3.75
IOC, Mathura 7.50
IOC, Digboi 0.65
CPCL, Manali 6.50
CPCL, Nasimanam 0.50
BRPL, Assam 2.35
IOC, Panipat 6.00
IOC, Gujarat 3.00
BPCL, Mumbai 6.90
KRL, Kochi 7.50
NRL, Assam 3.00
HPCL, Mumbai 5.50
HPCL, Vizag 7.50
MRPL, Bangalore 9.60
RPL, Jamnagar 27.00
Total 114.95
Table 7.11: List of oil product pipelines
Pipeline Length (km) Capacity (mmtpa) Owner
GuwahatiSiliguri 435 0.82 IOCL
KoyaliAhmedabad 116 1.10 IOCL
BarauniKanpur 669 1.80 IOCL
HaldiaBarauni 525 1.25 IOCL
HaldiaMourigramRajbandh 277 1.35 IOCL
MathuraJalandhar 526 3.70 IOCL
KandlaBhatinda* 1443 7.50 IOCL
DigboiTinsukhia 75 0.73 IOCL
BombayPune 161 3.67 HPCL
100 | Indian Infrastructure: Evolving Perspectives
MumbaiManmad 252 4.33 BPCL
VizagVijayawada 356 4.10 HPCL
VadinarKandla 113 11.50 PIL
JalandharUdhampur 233 IOCL
KoyaliSidhpur IOCL
MangaloreHassanBangalore 332 4.20 HPCL/PIL
ChennaiTrichyMadurai 505 1.40 IOCL/PIL
CIPL (JamnagarRajkot 1760 RPL/IOCL/
KoyaliRatlam) PIL(shelved)
ParadeepRourkela 5.00 IOCL/PIL
JamnagarBhopal (Phase I) ~2500 GTIC
(Reliance)
BhopalRaipurCuttack (proposed)
Kolkata (Phase II)
ChennaiBangalore RIL (proposed)
Total 4935 41.94
* Being converted into a crude pipeline
Source: IOC Presentation, Seminar on Pipelines (2000), media reports
Table 7.12: List of ports handling oil/petroleum products
Category Ports
Crude oil Salaya (Gujarat), Jamnagar (Gujarat), Mumbai, Mangalore,
Kochi, Chennai, Vizag, Haldia
Petroleum products Kandla (Gujarat), Okha (Gujarat), Mumbai, Goa, Mangalore,
Kochi, Tuticorin, Chennai, Vizag, Paradeep, Haldia, Port Blair
Table 7.11: List of oil product pipelines (contd...)
Pipeline Length (km) Capacity (mmtpa) Owner
Regulation of Petroleum Product Pipelines | 101
APPENDIX B
Crude oil price web and natural gas prices
Apart from price spikes during brief political and economic crises, oil prices, since
the early 1970s, have tended to move closely in line with OPEC producer capacity
utilisation. Significant price increases have generally occurred when OPEC
production exceeds 90 per cent of capacity utilisation (roughly 28 to 30 million
barrels per day). When utilisation is high, prices stay higher. When utilisation falls,
producers have been unable to sustain high prices.
OPEC is crumbling now and OPEC producers have realised that substantially higher
prices are not in the producers long-term interests. Major Middle East producers
have tried to follow a strategy of maintaining moderate prices and high market
share that will maximize their returns over time. This strategy has allowed
non-OPEC economies to grow and prosper, whereas excessive energy prices have
led to reduced economic activity and lower oil consumption. It also discourages a
number of activities that run counter to OPEC interests: oil conservation and the
substitution of alternative energy sources; synthetic fuel research and LNG
developments; tertiary recovery with tax and fiscal incentives; and exploitation of
non-conventional hydrocarbons (heavy oil, oil shale, deepwater oil, and sources in
Arctic or near Arctic regions). A price of US$25 per barrel (in 1994 prices) is
considered to be optimal and US$20 per barrel discourages oil conservation and
substitution of alternative energy resources. [Conn and White (1994)]. Equivalent
gas prices are in the range of US$34 per mBtu.
Figure 7.7: OPEC supply/price dynamics
Source: Oil Industry Outlook, BP Statistical Review 2002
0
10
20
30
40
50
60
15 20 25 30 35
Crude oil production (Mbbl per day)
P
r
i
c
e

(
U
S
$

p
e
r

b
b
l

i
n

1
9
9
4

p
r
i
c
e
s
)
1970 71 72
73, 98
74 75
76
77 78
79
80 81
82
83
84
85
86
87
88
89
90
91
92 93
94, 95
96
97
99
2000
01
02
102 | Indian Infrastructure: Evolving Perspectives
APPENDIX C
Box 7.5: Main conversions used in the petroleum industry
Crude oil
1 tonne = 7.33 barrels
= 1.165 cubic metres (kilolitres)
1 barrel = 0.136 tonnes
= 0.159 cubic metres (kilolitres)
1 cubic metre = 0.858 tonnes
= 6.289 barrels
1 million tonne = 1.111 billion cubic metres natural gas
= 39.2 billion cubic feet natural gas
= 0.805 million tonnes LNG
= 40.4 trillion British thermal units
= 0.805 million tonnes LNG
Natural gas
1 billion cubic metre = 35.3 billion cubic feet natural gas
= 0.90 million tonnes crude oil
= 0.73 million tonnes LNG
= 36 trillion British thermal units
= 6.29 million barrels of oil equivalent
LNG
1 million tonne = 1.38 billion cubic metres natural gas
= 48.7 billion cubic feet natural gas
= 1.23 million tonnes crude oil
= 52 trillion British thermal units
= 8.68 million barrels of oil equivalent
Source: BP Statistical Review of World Energy 2002
NOTES
1. India, which imports 70 per cent of its energy requirement, is projected to have the capability
of producing up to 3 per cent of the worlds oil and gas output, with a sedimentary basin
region of around 5.37 per cent, in the coming few years. In the year 2001, India produced
36.1 million tonnes of crude oil (1per cent of world output) and 26.4 billion cubic metres
of natural gas (1.1 per cent of world output). Compared to this, Indias proven reserves
were reported to be 0.62 billion tonnes oil and oil equivalent gas (O+OEG) [BP (2002)].
The Directorate General of Hydrocarbons (DGH) has informed the Petroleum Ministry
that Indias prognostic hydrocarbon resources are about 28 billion tonnes of O+OEG.
After the recent discoveries in the KrishnaGodavari deepwater area, the resources could
go up by another 4 billion tonnes (Business Standard, 25 February 2003).
Regulation of Petroleum Product Pipelines | 103
2. This information was given by the Union Minister for Petroleum and Natural Gas,
Shri Ram Naik, to the Parliamentary Consultative Committee (Infraline,
24 February 2003).
3. US energy giant Unocal has offered to sell piped natural gas from Bangladesh to markets
in northern India at US$3.54.5 per million British thermal units (mBtu). The landed
cost of Bangladesh gas in Delhi would be between US$3.5 and US$4.5 per mBtu,
compared to the subsidised current natural gas price of US$2.52.7 per mBtu (Business
Standard, 10 December 2002). Bangladesh is looking for export of around 500 million
cubic feet of gas per day. A proposal approved by Bangladeshi Prime Minister, Begum
Khaleda Zia, in February 2003 is expected to be presented in the Parliament soon for
ratification. The ruling four-party coalition government has a comfortable number of
seats in the houses to get the proposal through (Infraline, 18 February 2003).
4. The report did refer to change in industry structure in India and suggested that the
income elasticity may reduce to 0.7 by the year 2025 [GOI (2000)].
5. Industry Experts Look at Downstream Future in Hydrocarbon Processing (January
2003) published by Gulf Publishing Company.
6. This should not surprise anyone because as a crude oil importing country it is
advantageous to have refineries in the coastal region. Incidentally, three out of four
major metropolitan cities have major ports which are served by oil tankers.
7. The IOC refinery at Panipat is going to expand its capacity from 6 mtpa to 12 mtpa by
2004. HPCLs Bhatinda refinery and BPCLs Bina refinery will take 67 years to come
on stream. Reliance is likely to expand capacity of its Jamnagar refinery from 27 mt to
37 mt in two years time. BPCLs Mumbai refinery expansion from 8 mtpa to 12 mtpa is
expected to be completed in FY05.
8. The new domestic gas finds or more such discoveries in the future would not in any
significant way diminish the prospect of import of piped gas or LNG. Demand for gas
will grow in the country from 110 million standard cubic metres per day (mmscmd) in
200102 to 145 mmscmd in 200607, 225 mmscmd in 201112 and to 325 mmscmd in
201920, according to GAIL estimates. These estimates are modest compared to the
estimates given in Table 7.3.
9. India will continue to remain a net deficit country in natural gas production despite
the discovery of world-class gas reserves off the east coast according to the Minister of
State for Petroleum and Natural Gas, Santosh Kumar (written reply to the Lok Sabha,
12 December 2002).
10. Sale of condensate, a by-product of gas extraction, has reduced the breakeven point
of Qatargas landed in Japan to US$13.6/bbl. After adding around US$3/bbl
for regassification cost, the cost of gas could be approximately US$17/bbl or
104 | Indian Infrastructure: Evolving Perspectives
<US$3 per mBtu in Japan (editorial in Pipeline and Gas International, May 1999).
It should be lower in India if imported from Qatargas and can compete with
imported pipe gas.
11. The reserves are estimated to be 9 tcf by DGH (Times of India, 25 February 2003 and
Hindustan Times, 20 November 2002).
12. Wall Street Journal (10 February 2003 and 2 December 2003), Far Eastern Economic
Review (30 January 2003).
13. At present, gas prices are as low as US$0.4/mBtu in North Africa to US$3.15/mBtu in
the US. In Western Europe prices are US$3/mBtu, and in Russia, Venezuela and the
Middle East prices are US$0.50.6/mBtu.
14. The concessional price for gas-based industries in the Northeast also rose to
Rs 1700/1000 m3.
15. Gas prices pertain to a calorific value of 10000 kcal/1000 m3 and the gas transported
by GAIL has a calorific value of 9000 kcal/1000 m3, thus consumers in effect pay
10 per cent less.
16. This will reduce marginally by US$0.10/mBtu after the reduction in import duty from
20 per cent to 5 per cent announced in Budget 200304.
17. Business Line, 30 January 2003.
18. Infraline, 30 January 2003 and GoM (2001).
19. Gas for Delhi and Mumbai transport need are catered to in batch mode using a bundle
of high pressure cylinders. The transport sector is allocated <3% of total gas allocation
in India.
20. In 19992000, shrinkage in internal consumption accounted for 7% of the total gas
consumed in India [GOI (2002a)].
21. The Financial Express, 3 October 2002.
22. The government rejected Reliances plea for being allowed to use public sector oil
companies infrastructure to sell jet fuel (Aviation Turbine Fuel) saying it does not fall
under the common carrier principle (Economic Times, 12 November 2002).
23. IOC is converting KandlaBhatinda pipeline to carry crude oil. It will transport only
crude oil through the KandlaPanipat section of the KandlaBhatinda pipeline from
July 2004. At present, it carries both crude and petro-products from IOCs Koyali and
Reliances Jamnagar refineries. Petronet has informed the MoPNG that IOCs plan would
make its Rs 383-crore VadinarKandla product pipeline unviable. Petronets project
was conceived on the assumption that the KandlaBhatinda pipeline would be available
for transporting products of Reliance and Essar refineries.
Regulation of Petroleum Product Pipelines | 105
24. For petrol and HSD, class for wagon load has been reduced from 300 to 250, and for
crude and gas it has been reduced from 270 to 250 in the Railway Budget 200304.
Reducing the class leads to lesser freight rates. Carrying petroleum products on the
Railways will now be 10.7 per cent cheaper (Business Standard, 27 February 2003).
25. The Economic Times (23 October 2002).
26. The government would continue to provide freight subsidy in far-flung areas in the
north and east regions, but the quantum of sales in these region is very less.
Bongaigaon Refinery and Petrochemicals Ltd, having an installed capacity of
7 mtpa, is working below capacity as crude availability from Assam oil fields is pegged
at 5 mtpa.
27. The Directorate General of Hydrocarbons (DGH) was established under the
administrative control of the MoPNG in 1993 to manage Indian petroleum and gas
resources. The DGH acts as a regulator for reservoir management of oil and gas fields;
monitors public service centres on behalf of the Government of India; and acts as a
project facilitator, assisting companies to get clearances/approvals from various
ministries. One may simply call him an upstream hydrocarbon sector regulator.
28. The Business Standard (25 December 2002).
29. In 19992000, gas losses due to shrinkage were 7 per cent [GOI (2002a)].
30. GAILs charges along non-HBJ pipelines are significantly lower (Rs 165/tcm).
These pipelines, which were primarily transferred from ONGC in the fiscal year 1993,
operate on cost plus margin basis.
31. Under the existing pricing mechanism, Rs 350 accrued to the gas pool for every 000 m
3
of gas sold. This money is collected by GAIL and is shown as a liability on its balance
sheet. At the end of the fiscal year 1997, the gas pool account was Rs 11.3 billion in
surplus. The gas pool money is supposed to subsidise gas consumption in the states of
the Northeast. However, low consumption in these areas results in relatively small outflow
from the gas pool.
32. The Gas Authority of India (GAIL) has finally started work on the Rs 26 billion,
600 km DahejVijaipur gas pipeline. It hopes to complete work on the pipeline by
April 2004. For months, the Gujarat State Petroleum Corporation Limited (GSPCL)
had tried to block GAILs plan to lay this 600 km pipeline from Dahej to Vijaipur to
carry regassified LNG from the Dahej terminal to customers on the HBJ. GSPCL had
argued that GAIL had no right to build pipelines in the state (The Economic Times,
February 23, 2003). Even after the passing of almost two years, Gujarat State Petronet
is still waiting for the bidders to finalise their bids to pick minority stake in a gas grid
promoted by its subsidiary Gujarat State Petronet Limited (GSPL). Gujarat State
Petroleum Corporation (GSPC) is offering 49% equity of GSPL for sale with a cap of
106 | Indian Infrastructure: Evolving Perspectives
11 per cent on each equity holder. GSPC wants to retain management control.
The reports say that pending clarity on the constitutional validity of the Gujarat Gas
Act, none of the interested partiesShell, British Gas, GAIL, Indian Oil, Bharat
Petroleum and KRIBHCOare ready to commit anything. Also, the Supreme Court
is yet to pronounce judgment on the rights of the state to pass legislation related to gas
(Infraline, 18 February 2003).
33. The rationale for having the Gujarat Gas Act according to the state government has
been that the item gas and gas works figures in the State List of the Constitution.
The item gas and gas works pertains to synthetic and industrial gas and does not relate
to natural gas. The central government is of the opinion that natural gas is part of mineral
oils, which is under the Central List. The issue of centrestate jurisdiction would be
settled after the Supreme Court has given its opinion on this issue to the government.
34. Business Line, 22 January 2003.
35. Gas Transportation and Infrastructure Co. Ltda subsidiary of Reliance India Ltd
has been given permission to acquire land under the Petroleum and Minerals Pipelines
(Acquisition of Right of User Inland) Act, 1962, to lay a gas pipeline for GoaHyderabad
Kakinada and an oil product pipeline for JamnagarBhopal (Government of India,
Ministry of Petroleum and Natural Gas, Lok Sabha, starred question no. 2763, answered
on 5.12.2002). Reliance intends to extend the JamnagarBhopal oil product pipeline to
Kolkata passing through Raipur and Cuttak. The pipelines are expected to be ready by
the end of 2004 to supply gas from the KG Basin to users in Andhra Pradesh,
Maharashtra and Goa and to evacuate oil products from the Jamnagar refinery to
users in Gujarat and Madhya Pradesh. The guidelines have enabled Reliance India
Ltd to lay five pipelines for moving products from its 27 million tonne refinery to
various parts of the country. These pipelines will connect Jamnagar to Delhi, Goa to
Hyderabad through Sholapur, Delhi to Patiala, and one connecting Chennai to
Bangalore (source: industry reports).
36. Oil product pipelines owned by PIL and other oil companies will benefit from the
secondary market as it has happened in the US [IDFC (2002)]. The HBJ pipeline
capacity is 65 mmscmd whereas it transports roughly 21 mmscmd. The pipeline can
function on open carrier principle for quite some time. Sunk cost of this pipeline is so
large that even at flat tariff rate, it will be beneficial for GAIL. The HBJ is a gift of a
powerful politician to his constituency at the cost of the nation. Should consumers
continue to suffer for profligation of politicians or move ahead is a question which
the regulator has to tackle.
37. The HBJ pipeline capacity of 64 mmscmd compared to usage of ~21 mmscmd would
restrain development of secondary market for sometime.
Regulation of Petroleum Product Pipelines | 107
REFERENCES
1. BP (2002): BP Statistical Review of World Energy, British Petroleum,
London.
2. Conn Charles and White David (1994): The Revolution in Upstream Oil
and Gas, The McKinsey Quarterly Number 3.
3. ICRA (2003): The Indian Oil and Gas Sector, ICRA Limited, New Delhi.
4. IDFC (2002): International Best Practices in Pipeline Regulation (Mimeo).
5. Gardel Andre (1981): EnergyEconomy and Prospective, A Handbook for
Engineers and Economists, Pergamon Press, Oxford.
6. GOI (1962): The Petroleum and Minerals Pipelines (Acquisition of Right of
User Inland) Act, 1962, GOI, New Delhi.
7. GOI (2000): Report of the Group on India Hydrocarbons Vision 2025,
GOI, New Delhi.
8. GOI (2002a): Report of the Sub-Group on Natural Gas Availability, Tenth
Five Year Plan 200202, Ministry of Petroleum and Natural Gas, Government
of India, New Delhi.
9. GOI (2002b): The Petroleum Regulatory Board Bill 2002, Bill No. 38 of 2002,
Government of India, New Delhi.
10. GOI (2002c): Guidelines for Laying Petroleum Product Pipelines, Ministry
of Petroleum and Natural Gas, Government of India, New Delhi.
11. GOM (2001): Report of the Energy Review Committee (Part 1), Government
of Maharashtra, Mumbai.
12. World Bank (2001): First World Bank Workshop on the Petroleum Products
Sector in Sub-Saharan Africa, World Bank, Washington.
108 | Indian Infrastructure: Evolving Perspectives
INCENTIVES, OWNERSHIP
AND PERFORMANCE IN
POWER SECTOR:
The Case of UP
February 2005
8
1. INTRODUCTION
Like in the case of all other states in India, the power sector in Uttar Pradesh (UP)
has been traditionally characterized by lack of competition, high transmission and
distribution losses, irrational tariff structure and inadequate government support.
These problems manifested themselves in huge cash losses for Uttar Pradesh State
Electricity Board (UPSEB) year after year. By March 1999, the accumulated losses
of UPSEB were Rs 10,300 crore or 6 per cent of SGDP and payables to power
suppliers were about Rs 3400 crore (almost 20 months of power purchases).
The poor financial performance of UPSEB, which performed as a single buyer,
deterred private investment, while public investment was slow due to the resource
crunch of the state. The inadequate and often distorted investment in turn led to
poor performance. The sector was thus caught in a downward spiral of poor
performance, low revenue and sluggish investment.
It is against the background of bankruptcy of UPSEB, a near halt in investment and
unsustainable fiscal pressures, that the power sector reforms were introduced, with
the government issuing a power sector policy statement in January 1999. Realizing
that UPSEB was operating as an extension of the state government and that the
organizational, institutional, financial and ownership arrangements were not
conducive to the realization of reform goals, the state government decided to distance
the power industry from state administration and provide the power sector with
the autonomy required to operate on commercial principles. The UP Electricity
Reforms Act was notified in July 1999 to support the reform process.
A number of significant initiatives entailing changes in organizational, institutional
and financial structures have been taken in the last six years (see below).
Power Sector: The Case of UP | 109
Two significant areas that have remained untouched, however, are the ownership
arrangement and market structure. The power industry in UP is still predominantly
government-owned in all its segments. So far, there has been no generation capacity
(other than captive power) created by the private sector in the state. Except for a
small part of the state, i.e. Greater Noida (connected load of about 35 MW) which
is operated by a private distribution company, power distribution and transmission
in the state are carried out by utilities owned by the state government.
1
It may also be noted that the reform measures taken so far have virtually done
nothing to change the market structure which could introduce competition into
the sector. There has been no scope for competition for the distribution market
as the recently formed distribution companies continue to be owned by the
government. Further, the two state generating companies have signed long-term
PPAs with UPPCL, whereby, generation tariff is determined on cost-plus basis
and there is no scope for competition among generating companies.
In the absence of competition, there has been a tendency on the part of the
regulator and policy makers to resort to incentives to improve sector performance.
The objective of this note is to assess how the power sector has responded to the
various incentives in the last few years and examine whether government
ownership has been the dominant factor influencing the nature and extent of
this response.
2. FACILITATING MEASURES
2.1 Multi-year tariff (MYT)
An independent regulatory commission, Uttar Pradesh Electricity Regulatory
Commission (UPERC), was established in September 1999, with a mandate to adopt
a tariff structure that would meet the objectives of efficiency and equity. The UPERC
has issued five tariff orders so far in pursuit of its mandate. To enhance the
predictability of the basis for tariff setting and ensure that consumers gain from
reforms, the UPERC has adopted a multi-year tariff framework since 2002, which
has been working as the prime incentive system for the utilities. Under the
framework, annual performance targets for the utility have been fixed for five years
in terms of T&D losses and collection efficiency, assuming 200001 as the base
year.
2
If the utility fails to achieve the targets and hence incurs a loss, the regulator
would not treat the loss as a regulatory asset, implying that the consumers will not
be required to bear the burden (in the next year or any time in future) resulting
from the failure of the utility to achieve targets. On the other hand, if the utility
exceeds the targets, it would retain the resultant profits.
110 | Indian Infrastructure: Evolving Perspectives
2.2 Initiatives to improve performance
To facilitate improved performance of the sector, three important initiatives have
been taken.
Unbundling
With the ultimate aim of introducing competition in generation and distribution,
the government unbundled UPSEB into three functionally separate, autonomous
and separately accountable corporations: a thermal generation company
(UPRVUNL), a hydro company (UPJVNL) and a company responsible for
managing the transmission and distribution system (UPPCL). The assets,
liabilities and staff of the UPSEB were transferred to these three corporations
under a statutory transfer scheme. These companies continue to be state-owned.
In a second round of unbundling, the state was divided into four geographically
contiguous zones (barring Noida and Kanpur) and a separate distribution
company was created in each. These four companies were carved out from
UPPCL through the notification of a transfer scheme in August 2003.
3
The
discoms are managed by boards and have organic links with the UPPCL. To
strengthen governance in the discoms, the selection of the MDs has been done
through open advertisement.
Financial restructuring
In January 2000, a clean up of the balance sheet of the UPSEB was carried out as
a prelude to the transfer of business to successor utilities to enable the sector to
inherit a relatively healthy opening balance sheet, which would facilitate a quick
restoration of the sectors creditworthiness (World Bank, 2000). The
restructuring was done by write-off and provisioning of doubtful and obsolete
assets, recognition of liabilities that were either understated or not reflected in
the balance sheet, and settlement of cross dues between the government
and UPSEB.
Tariff rationalization
Tariff proposals are now subject to public scrutiny and the utilities have to defend
their requests for tariff revision in open hearings. To reduce cross subsidy, the
tariff increase for the subsidizing segments (industrial, commercial, railway
traction, etc.) has been kept at lower levels than those for the subsidized sectors.
Further, to the extent the tariffs suggested by the state government deviates from
that fixed by the regulator, the state government has been required to fill the
revenue gap through subsidies.
Power Sector: The Case of UP | 111
3. IMPACT ON PERFORMANCE
3.1 Immediate results
Let us first discuss the facilitating measures. Unbundling and corporatization has
facilitated the emergence of a clearer picture and helped identify the sources of
inefficiency, which would not have been possible under the vertically integrated
entity. Thus, the true cost of generation and distribution (of different discoms, which
have recently been created) is now revealed. It is now possible to find out, for example,
the T&D loss at each discom.
Financial restructuring has provided a pragmatic solution to dealing with the
problem of past liabilities, which could have potentially become a hindrance to
reforms. As a result of restructuring, the balance sheet size of the utility fell from
Rs 33,800 crore to Rs 14,500 crore; the debt equity ratio fell from 23:1 to 3:1; net
receivables for sale of power declined from 440 days to 61 days because of provision
made for doubtful receivables; and payables on power came down from 615 days to
52 days (World Bank, 2000). The restructuring has clearly improved the financial
viability of the sector.
Tariff rationalization process is underway. Cross-subsidies are getting reduced. For
example, the cross-subsidization by railway traction has fallen from 47 per cent in
200001 to 30 per cent in 200203; similarly, the cross-subsidy received by domestic
consumers fell from 41 per cent to 25 per cent over the same period. Further, tariffs
in successive years are reflecting increasing levels of efficiency on the part of the
utility. Finally, the subsidy as determined by the UPERC is being paid by the
government on a regular basis. Clearly, as a result of the on-going rationalization,
tariffs are sending less distorted signals for production, maintenance and use.
3.2 Impact on performance
While the immediate results of the facilitating measures have been in the right
direction, they have not been translated into better performancefinancial or
technicalof the utilities. The UPPCL, like its predecessor (the UPSEB), continues
to be in financial trouble. Total accumulated loss of consolidated UPPCL had risen
to Rs 5072 crore in March 2003, up from Rs 3753 crore in March 2002 and further
to RS 7400 crore (estimated) by January 2005 (see Table 8.1).
Table 8.1: Cumulative commercial losses of consolidated UPPCL (Rs crore)
Jan 2000 Mar 2000 Mar 2001 Mar 2002 Mar 2003 Mar 2004 Jan 2005
0 142 2353 3753 5072 6156 (estd.) 7400 (estd.)
Source: PWC
112 | Indian Infrastructure: Evolving Perspectives
In the past few years, the UPPCL has not been collecting enough revenue to even
pay for its power purchases. A large part of the commercial losses of the UPPCL can
be attributed to the repeated failure of UPPCL to reach target levels of T&D losses
and collection efficiencywhich are the basis for tariff setting and which UPPCL
has committed itself to. The T&D loss has fallen from 41.5 per cent in 199899 to
33 per cent in 200304 and collection efficiency has risen from 78 per cent in
200001 to 85 per cent in 200304 (Table 8.2).
Even this slow and modest improvement claimed by UPPCL is suspect. The
UPERC, for example, has raised doubts about the UPPCLs claim relating to
loss levels in 200304.
The performance can be evaluated only when actual consumption data
for the whole year is available to the Commission. Further, the sharp fall
in revenues as compared to the approved levels in the tariff order does
raise serious doubts about the maintainability of the stand of the licensees
that the loss position has considerably improved, as compared to the
previous year. Till the time that there is credible estimation of unmetered
consumption and the billing data on slab-mix can be relied upon, the
stand of the licensees has little value. (UPERC Tariff Order 200405)
In terms of physical performance parameters, while there has been moderate
improvement in PLF and oil consumption since 200001, the increase in generation
has been insignificant (Table 8.2).
Table 8.2: Performance parameters
200001 200102 200203 200304
Actual Target Actual Target Actual Target Estd.
T&D loss (%) 39.0 33.4 41.0 31.3 36.0 30.4 32.8
Collection
efficiency (%) 78.3 85.0 81.0 88.0 79.0 91.0 84.0
AT&C loss (%) 45.9 52.7 41.4 49.2 36.7 43.6
Generation
(billion units) 19.6 20.5 20.9 20.7
PLF (%) 57.2 59.8 61.2 60.2
Oil consumption
(KL/MU) 2.7 2.3 2.2 2.1
Note: AT&C: Aggregate Technical & Commercial
Generation, PLF and oil consumption relate to thermal plants.
Source: UPPCL, UPRVUNL and UPERCs tariff orders (200102, 200203 and 200304)
Further, UPPCL has not made satisfactory progress in most of the directions issued
by the Commission, which ranged from introduction of MCBs to database
Power Sector: The Case of UP | 113
management (UPPCL Tariff Order 200304). It has also failed to honour the
commitments it made to the Government of India as per the MOU
signed in February 2000 (See Box 8.1). For example, although the MOU required
the UPPCL to introduce online billing in 20 selected towns by March 2001, only
one locality of the city of Lucknow is reported to have made some progress
by that date.
Box 8.1: Memorandum of Understanding with GOI
The Government of India has signed a Memorandum of Understanding with the UP
government to facilitate further reforms in a time-bound manner. The memorandum
signed on 24 February 2000, inter alia states:
Energy audit will be undertaken at all levels in order to reduce system losses.
This would be done in a time-bound manner with the following milestones:
1. Installation of metering at all 11 kV feeders by September 2000.
2. 100 per cent metering of all consumers by December 2000.
3. Online billing in 20 selected towns through computerization by 31 March 2001.
The Government of India would provide financial assistance/loans to the tune of around
Rs 7000 crore for renovation and modernization of thermal generation stations, repair
and maintenance of hydro-electric stations, repairing critical transmission and
sub-transmission lines, etc.
Source: http://powermin.nic.in/
4. OTHER INCENTIVES AND UTILITIES RESPONSE
4.1 Generation
The Commission allows return on equity at the rate of 14 per cent for UPRVUNL
plants if stations operate at higher than UPERC benchmark PLFs and 80 per cent,
whichever is higher, and at the rate of 8 per cent when they are operating at or
higher than UPERC benchmark PLF, but lower than 80 per cent. In the financial
year 200304, four out of seven generating stations of UPRVUNL did not qualify
for any return on equity (Table 8.3).
Similarly, the Regulatory Commission has considered it appropriate to provide
incentives (to be assessed on the basis of prescribed norms) to the generating
stations for better performance. Incentives are determined on the basis of actual
performance as compared to the benchmark PLFs. In 200304, only one generating
station (Anpara B) qualified for incentives (Table 8.3).
114 | Indian Infrastructure: Evolving Perspectives
Table 8.3: Performance of UPRVUNL generating stations
Name of the Actual Projected Benchmark Return on Incentive
station PLF 200304 PLF 200405 PLFs equity
(%) (%) (%) (Rs crore) (Rs crore)
Harduaganj 22.3 24.4 25.0 0.0 0.0
Panki 50.1 49.0 49.0 3.2 0.0
Paricha 33.9 53.0 53.0 4.2 0.0
Obra A 20.2 30.0 50.0 0.0 0.0
Obra B 62.2 57.7 65.0 0.0 0.0
Anpara A 78.9 77.7 80.0 0.0 0.0
Anpara B 86.7 80.8 80.0 177.6 4.1
Note: For estimating revenue requirement on account of return on equity and incentives for
200405, projected PLF for 200405 (based on actual PLF in 200304) was compared with
benchmark PLF.
Source: UPERC Tariff Order 200405
4.2 APDRP
The GOIs Accelerated Power Development and Reform Programme (APDRP) aims
at using the fiscal leverage of the GOI to encourage reforms at the distribution level.
Funding under the APDRP has two components: the incentive component and the
investment component (for upgradation and modernization of sub-transmission
and distribution networks). The incentive component rewards the utilities for actual
cash loss reduction by way of grants (50 paisa for every 1 rupee reduction), while
the investment component makes resources available for investment geared towards
cash loss reduction. As part of the investment component, the GOI provides an
assistance of 50 per cent of the project cost, of which 25 per cent is a grant and
25 per cent a loan.
4
Under the incentive component, UP has not benefited in any single year because
of its inability to reduce its cash losses. As regards investment component, in
200102, upgradation projects at a cost of Rs 124 crore were sanctioned with
the target date of completion being March 2004. Of this, Rs 30 crore has been
released by the GOI, but no expenditure appears to have been incurred so far.
Similarly, in 200203, upgradation projects worth Rs 306 crore were sanctioned
and the GOI has already released money against the above sanction. But the
state-owned discoms have been unduly tardy about utilizing the funds (UPERC
Tariff Order 200405).
Power Sector: The Case of UP | 115
4.3 Captive power
In UP, the industrial sector is one of the largest consumers of electrical energy. A
number of industries are, however, relying on their own generation (captive and
cogeneration) rather than on grid supply, primarily because of:
Non-availability of adequate grid supply
Poor quality and lack of reliability of grid supply
High tariff as a result of heavy cross-subsidization.
Realizing their inability to meet the demands of the industry, state governments
(including UP) have traditionally been taking policy initiatives to promote captive
power, but not to the extent that it would paralyze their respective utility. UP, for
example, has been following a transparent, but restrictive captive power policy.
The threat of loss of revenue due to existing or new industries opting out of the
grid for self-generation is generally expected to create competitive pressures,
especially when the sector is corporatized. In that sense, the captive policy is
supposed to create incentives for the utilities to improve their performance. But
this has not been borne out by experience. UPPCL has made little attempt to
improve availability, quality and reliability of grid supply to retain its (existing
and potential) high-paying customers. Instead, it has responded on certain
occasions by urging the regulatory authorities (unsuccessfully) not to permit the
creation of captive capacity. As a result, captive capacity continued to grow from
an estimated 1240 MW in 1998 (Captive Report 1998, Power Line Research) to
1907 MW in 2003 (Central Electricity Authority), while addition to capacity by
state generating companies (and earlier by UPSEB) during the period was
negligible.
5
This has been the case despite the fact that the industrial tariff over
the past few years has been relatively stagnant!
4.4 One-time settlement of UPSEB dues
Following the formulation of a well-designed scheme by an expert group set up by
the GOI, recommending a one-time settlement of outstanding dues (as on 1 October
2001), a tripartite agreement (between each state government, GOI and RBI)
incorporating the scheme is in operation.
6
The key feature of the scheme is that it
brings into focus the payment of current dues in future by linking it to the settlement
of outstanding dues through an incentive mechanism. If states adhere to some
specified conditions, which include making timely payments of current dues in
future and achieving certain performance milestones, 60 per cent of the surcharge
currently outstanding will be waived and some cash incentives will also be given to
them.
7
If, however, they default, they would be penalized through graded reduction
in the supply of power from central power stations and through suspension of
APDRP grants.
8
116 | Indian Infrastructure: Evolving Perspectives
UP is one of the many states that have signed this agreement. Consequently, power
purchase payables of erstwhile UPSEB to central generating stations have been
securitized. As the state government is servicing this liability, the burden on the
sector has been considerably reduced. But, how has the UPPCL responded to the
incentive system underlying the agreement? The nature of the response can be gauged
from the UPPCLs submission to the UPERC in 2003 that it purchased less power
during 200203 than its own projection, so as to meet the payment conditions in
the tripartite agreement. The UPPCL did this by cutting down power supply rather
than executing measures to improve T&D losses and collection efficiency.
Furthermore, while the UPPCLs payables to central PSUs have remained under
control, its payables to state generating stations have tended to go up.
5. ASSESSMENT
Reform initiatives taken in recent years have been in the right direction. While
financial restructuring and one-time settlement of UPSEB dues have substantially
reduced the burden of past liabilities of the utilities, making the utilities more
amenable to future reforms, initiatives such as unbundling and public scrutiny of
tariff proposals have resulted in greater transparency. Tariff setting has been
substantially insulated from political interference and some degree of tariff
rationalization has been achieved.
There is no doubt that these measures have together created a facilitating
framework. A number of incentives are currently in operation to complement the
framework. Some of them are designed to improve overall performance, while
others are in specific areas. The incentives are largely well-designed and a strong
and positive response by the utilities would have certainly helped increase sector
efficiency. But the utilities response has been weak and often perverse. Even though
a number of years have passed since these measures were taken, the sector efficiency
has remained abysmally low as evidenced by grossly inadequate investment, high
T&D losses, low collection efficiency and consumer dissatisfaction. Why has this
been the case?
5.1 Contrast with Delhi
The answer is illustrated most strikingly by contrasting UPs response to the MYT
approach to that of Delhi. It has been noted that although UP had adopted MYT in
2002, privatization of distribution is yet to occur. It was made clear to UPPCL from
the beginning that underperformance (vis--vis targets) would lead to commercial
loss in any given year (because tariff for a particular year is set by the regulator by
taking into account pre-determined performance targets) and would also make the
challenge for the next year even tougher. Yet, the UPPCL not only underperformed
persistently in the face of progressively stiffer targets (see Table 8.1), but also failed
Power Sector: The Case of UP | 117
to comply with even the routine directives given by the UPERC. The UPPCLs
explanation for its repeated poor performance has been an attempt to blame
extraneous factors for its low level of efforts (UPERC Tariff Order 200304).
Delhi, on the other hand, decided to privatize its distribution zones at about the
same time that it adopted the MYT approach. The experience of the past two years
shows that the privatized distribution zones met the targets and in some cases,
exceeded them (see Table 8.4).
Table 8.4: Reduction of AT&C loss in North Delhi Power Ltd (% points)
July 02March 03 200304 200405
Committed reduction 0.5 2.3 4.5
Effective reduction 2.6 6.2 6.1*
*Up to August 2004
Source: North Delhi Power Ltd
The contrast weakens the argument made by some that it is too early for UP to
expect any substantial improvement in operations, and that the investment in
recent years in the primary and secondary systems (including metering of feeders,
implementation of energy audits, etc.) would show results only in the coming
years. More importantly, the contrast provides evidence that MYT system can
hardly work as an incentive scheme in a setting such as UPPCL, which lacks
commercial orientation.
5.2 Contrast with NTPC
As regards efficiency in generation, a contrast of UPRVUNL stations with those
of NTPC, which have similar kinds of incentive systems, can be illustrative. The
PLF of NTPC power stations have historically been much higher than those of UP
state generating stations. In 200304, for example, the overall PLF of NTPC was
84.4 per cent as compared to 60.2 per cent for UPRVUNL. One major factor
explaining the difference in performance is resource (revenue and capital)
availability. Resource abundance helped NTPCwhose revenues are now
protected by the tripartite agreementto respond positively to the tariff system,
which linked profitability to physical performance. A large part of the rising profits
were ploughed back into investment, encouraging lenders to lend more and at
fine rates. In contrast, UPSEB and later UPRVUNL lacked resources, primarily
due to absence of reforms at the distribution end. It is well known how this has
led to a vicious circle of deteriorating performance.
It may be pointed out that a frontier production function model study carried out
by the UPERC shows that on an average, the power stations of UPRVUNL can
118 | Indian Infrastructure: Evolving Perspectives
increase their existing output levels by 37 per cent without additional resources,
simply by proper utilization of technology and adoption of best practices. But the
study perhaps presupposes a well-trained and motivated work force and management
and a corporate culture (such as that of NTPC), which UPRVUNL does not have. It
is, of course, debatable whether it is possible to have good training, sound human
resource management and a corporate culture in the face of acute and persistent
shortage of resources.
5.3 Is open access the answer?
Can the problem be taken care of by open access per se? It is expected that as open
access is phased in as envisaged in the Electricity Act 2003, competitive pressures
would be created. If, however, the generation and distribution assets remain
predominantly with the government, the government would have a vested interest
not only in delaying the phase-in of open access, but also in rendering it ineffective
to the extent possible. Even if open access succeeds in facilitating the creation of
private generating capacity, which in turn attracts away high paying consumers
from government-owned distribution companies, it is doubtful that the latter would
be motivated to improve performance to remain competitive, as evidenced from
the utilities experience relating to captive power. In fact, the open access regime
would entail lesser losses (and therefore weaker pressure) for the utilities than self-
generation, as the former requires cross-subsidies to be paid by consumers to the
affected distribution company, while the latter does not.
6. SHORTCOMINGS OF THE CURRENT DISPENSATION
Shortcomings of the current dispensation that impede adequate response of utilities
to reform stimuli can be mainly attributed to government ownership, as can be
seen from the discussion given below.
6.1 Political patronage
There are major shortcomings in the accountability framework in government-
owned utilities, even though they are managed by a board. Corporatization does
not help in altering the orientation of accountability from internal hierarchy to
power consumers or regulators. Year after year the regulator has been reprimanding
the utility for its poor performance, but to no avail. At the root of the problem is the
political patronage of payment indiscipline, which has been possible mainly because
of government ownership. Given the political patronage, there is hardly any incentive
for the management to bring dishonest staff to book or to cut off connections to
non-paying consumers. Besides, the maximum punishment given to government
employees is usually not deterring enough. Under such circumstances, tariff
rationalization can hardly serve any useful purpose: neither can it create incentives
Power Sector: The Case of UP | 119
for consumers to use electricity more efficiently nor can it boost revenues for
operators to expand access or improve services.
6.2 Government interference
The government has continued to interfere in the day-to-day operations of the newly
formed corporations, whose managements hold the same bureaucratic attitudes and
promote the same organizational cultures as before. Their relationship vis--vis the
state government has also remained unchanged. For example, the government of
UP, in an effort to stall tariff increase, had given a direction to the UPPCL to file
their tariff application to the SERC for 200001 with reduced T&D loss target,
without giving any strategy for achieving the target. The utility, being a government-
owned company, had to oblige.
9
Although the immediate result was that the tariff
hike was moderated, ultimately, the T&D losses remained at the previous year level
and the UPPCL incurred large commercial losses. Not surprisingly, with government
interference eroding the autonomy of the utility, it has been difficult to establish
accountability for the utilitys performance.
6.3 Dual role for government
The governments role as a consumer of power compromises its position as an
operator. The government is itself one of the biggest defaulters. The collection
efficiency of the government category has been fluctuating over the years: for
example, it fell from 87 per cent in 19992000 to 42 per cent in 200001. True, the
government is a relatively small consumer of power accounting for 1112 per cent
of the total bill and therefore cannot possibly drag down the overall collection
efficiency substantially. The important point is that the government, which is
constrained by its fiscal situation, cannot provide moral leadership in payment
discipline because of the poor example it sets for other consumers.
Table 8.5: Collection efficiency (%)governmental and
non-governmental categories
Billing 199798 199899 19992000 200001 200102
Government 74 52 87 42 52
Non-government 87 86 84 83 82
Overall collection
efficiency 86 82 84 78 78
Source: UPPCL/PWC
6.4 Erosion of hard budget constraint
The government ownership has led to an absence of hard budget constraints. It has
been noted that UPPCLs payables to the state governments generating stations has
120 | Indian Infrastructure: Evolving Perspectives
been rising (from 112 days power purchases in 200304 to 169 days by September
2004), while those to the central PSUs have remained under control (30 days). Similarly,
in the repayment of loans, UPPCL has given the lowest priority to the government of
UP amongst all its lenders. Yet, the government continues to be its dominant lender.
7. WAY FORWARD
The government had formally recognized that privatization of the distribution
business was critical to the viability of the sector in its Power Sector Reform Policy
Statement in January 1999. In fact, the privatization of Greater Noida was done as
early as 1992 and the results were encouraging (see Box 8.2). There was a subsequent
attempt to privatize distribution in Kanpur. While the first attempt by the state
government to privatize KESCO (Kanpur Electricity Supply Company Ltd) was
unsuccessful, the subsequent decisions to invite private bids have been postponed
several times (see Box 8.3).
Recognizing that privatization is the answer is not enough; the task has to be
implemented quickly. While privatization is getting delayed, commercial losses of
the UPPCL have been mounting and the benefits of the balance sheet clean-up in
2000 are getting wiped out (Table 8.1). Since at the time of privatization, these
losses would have to be dealt with, delays in privatization will increase the financial
burden on the government.
Box 8.2: Noida Power Company (NPCL)
a successful distribution company
Background
NPCL is the first private distribution company in India, which took over a network
from a state undertaking. It was jointly promoted by New Okhla Industrial Development
Authority (Noida) and Greater Noida Industrial Development Authority (GNIDA) in
1992 to take over distribution of the new industrial township. Currently, NPCL has an
equity base of Rs 9.2 crore, of which 73 per cent is held by the RPG group and the
balance by GNIDA.
Performance
The company inherited a dilapidated distribution network, inadequate to meet the
rising load growth. Through extensive operational revamping and high consumer focus,
the company has been able to achieve a turnaround. Between 199495 and 200203,
its asset base has grown from Rs 14 crore to Rs 60 crore and sales revenues from
Rs 19 crore to Rs 70 crore. Its T&D loss level has been consistently about 8 per cent,
one of the lowest in the country. NPCL also has one of the lowest distribution manpower
cost (at Rs 0.05 per unit sold). In 200001, the company made a net profit of
Rs 2 crore, up from Rs 0.5 crore in 199697.
Power Sector: The Case of UP | 121
Minimizing revenue loss
To minimize revenue loss, the company follows a thorough energy auditing process,
which entails aggregation of the quantum of energy consumed in downstream
distribution on a periodic basis for reconciliation with input energy. The 11 kV feeders
are provided with electronic meters at substations, which enable accurate assessment
of energy sent out to the system. To develop the rural distribution network, NPCL has
developed the concept of cluster supply in villages, whereby multiple small-sized
transformers are introduced for providing supply to localized groups of consumers.
By extending the high tension network to almost the doorstep of consumers, NPCL
has reduced energy pilferage opportunities. The companys consumer focus is reflected
in the fact that connections are activated within 6 days of application for domestic
consumers and 15 days for industrial consumers.
Source: NPCL Annual Report (various issues), UPERC Order, 200304, Prayas Occasional
Report No.2 (2003)
Box 8.3: KESCO privatization
The government of UP indicated its intention to privatize power distribution in Kanpur
city in the first quarter of 1999. Although more than five years have since passed,
distribution in Kanpur is yet to be privatized.
In April 1999, the government had pre-qualified four bidders for the privatization
procedureBSES Limited (BSES), Calcutta Electricity Supply Company Limited
(CESC), Larsen & Toubro Limited and AES Combine (L&TAES) and Tata Electric
Companies (TEC). The bidders sought and obtained a postponement of the final date
for submission of bids until after the issue of the first tariff orderwhich came in July
2000since bidders (rightly) expected future viability of KESCO to be contingent on
regulatory decisions on a number of issues such as the bulk tariff payable by KESCO to
UPPCL, the consumer tariffs chargeable by KESCO and the allowable level of T&D
losses. Bidding took place in July 2000. However, since only one company submitted
its bid, the bid was not opened. Since then, although the bidding deadline has been
postponed a number of times, bidders have not responded.
Source: Tadimalla, Sri Kumar, Privatization of KescoA Case Study, 2000
To extract best results from privatization, distribution zones need to be appropriately
designed. Two methods are generally considered: mixed zones and concentrated
zones. The latter is a superior method, for the following reason. The option of
claiming subsidy encourages distribution companies in mixed zonesregardless
of whether they are government-owned or owned by private playersto camouflage
theft and inefficiency rather than to improve distribution efficiency, by over-
reporting consumption of subsidized categories, and thereby raising the subsidy
burden on the government.
10
(Concocting false consumption data is particularly
122 | Indian Infrastructure: Evolving Perspectives
easy in states that have a large number of agricultural consumers, such as UP.) Such
options do not exist for concentrated zone distribution companies, who, by
definition, would have no access to subsidy flows. In fact, these zones can be made
to cross-subsidize rural zones through a transparent electricity surcharge. Mixed
zone privatization would thus weaken the motivation for the distribution companies
to respond strongly to the incentive systems.
UP had started the right way by attempting to privatize KESCO. Potential private
investors showed little interest because of the lopsided risk allocation that was
attempted and the absence of regulatory certainty, and not due to the fact that KESCO
was a relatively small, concentrated zone. It would not be appropriate to abandon
this strategy in favor of mixed zone model for distribution, as UP appears to have
been doing. Unless UP rectifies this flaw at this stage, it would lose substantial benefits
of privatization.
8. CONCLUSION
As stated earlier, there are two areas that have remained untouched by the recent
reform process: ownership arrangement and market structure. While the Electricity
Act, 2003 entails provisions to radically alter market structure, it allows a number
of options for ownership and does not mandate any changes in the existing
ownership structure. So, UP as well as a number of other major states, which are
in the same stage of reform as UP (such as Rajasthan, Karnataka, Haryana and
Andhra Pradesh) are well within their rights to continue with government
ownership of distribution business.
The case of UP, however, shows that it is futile to attempt to achieve higher
productivity through multi-year tariff regime and other incentive schemes if the
distribution business continues to be owned by the government. Furthermore, it
would be nave to believe that with the onset of open access, the sector efficiency
will increase even if distribution is not privatized. The UP experience shows that
continued government ownership would lead the newly formed utilities to deeper
and deeper financial trouble, while the sector would continue to ail. There is even a
danger that reforms may be discredited. To make utilities more responsive to
incentives and to take advantage of the upcoming open access regime, states need to
privatize distribution at the earliest and do it the right way.
NOTES
1. The right to distribute power in Greater Noida was sold in 1993 to Noida Power
Company Ltd.
2 . The process of tariff setting on the basis of performance targets set each year by the
regulator increases the uncertainty of investor/utility about their respective future revenue
Power Sector: The Case of UP | 123
streams. This is borne out by the KESCO privatization exercise. The practice also increases
the burden on the financial and human resources of the utilities. Finally, such a process
fails to offer correct incentives for a long-term view of investment, maintenance and
use. A multi-year incentive-based approach to regulation can rectify these shortcomings.
3. They are Varanasi, Agra, Lucknow and Meerut distribution companies. In addition to
these four, UP has two more discoms operating at Kanpur and Noida respectively.
4. The balance 50 per cent is to be arranged by the utilities either through internal resource
generation or as counterpart funding from financial institutions such as the Rural
Electrification Corporation and Power Finance Corporation.
5. The UP Government Energy Policy 2003 states that the captive power capacity in UP is
higher than the industrial load contracted with the grid.
6. For details, see Report of the Expert Group on Settlement of SEB Dues, March 2001.
7. The balance arrears would be securitized through tax-free bond issued by respective
state governments.
8. If defaults exceed 90 days from the date of billing, the Ministry of Finance should recover
these dues through adjustments against releases due to them from the centre.
9. The SERC, on its part, had even felt that the target spelt out in the tariff application was
inadequate and called for even higher loss reduction target.
10. To scrutinize the validity of the claims for subsidy by distribution companies, the
regulator will have to verify the actual consumption by subsidized categories, which is a
very cumbersome exercise.
124 | Indian Infrastructure: Evolving Perspectives
1. INTRODUCTION
In the electricity sector, the totally steel-jacketed arrangement of long-term contracts
which defined the rules of the game for several years has not allowed a competitive
market structure to develop. Even though power trading has been recognized as a
distinct licensed activity under the Electricity Act, 2003, the volume of trade has
been so insignificant and far from a critical mass that it has not created any visible
impact. Though the National Electricity Policy, 2005, provides for 15 per cent of
the total capacity to be developed as merchant capacity which could play a meaningful
role in market development, even this alternative has not taken off in a credible
way. Therefore, definite action needs to be taken to ensure that (a) merchant
capacities develop at least to a level of about 15 per cent of the total capacity,
(b) trading is encouraged to occupy a much larger space, thereby giving options to
distribution licensees for competitive procurement, and (c) availability of open
access, firstly to the transmission system and subsequently to the distribution
network, does not emerge as a constraint on facilitating these processes.
2. MERCHANT POWER PLANTS
The Electricity Act envisages the bulk of the development of power plants through
long-term power purchase agreements (PPAs) with tariff determination as prescribed
under Sections 62 and 63 of the Act. Consistent with the provisions of the Act, the
Guidelines for Determination of Tariff by Bidding Process for Procurement of Power
by Distribution Licensee stipulates PPAs for periods exceeding one year. Section
62 of the Act also permits sale or purchase of electricity between a generating
company and a licensee or between two licensees for a period not exceeding one
year. Section 66 of the Act explicitly provides for development of the power
DISCUSSION PAPER ON
DEVELOPING POWER
MARKETS
September 2008
9
Developing Power Markets | 125
markets. With a view to developing the electricity market, it would be essential
that while there are power projects which are developed on the basis of long-term
PPAs, lasting over project life cycles under which capacities developed are fully
tied up with the procuring agencies, there are also capacities developed to cater to
needs which are short-term in nature. The competitive advantage of the electricity
market would accrue to consumers only when a reasonable
quantum of merchant power generation from a number of producers is also
available for purchase on the basis of competitive tariff through trading or
equivalent arrangements.
Some of the key benefits of setting up merchant power plant capacities, inter
alia, include:
a. Merchant power plants provide virtual capacities for regions/areas in need of
short-term power due to temporary demandsupply mismatches.
b. The entire risk for offtake of power is carried by the merchant power plant,
thereby obviating the need for procurers to enter into firm power purchase
agreements for their requirements. Procurers could enter into firm PPAs for
their base load requirements and meet the peaking, short-term requirements
from merchant power plants.
c. Power plants operating on a merchant basis, necessarily need to ensure that
the power produced is cost-effective/reliable, failing which these capacities will
not be dispatched in preference to other available power supplies.
d. These power plants can also help meet peak load demand in the system.
Development of merchant power capacities to the extent of about 15 per cent of the
installed base would go a long way in terms of development of trading, introduction
of competition, and development of the electricity markets. Project-specific merchant
capacity should be determined on the basis of the location of the project, type of
project fuel, etc. However, there are certain issues hampering the development of
power projects in general, which are discussed below:
a. In the recent past, a number of promoters have announced power generation
capacities in the range of 1000 MW or above. The majority of these capacities
are based on coal or hydel and are expected to be developed in the eastern
part of the country for coal (Jharkhand, Chhattisgarh or Orissa) and in the
states of Arunachal Pradesh, Himachal Pradesh, Uttaranchal or Sikkim for
hydro power projects. Currently, many of the proposed generation capacities
are in the development stage and as such are yet to tie up any offtake of
power. Typically, most of these projects would tie up offtake for 60 per cent
to 70 per cent of the capacity with the balance capacity to be committed on a
merchant basis. The tie-up of 60 per cent to 70 per cent of the capacity on
126 | Indian Infrastructure: Evolving Perspectives
long-term PPA basis will be essential to service the debt for the project. In the
case of hydro projects, government policy recently notified 40 per cent of the
capacity on merchant basis.
At the time when promoters approach financiers for tying up equity/debt
funding, the generation capacities have not tied up long-term offtakers of power.
The tie-up of capacity on long-term basis with the offtakers, in some cases,
may take considerable time, which may delay the financing/equity tie-up. The
Guidelines for Determination of Tariff by Bidding Process for Procurement of
Power by Distribution Licensee makes it mandatory for the state discoms to
competitively procure the power for their requirements more than one year.
The procurement process of the discoms is carried out under Case I bids (where
the location, technology or fuel is not specified by the procurer) or Case 2 bids
(for hydro power projects, load centre projects or other location-specific
projects with specific fuel allocation, such as captive mines available, which
the procurer intends to set up under the tariff-based bidding process). The
time taken for finalization of the bids is in line with those stipulated by the
Ministry of Power (MoP)(240 days for single-stage bid to 425 days for two-
stage bid (RFQ and RFP)). Additionally, the bids called by various states do
not occur within a specific time period and can occur any time during the
year. These factors add to the uncertainties of the outcome associated with the
bidding process, wherein the promoter may not be successful in some or all
the bids, which themselves are a time-consuming process and therefore may
extend the planned financial tie-up date. The financiers/investors would need
to evaluate the credit risk associated with the offtakers, and hence it becomes
imperative that the intended capacity tie-ups (60 per cent to 70 per cent) occur
prior to financial closure. If it is possible for the power plant developer to
indicate tied-up capacity and the states in the respective regions, then this
would enable the CEA and the CTU to prepare a plan for additional
transmission capacity needs of these developers.
b. The delays in tying up of firm capacities may have implications in terms of
evacuation arrangements for the project. The inter-regional transmission
infrastructure may not be adequate to ensure evacuation of power primarily
from the Eastern/North-Eastern to the North/West and Southern regions,
assuming that a significant part of the capacities planned in these regions
materialize. The existing transmission capacities are tied to generation capacities
which evacuate power from specific power plants to different regions. The
transmission capacities that are expected to be developed within the next few
years (Eleventh Plan) will evacuate the power from identified projects
(78,000 MW planned to be developed in the Twelfth Plan period) to specific
Developing Power Markets | 127
regions with marginal redundant capacities. The process of planning and
developing evacuation infrastructure, by the Central Transmission Utility
(CTU), requires the identification of the project location and the offtaker. This
process of planning and development of the transmission infrastructure may
take about 30 to 36 months from the time the offtaker is identified for a specific
project. In a situation wherein the developer is unable to tie up the offtaker of
the capacity within a suitable timeframe, it will lead to delays in the development
and commissioning of evacuation infrastructure. Such delays in establishing
evacuation infrastructure will lead to part or the complete power generation
capacity being commissioned prior to the transmission infrastructure being
operational and create a stranded asset for a limited period of time. If developers,
at the time of commencing the development activities, indicate tied-up capacity
and the states in the respective regions, it would enable the CEA and the CTU
to plan for additional transmission capacity needs of these developers.
In the case of coal-based plants that are coming up in Orissa, Chhattisgarh
and Jharkhand, which will become the hub for the new capacities of the IPP
developers, a two-track policy approach may be required. First, there is need
to have a dedicated line up to the identified pooling point, and its cost should
be shared by the developers. Second, from the common pooling point a separate
common corridor should be planned, and its cost should be shared by all the
states in the region. This approach may be further discussed with the IPPs,
CEA and the states concerned in the region.
c. In the recent past, the Ministry of Coal, Government of India, has allotted coal
mines to private developers of power projects. The developers are expected to
use the coal from the mines to operate their power plants. The process of
developing the mine ranges from conducting geological investigations,
submission of mining plans, obtaining statutory approvals to land acquisition
and obtaining mining lease. This process of development of the mines is time-
consuming, and can take about four years before the extraction of coal from
the mine can commence. The power project is, however, expected to commence
generation prior to the extraction of the coal from the allotted mine considering
the timelines involved in the development of the power project and the coal
mine development. In such a situation, the developer is expected to have some
alternative tie-up for fuel till such time as the captive mine is operational.
d. Land acquisition is one of the most critical activities that can delay project
development substantially and have major implications on the project costs.
Currently, land for the private power projects is being acquired by the state
governments, and the procedures identified under the Land Acquisition Act
1894 are followed. These procedures are enshrined in various sections, starting
128 | Indian Infrastructure: Evolving Perspectives
from Section 4(1) which relates to public notice by the state government
informing the general public of the land identified for acquisition in the public
interest, followed by Section 5(1) and Section 6(1) notifications which deal
with identification of the land records, and fixing and approval of the
compensation. There are further notifications which need to be made and
finally culminate in obtaining a notification from the state government under
Section 17(1), wherein the possession of the land is actually handed over to
the developer. The entire process of land acquisition by the state government
can take up to two years, assuming the processes are not marred by
controversies/litigation as has been observed in some of the projects being
implemented in Orissa. The delays in acquisition of land in turn impact on
the receipt of various statutory clearances/licences (mining lease), etc. that
further delay the projects.
Recommendations
The importance of merchant power projects for the development of the power sector
in India cannot be disputed. It should be ensured that capacity additions in merchant
generation take place at a rapid pace. If the stakeholders ensure that visibility with
reference to the variables under their control is enhanced, as have been identified
herein below, thereby reducing the associated risks, the process of funding of the
projects by both the equity investors and the funding institutions would be smoothened.
A. Developers:
a. Land acquisition: Acquisition of land is a time-consuming process. It is
suggested that the developers acquire at least 40 per cent of the land with a
firm schedule to acquire the balance land if the developer is acquiring the
land on its own or deposit about 80 per cent of the cost of the land (with the
state government) if the same is acquired by the local authority for the power
project before approaching the funding agency (equity investor/lending
institution). The above will provide visibility as regards the land acquisition
timelines and eliminate the land-related variables in the risk perception of
the funding agency.
b. Environment: Prior to approaching funding agencies for financing (equity
and debt), the developer should ensure that the following activities have
been completed:
i. Terms of reference of the environment study are approved; and
ii. Public hearing process is either completed or is scheduled.
The above will obviate to a certain extent the risks associated with the visibility
on the key statutory clearances.
Developing Power Markets | 129
c. Firming up power offtake: The funding agencies (equity and debt) place a
great deal of importance on the credit risk associated with the offtaker of
power. For the projects supplying power to financially stressed discoms, the
equity investors are willing to participate in the project at relatively higher
rate of returns and the financial institutions providing debt do so with additional
covenants and at higher rates of interest. For mega power projects (greater
than 1000 MW capacity), the developer should make firm arrangements
through medium-long-term power purchase agreements for 60 per cent to
70 per cent of the capacity at the time of approaching the funding agencies for
tying up equity and debt. The balance could be left open, and tied up
progressively over the next few months with discoms which are not financially
stressed. In the case of small to medium projects (less than 1000 MW), the
percentage of power offtake to be tied up at the time of the developer
approaching the funding agencies could be lower at 40 per cent to 50 per cent,
with the balance being tied up later. The above provides visibility to the funding
agencies as regards the credit risks associated with the project during its
operations phase. For Case I bidding, however, no PPA could be even discussed
unless the bidder quotes a price and wins the bid. The bidder cannot quote a
price unless he has an idea of cost of funds. Therefore, the requirement of
offtake should be made a pre-disbursement condition and not pre-commitment
condition. This approach will facilitate capacities through Case I bidding.
d. EPC/major equipment contract(s): The ability of the developer to ensure
successful implementation of the project to a greater extent rests on the selection
of the contractor. The developer of the merchant project, by selecting the key
equipment supplier or the EPC contractor (or at least placing the letter of
intent), will help in the assessment of the construction risks on the basis of the
reputation of the contractor. Hence it is suggested that the developer should
have signed the agreement with the proposed equipment supplier(s) or the
EPC or package contractor prior to any loan disbursement. Issuance of the
letter of award of the main plant should be a precondition to loan finalisation.
e. Coal availability: The list of activities to be carried out post-allocation of the
coal block ranges from conducting geological investigations, submission of
mining plans and obtaining statutory approvals to land acquisition and
obtaining mining lease. These processes can take up to four years to conclude
prior to commencement of mining operations. In the event of part of the power
plant capacity achieving commercial operations prior to commencement of
mining activities, the fuel source needs to be firmed up. Developers should
have a clear-cut plan on the timelines within which they will obtain all necessary
approvals or have a back-up in terms of a coal linkage. In addition, the
130 | Indian Infrastructure: Evolving Perspectives
developers of merchant capacities should have provided a bank guarantee of
the requisite amount to the Ministry of Coal prior to approaching funding
agencies for tying up equity and debt.
B. Regulators and Central Government/ministries
a. Coal linkages: In some of the coal blocks which have been allocated, the
timelines involved in land acquisition and obtaining all clearances leading to
mining are very long. This would lead to part or total capacity achieving
commercial operation prior to the commencement of mining activities. It is
recommended that in such cases the ministry of coal should provide tapering
linkages to projects where there has been serious project development work
and where delays in commencement of mining operations and extraction of
coal from the allotted mine(s) are anticipated.
b. Open access: As of now open access in transmission is available either for a period
of up to 3 months or greater than 25 years. This poses a problem to developers as
they need open access for short/medium terms and for varying capacities to sell
power from their proposed project. It is recommended that open access be made
available for varying terms: short term, up to 3 months; intermediate term,
3 months5 years; medium term, 5 years15 years; and long term, over 15 years,
to merchant power plant developers to enable them to dispatch their power for
varying terms and capacities to offtakers for the untied capacities.
c. Exemption from cross-subsidy in the case of financial event of default: Currently,
the power procurement for the state discoms is handled by the aggregator(s) at
the state level who invite(s) bids for power on behalf of all or some of the discoms.
The financial position of all the discoms, for whom the state aggregator may
procure power may not be similar. This will result in some of the financially
weak discoms incurring a financial default. Though the model PPAs stipulate
third party sale, in reality, the sale of capacity defaulted on by the discom is
generally made to another discom despite the existence of financially sound HT
consumers in the distribution area of the defaulting discom. This is due to the
prevalence of cross-subsidy surcharge. It is recommended that if a state-owned
procurer defaults on the payment for power procured from any power plant,
the power plant should be allowed to sell power to third parties within the state
(like HT consumers), and the discom provides the wheeling services for the
power of the project at wheeling charges as decided by the regulator. The levy of
cross-subsidy surcharge in such cases should be waived and in other cases be
decided in a rational manner, as the state procurer has already defaulted on
obligations to the seller, and the surcharge should reflect the cost of efficient/
uninterrupted supply. It should, however, be noted that in order to encourage
Developing Power Markets | 131
Open Access, surcharge should not be in excess of the surcharge as per the formula
laid down in para 8.5.1 of the National Tariff Policy.
d. Mega power status for tied capacities: The mega power policy of the MoP,
Government of India, exempts the equipment for power projects above a
capacity threshold (1000 MW for coal-based and 500 MW for hydel) from
customs duties and excise duties, provided such projects supply power to more
than one state and the beneficiary states have constituted their regulatory
commissions with full powers to fix tariffs as envisaged in the Central Act. The
procuring state would also have to privatize distribution in the cities having a
population of more than one million. In the case of a project where at least
1000 MW of capacity is proposed to be sold through long-term power purchase
agreements to utilities in more than one state, the benefits of the mega power
project should be automatically accorded to such projects. This will have a
clear implication for the project cost, since the taxes and duties constitute a
substantial element of the cost, and consequently on the means of finance. For
the merchant power projects, tying up funding on the basis of a mega power
projects benefits, in the absence of visibility on the applicability of the benefits
to the project, runs the risk of an increase in the project cost if the mega power
projects benefits are not available.
C. Governments
a. State governments should continue to assist the developer in land acquisition
and allocation of water to the merchant power plants.
b. The state governments over the past few years have had the benefit of
experiencing the patterns of power demand, and supply and growth in the
power demand. Various states together should be in a position to project their
demand for the next few years and arrive at an assessment of supply. On the
basis of this, the states can call for competitive bids for supply of power at the
same time to mitigate the risks associated with visibility on the power capacity
tie-ups by the developer (as highlighted above).
c. MoP or the CEA could coordinate this, particularly with respect to the timing
of the bids.
d. An in-principle support for transmission of power based on requisition from
the developer, CEA or PGCIL, could provide this comfort.
D. Financing agencies
Non-finalization of loan agreements also emerges as a constraint in many cases.
Financing agencies can encourage development of merchant plant/capacities
for which it may be necessary to adopt the following approach for some of the
critical issues:
132 | Indian Infrastructure: Evolving Perspectives
1. Land
2. MoEF/
Forest
clearance
3. Power
offtake
4. EPC/Major
equipment
contracts
Table 9.1: Recommended loan conditions
Issues Conditions for final loan agreements Conditions for loan
disbursement
Land should have been identified and
Section 6(1) notification should have been
issued for the entire land and the
developer should have deposited 80% of
the cost of the land with the
government authorities.
The terms of reference for the
environment studies should have been
approved and the public hearing process
should have been completed.
Initiated a process of bidding for offtake
of power through the competitive process
The developer should have issued the
letter of award for the entire scope of the
project (EPC basis) or major critical
equipment for the power project.
(However, for commencing the discussions
with the lenders, the promoter should have
at least initiated the tendering process for
major equipment/EPC contract and should
have achieved significant progress).
The developer should
have the possession of the
entire land for the project.
MoEF clearance and
Forest clearance should
have been obtained.
In addition, the developer
should have obtained
consent from the state
pollution control board.
Finalised off-take of power
for at least 60% to 70% of
the capacity for major
projects and 50% to 60%
of the capacity for smaller
projects (up to 500 MW).
The EPC or the major
equipment contracts, as
the case may be, should
have been finalized
incorporating the inputs
from the lenders'
engineer and all the
conditions precedent for
effectiveness of the EPC/
major equipment
contracts should have
been fulfilled.
Developing Power Markets | 133
Table 9.1: Recommended loan conditions (contd...)
Issues Conditions for final loan agreements Conditions for loan
disbursement
5. Fuel tie-ups
6. Power
evacuation
The developer should have obtained Letter
of Assurance from the Ministry of Coal
and deposited the bank guarantees with
the ministry towards linked supplies.
For captive mines, in addition to obtaining
a fuel linkage for the period between the
time the plant achieves commercial
operation and the time the captive mine
commences operations, the developer
should have initiated the process of GR
preparation, mining plan preparation etc.
In addition, the heads of agreement should
have been entered into with the fuel
supplier before the financing documents
were finalized.
Currently, a single coal block is allotted to
a number of allottees. It becomes essential
that the company approaching the lenders
for financing its power project has at least
formed the company for the coal mining
and should have entered into a share-
holders agreement with the other allottees
of the coal block.
The developer should have initiated
discussions with the CTU for evacuation
of power from the project site to the
prospective states in line with 3 above.
Fuel supply agreement
should have been signed
with the state mining
agencies for projects
where fuel linkages are
available (and for projects
with captive mines
wherein fuel linkages shall
be required for the period
commencing from the
project COD till the
commencement of
mining operations).
For captive mines, the GR,
mining plan should have
been prepared and
approved by the
relevant agency.
The evacuation
arrangements/agreements
for evacuation of power
from the project to the
respective procuring states
should have been firmed
up with the CTU.
The above will reduce to a large extent the risks associated with financing and
development of merchant power plants and ensure that the capacities announced
by the various developers materialize.
134 | Indian Infrastructure: Evolving Perspectives
3. POWER TRADING
Prior to enactment of the Electricity Act 2003, there was no concept of trading
of power. The power sector was a natural monopoly with state-owned entities,
viz. State Electricity Boards (SEBs) which were vertically integrated
(i.e. generation, transmission and distribution housed in one entity) and
accorded the right to carry out their businesses in a geographically defined
territory with pre-approved tariffs. Each SEB had an allocated share in a central/
jointly-owned power station. The entire power sector operated on a fixed return
basis and interplay of market forces remained non-existent. Utilities would
back down their generating stations in case of low demand and resort to load-
shedding in case of excess demand. Thus the concept of power sector operations
(generation, transmission and distribution) as a commercial activity which
could utilize the surpluses of other regions and use the fixed assets for better
returns did not exist.
With a view to developing the electricity market, power trading was introduced
as a concept in 2001 to tap the power from surplus regions of the country to
the deficit regions. This resulted in better utilization of existing capacities by
way of creating virtual capacities and also added to the cause of substantial
improvement in plant load factors of the existing generation units. The initial
growth of the short-term power trading market was appreciable. The share of
short-term traded power increased to about 2.5 per cent, while the balance
grid power continued under long-term power purchase agreements. The
participants in the power sector for the first time started to look at power as a
source of revenue. In the present situation, many states like Chhattisgarh,
Jharkhand, Orissa, Himachal Pradesh, J&K and Uttaranchal have devised
policies and planned large capacity additions to become power hubs. This will
lead to rapid capacity addition, including merchant power plant capacities.
Characteristics/Advantages of power trading
After due consideration over a long period of time, power trading is now recognized
as a distinct activity, hence it may be worthwhile outlining the characteristics/merits
of electricity as a trading activity:
a. Electricity trading facilitates sale of power from a surplus region to a deficit
region, mitigating shortage. In effect, electricity trading enables better utilization
of existing generation assets, without requiring huge investments to be made
in setting up generation assets.
b. Electricity traders act like market makers. They provide a single-point
specialized service and enable buyers and sellers to transact their business. In
the absence of traders, both buyers and sellers shall have to incur significant
Developing Power Markets | 135
expenditure for training manpower, locating sellers/buyers and establishing
the trading infrastructure.
c. Unlike an intermediary who does not acquire interest and incur liability, the
electricity trader purchases electricity and assumes all the risks of the
transaction, especially the payment risk by way of adequate payment security
mechanism. An electricity trader acts as a specialist who accepts liability and
responsibility for the transaction to be completed, unlike a person who gets a
commission for bringing seller and buyer together.
d. By assuming counter-party credit risk, electricity traders provide comfort to
the seller of electricity by facilitating sale and purchase of power at a
predetermined price, thereby insulating the purchaser and the seller from the
financial risk of transacting through the Unscheduled Interchange (UI) market,
where the frequency and rate realised are variable. Such predetermined sale of
power also aids better grid discipline and leads to better grid parameters.
e. With the development of the electricity markets, the number of active
participants in the trading segment would increase. This would create, though
in a limited way, an environment of competition in which the procurer
distribution companies do have the option to choose from various trading
agencies which, in turn, leads to reduced burden on ultimate consumers. Going
ahead, there is a potential for credible trading agencies to act as catalysts/
facilitators of new generation capacity, wherein the trader could facilitate
tie-up of the bulk of the capacity on a long-term basis with a utility and take a
principal risk for the balance untied amount.
f. Even the limited volume of trading activity has been able to establish the
value/price of power and has brought in a commercial sense among, if not
all, a large number, of state utilities.
Regulatory orders on power trading
The increased demand for power as well as inadequate new generation capacity
being set up has led to a rise, over the past two to three years, in the short-term price
of the power being traded, causing concern to purchasing utilities as well as to the
regulatory bodies. To address the situation, the CERC/Appellate Tribunal for Electricity
(ATE) have passed three orders, and highlights of which are presented below:
a. The trading margin, which can be charged by trading licensees for inter-state
trading of power was capped at 4 paise/kWh on power traded on a short-term
basis (not exceeding a year), including all charges, except charges for scheduled
energy, open access and transmission losses.
b. The price at which a generating company can trade power should not exceed
the base price plus 4 per cent thereof.
136 | Indian Infrastructure: Evolving Perspectives
c. Trader-to-trader transactions are not permitted.
The above matters are sub judice, and final decisions on the same are still awaited.
Current trading scenario
a. The capping of trading margin has not led to price stability. The transaction
prices quoted below indicate that there has been no price stabilization post
fixation of trading margin by CERC.
Table 9.2: Trading margins
Year 2005-06 2006-07
Weighted average purchase price 3.14 4.47
Weighted average sale price 3.23 4.51
Trading margin 0.09 0.04
b. The present short-term bilateral market prices have reached levels of Rs 7 to
Rs 8/kWh, which is less than the present maximum Unscheduled Interchange
(UI) price. The present maximum UI price is in the range of Rs10/kWh, with
many of the state utilities continuing to overdraw from the grid, causing
substantial variation in the grid frequency. The short-term prices (UI price/
bilateral contract prices) are sending out price signals of a massive deficit power
situation in the country.
c. Pursuant to the above trading restrictions, the growth rate in short-term trading
volumes has declined, and the market appears to have stagnated. Few players
in the trading industry have remained active, and many are reworking their
business plans to ensure that viability/profitability levels are maintained. Market
making/trading as an activity is not making an impact or contributing to the
extent envisaged.
d. The role of a trader, in accordance with the Act, is also to promote electricity
markets and develop new and innovative products, which may inherently
carry higher risks. Capping of trading margin will reduce the risktaking
appetite of traders and discourage them from assuming a principal role
in trade and push them to a broking role, wherein they would have
back-to-back arrangements tied up.
e. Traders bring a substantial level of comfort to both buyers and sellers of
electricity by way of providing the counter-party credit risk in even long-term
power purchase and sale agreements. The trader effectively assumes a principal
position and takes high payment risks toward open access charges payable to
Central Transmission Utility, full fixed charges during plant life (35/25/15 years)
Developing Power Markets | 137
even in the event of failure of power off-take, and prompt payment to the
seller even if it receives delayed or no payment from the buyers. Such comfort
by the trader to the project developer helps finance new and upcoming projects.
In absence of such a counter-party guarantee and such trading restrictions
over a prolonged period, investment in new and upcoming projects may get
adversely affected, which will become a barrier to the overall development of
the electricity market in the country.
Recommendations
a. Trader-to-trader transactions:
Pursuant to the Electricity Act 2003, the power sector has been unbundled and
reorganized. The monolithic SEBs in many states have been split up into distinct
generation, transmission and distribution companies. In many of the states, a
state-owned trading company has been incorporated which is involved in bulk
purchase/sale of power. The state-owned trading entity procures power in
bulk for onward sale to the distribution companies (discoms) in the states.
In the present situation, wherein the financial position of the discoms is
weak, it has become necessary to aggregate/facilitate power procurement
at a nodal level, i.e. bulk purchaser/state-owned trading entity, at a common
price from generators/inter-state traders and avoid duplication of expertise
and effort. Also, in most of the states, financial health varies significantly
across discoms, which results in higher power purchase cost for a financially
weaker discom as compared to a discom having a better credit rating.
Imposition of restrictions on trader-to-trader transactions may also affect
the progress of reform of state utilities. Even though by virtue of an
intervention by the Honble Supreme Court, technically, restrictions on
trader-to-trader transactions for purchase/sale of power do not exist, in
view of an earlier order of the CERC, many of the states have been avoiding
trader-to-trader transactions.
The trader-to-trader transaction should be freely allowed, so long as it is
unidirectional, and the discoms/state-owned bulk procurers of power should
be permitted to buy power from either generators or traders; however, the
purchase consideration should be governed solely by the cost competitiveness
of the procured power. Restricting state-owned traders to procuring power
only from generators will constrain the development of the electricity markets
in the future and minimize options available to the purchaser of power.
The Act does not disallow trader-to-trader transactions; rather, it is silent on
this issue. Furthermore, if the trader is not broking a deal as an intermediary,
but assuming the role of a principal, then he bears the risks associated with the
138 | Indian Infrastructure: Evolving Perspectives
trade and hence enjoys the returns thereof. Traders cannot force utilities to
buy power at high rates as the economics of demand and supply dictate the
sale and purchase of electricity.
To prevent any price escalations arising due to the operation of a trading cartel,
trader-to-trader transactions could be allowed, provided the trade conducted
is unidirectional in nature.
b. Generator-to-trader transactions:
The restriction on the generator-to-trader transactions at a price not exceeding
4 per cent over the cost of generation may prove to be counterproductive in
terms of developing the electricity market. In a situation of extreme power
shortage, when part of the proposed/planned capacity is merchant in nature
(i.e. where power sale is not tied through long-term PPAs), with associated
risks to be borne by developers, any exercise to cap the price through regulatory
intervention could only hamper the process of addition of such capacities
coming into the grid. Since the cost of generation is not determined for
competitively bid out projects and merchant power plants, the restriction of
4 per cent over base price on the sale of power by generators to traders should
not be applied to such plants. With the introduction of the power exchange,
the sale/purchase of power will be market-driven, and price restrictions on
sale of power may be difficult to implement. It needs to be recognized that one
of the reasons for trading volume not increasing substantially is insufficient
power available outside long-term PPAs. Such power can be available only
when the regulator facilitates merchant capacity and duly recognizes the risks
which developers may have to take while developing such projects. Further,
this may not send the right investment signals to the states which have already
planned for power hubs or are willing to set up such hubs in the near future.
Though technically this restriction does not exist currently by virtue of the
intervention of the Honble Supreme Court, in view of an earlier judgment
of the Appellate Tribunal of Electricity, there has been uncertainty on the
final outcome of the case.
It may be reiterated that the objective of power trading outside the long-term
power purchase agreements (PPAs) is to permit the development of electricity
markets and enable competitive forces to determine price. The National
Electricity Policy (NEP) recognises that, to promote market development, a
part of new generating capacities, say 15 per cent, may be sold outside long-
term PPAs, i.e. effectively on market-based commercial principles. In the
coming years, a significant portion of the installed capacity of new generating
stations could participate in competitive power markets. Regulators may need
Developing Power Markets | 139
to be more proactive towards promotion of the power market and take
additional steps to bring in captive, renewables, etc. into the fold. This will
increase the depth of the power markets, provide alternatives for both generators
and licensees/consumers and, in the long run, lead to reduction in tariff.
c. Cap on trading margin:
In the initial years, the trading companies commenced operations as
intermediaries, without assuming any principal risk and as such the
operating/financial risk for traders was significantly lower. Past experience
indicates that trading licensees could be encouraged to undertake a certain
amount of risk, and they will be prepared to do so. Of the over two dozen
licensees (those authorized by CERC), there are some who have not only
imbibed operational capabilities in trading but are also financially sound.
These trading companies may not necessarily assume an intermediary
position but may, for part of the trading volume, assume a principal position
wherein they would not always have back-to-back arrangements with the
distribution companies for any commitment which they make with the
generators. In such a situation, the traders would bear significantly higher
risks and as such would expect commensurate returns. Therefore, any
restriction on the trading margin needs to be removed. Any cap on the
margin admissible to trading licensees may only prove counter-productive
with regard to the process of trading and its becoming an instrument/
catalyst for capacity development. In the most simplistic model of a trader
only functioning as an intermediary, such a stipulation could perhaps be
justified, but unless we think of different alternatives and structure
appropriate riskreward models which could permit various types of traders
with their meaningful contribution, we may end up defeating the objective
of trading being a distinct licensed activity and the resultant outcomes
expected from such institutions.
In short, the removal of the restriction on the trader-to-trader transaction,
and the lifting of the cap on the traders margin will lead to the development of
trading markets that will ensure market pricebased competition amongst the
traders. In addition, the traders will be encouraged to introduce new products
in the electricity markets and differentiate their offerings to the end-consumer,
resulting in benefits to the latter.
4. OPEN ACCESS IN TRANSMISSION
In the Electricity Act, open access has been defined as the non-discriminatory
provision for the use of transmission lines or distribution system or associated
140 | Indian Infrastructure: Evolving Perspectives
facilities with such lines or system by any licensee or consumer or a person
engaged in generation in accordance with the regulations specified by the
Appropriate Commission. It may be seen that the option has been provided
to consumers, to intermediaries like trading licensees or distribution
licensees or even to generating companies. Each one of them is entitled to
the use of transmission systems or distribution infrastructure in a non-
discriminatory manner.
Advantages of open access
a Enables power to be sold from surplus regions to deficit regions, thereby
enabling overall economic growth in both regions.
b Encourages merchant power capacities to come up, and thereby leads to
competition in the power markets and development of power markets.
c Provides freedom to procurers to choose their suppliers, promoting
competition in the sector and reduction in the cost of procurement.
d Provides flexibility to generators to sell their power to procurers of
their choice.
The present dispensation on provision of open access on transmission is so
structured that it is almost impossible to develop capacities to larger volumes
outside long-term contracts. Open-access requests are entertained for periods
(a) up to 3 months and (b) 25 years or more. No trader can be in a position to
make any long-term arrangement beyond three months unless he takes the risk
of beyond 25 years (a highly unrealistic proposition). Unless transactions of
various types, short-term, medium-term, long-term, and for intervening
durations are permitted, it will be difficult for any meaningful market
development outside PPA to materialize. A number of project developers, keen
to take investment risks, are facing difficulties at the time of achieving financial
closure due to restrictive conditionalities in providing open access to the grid.
Unlike other commodities, electricity does need to have a dedicated transmission
system. Project developers can take risks in terms of likely consumers and market
prices. However, to expect the developers to accept the risk of evacuation
infrastructure/open-access availability is an unrealistic proposition in a situation
of power shortages.
RECOMMENDATIONS
1. Open access period
The present arrangement of short term up to 3 months and long term of
25 years needs to be modified if we have to take into account the practical
Developing Power Markets | 141
requirements of industry and consumers. Open access should be available
for the following periods:
Short term: up to 3 months
Intermediate term: 3 months to 5 years
Medium term: 5 years to 15 years
Long term: over 15 years
The above will ensure contracts (trading and transmission) for intervening
durations (3 months to less than 25 years) and increase competition
amongst the various players in the trading/generating sphere to the benefit
of the end user.
2. Transmission hubs
A large number of merchant power plants are coming up in the states of Orissa,
Chhattisgarh, Jharkhand, Sikkim and Arunachal Pradesh. The Central
Electricity Authority (CEA) and the Power Grid Corporation of India Limited
(PGCIL) should take up the lead in developing transmission hubs in these
states as the development of large merchant capacities calls for large
transmission capacity additions. Such transmission capacities should be made
available to the merchant generation capacities on a non-discriminatory basis.
Project developers could at most be expected to connect to the transmission
hubs (maximum 100 to 150 km). The CEA and the PGCIL will be in the best
position to determine the direction of flow of power from the transmission
hubs to the load centres, and they shall keep creating the transmission network.
The contention that aiming at eliminating congestion with large investments
may not be optimal needs to be challenged. This approach may be applicable
to a system which is stabilized and augmentation requirement is minimal. In
the Indian context, when the growth of the power sector is expected to be
8 per cent to 10 per cent a year, the stakeholders involved need not be
concerned about excess build-up on transmission. Any excess would get
absorbed within the network in a couple of years, particularly when the
demand for power is growing at 8 per cent to 10 per cent per year. In the
unlikely event that the PGCIL, for some reason, is constrained to bring in
requisite funds due to the absence of beneficiary state utilities, i.e. offtake
not being tied up, then it is recommended that the funds be sought from
the Plan Allocation on a need basis.
3. Open access charges
Pancaking of transmission charges, i.e. adding up of transmission charges of
intermediate regions in case of transfer of power from one region to another,
142 | Indian Infrastructure: Evolving Perspectives
leads to increase in cost of power. The same renders the generated power from
efficient generators located in other regions/states expensive. It is recommended
that a postage stamp pricing mechanism be adopted to both simplify the tariff
mechanism and encourage open access.
4. Timely open access permission by state load dispatch centres (SLDCs)
There are instances where it is seen that when captive power plants approach
the SLDCs for open-access permission, the SLDCs take considerable time in
arriving at a decision, leading to uncertainties for the developer. Many states
are yet to fix the transmission charges and wheeling charges. This works as a
disincentive to merchant power plants and restricts competition and
development of the power market.
5. Cross-subsidy charges
Cross-subsidy surcharge may need to be reworked in a manner that encourages
and facilitates open access rather than constrains this initiative. Some state
regulatory commissions have notified cross-subsidy charges which are so high
that open access would practically not be possible.
Captive Coal Mining by Private Developers | 143
The rapid growth in the Indian economy has led to a robust growth in the demand
for power, which has been constantly outpacing supply. With a view to reducing the
demandsupply gap, large additions to generation capacity have been planned.
Notwithstanding efforts to have a diversified portfolio of fuel options in power
generation, the share of coal-based generation has increased over the years, and with
large capacity additions envisaged over the next decade, coal will continue to remain
the primary source of fuel for power generation. Besides substantial coal-based capacity
additions, the increase in demand for coal has been accentuated by improved utilization
of plants, diminishing quality of coal and inadequate availability of gas.
With rapid growth in demand for coal, coal supply is proving to be a major cause
for concern. The Government of India (GOI) is targeting coal-based generation
capacity addition of about 53,000 MW by 2012 (end of the Eleventh Plan period);
coal-based installed capacity would then be more than 125 GW by 2012.
1
In this
scenario, there is an apprehension that coal companies may not be able to cater to
the enhanced coal requirement due to resource and other constraints. To augment
the coal supply, the Ministry of Coal (MoC), GOI, decided to allocate captive mines
to bulk users of coal, in the public and private sectors, and consequently many
captive coal blocks have been allocated to power developers.
2
In May 2007, at the Parliamentary Consultative Committee meeting of the MoC,
3
it was announced that, to meet the coal demand, about 81 coal blocks with
geological reserves of about 20 billion tonnes had been identified for allocation to
companies, both government and private, for permissible end uses. Of these,
41 coal blocks, with geological reserves of about 15.7 billion tonnes, were earmarked
for the power sector. Currently, the allocation of coal mining blocks to companies,
other than Coal India Ltd (CIL), is done either under the government company
CAPTIVE COAL MINING BY
PRIVATE POWER
DEVELOPERS:
Issues and the Road Ahead
October 2009
10
144 | Indian Infrastructure: Evolving Perspectives
dispensation route
4
or through the captive dispensation route. These blocks for
the power sector have been further categorized in three separate lists on the
basis of method of allocation, namely government company dispensation route,
screening committee
5
route and tariff-based bidding as per the Ministry of Power
(MoP) guidelines. The details of these blocks identified for the power sector are
as follows:
Table 10.1: Coal blocks identified for the power sector
Method of allocation No. of blocks Total reserves
(billion tonnes)
Government dispensation route 10 6.1
Tariff-based bidding as per Ministry
of Power guidelines 16 6.0
Screening committee route 15 3.6
Total 41 15.7
According to the MoC, till 31 December 2007, 170 captive coal blocks had been
allocated, of which 15 blocks allotted to three PSUs and nine private companies
had already started producing coal. Of the 170 captive coal blocks allotted (with
reserves of 39.3 billion tonnes), 76 coal blocks with reserves of about 23.6 billion
tonnes had been allotted to the power sector (24 coal blocks were allotted
in 2007).
6
It may be noted that production of coal through open cast mining may not
need a lengthy lead time unlike in the case of underground mining, which
involves a lengthy gestation period, particularly when the stripping ratio is high.
Given the foregoing, one may be misled into believing that coal production can
start within a short period from the allotted coal blocks. This is not the case, as
the allocated mines could also involve underground mining.
Discussions with private sector and public sector coal mine allottees have
revealed that the lead time is at least four to six years on account of initial
planning, conducting geological studies to authenticate quantum and structure
of reserves, obtaining several statutory approvals from a multitude of authorities
and agencies, formulating mining plans and getting approvals, land acquisition,
relief and rehabilitation issues, and infrastructure development.
This note attempts to examine the problems faced by allottees of the captive coal
blocks and suggests recommendations which could shorten the actual lead time
involved in commercial production of coal from these coal blocks.
Captive Coal Mining by Private Developers | 145
GUIDELINES FOLLOWED FOR IDENTIFICATION OF COAL BLOCKS FOR
CAPTIVE ALLOCATION
The guidelines adopted for demarcating the blocks are such that the developers would
face a number of problems in quickly bringing the allotted blocks to the production
stage. The MoC relies on Coal India Ltd (CIL) and Singareni Collieries Company Ltd
(SCCL), for identifying the captive coal blocks. The guidelines adopted by CIL and
SCCL for identifying and allotting coal blocks for captive mining are as follows
7
:
The blocks offered to the private sector should be at reasonable distance from
existing mines and projects of CIL in order to avoid operational problems.
Preferably, blocks in greenfield areas with little or no development of basic
infrastructure, like road or rail links, may be allotted to the public/private sector
for captive mining. The areas where CIL has already invested in creating such
infrastructure for opening new mines should not be handed over to the private
sector, except on reimbursement of costs.
Blocks already identified for development by CIL, where adequate funding is
on hand or in sight should not be offered to the private sector.
The public/private sector should be asked to bear the full cost of exploration
in the blocks offered.
For identifying blocks, the requirement of coal for about 30 years would be
considered.
Others, which include mine plan approval under the provisions of the Mines
and Mineral (Development and Regulation) Act 1957, approval of the
Directorate General of Mine Safety, and inspection by the Coal Controller for
appropriate enforcement of conservation measures under the provisions of
the Coal Mines (Conservation and Development) Act 1974.
Given the fact that the blocks are identified at a distance from the existing infrastructure
of the CIL and also that coal blocks are located in remote areas devoid of all basic
infrastructure, like roads, rail links and electricity it is difficult for the coal block allottees
to quickly bring the coal blocks to production stage. The development of infrastructure
on a piecemeal basis, i.e. individually on a block-by-block basis, may cause a drain on
the resources of the developer, would not bring in economies of scale, and could be
onerous as well. Further, the blocks identified are only regionally explored with inadequate
information, which adds to the risk and causes a delay in the development of the blocks.
Thus, to facilitate speedy development of coal blocks, it is recommended that the
following be considered in identifying and allocating the blocks:
If there are coal blocks in the vicinity of the CIL/SCCLblocks which are not
included in the expansion plans of CIL/SCCLthen these blocks should also
146 | Indian Infrastructure: Evolving Perspectives
be included in the list of captive blocks for allocation and not excluded simply
because of their proximity to CIL/SCCL blocks.
In identifying captive coal blocks at a reasonable distance from existing mines
and projects of CIL/SCCL, it should be ensured that the distance should not
put the captive coal block developer at a disadvantage in terms of available
infrastructure and other facilities.
Without disturbing the present procedure of coal block allotment, the future
allotment should be on the basis of better investigation, for which CMPDIL
and other agencies should be mobilized.
Further, in the context of inadequacies in infrastructure associated with the captive
blocks identified for allocation, it is recommended that the central/state government
agencies facilitate development and creation of infrastructure in the mining areas,
particularly in providing right of way, railway clearances, water, electricity, etc. The
Government could also consider pre-identification of non-coal bearing corridors
to be used for rehabilitation colonies and townships.
The captive block developers should coordinate with other coal block developers in
proximity to jointly fund the development of infrastructure based on a master plan
prepared by an independent agency.
ALLOCATION OF COAL BLOCKS
Allocation of coal blocks should not only look into the promoter background and
the end-use but should also give importance to the technical and financial capability
of the applicants for timely development of the blocks. The process of allocation of
the blocks could also take into consideration the extent of the preparedness of the
developers and the projects. Further, the auctioning approach may be adopted for
allocation of coal blocks. However, it may be noted that auctioning of the block to
the highest bidder may not be economically viable, since it would get translated
into a pass-through in the cost of the end-use product and thereby adversely affect
the ultimate consumer.
The following approaches, depending on the level of information available for the
coal blocks, may be adopted in taking the auctioning route for allocation of blocks:
Table 10.2: Criteria for allocation of coal blocks
Status of block Possible criteria for allocation
Fully explored Lowest cost of power generated
Partly explored Maximum estimated production
Totally unexplored Production-sharing formula
Auctioning on the basis of the maximum proposed production or a production-
sharing formula may be workable till sufficient data on the depth, seam thickness,
Captive Coal Mining by Private Developers | 147
and quantity and quality of the coal is available for the blocks put up for auction.
However, once sufficient data is available for the blocks put up for auction, the
criteria for grant of block could be linked to the lowest cost of power generated
from the captive coal block.
APPROVALS AND CLEARANCES
In the present legislative and regulatory framework, the allottee of a captive coal
block has to obtain a multitude of clearances and approvals as stipulated under the
provisions of the Coal Mines (Nationalisation) Act, the Colliery Control Rule 2004,
the Coal Mines (Conservation and Development) Act 1974 and rules thereunder,
the Mines and Minerals (Development and Regulation) Act 1957 (MMDR), the
Mineral Concession Rules 1960 (MCR), the Environment Protection Act with its
rules and procedures, and the Forest Conservation Act with its rules and procedures.
In the federal structure of India, the state government is the owner of the minerals
located within the boundaries of the state. Thus, though the central government allocates
the coal blocks for captive mining, the state government grants the reconnaissance permit
(RP), prospecting licence (PL) and mining lease (ML) under the provisions of the MMDR
Act and Mineral Concession Rules. However, the state government can grant the
mining lease only with the prior approval of the central government as provided under
Section 5(1) of the MMDR Act. The central government approves the application
only after the coal block allottee obtains the mining plan approval and clearances
from several authorities at the central, state and district levels.
Although broadly three clearances are requiredgrant of RP or ML, environmental
clearance and forest clearance, depending on whether the allotted block is explored
or unexplored, in forest or non-forest areas, etc.clearances may be required from
multiple authorities. Table 10.3 below indicates the authorities and agencies at the
central and state levels from whom the approvals have to be sought by coal block
allottees before actual production can begin:
Table 10.3: Pre-production approvals for allottees of coal blocks
Approvals/Clearances Authority/Agency involved
Mining Lease
Approval or purchase of CMPDIL (purchase could also be from
geological report SCCL, MECL)
Directorate General of Civil Aviation and
Ministry of Defence (for unexplored blocks if
aerial reconnaissance is conceived)
Mine plan CMPDIL
Coal Controller
148 | Indian Infrastructure: Evolving Perspectives
Mine safety Directorate General of Mine Safety
Mining technology & Coal Controller (under the provisions of
conservation measures; Colliery Control Rules and the Coal Mines
coal categorisation (Conservation & Development) Act)
Mining Lease State Government (Mining Department),
Ministry of Coal (GOI) Reviewed at various
levels within the departments at the state &
central government levels
Environment
EIA/EMP studies State Pollution Control Board;
State Environmental Impact
Assessment Authority;
State Water Resource and Water
Supply Department;
District Administration (for various aspects
of site clearance);
Coal Controller;
Department of Environment (MoEF).
Forest
Forest clearance & valuing Committee to advise GOI (MoEF);
compensatory afforestation Office of Chief Conservation of Forests,
(Regional Office of MoEF);
State Forest Department & District Authority;
Department of Environment &
Forests (MoEF);
State Revenue Department;
Honble Supreme Court
Land Acquisition Ministry of Coal (under provisions of CBA);
State Department of Revenue
Infrastructure (electricity, Appropriate departments of the state
water, railways, roads, etc.) government & ministries of
central government
It may be noted that of all the clearances, the MoEF clearance is the most time-
consuming, since many departments and issues are involved in getting
environmental clearances and also the vast majority of the coal blocks are
situated on forest land. Even geological investigations (which require
Table 10.3: Pre-production approvals for allottees of coal blocks (contd...)
Approvals/Clearances Authority/agency involved
Captive Coal Mining by Private Developers | 149
L
e
t
t
e
r

o
f

a
l
l
o
t
m
e
n
t

o
f

c
o
a
l

b
l
o
c
k

(
z
e
r
o

d
a
t
e
)
0 3 6 9 12 15 18 21 24 27 30 32 36 39 42 44 48
Infrast
Coal mining
Coal p
Start of prod.
Start of oining op.
Source: Infraline
GR purchase
Land acquisition
mining lease grant
Submission & approval of mining plan
EIA/EMP studies & approval
Forest clearance
drilling for exploration) in these areas require MoEF approval. This is a
lengthy process.
The Guidelines for Allocation of Captive Blocks & Conditions of Allotment
through the Screening Committee, MoC, provide for the normative time limit
ceilings (Appendix, Table 10.5) to ensure that coal production from the allocated
captive blocks commences within 36 months (42 months in case the area is in
forest land) of the date of issuance of letter of allocation in the case of open cast
(OC) mines and within 48 months (54 months in case the area falls under forest
land) from the date of the said letter in respect of underground (UG) mines.
Figure 10.1 (drawing upon the ceiling time limit provided in the guidelines) is an
indicative depiction of the schedule of commencement of mining operations from
the time the coal block is allocated.
Figure 10.1: PERT chart for coal mine development
The MoC guidelines mentioned above are to ensure timely development and
operation of the allocated captive blocks. In order that timelines are adhered to, the
allottee has to provide a bank guarantee, and the encashment of the bank guarantee
is dependent on achievement of the milestones consistent with the normative time
limit ceilings.
Time limits are specified in the Mineral Concession Rules and other legislation for
maximum time permissible for grant of approval to an application. This is based on
the time to be taken from the receipt of the completed application. Since basic
information required for processing the application is available at the district level,
particularly for forest clearance, unless and until all such information is available,
the application is considered incomplete. The time taken at various levels of scrutiny
delays the process. Thus, in view of the large number of approvals required, it is
unlikely that the timeline specified by the MoC for development of the coal block
150 | Indian Infrastructure: Evolving Perspectives
would be adhered to by the coal block allottees. The existing provisions of the acts
do not provide for deemed approval status to applications if the timelines are not
adhered to, and thus there is no urgency in disposing of the applications within
the specified time.
From the above, the following limitations are thus evident in the process of grant of
clearances and approvals, which would cause significant delay in production from
the allotted captive blocks:
Several parallel clearance and approval processes are to be pursued at the central
and state government levels, and the allottee has to follow up the applications
with various authorities.
Environment and Forest clearance is extremely time-consuming, and
significant delays arise in the public consultation process, valuation of
compensatory afforestation, identification of non-forest land for
compensatory afforestation, enumeration of trees and completion of cost
benefit analysis by the forest departments.
The entire process of seeking approvals lacks clarity, and often delays in one
process cause delays in the others. Besides, conditions of the mining lease are
not standardized and could be significantly influenced by individual judgment
of the granting authorities.
A comparative study on grant of mining leases in Australia, Canada and India,
included in the Report of the Expert Group, constituted by the Ministry of Steel for
formulating Guidelines for Preferential Grant of Mining Leases (2005), suggests
that the time taken for grant of mining lease in Australia is about one to two years
(12 + months) and in Canada about two to three years (12 to 36 months) as compared
to seven to eight years in India (though the Mineral Concession Rule
8
provides that
the state government shall dispose of the application for grant of mining lease within
12 months of the date of receipt of application). The observations of the study are
listed in Table 10.4.
Based on the above observations and discussions, the following suggestions may be
considered to speed up the approval process and grant of mining lease:
A single-window approach through nodal agency set up at the state level under
the department of mines with representation from all the departments
concerned in various ministries. The nodal agency can predetermine the
conditions for each category of land based on environmental sensitivity and
the nature of the proposed activity (prospecting, mining, etc.). The nodal agency
may complete the requirements of identification of land for compensatory
afforestation, enumeration of trees, costbenefit analysis, etc. before inviting
application for ML.
Captive Coal Mining by Private Developers | 151
State is fully empowered to
grant mining lease
Single-window process,
involving four agencies:
Department of Minerals
& Energy
Department of
Environment
National Native Title
Tribunal
Land Acquisition
Authority in Local
Government
Minister of Minerals and
Energy is the final
approving authority, and
takes decisions in
consultation with other
Ministries. Close interaction
between Department of
Minerals and Energy and
agencies responsible for
protection of environment.
Mining Lease: Time taken
for grant of mining lease is
one to two years. Time
taken for activities involved
are fixed and largely
adhered to, except in cases
where public consultation
process and stakeholder
participation is involved.
Applicants submit
application for grant of
Table 10.4: Comparison of mining leases in Australia, Canada and India
Australia Canada India
State is fully empowered to
grant mining permit (MP)
Single-window process,
involving three government
agencies:
Department of Natural
Resources
Department of
Environment
Department of Labour
Mining Lease: The time
taken for grant of MP is two
to three years. Fixed time
frames are complied with.
The project can be rejected
if there are strong chances
of adverse socio-economic
and environmental impacts.
State to grant mining lease
with the approval of the
Central Government
Approvals are required
from a multitude of
authorities at the central,
state and district levels, with
the different authorities
having little or no
coordination amongst
them. Broadly three
different clearances
requiring submission of
separate applications:
1)Approval of grant of ML
2) Forest clearance
3) Environmental
clearance
Central Government grants
forest and environmental
clearances on the
recommendations of the
state government.
Mining Lease: Although
time frames for clearances
and approvals are
specified as less than a year
in the various rules, the
actual time taken is usually
seven to eight years for
grant of ML.
Identification of non-forest
land for compensatory
afforestation is a lengthy
152 | Indian Infrastructure: Evolving Perspectives
Table 10.4: Comparison of mining leases in Australia, Canada and India (contd...)
Australia Canada India
lease to the Mining
Registrar in the Department
of Minerals & Energy.
Mining areas are
categorized as per
environmental sensitivity.
Conditions and procedures
for each category are
predetermined and
identified in each case.
Grant of mining leases in
very sensitive areas requires
approval from both Houses
of Parliament.
Applicant is required to
submit a bond to take care
of environmental and
rehabilitation
considerations.
Financial and technical
strengths of the applicant
are taken into
consideration before grant
of mining lease.
Minimum term of mining
lease is granted for 21 years.
The project is first assessed
from an environment angle,
before processing for
mining permit (MP). Once
the project gets
environmental clearance,
the proponent makes an
application for MP.
Department of Natural
Resources requires a bond
or security to ensure that
reclamation work is
carried out.
Information not available
The minimum term of
mining permit is 20 years.
process, and sometimes
takes more than a decade.
Requirement of
enumeration of trees; cost-
benefit analysis carried out
by the State Forest
Department is time-
consuming (10 to 12 months)

Limited emphasis being


given to the technical and
financial strength of the
applicant.
Mining lease is granted for
20 to 30 years.
Captive Coal Mining by Private Developers | 153
Since a single-window approach may require change in legal procedure,
alternatively a PublicPrivate Partnership model can be adopted in the form
of a shell company formed for each of the captive blocks allocated, as has been
done in the case of UMPPs in the power sector, wherein shell companies
(formed by the public sector) are bid out to the private sector only after
obtaining clearances and completion of the land acquisition process.
As an immediate remedial measure, MoEF should map and segregate the entire
coal-bearing areas into Go and No-Go areas for each type of lease
(reconnaisance, prospecting, and mining) on the basis of forest cover, and
environmental and ecological sensitivity. The GOI/MoC, by not allotting the
blocks under the No-Go areas, would prevent wastage of resources and also
speed up the approval process for grant of lease. Thus, for areas defined as
Go, it may be prudent to allow minimal or no forest and environmental
clearances for investigative or prospecting purposes, with the conditionality
that cutting of trees without prior permission is not allowed. Thus, although
the need for detailed environmental impact studies, assessment of
compensatory afforestation and enumeration of trees and costbenefit
analysis for forest clearance is required for mining approval, the same level
of detail may not be required for limited drilling involved in prospecting or
investigative purposes.
Forest clearance is a contentious issue, and the problem has been further
compounded by the development which requires, in each case of forest
clearance, concurrence by the forest advisory committee or the empowered
committee, which has to then send a report to the Honble Supreme Court
before sanction is accorded. This procedure needs to be reviewed, and the
empowered advisory group or the empowered committee and the MoEF
could be delegated authority to accord approval in certain defined categories
of forest areas.
MoEF clearances for projects which have a greater probability of commencing
operations before the Eleventh Plan should be given priority.
Approval for the prospecting licence by the state government should be issued
as the foremost requirement within a minimum time. The developer could
then develop the coal block in two or three phases, i.e. identify comparatively
easier areas within these blocks (keeping in view government/private land,
forest/non-forest land, etc.) and get on with the required investigations,
mining plan, approach, etc. for the first phase so that production could start
early, and also repeat the cycle of activities in the subsequent phases. This
approach will require due consideration and consent by the Ministry of Coal
as well as the MoEF.
154 | Indian Infrastructure: Evolving Perspectives
LAND ACQUISITION
Unlike in the case of other industries, siting of a coal mine does not leave room for
choice in the land to be acquired. Land has to be acquired where coal exists,
irrespective of population base or existence/density of forest land. The present
procedure regarding land acquisition is lengthy and is prone to litigation. In a great
number of cases, a large part of the land belongs to the government, and in such
cases the government should take measures to transfer the land to the developers in
a shorter time frame.
Rehabilitation of project-affected people
As regards rehabilitation of project-affected people (PAP), there are many prevalent
resettlement and rehabilitation (R&R) policies. The central government has a
National R&R Policy 2007, which provides for the state governments to have their
own policies. The R&R policies for the benefit of the PAPs are more stringent on
the project developers. Also, providing employment to all PAPs may not always be
possible as new technology-driven mining methods are less labour intensive.
It is recommended that the MoC coordinate with the state governments to align
the state R&R policies with the national R&R policy. Further, the state
governments should help developers negotiate the compensation package with
the PAPs.
For general development and improvement in the coalfield areas, the state
government could consider creating an Area Development Fund by applying a levy
on each tonne of coal produced. This fund could be utilized for social welfare of
PAPs, including their health and education, improvement of infrastructure, roads,
water supply, etc.
Geological investigations and mining planAlternative agencies
In most coal blocks allocated to companies, detailed geological investigations have
not been done. At present, exploration for coal in India is carried out by the
Geological Survey of India (GSI), Mineral Exploration Corporation Ltd (MECL),
Singareni Collieries Company Ltd (SCCL), and directorates of mines and geology
of some states. These agencies have limited capacity for drilling of areas (for collating
data) and, currently, are already fully stretched. Out of 22,400 km
2
of the coal-bearing
sedimentary formations identified by the GSI, only about 10,200 km
2
, or only
45 per cent of the total area, has been systematically explored through regional and
promotional drilling.
Apart from geological investigations, in the present legislative framework, the mining
plan is approved by the MoC (with technical inputs from CMPDIL). This further
delays the whole process.
Captive Coal Mining by Private Developers | 155
Thus, new agencies with the competence to perform geological investigations
need to be set up and accredited by the GOI. These agencies should be
independent and unaffiliated to Coal India Limited or other public sector coal
companies. These agencies or an independent expert group should also be
empowered to review and approve the mining plan, which would be an input to
the MoC.
Tapering coal linkage/marketing of surplus coal
The time frame for development of the coal block is likely to be much longer than
for a power plant in view of the various problems faced by the developers.
Therefore, there is a risk that the power plant would be commissioned prior to
the commercial operations date of the coal mine. In order to mitigate this risk of
delay in the commercial operations of the coal mine, the MoC has decided to
provide coal linkage on a tapering basis to the power producers who have been
allotted coal blocks for captive use. The tapering linkage is being considered by
the MoC to facilitate the working of end-use plants in case development of coal
blocks allocated to such consumers does not synchronize with the operation of
end-use plants. In this regard, the MoC, in December 2007, came out with a
guideline relating to issuance of LoA/allocation of coal on a tapering basis to
various consumers. However, the application for such tapering linkage would
only be considered if the applicant has an approved mining plan for the coal
block allocated.
This is tricky, and most of the captive block owners are unlikely to qualify for tapering
linkage even if their end-use plant is in an advanced stage of development. The
Ministry of Coal should consider reviewing this condition for grant of tapering
linkage to facilitate rapid capacity addition in power (considering the huge deficit
situation in power and sustenance of economic growth), and should consider
granting tapering linkage based on the technical and financial capability of the
developer and preparedness of the end-use project. Instead of keeping approved
mining lease as the criterion for considering the application of tapering linkage, the
MoC should provide for the condition that the mining lease be approved before the
power plant commences operations.
Joint allotment of coal blocks
In some cases, a coal block has been allotted to a number of companies and the
allottees have been required to submit bank guarantees to safeguard commercial
obligations and ensure timely development of the allotted coal blocks. If some
partner companies of the proposed joint venture do not furnish the bank guarantee,
then the development of the mine and its associated power plant is held up.
156 | Indian Infrastructure: Evolving Perspectives
It is recommended that if in the consortium of companies granted a coal block, one
or some of the partners are not serious, but the remaining partners are serious, then
the progress of the development of the block by the consortium should not be
jeopardised. Thus, companies in the consortium who furnish the bank guarantee
should be allowed to proceed with development of the coal block, and the partners
who fail to provide the bank guarantee should be replaced with other companies
from among the applicants whose applications are pending with the ministry.
However, pending the replacement of partners, the development of the coal block
should proceed as usual. In this regard, the company allocated the coal block, having
the requisite financial strength, could also be given the freedom to choose partners
from among the applicants whose applications are pending with the ministry.
Infrastructure status for coal industry
The coal industry needs to be given infrastructure status so as to attract more players
into this industry and to incentivise domestic production of mining equipment.
The infrastructure status could be for both coal mining and coal washeries.
Infrastructure status for the coal sector would bring it on a par with other sectors
such as roads, railways and oil, and the laying of oil and gas pipelines.
In the past, this proposal was rejected as the bulk of coal mining was under the public
sector. Coal mining, however, is expected to undergo a major change in the coming
years, with production from captive blocks mainly by private sector companies. The
main beneficiaries would be power companies as concessions would make coal
production economical and ultimately help in keeping power tariffs low. Coal companies
would be also able to import capital equipment and spares at concessional rates.
APPENDICES
APPENDIX 1
Table 10.5: Normative time limit ceilings as provided in guidelines for
allocation of captive blocks and conditions of allotment through the screening
committee, Ministry of Coal
Sr. Event Time limit
no. in months from 0 date
1 Allocation 0
2 Purchase of GR 1.5
3 Bank guarantee 3
4 Mining lease application 3
5 Mining plan submission 6
Captive Coal Mining by Private Developers | 157
Table 10.5: Normative time limit ceilings (contd...)
Sr. Event Time limit
no. in months from 0 date
6 Mining plan approval 8
7 Previous approval application 11
8 Previous approval 11
9 Forest clearance application 12
10 Forest clearance 18
11 Environment clearance application 12
12 Environment clearance 18
13 Mining lease grant 24
14 Land acquisition begins 9, 19
15 Land acquisition 30, 36
16 Opening permission application 34, 40 for OC
17 Opening permission grant 35, 41 for OC
18 Production 36, 42 for OC
48, 54 for UG
158 | Indian Infrastructure: Evolving Perspectives
APPENDIX 2 (A)
Figure 10.2: Flowchart of mining proposal approval process
Source: Mining Approvals in South Australia, Regulatory Guideline No.1 of the Division of
Minerals and Energy Resources, Government of South Australia, June 2007
Note: PIRSA - Department of Primary Industries and Resources; TRC - Tenement Review
Committee - PIRSA independent peer review committee for lease application assessments; DAC -
Development Assessment Commission; EIC - Extractive Industries Committee - a subcommittee
of DAC; EPA - Environment Protection Authority; MARP - Mining and Rehabilitation Program;
SEB - Significant environmental benefit (offset for native vegetation clearance)
Applicant
Responsibilities
PIRSA
Responsibilities
Initial stakeholder consultation
Assess risks with key stakeholders (including PIRSA)
Prepare draft proposal
Assessment report drafted including lease conditions
MINING MAY
COMMENCE
MARP/SEB plan assessed and
approved
EPA Licence
granted
Formally apply for
EPA Licence
(if required)
Matter is
referred to
Cabinet or
proposal
modified
Applicant
revises
proposal
Waivers obtained
(if required)
Assessment report endorsed by PIRSA TRC?
Lease grant intention endorsed by Director of Mines.
Is referral to DAC or Minister for River
Murray or Minister for Environment and
Conservation required?
Minister for Environment and
Conservation recommends
grant?
EIC of DAC
recommends
grant?
Minister for River Murray
recommends grant?
Is Native title
agreement
required?
MARP prepared
Minister or delegate grants Lease.
Lease offered to applicant
Native title Agreement registered with PIRSA
Native title agreement negotiated
Are Lease conditions accepted by applicant?
Bond paid.
Comments provided by other agencies
Is consultation with other agencies required?
Applicant appeals to
Minister
Has proposal changed materially
Is response adequate?
Applicant prepares response
Responses to consultation collated and referred to applicant for response
Proposal publicly advertised and circulated to other government agencies
Formally lodge proposal with PIRSA
Is proposal suitable for public circulation?
Return to
applicant
No
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Yes
Yes
Yes
No
No
Other agency
Responsibilities
Captive Coal Mining by Private Developers | 159
APPENDIX 2 (B)
Table 10.6: Minimum time frame of process
Step Activity Duration Comment
1 Applicant engages and Duration dependent on applicants
undertakes consultation with resources, complexity of project, and
relevant stakeholders and stakeholder sensitivity.
acquires relevant studies.
2 Applicant organises risk Duration dependent on applicants
workshop with key stakeholders, resources, complexity of project, and
including PIRSA and other stakeholder sensitivity.
relevant government agencies.
3 Applicant prepares proposal, Duration dependent on applicants
taking into account these resources, complexity of project, and
guidelines and identified stakeholder sensitivity.
stakeholder concerns.
4 Applicant submits draft 1 day Nominal timeframe
proposal
5 PIRSA reviews draft 2 weeks
proposal
6 If acceptable - Step 7. Otherwise back to Steps 1 to 3
7 Applicant formally submits Duration dependent on applicants
lease application and proposal resources and efforts so far
8 PIRSA commences statutory
processing of mining lease
application. This includes Statutory 14-day time frame to
preparation of advertisement for 2 weeks notify landowner and council.
relevant newspapers and formal Approximately 2 weeks to prepare
notification to landowner and for formal consultation.
council that an application has
been received.
9 Formal public consultation 2 to 8 The statutory time frame is at least
period. (Written submissions weeks 14 days. Dependent on complexity
received from agencies and or more of project and PIRSA assessment of
public). consultation undertaken by applicant,
the time frame may be extended at
request of individual stakeholders.
10 Applicant formally asked to Depends on extent of stakeholder
respond to issues raised during concern.
consultation. PIRSA may
160 | Indian Infrastructure: Evolving Perspectives
Table 10.6: Minimum time frame of process (contd...)
Step Activity Duration Comment
summarise issues raised in public 2 weeks
consultation and recommend or more
actions to be taken by applicant
to address issues raised.
11 Applicant produces response Duration at applicants discretion.
document. Document will be made public.
12 If acceptable, Step 13. Otherwise (major issues are raised, or major material changes
to the project are proposed) back to Step 10, or Steps 1-3.
13 PIRSA assesses all documentation This is a major task for PIRSA. This
(including proposal, time frame cannot be reduced
submissions and response) 4 weeks without compromising quality of
and produces formal Assessment assessment. Assessment report is
Report, including detailed made public.
lease conditions.
14 Consideration of Assessment PIRSA will manage as far as possible
Report and Draft Lease 2 weeks to keep to a minimum.
Conditions by Tenement Review
Committee and Director of Mines.
15 Consideration of lease Not under PIRSAs control. Subject
conditions by Minister for to EIC/DAC meeting arrangements,
Planning (Schedule 20 area of and Minister for Environment and
Development Act); Minister for Conservation or River Murray
Environment and Conservation time frames. If the recommendation
(regional reserve or jointly of PIRSA is rejected by DAC or
proclaimed park under National Minister for Environment and
Parks and Wildlife Act); and/or Conservation or Minister for River
Minister for the River Murray Murray, the matter may be resolved
(River Murray Protected Area). in Cabinet.
16 Applicant negotiates native
title access and/or aboriginal Duration at applicants discretion
heritage access and registers with
PIRSA (if subject to native title).
17 Formal offer of mining lease 1 week
with detailed conditions.
18 Applicant accepts offer of 21 days is a statutory time frame to
mining lease terms and 3 weeks which a response must be made by
conditions. the applicant. The time frame may be
Captive Coal Mining by Private Developers | 161
extended at the discretion of PIRSA.
If applicant does not accept terms and
conditions offered, the applicant may
appeal directly to the Minister.
19 Formal grant of mining lease. 1 week
20 Company formally applies for Duration at applicants discretion
EPA licence and works approval
(if required).
21 Company finalises MARP Duration at applicants discretion
and SEB plan.
22 Consultation on MARP with Not under PIRSAs control. Subject to
other government agencies, if other agency timeframes.
required by lease conditions or
for other reasons.
23 PIRSA assesses draft MARP 2 weeks
and sets bond.
24 PIRSA formally approves MARP 1 week
and SEB plan (if required).
25 EPA works approval/ Not under PIRSA control.
licence issued.
26 Leaseholder pays bond to PIRSA
Leaseholder obtains waivers and Duration at leaseholders discretion.
provides copy to PIRSA
(if applicable).
27 Leaseholder may commence
mining
TOTAL minimum timeframe approximately 6 months from formal submission of an
acceptable mining lease proposal, dependent on complexity of project, quality of
stakeholder engagement undertaken by applicant, PIRSA and other government agency
workloads. If any part of this process covers the Christmas New Year period, a further
month can be added to the approximate time frame.
Source: Mining Approvals in South Australia, Regulatory Guideline No.1 of the Division of
Minerals and Energy Resources, Government of South Australia, June 2007
Table 10.6: Minimum time frame of process (contd...)
Step Activity Duration Comment
162 | Indian Infrastructure: Evolving Perspectives
NOTES
1. Power Scenario at a Glance for All India, CEA, GOI, July 2008; White Paper on Strategy
for 11th Plan, CEA & CII, August 2007.
2. Under the provisions of the 1993 amendment to Coal Mines (Nationalisation) Act 1973.
3. 81 coal blocks identified for allocation under captive END-USE, Press Release, PIB, GOI,
18th May 2007.
4. Under the government dispensation route, the block is allocated to a government
company and this company has the right to be used for a specific end-use such as power,
steel and cement.
5. A screening committee has been set up in the MoC for screening the proposals received
for captive mining of coal and lignite. The screening committee comprises members
representing the Ministry of Coal, the Ministry of Power, the Ministry of Railways, the
Ministry of Steel, state governments concerned, CIL, CMPDIL, and the Department of
Industrial Policy & Promotion (Ministry of Industry).
6. Coal Directory of India 200607, Part-I: Coal Statistics, Ministry of Coal, GOI
7. Coal Directory of India 200607, Part-I: Coal Statistics, Ministry of Coal, GOI
8. Mineral Concession (Amendment) Rules 2002.
9. The mining proposal approval process and minimum timeframes of process as provided
in the Regulatory Guideline No.1 of the Division of Minerals and Energy Resources,
Government of South Australia, June 2007, are presented in Appendix 2. The regulations
laid down by the Department of Industry & Resources, Government of Western Australia,
are similar.
Distribution Reforms in Andhra Pradesh | 163
INTRODUCTION
The Andhra Pradesh State Electricity Board (APSEB) was formed on 1 April 1959.
Until its unbundling in February 1999, APSEB was responsible for electricity
generation, transmission, distribution and supply. It functioned under the overall
guidance of the state government, interacting with the central power agencies for
planning and coordination.
The APSEB enjoyed a good reputation amongst the other utilities in India. The
plant load factor (PLF) of APSEB-owned generation stations was 83.2 per cent in
2000, much higher than the national average of 67 per cent. The Vijayawada
Thermal Power Station (VTPS) received the productivity award in 2000 (PLF of
86.9 per cent) and the Rayalaseema Thermal Power Plant (RTPP) won the incentive
award. Other aspects of good performance include rapid erection of power stations,
and low employee/consumer ratio.
1
The APSEB was the third-largest SEB in terms
of units of power sold, next only to Maharashtra and Gujarat.
2
REFORMS IMPERATIVE IN THE STATE
Though APSEBs performance on the generation side was far better compared to
other state electricity boards, its performance on distribution and financial aspects
was poor.
1
By the late nineties, the state was facing both energy and peak shortages
and the quality of power supply had deteriorated; the power utilitys financial
losses had grown to Rs 39 billion and new investments were not financeable.
The power subsidies had increased to 1.6 per cent of the Gross State Domestic
Product (GSDP), while on the other hand the combined public expenditure on
health and education had declined from 4.7 per cent of GSDP in FY1987 to
POWER DISTRIBUTION
REFORMS IN ANDHRA
PRADESH
October 2009
11
164 | Indian Infrastructure: Evolving Perspectives
3.6 per cent of GSDP in FY1998.
3
The gap between average cost of supply (ACS)
and average revenue realized (ARR) grew from 4.2 paise/kWh in 199091 to
138.8 paise/kWh in 19992000.
2
Power sector reforms became imminent as in their absence the need for subsidies
from the governments budget would have continued to grow and crowd out social
sector investments.
Figure 11.1: Cost of power supply, average tariff and gap
Source: Annual Report (200102) on the Working of State Electricity Boards & Electricity
Departments, Planning Commission (Power & Energy Division), Government of India,
May 2002
Box 11.1: APSEBs performance review
Power deficit: The power shortage faced by the state kept on increasing despite
significant growth witnessed in generation in Andhra Pradesh. The total deficit
increased from 6.7 per cent in 199192 to 8.5 per cent in 200102. During the same
period, peak power deficit saw an increase from 15.8 per cent to 19.9 per cent.
2
Transmission and distribution losses (T&D losses): Inadequate infrastructure, low
investments in new infrastructure and improper O&M of the network led to an
increase in T&D losses reported by APSEB. T&D losses as a percentage of availability
increased from 19.2 per cent in 199293 to 35.2 per cent in 19992000.
2
Gap in cost and revenue realized: The gap between cost of power supply and the
average tariff realized from the customers denotes the margin for a power
distribution business. This gap grew from 4.2 paise/kWh in 199091 to
138.8 paise/kWh in 19992000.
2
350
300
250
200
150
100
50
0
P
a
i
s
e
/
k
W
h
199091 199192 199293 199394 199495 199596 199697 199899 199798 19992000
4.2
5.9 5.8
10.4
36.0
59.0 57.8
73.1
122.3
138.8
Cost of power supply Average tariff Gap
Distribution Reforms in Andhra Pradesh | 165
Increasing losses and subsidy: Increasing T&D losses combined with the large gap
in cost of supply and revenue realized led to deterioration in the financial health
of APSEB. Commercial losses without subsidy increased from Rs 4 crore in
199293 to Rs 3117 crore in 19992000. Subsidy received from State Government
increased during the same period from zero to Rs 3064 crore.
2
T&D losses as % of availability
Source: Annual Report (200102) on the Working of State Electricity Boards &
Electricity Departments, Planning Commission (Power & Energy Division)
Government of India May 2002
Commercial loss (without subsidy)
Source: Annual Report (200102) on the Working of SEBs & Electricity Dept.,
Planning Commission (Power & Energy Division), Government of India May 2002
The deteriorating situation on the power front in Andhra Pradesh had a number of
causes. Some of the main reasons are:
Change in hydro-thermal energy mix: In Andhra Pradesh, historically, installed
capacity of hydel power used to be greater than that of thermal power.
40
35
30
25
20
15
10
5
0
199293 199394 199495 199596 199697 199899 199798 19992000
3500
3000
2500
2000
1500
1000
500
0
199293 199394 199495 199596 199697 199899 199798 19992000
4 23
981
1255
939
2679
1376
3117
166 | Indian Infrastructure: Evolving Perspectives
In 196061, hydel power accounted for 58.2 per cent and thermal power for
41.8 per cent of the installed capacity. Over time, this mix has changed in
favour of thermal power. In 199091 the proportion of installed capacity
constituted 50.1 per cent hydel power and 48 per cent thermal power, which
further changed to 36.5 per cent for hydel power and 42.9 per cent for thermal
power by 199798. The remaining power capacity in 199798 was in gas
projects.
1
As the proportion of cheaper hydel power declined over time and
the proportion of costly thermal power increased, so did the average unit cost
of power. With the rising average cost of power supply, the gap in ACS and
ARR widened, leading to deterioration in the financial health of APSEB.
Change in load mix: There was a huge disparity between agricultural and
industrial tariffs over the years, putting pressure on the industrial sector and
leading to stagnation in industrial consumption. Slowly, industry moved
towards cheaper captive generation. Sale of power to industry declined from
35 per cent in 199394 to 24 per cent in 19992000, while sale to agriculture
remained unchanged at around 40 per cent during the same period. The
average tariff charged from industry and agriculture during 19992000 was
394.9 paise/kWh and 15.35 paise/kWh respectively
2
.
REFORMS UNDERTAKEN
In the background of the deteriorating situation on the power front and the new
initiatives by the Government of India to attract private investment, the state
government contemplated restructuring the power sector. Reforms were brought
about in multiple steps.
Hiten Bhaya Committee
The Government of Andhra Pradesh constituted a high-level committee under the
chairmanship of Hiten Bhaya, a former chairman of the Central Electricity Authority,
to suggest reforms in the power sector. This committee was constituted in
January 1995, and it submitted its report in June. The important proposals made by
the Hiten Bhaya committee were:
A tariff structure which covers production costs
Restructuring APSEB on a functional basis to promote efficiency and functional
specialization by unbundling APSEB. Constituting separate companies for each
function (namely generation, transmission and distribution) and putting them
in the hands of different companies
Keeping the companies thus formed as subsidiaries of APSEB

Distribution Reforms in Andhra Pradesh | 167


Running the companies on commercial lines
Retaining the board as a holding company in charge of long-term sector
planning, supervision and co ordination of the subsidiaries
Government to retain role of monitoring reform implementation and advising
on policy
Setting up a regulatory commission to fix tariff structure and keep licensing
powers with the state government
The committee did not recommend outright privatization of public utilities
and cautioned that substituting private monopoly for public monopoly
would only make the situation worse. The committee felt that the
privatization initiative should start initially with management contracts in
the distribution business.
The World Bank and the AP power sector restructuring programme
After Chandrababu Naidu became chief minister in September 1995, the Government
of Andhra Pradesh (GoAP) approached the World Bank for a structural adjustment
loan to tide over the fiscal crisis that it was facing. In response, the World Bank brought
out a comprehensive report, APAgenda for Economic Reforms, in January 1997,
outlining its approach to reforms, including the power sector.
The bank suggested comprehensive reforms in the power sector going beyond the
recommendations of the Hiten Bhaya Committee. Some important components of
the reforms proposed by the World Bank were:
Defining a structure for the sector consistent with privatization of distribution
and private sector development in generation
Corporatizing power utilities and ensuring that they operate without
governmental interference
Creating an independent and transparent regulatory system for the sector
with a broad range of responsibilities, including granting of licences and
enforcing them
Enacting comprehensive reform legislation to establish the new regulatory
framework and implement restructuring measures
Increasing the tariff rate for agriculture to at least 50 paise/kWh in the
near term and continuing to adjust tariffs to cover costs and reduce
cross-subsidies.
168 | Indian Infrastructure: Evolving Perspectives
Table 11.1: Steps taken for power sector reforms in Andhra Pradesh
1995 June Hiten Bhaya Committee Report
1996 September World Banks Agenda for Economic Reforms in Andhra Pradesh
1997 March AP State Governments Policy Statement on Power Sector Reforms
1998 April Passing of AP Electricity Reforms Bill in the State Legislative Assembly
1999 January World Banks PAD on AP Power Sector Reforms Programme (APPSRP)
1999 February AP Electricity Reforms Act 1998 comes into force
1999 February APSEB unbundled into APGENCO and APTRANSCO
1999 April AP Electricity Regulatory Commission starts functioning
2000 March APTRANSCO further unbundled into APTRANSCO and four discoms
2002 April Financial autonomy to discoms
2002 August Employee division (option process) among APGENCO, APTRANSCO
and discoms on permanent basis
2003 June Enactment of Electricity Act, 2003
2003 August Suspension of the World Bank loan after the first stage itself citing high
interest rate and unacceptable conditions
2004 May Change in government and the announcement of free power to the
agricultural sector.
The bank's approach was driven by the idea of changing the ownership from
public to private in a span of eight to ten years. The AP Power Sector
Restructuring Programme (APPSRP) was to be implemented over a ten-year
period, starting February 1999. The Adaptable Programme Loan (APL) scheme
was planned in five stages, APL-1 to APL-5. The total loan amount was
US$4460 million, with the World Bank contributing 22 per cent of the amount.
The other international lending agencies included Department for International
Development (DFID) and Overseas Economic Cooperation Fund (OECF). The
Indian agencies included the GoAP, the Power Finance Corporation and the
Rural Electrification Corporation. This loan had several preconditions which
were to be satisfied so that the utility became eligible for the next stage of the
loan. These conditions included privatization of distribution and generation,
average annual tariff hikes, implementing cost-based tariff and reducing
government subsidy to zero.
Reforms undertaken by the AP Government
Within six months of the World Bank recommendations, on 14 June 1997, the
GoAP released a power sector policy statement indicating proposed policy and
Distribution Reforms in Andhra Pradesh | 169
structural changes in the power sector. In order to give concrete shape to this policy,
the GoAP enacted the Electricity Reforms Act of 1998. The Reform Bill was
introduced in the Legislative Assembly on 27 April 1998 and was passed on
April 28. It was notified on 29 October 1998 and came into effect in February 1999.
Figure 11.2: Power sector: Structure pre- and post-reforms
The APSEB was unbundled into APGENCO and APTRANSCO in February 1999.
The Electricity Reforms Act provided for the constitution of the Andhra Pradesh
Electricity Regulatory Commission (APERC). In April 2000, APTRANSCO was
further unbundled into a transmission company and four distribution companies
(discoms) managing distribution in the four zones of the StateCentral, Eastern,
Northern and Southern. The state government signed an MOU with the Ministry
of Power, Government of India, on reform and restructuring which had the road
map for reform, plans for tariff rationalization, metering and maintaining grid
discipline. As part of the distribution sector reforms, in April 2001 the four discoms
were issued independent licences for distribution.
Andhra Pradesh took to power sector reforms much earlier than most other states
in the country. However, the pace of reforms slowed down by year 2004. Signs of
the slowdown were visible in suspension of the World Bank loan after Stage I itself,
and no attempt was made to privatize distribution. The reasons identified for this
slowdown were opposition to the reform agenda, failure of the World Bank-led
reform process in Orissa and the national-level rethinking on World Bank-led
reforms. In May 2004, the Congress came to power in AP, replacing Chandrababu
Naidus TDP. It announced free power to agriculture and promised to review the
reforms, including power purchase agreements (PPAs) with private generators.
APSEB
(Andhra Pradesh State Electricity Board)
Structure prior to reforms
Structure post-reforms
APGENCO
Generation Company
APTRANSCO
Transmission Company
APCPDCL
(AP Central Power
Distribution Company Ltd)
APEPDCL
(AP Eastern Power
Distribution Company Ltd)
APNPDCL
(AP Northern Power
Distribution Company Ltd)
APSPDCL
(AP Southern Power
Distribution Company Ltd)
170 | Indian Infrastructure: Evolving Perspectives
Initiatives taken during the reform process
Power distribution sector reforms in Andhra Pradesh were concentrated on reducing
losses and improving commercial viability through improved infrastructure, better
auditing, and use of information technology. The initiatives taken during the reform
process were:
Theft control: The GoAP enacted an anti-theft legislation in July 2000, laying
down stringent penalties for theft of electricity, including mandatory
imprisonment of offenders. The legislation enabled constitution of special
tribunals and courts for speedy trial and recognized collusion of the utility
staff as a punishable offence. The enforcement efforts made by both government
and distribution companies have shown positive results in controlling theft.
According to a report by the World Bank, about 5 million out of 12 million
metered services have been inspected. About 150,000 cases of theft were
registered during FY200003 compared to 9200 cases during FY19982000.
Also, 4100 consumers and about 50 employees were arrested.
3
The success of the theft-control initiatives was built on proactive measures
taken, including:
Communicating to the stakeholders the objective, intent and the enforcement
of the new act
A regularization drive was launched to provide a one-time opportunity to the
unauthorized consumers to register legally. About 2 million
3
residential
consumers were regularized.
Implementing institutional, management and administrative changes in the
power distribution companies to ensure effective enforcement of the act
Legal support system geared up to provide implementation support
The vigilance department has been strengthened with appointment of the
Inspector General of Police as the joint managing director in the company.
The organizational structure was modified to strengthen coordination between
various departments like operations/technical department, commercial
departments and vigilance department.
Special police stations were set up to deal with electricity theft cases.
Initially, statewide inspections and revenue collection drives were launched targeting
large industrial and commercial consumers, and were gradually extended to the
rural areas. This was supported by a comprehensive programme of consumer
metering and energy audit. Discoms have developed specialized IT-based tools for
Distribution Reforms in Andhra Pradesh | 171
institutionalization of theft control and monitoring measures. These efforts at theft
control led to improvements in billing and collection by the utilities.
Energy audit and metering: To measure power transacted at various levels and
determine reliable extent of transmission and distribution losses in the system,
a new metering drive was launched. High-quality meters were installed on the
interface points between the power sector companies. The 11-kV feeders were
metered and data loggers were installed to monitor the supply of electricity to
agricultural consumers. For realistic estimation of agriculture consumption,
about 30,000 distribution transformers (out of 190,000 DTRs) supplying power
to predominantly agriculture consumers were metered
3
.
A programme to improve the consumer metering system was also started by
distribution companies. For high-value customers, the existing meters were
replaced with high-accuracy electronic meters.
Consumer Analysis Tool (CAT): CAT is a customer database used to analyze
customer information in order to identify trends in metering, billing, and
collections. A key feature of CAT is to risk-profile customers to enable the
management to design strategies for efficiency improvements targeted at
specific customer groups. The customers are grouped into different categories
based on their payment historya matrix of proportion of bill paid and number
of defaults in a twelve-month payment track record.
CAT addresses the needs of a number of departments, including operations,
vigilance, and regulatory affairs departments. It acts as an effective monitoring
tool and helps exercise control. The results are reflected in improved billing
and collection efficiency.
Monitoring and Tracking System (MATS): MATS has been designed as a tool
to assist in monitoring and tracking various cases of irregularities, like theft,
malpractice and back-billing. The objectives of the system are to:
Streamline the regularization system by reducing the effort and time
required to inspect and follow up on irregularities
Enable process automation to reduce high documentation requirements
and loss of records
Enable a performance-based monitoring system to track and take action
on irregularities. MATS is based on a workflow process where each
completed document is automatically sent to the appropriate reviewing
officer based on the defined process. Training is given to all officers on
the usage of the system to enable them to fulfil their role.
172 | Indian Infrastructure: Evolving Perspectives
The system also enables performance review of the employees by tracking
the period of time each case is kept pending at each level.
The system is highly role-based with each officer being able to track as
well as take action only on cases that lie within his/her jurisdiction.
Investment in infrastructure: The distribution infrastructure was modernized
to bring down technical losses and improve the performance of the system.
Under the first power sector restructuring loan under the adaptable loan
programme of the World Bank (APL1), funds were provided for financing
high-priority investments in the T&D system. Till 2006, a total of
Rs 6652 crore was spent on improving the distribution system.
8
These funds
were utilized for installing new meters, replacing or repairing old meters,
installing new transformers and upgrading distribution lines. The yearly
capital expenditure of various discoms is shown in Table 11.2:
Table 11.2: Investment in infrastructure (Rs crore)
2001 2002 2003 2004 2005 2006 Total
APCPDCL 404 397 445 426 456 483 2611
APEPDCL 186 199 151 198 222 167 1124
APNPDCL 327 207 195 194 287 329 1537
APSPDCL 261 171 195 194 283 277 1381
TOTAL 1178 974 985 1012 1249 1255 6652
Source: Power Sector Reforms in Andhra Pradesh: Their Impact and Policy Gaps: B. Saranga
Pani, N. Sreekumar and M. Thimma Reddy
Transformer Information Management System (TIMS): TIMS enables effective
tracking of the distribution transformers as well as the associated structures
throughout their life cycle and analyzes the information to:
Improve asset tracking, utilization and maintenance
Improve customer service through deployment of transformers and
exception handling (in case of failures)
Enable greater visibility leading to improved decision making.
Discoms benefit financially by reducing inventory carrying costs.
Operationally, they help reduce transformer downtime and evaluate
vendor performance, and enable these through various reports which
indicate data like:
Availability of stocks of DTRs in stores
Locations with maximum transformer failures
Distribution Reforms in Andhra Pradesh | 173
Identification of transformers and structures which show frequent failure
Time required to repair transformers at each repairing location
Book Consolidation Module (BCM): BCM is a tool aimed at reducing the
time taken and the manual intervention involved in the consolidation of
accounts from the circle level. The tool generates balance sheets and profit/
loss for the discoms after consolidation of all accounting units. In addition to
consolidation, the tool also provides for various variance reports:
Budgeted versus actual comparisons: These reports compare monthly
variance between budgeted and actual income or expenses from various
account codes.
Comparative statements: These reports compare income/expense for
current month with the previous month or the previous year to calculate
appropriate variances.
Outcome of reforms and initiatives
The reform process in Andhra Pradesh was started under the guidance of the World
Bank. However, the loan was suspended after the first tranche, and the regime also
changed in AP. The new regime changed the course of the reform process, and this
was reflected in a number of parameters used to assess the distribution sector.
Some of these are discussed below:
Aggregate technical and commercial losses (AT&C): AT&C losses in AP have
decreased from 27 per cent in 200203 to 16 per cent in 200708. Such a decrease
is attributable to the focus of reforms on reducing losses through better auditing
and investment in infrastructure. However, AT&C losses have not declined
much since 200506.
Figure 11.3: AT&C losses (%)
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
30
25
20
15
10
5
0
200203 200708 200304 200405 200506 200607
27.0
16.2
16.5
21.2
16.7
17.9
174 | Indian Infrastructure: Evolving Perspectives
The performance of the discoms is shown in Table 11.3. While eastern and
northern region discoms have reported low losses significantly, AT&C losses
reported by central and southern region discoms are still high. Also, post-
200405, loss reduction has not been significant.
Table 11.3: AT&C losses (%) of distribution companies
200203 200304 200405 200506 200607 200708
APCPDCL 30.19 18.99 23.95 18.99 18.32 19.23
APEPDCL 17.61 16.57 14.27 12.19 12.09 7.46
APNPDCL 27.09 9.79 21.91 11.82 23.28 11.92
APSPDCL 27.45 17.06 20.55 19.23 17.47 20.02
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
Collection efficiency: The collection efficiency in Andhra Pradesh has been
above 90 per cent post-reforms. High collection efficiency has been possible
due to the energy auditing and metering drive and implementation of tools
like MATS and CAT.
Collection efficiency of individual discoms is shown in Table 11.4.
While collection efficiency of all discoms has been high, there has been a lot of
variation in collection efficiency reported by APNPDCL.
Figure 11.4: Collection efficiency (%)
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
120
100
80
60
40
20
0
2002-03 2007-08 2003-04 2004-05 2005-06 2006-07
92.4
102.9
96.5 97.2
98.1
100.2
Distribution Reforms in Andhra Pradesh | 175
Table 11.4: Collection efficiency (%) of distribution companies
200203 200304 200405 200506 200607 200708
APCPDCL 90.52 102.39 94.81 99.04 98.51 97.46
APEPDCL 96.95 96.63 99.54 99.18 99.22 99.88
APNPDCL 92.57 113.10 96.65 104.27 89.41 96.90
APSPDCL 92.11 102.83 97.03 100.58 98.53 99.23
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
Subsidy by state: Subsidy provided by the state government to the power
distribution sector has come down significantly from the pre-reforms period.
In 19992000, subsidy by the state was over Rs 3000 crore while the subsidy
received in 20045 was Rs 1303 crore. However, post-200405, subsidy has
started increasing. Subsidy reported for the year 200708 was Rs 2408 crore.
Figure 11.5: Subsidy received (Rs crore)
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
Subsidy received by individual discoms is given below:
Table 11.5: Subsidy received (Rs crore)
200203 200304 200405 200506 200607 200708
APCPDCL 506 579 464 261 499 1108
APEPDCL 212 227 194 31 8 0
APNPDCL 353 307 311 639 839 733
APSPDCL 438 402 334 552 496 567
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
3000
2500
2000
1500
1000
500
0
200203 200708 200304 200405 200506 200607
1509 1515
1303
1483
1842
2408
176 | Indian Infrastructure: Evolving Perspectives
Financial viability of AP discoms:
1. Profitability: Discoms in AP have been registering losses without subsidy.
While these losses were around Rs 1200 crore in 200405, they started
increasing in later years. Aggregate losses registered without subsidy for
the year 200708 were Rs 2526 crore. With the help of subsidy, discoms
have been able to cover the losses made. However, in 200708, aggregate
losses with subsidy were Rs 118 crore.
Table 11.6: Profit with and without subsidy
200203 200304 200405 200506 200607 200708
With subsidy 16 -135 26 308 145 -118
Without subsidy -1232 -1579 -1194 -1241 -1697 -2526
Source: Report on the Performance of the State Power Utilities for the Years 200203
to 200405 and 200506 to 200708, Power Finance Corporation Limited
2. Gap in cost and revenue realized: Post-reforms, the gap in ACS and
ARR has decreased significantly for AP post-reforms. The gap reported
for the year 19992000 was 138 paise/kWh as compared to
48 paise/kWh in 200708. However, this gap has started increasing in the
last few years.
CONCLUSION
Andhra Pradesh is among the states that initiated reforms in the power sector. The
first steps were taken way back in 1995 with the formation of the Hiten Bhaya
Committee. Actual unbundling took place in the year 2000. It has been over eight
years since the power sector has been unbundled in AP. Over this period, AP has
seen a change of regime which has also brought a change in the way reforms have
been pursued in the state. At the time of unbundling of the APSEB, the reforms
were driven by World Bank guidelines, and minimization of cross-subsidization
and privatization of discoms were considered eventual outcome of reforms.
However, the World Bank's failure in Orissa led to AP withdrawing from the
programme and to change in the course of reforms.
All the discoms are still under government ownership. Also, the new government
announced free power for agriculture. At the time of introduction of free power
to agriculture, the four discoms together were receiving nearly Rs 400 crore
1
as
revenue from agricultural connections. It was claimed that the same amount would
be saved by renegotiating the PPAs with the IPPs in the state. However,
Distribution Reforms in Andhra Pradesh | 177
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
200203 200708 200304 200405 200506 200607
ACS ARR Gap
0.37 0.38
0.29 0.30
0.35
0.48
increasing subsidy and the gap between ACS and ARR after introduction
of free power shows that it had a negative impact on the financial health of
the sector.
Figure 11.6: ACS, ARR (without subsidy) and gap over the years
Source: Report on the performance of the State Power Utilities for the Years 200203 to
200405 and 200506 to 200708, Power Finance Corporation Limited
The impact of distribution reforms had been positive and can be seen in decreased
losses, improved collection efficiencies, and smaller gap between ARR and
ACS compared to what existed in the state prior to reforms. Also, the deficit
position of the state has improved over the years. Peak deficit for the state declined
from 19 per cent in 200203 to 7.6 per cent in 200809. Overall energy deficit
declined considerably till 200304 but rose again and stood at 6.8 per cent
in 200809.
7
Table 11.7: Peak deficit (%) and energy deficit (%) in AP
200203 200304 200405 200506 200607 200708 200809
Peak deficit 19.2 10.5 2.3 5.1 15.4 8.8 7.6
Energy deficit 6.8 2.9 0.7 1.3 4.4 4.1 6.8
Source: Power Sector at a Glance, April 2009, Central Electricity Authority
Performance, both in financial and operational terms, has varied across the
discoms. While APEPDCL has been able to considerably reduce its AT&C losses
and subsidy received, APCPDCL and APSPDCL have not been able to maintain a
similar performance.
178 | Indian Infrastructure: Evolving Perspectives
Table 11.8: Subsidy received by distribution companies
APCPDCL APEPDCL APNPDCL APSPDCL
200203 506 212 353 438
200304 579 227 327 402
200405 464 194 377 334
200506 261 31 639 552
200607 499 8 839 612
200708 1108 0 733 567
Source: Report on the performance of the State Power Utilities for the Years 200203 to
200405 and 200506 to 200708, Power Finance Corporation Limited
The good performance of APEPDCL can be attributed to the customer mix, given
the high proportion of industrial mix it inherited from APSEB (see Annexure 1).
However, APNPDCL has performed even better despite having a high proportion
of agricultural customers.
In the long run, there is a question mark over the commercial viability of various
discoms without subsidy, especially in view of the rise in subsidy requirements in
the last three financial years of this study. Also Quality of Supply (QoS) targets need
to be set and measured in order to usher in a power distribution sector which is
both commercially viable and consumer friendly.
ANNEXURE 1
Sales mix, revenue mix and cost components
Sales mix: This was inherited by discoms from APSEB depending on their
region. While APEPDCL inherited a favourable mix due to very low agricultural
component, APNPDCL sells approximately 50 per cent of its power to the
agricultural sector. Over the years, the sales mix for various discoms has
remained the same.
Revenue mix: The revenue mix of various discoms given below shows that
maximum contribution to revenue is made by the industrial sector, irrespective
of the proportion of sales accounted for by them. Also, it can be seen that the
agriculture sector contributes very little to the revenue of discoms. Contribution
to revenue by the commercial sector is also higher than the proportion of sales
accounted by them. This revenue mix clearly shows the cross-subsidization
being done by the industrial and commercial sectors.
Distribution Reforms in Andhra Pradesh | 179
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180 | Indian Infrastructure: Evolving Perspectives
Cost components: The cost components as percentage of cost have remained
the same over the years. Interest cost for APCPDCL and APNPDCL has
declined. APEPDCL has seen a continuous increase in employee costs.
REFERENCES
1. Saranga Pani, B., N. Sreekumar and M. Thimma Reddy. Power Sector Reforms
in the State of Andhra Pradesh in India.
2. Government of India. 2002. Annual Report (200102) on the Working of State
Electricity Boards & Electricity Departments. Planning Commission (Power &
Energy Division).
3. Government of Andhra Pradesh. 2004. World Bank implementation completion
report on a loan in the amount of US$210 million to the Government of India for
Andhra Pradesh power sector restructuring project.
4. Power Finance Corporation Limited. Report on the Performance of the State
Power Utilities for the Years 200203 to 200405.
5. Power Finance Corporation Limited. Report on the Performance of the State
Power Utilities for the Years 200506 to 200708.
6. Chatterjee, Rachel. 2003. Presentation. National Conference on Reforms in
Infrastructure Sectors: Impact Assessment and Governance.
7. Central Electricity Authority. 2009. Power Sector at a Glance.
8. Saranga Pani, B., N. Sreekumar and M. Thimma Reddy. 2007. Power Sector
Reforms in Andhra Pradesh: Their Impact and Policy Gaps.
Distribution Reforms in Maharashtra | 181
INTRODUCTION
Traditionally, the power sector in Maharashtra, excluding Mumbai, has been served
by Maharashtra State Electricity Board (MSEB) which was set up in 1960 to generate,
transmit and distribute power to all consumers in Maharashtra excluding Mumbai.
Mumbai is served by three power utilitiesTata Power Company Ltd, Bombay
Suburban Electric Supply (BSES) Ltd and Bombay Electric Supply & Transport
Undertaking (BEST). MSEB was the largest SEB in the country in terms of units of
power sold till 200506.
5
Its generation capacity grew from 760 MW in 196061 to
9771 MW in 200102. MSEB's customer base of 107,833 in 196061 grew to 14,009,089
in 200102. MSEB's thermal power stations were also efficient as they achieved high
power availability of 86 per cent and plant load factor of 74 per cent in 200102 (the
average PLF [thermal] for various utilities was 69.9 per cent in 200102).
2
By 200102
MSEB had a large Transmission & Distribution (T&D) network of 6.67 lakh ckt km.
1
IMPERATIVE FOR REFORMS IN THE STATE
Over time, the predominance of social objectives led to a lack of commercial
orientation in the operations of MSEB. Further, tariffs for domestic, power looms
and agricultural segments were lower than the average cost of supply of power, and
were subsidized by industrial and commercial consumers. For the year 200001
average cost of supply for MSEB was Rs 3.65 kWh whereas average realization was
Rs 2.93/kWh. As shown in Figure 12.1
1
revenue realized from agricultural
connections was far lower than the cost of supply.
The distorted tariff structure led to more and more high-paying industrial consumers
setting up their own captive generating stations. This led to decline in consumption
POWER DISTRIBUTION
REFORMS IN
MAHARASHTRA
October 2009
12
182 | Indian Infrastructure: Evolving Perspectives
of power from the MSEB grid by high-paying industrial consumers, while
consumption by subsidized consumer categories grew over the years. Share of
electricity sold to agricultural customers grew from 25 per cent in 199394 to
34 per cent in 199899 in Maharashtra. During the same period, share of industry
fell from 35 per cent to 32 per cent.
2
Figure 12.1: Average cost and realization of power in 200001
Further, the low tariff for subsidized consumers led not only to deterioration in
financial performance, but also to wasteful consumption from these consumers.
The impact of the lack of commercial focus was reflected in both the quality of
supply and the performance of MSEB as shown in Box 12.1.
The above factors contributed to MSEB's decline in financial health. MSEB made
commercial profits without subsidy till 199495. Commercial profits (without
subsidy) as reported in 199495 were Rs 276 crore. These profits declined over time
and MSEB reported a commercial loss (without subsidy) of Rs 1479 crore in the
year 19992000.
2
However, MSEB shows commercial profits during the year if the
subsidy of Rs 2084 crore provided by the state government is taken into account.
The commercial profits stood at Rs 605 crore.
With deterioration in its financial health, MSEDCL found it difficult to invest in
maintenance and upgradation of infrastructure. This led to further deterioration
in the quality of supply and increase in technical losses. Caught in this downward
spiral, MSEB was finding it hard to escape from declining performance. Due to
financial deterioration and ever increasing need for subsidies, need for reforms
became eminent.
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Commercial Industrial
Average cost of supply
Average realization
Rs 3.65/kWh
Rs 2.92/kWh
Residential Agriculture
4.62
4.20
2.25
0.86
R
s
/
k
W
h
Distribution Reforms in Maharashtra | 183
Box 12.1: MSEBs performance review
Power deficit: The state faced a shortage in meeting overall as well as peak load
requirements. Energy deficit grew from 4.5 per cent to 8.8 per cent between
199192 and 200102. The peak deficit during the same period grew from
8.7 per cent to 12.5 per cent.
2
Transmission and distribution losses (T&D losses): Ageing infrastructure,
inadequate O&M of the network and low investments in new infrastructure and
increased power theft led to an increase in T&D losses from 17.7 per cent in
199596 to 30.5 per cent in 19992000.
2
Gap in cost and revenue realized: The difference between the cost of power supply
and the average tariff realized from the customers denotes the margin for a power
distribution business. This difference grew from 16.3 paise/kWh in 199596
2
to
48.8 paise/kWh in 19992000.
2
Increasing subsidy: The increasing difference between the cost of supply and
revenue realization per unit led to increase in subsidy requirements. From
199495 to 19992000 the subsidy provided by the state government to MSEDCL
increased from nil to Rs 2084 crore.
2
REFORMS UNDERTAKEN
Given the deteriorating financial health of MSEB and its impact on the state, the
Government of Maharashtra (GOM) decided to review the power situation in the
state and undertake reforms. The GOM constituted the State Electricity Restructuring
Committee and the Energy Review Committee (ERC) to review the power situation
in the state and suggest broad future course of reforms for the power sector in the
state. The GOM came up with a white paper in August 2002, indicating reforms to
be undertaken and the timelines for the same. The summary of various suggestions
made in this white paper are discussed in Box 12.2. This white paper specifically
mentioned that employees and unions of MSEB were opposed to unbundling and/
or privatization and stated that full operational autonomy must be given to MSEB
and internal reforms should be carried out first.
In less than a year of this initiative taken by the GOM, Electricity Act 2003 was
passed. As per the Act, states were required to unbundle SEBs and, at the minimum,
the transmission activity was to be separated from SEBs. Consequently, the GOM
unbundled the MSEB in June 2005 into one holding and three subsidiary companies.
The new entities formed were:
MSEB Holding Company
Maharashtra State Generation Company
Maharashtra State Transmission Company
Maharashtra State Electricity Distribution Company
184 | Indian Infrastructure: Evolving Perspectives
MSEB Holding Company was expected to function as a think tank and take necessary
decisions relating to investment in the three companies.
Maharashtra State Electricity Distribution Company Limited (MSEDCL) came into
existence on 6 June 2005 as a result of this unbundling. MSEDCL is also known as
Mahavitaran or Mahadiscom. MSEDCL inherited a number of problems from its
predecessor, MSEB, which showed in its results for the year 200506:
Low collection efficiency: Collection efficiency reported by MSEB for the year
200506, when unbundling was done, was less than 90 per cent.
5
Box

12.2: White paper on Maharashtra power sector reforms
1
Participants: Prior to the preparation, the Government of Maharashtra (GOM) invited
suggestions from various stakeholders comprising industry, employees, consumers and
the Maharashtra Electricity Regulatory Commission (MERC).
Reform requirements identified: The reform process was expected to bring about changes
under three broad categories:
Internal reforms: These reforms were expected to focus on developing human
resources, implementing loss-reduction measures and anti-theft measures. To
improve the quality of service, demand side management and consumer grievance
redressal system were to be set up.
Independent regulatory mechanism: GOM did setup MERC under the provisions
of the Electricity Regulatory Commissions Act, 1998. GOM made a commitment
to ensure smooth and independent functioning of MERC. Tariff rationalization
was also considered as an important measure to ensure the recovery of the cost of
power supply.
Structural changes: It was identified that a vertically integrated MSEB catering to
the diverse needs of a customer base has inherent limitations. GOM proposed that
MSEB be restructured in order to promote and encourage efficiency, autonomy
and accountability in decision making and functional specialization.
Milestones: GOM identified the following milestones:
Legislative milestones: To make anti-theft legislation effective from October 2002
and pass the Maharashtra Electricity Reforms Bill in December 2002
Efficiency improvement milestones:
To develop Consumer Charter of Rights in six months
To reduce technical losses by 1 per cent and commercial losses by 3 per cent
per year in urban areas. In rural areas, technical losses to be reduced by
0.5 per cent and commercial losses by 2 per cent per year
To increase overall collection efficiency to 94 per cent in two years
To ensure metering of all agricultural consumers by December 2004
Distribution Reforms in Maharashtra | 185
Inadequate distribution infrastructure: MSEDCL also inherited an inadequate
infrastructure which had a negative impact on technical losses as well as
reliability of supply. The LT to HT ratio of distribution lines at that time was
high at about 2:1 which led to high technical losses.
Aggregate Technical and Commercial Losses (AT&C): AT&C losses for the
year 200506 stood at 36.74 per cent for MSEDCL.
Power deficit: By the year 200506 the peak deficit reached 23.1 per cent.
3
Gap in cost and revenue realized: For the year 200506 average cost of supply
(ACS) and average revenue realized (ARR) stood at Rs 2.49/ kWh and Rs 2.43/
kWh respectively.
Consumer-related problems: When MSEDCL came into existence, a number
of problems existed on the consumer front:
No separate consumer care centres
No call centre for complaints
No system to give feedback to consumers
Delay in supply restoration against complaints
No system for tracking status of consumer complaints
Due to high level of consumer dissatisfaction caused by low quality of supply and
high losses, MSEDCL decided to undertake a number of initiatives.
Figure 12.2: Restructuring of MSEB
MSEB
(Maharashtra State
Electricity Board)
MSPGCL
(Maharashtra State
Power
Generation Co. Ltd)
MSETCL
(Maharashtra State
Electricity
Transmission Co. Ltd)
MSEDCL
(Maharashtra State
Electricity
Distribution Co. Ltd)
MSEB Holding Co.
186 | Indian Infrastructure: Evolving Perspectives
INITIATIVES TAKEN POST-REFORMS
MSEDCL decided to undertake a number of initiatives to bring about concerted
changes in the distribution business and power scenario in the state. These initiatives
were combined under what is called as a "ten-point programme". The programme
is as follows:
1. Preventive maintenance
2. Distribution network planning
3. Consumer grievances redressal systems
4. Distribution system loss reduction
5. Improvement in collection efficiency
6. Circles to act as profit centres
7. Efficient use of technology
8. Improved services to ag. consumers
9. Improving working conditions of employees
10. Demand side management
It can be seen from the ten-point programme that the initiatives taken by MSEDCL
focused on three broad areas:
Initiatives to improve Quality of Supply (QoS)
Initiatives to minimize AT&C losses
Customer-centric initiatives
Initiatives to improve Quality of Supply (QoS)
Quality of Supply (QoS) is determined by keeping in view a number of factors like
reliability of supply, load shedding, etc. To improve QoS, MSEDCL decided to start
initiatives that can ensure better management of existing infrastructure by optimizing
allocation of infrastructure and better load management on demand side. Initiatives
introduced to achieve better QoS by MSEDCL are:
Gaothan Feeder Separation Scheme: Under this scheme, MSEDCL is
separating the rural feeders that service homes from those that feed agricultural
pumpsets. Expected to be completed in two phases, this scheme sought to
ensure better power supply to homes in rural areas.
Guaranteed 8 hours of electricity to agricultural water pumps would help in
shifting the agricultural load to non-peak hours, thereby enabling better load
management on the part of MSEDCL. Gaothan Feeder Separation Scheme has
been planned for more than 15000 villages. This scheme will be implemented
Distribution Reforms in Maharashtra | 187
with an estimated total cost of Rs 2389 crore for both the phases.
18
This scheme
is expected to provide multiple benefits to MSEDCL and is also expected to
bring relief to consumers by providing reliable power supply through load
management. Some of the benefits this scheme is expected to provide are:
1. Uninterrupted power supply to homes in villages and suburban areas
2. As agricultural connections are low-tariff connections, separating them will
lead to better power accounting.
3. Flattening of load curve: A typical load curve in MSEDCL shows peak
demand for the day at around 22:00 in the evening. At that time of the day,
demand-supply gap is the largest for MSEDCL. Schemes like Gaothan Feeder
Scheme can help MSEDCL to achieve the flattening of this load curve in a
judicial way, thereby reducing the cost on power purchase and reducing
the penalty for unscheduled interchanges.
Phase-I of Gaothan Feeder Separation Scheme has covered 5185 villages till
April 2009. 1318 feeders have been commissioned and a load management of
the order of 1592 MW has been achieved under this phase.
18
Akshay Prakash Yojana: Akshay Prakash Yojana (APY) is a demand side
management measure, whereby MSEDCL has attempted to restrict rural feeder
loads to 20 per cent of actual value by reducing pilferage, removing inefficient
devices and using better load management. The programme rests on the
collective responsibility of the inhabitants of the village and is carried out
voluntarily for ensuring better quality of supply.
3000
2500
2000
1500
1000
500
0
-500
0
0

0
1
0
1

0
2
0
2

0
3
0
3

0
4
0
4

0
5
0
5

0
6
0
6

0
7
0
7

0
8
0
8

0
9
0
9

1
0
1
0

1
1
1
1

1
2
1
2

1
3
1
3

1
4
1
4

1
5
1
5

1
6
1
6

1
7
1
7

1
8
1
8

1
9
1
9

2
0
2
0

2
1
2
1

2
2
2
2

2
3
2
3

2
4
Load gap on a typical day in MSEDCL (6 July 2009)
Time during the day
2055
2573
M
W
Box 12.3: Load management
The graph above shows the gap between power supply and demand for MSEDCL on a typical
day. Power requirements are high at certain times of the day, due to which peak daily deficit
is high. As shown in the graph, the peak deficit is of the order of 2573 MW at 10:00 pm,
whereas there is no deficit at 3:00 am.
7
Schemes like Gaothan and Akshay Prakash Yojana
allow MSEDCL to shift the agricultural load from high deficit time to non-deficit periods,
thereby reducing daily peak load requirements. This leads to reduced load shedding.
188 | Indian Infrastructure: Evolving Perspectives
This scheme was triggered by children demanding electricity for education from
MSEDCL. Some MSEDCL officials made them understand that electricity is a
scarce commodity and is being used through pilferage and inefficient devices in
their village. The school students then approached the gram panchayat with the
MSEDCL officials where it was communicated that if the villagers prudently
managed their consumption, the entire village could have better quality of supply.
Later, this initiative spread to other villages through the efforts made by MSEDCL.
Under this scheme, villagers voluntarily restrict the use of any 3-phase load during
5pm11pm on week days. Only lighting load is utilized. During 5pm11pm, the
load is restricted to 20 per cent of the full load. Load restrictions are supplemented
by the removal of hooks and unauthorised heavy consumption devices like heaters
and hotplates. Apart from this, the scheme envisages adoption of energy-saving
lighting and pumps and use of capacitors. To supervise the usage restriction and
reduction in unauthorised access, surveillance committees (Veej Dakshata
CommitteeVDC) have been formed by the villagers.
This scheme was intended to benefit both the consumers as well as the utility by
1. Reducing transformer breakdowns through reduction in usage of high
consumption devices and unauthorised connections
2. Reducing load shedding through better load management
3. Increasing supply of power and lesser load shedding improve conditions
for rural people and help cottage industries.
4. Reducing commercial losses and maintenance costs
Single Phasing Project: The Single Phasing Scheme is also aimed at providing
rural areas with uninterrupted power supply. It envisages supplying single phase
rural lighting load through three single-phase transformers.
Table 12.1: Progress of Single Phasing Scheme
Phase I Phase II Phase III*
No. of substations 424 296 459
No. of feeders 1186 768
No. of villages covered 8085 3877 1536
Expected load management 1153 MW 722 MW
Project cost 235 cr. 213 cr. 205 cr.
* All figures for Phase III are expected numbers
Source: MSEDCL Website
Distribution Reforms in Maharashtra | 189
Single phasing of the selected rural mixed load feeders is carried out by using
changeover switches at the sub-station. During the normal operation, the
agricultural load continues to be supplied from the three-phase transformers.
On operation of the changeover switch, there is no supply to the 3-phase load on
the 11kV distribution network whereas single phase supply is available to the lighting
and fan load. On revising changeover switch, normal 3-phase supply is restored.
This scheme is being implemented in three phases out of which two have been
completed already. Under these two phases, 11,962 villages were covered.
The third phase is expected to cover 1,536 more villages.
Pune load shedding model: This distributed generation model was designed
to achieve zero load shedding in the Pune urban circle. It was developed by
MSEDCL in consultation with the Confederation of Indian Industry (CII).
CII proposed to utilise surplus power available from Captive Power Producers
(CPPs) during peak hours by implementing a workable alternative for
harnessing distributed generation on a pilot basis.
CII proposed that industries with captive or standby gensets that were drawing
power from the MSEDCL grid on a 24-hour basis should reduce their off-take
of power from the grid during certain specified peak periods and instead operate
their own generators. The additional grid power made available through this
strategy could then be diverted by MSEDCL to low voltage customers to
mitigate load shedding. This would eliminate the need for load shedding in
the Pune urban circle. The CPPs were reimbursed the incremental cost for
electricity they generated on-site during the specified peak periods.
Initiatives to minimize AT&C losses
In order to minimize AT&C losses MSEDCL had to concentrate on its ageing
infrastructure. High technical losses result from inadequate and sub-optimal
infrastructure. The commercial losses are majorly caused by power theft. As the
existing AT&C losses were very high, it was essential for MSEDCL to take a number
of steps to contain and minimize them:
Investment in infrastructure: MSEDCL has started a three-year infrastructure
upgradation plan, to be executed in two phases. The objective of this project
is to improve existing infrastructure along with increasing the capacity of
the current system in order to support expected future demand. Improved
infrastructure is expected to reduce losses that arise because of outdated
equipment and over-loading across the grid lines. Heavier loads result in
frequent tripping of power along with transformers burning out. Hence
improvement in infrastructure will lead to increased reliability of power along
with lower distribution losses.
190 | Indian Infrastructure: Evolving Perspectives
MSEDCL has set the following milestones for this scheme:
Reduce loading of the distribution transformers to 80 per cent in the horizon
year from the present level ranging from 100 per cent to 150 per cent.
Use of SCADA, call centres, consumer facility centres in all municipal
corporation areas.
Bring down the DTC failure rate from 16.14 per cent in FY 200506 to
5 per cent for urban areas and 7 per cent for rural areas.
Bring down the Ag. pending connections to one month, in three years.
Meet the standard of performance given by MERC.
Power factor to be brought to 0.90, 0.95 and 0.99 in rural, urban and
industrial areas respectively.
As per the plan, the company is expected to set up 76,182 km of power
distribution lines in order to improve the HTLT ratio of the distribution
network. MSEDCL is also expected to set up 565 new substations and augment
the existing substations. The total project cost for infrastructure investment in
119 divisions is expected to be Rs 8918 crore.
19
For speedy and qualitative development of the electricity distribution grid in
Maharashtra and to ensure speedy implementation of its ambitious
infrastructure development and upgradation plans, the MSEDCL has decided
to engage professional services from project management consultants (PMCs).
To ascertain cost control and quality management under this program,
MSEDCL has taken the following steps:
Setting up of six Quality Control Labs with state-of-the-art testing
equipments at Kolhapur, Pune, Bhandup, Nasik, Aurangabad and Nagpur
Formation of a quality control department to ensure purchase of the
best quality material
Formation of a material specifications cell
Theft detection drive: MSEDCL launched a theft detection drive in order to
improve its collection efficiency. Six dedicated police stations have been
established in Maharashtra to handle power theft cases only. During
FY 200708 about 90,000 cases of power thefts amounting to Rs 55.41 crore
were detected. Speedy disposal of vigilance cases and strict action against
defaulters were ensured. As a result, more than 9000 FIRs were registered against
people accused of power theft. This drive was implemented consecutively for
15 days every alternate month. During April to September 2008, the drive
resulted in 36383 cases and recovery of Rs 25 crore as penalties and FIRs against
3559 persons.
4
Distribution Reforms in Maharashtra | 191
MSEDCL also took strict disciplinary action against delinquent employees.
This is evident from the fact that, in the initial days, FIRs were filed against
22 employees. Also, disciplinary action against 389 employees was taken.
Metering and energy audit related initiatives: MSEDCL started an initiative
for the metering of agricultural consumers and feeders. It also started carrying
out feeder-wise energy audit (EA) to obtain feeder-wise distribution loss data.
MSEDCL started to undertake Monthly Energy Accounting at division, feeder
and DTC levels.
By 2009, MSEDCL achieved the following milestones:
Over 5 million old consumer meters replaced in three years. This addressed
concerns/complaints about meters not being read, under- or over-
reporting, and manipulations.
Metering of 9339 feeders completed and carried out feeder-wise EA for
all of them
Metering of 150,000 distribution transformers completed
Monthly Energy Accounting at division and DTC levels
Distribution franchisee (DF) arrangement: MSEDCL was the first distribution
utility in the country to implement urban distribution franchising (DF)
arrangement, wherein it franchised the circle of Bhiwandi to the private sector.
Under the franchisee agreement, MSEDCL is to supply power at specified input
points as per MERC regulations and directives (viz. load shedding schedule)
and DF to pay the agreed input rate. DF was allowed to procure power and
supply additional power over and above the supply received from MSEDCL;
but no guidelines were given for such power procurement or for the recovery
of related costs from consumers. DF was to pay to MSEDCL wheeling charges
specified by MERC for distribution of such power. The DF is required to bring
about the reduction of T&D losses to 10 per cent and increase collection
efficiency to 98 per cent at the end of the franchise period.
The DF arrangement at Bhiwandi has yielded successful results as shown in
Table 12.2. Plans are afoot to give other circles (Nagpur, Aurangabad, Jalgaon,
etc.) to private parties on similar terms.
Performance based incentives: MSEDCL introduced the concept of annual
performance reports based on improvements in area-specific Aggregate
Technical and Commercial (AT&C) losses and collection efficiency of its
employees. Such initiatives have led to the involvement of employees in the
reform process. The company also conducts management classes for its staff
and sends them for training courses, besides sharing the best practices with
the employees.
192 | Indian Infrastructure: Evolving Perspectives
Table 12.2: Power scenario in Bhiwandibefore and after franchising
Handover to At the end
DF Dec 2006 of 200809
Aggregate Technical & Commercial
(AT&C) losses 58% 24%
Transformer failure rate 40% 7.5%
Status of consumer metering Poor with few 95% meters
accurate meters accurate
Indicators for Quality of Supply
System Average Interruption
Frequency Index (SAIFI) 47.63# 13.57*
System Average Interruption
Duration Index (SAIDI) 23.56# 3.55*
Consumer Average Interruption
Duration Index (CAIDI) 0.49# 0.26*
# Feb 2007 * Jan 2009 Source: MSEDCL, TPL
Customer-centric initiatives
Along with concentrating on technical issues, MSEDCL introduced a number of
initiatives to provide better customer services. With the usage of information
technology tools, MSEDCL has been able to connect to its customers and handle
their issues in a much better way. MSEDCL has established a customer database of
over 15 million

customers.
12
Initiatives taken by MSEDCL to serve its customers
better are:
Photo metering: To address billing complaints, wrong meter readings and
excessive consumption by consumers, MSEDCL took a first-of-its-kind initiative
in the country. MSEDCL has started taking digital photographs of energy meters
and displaying these images on energy bills. Billing is done as per the meter
reading shown in the photograph. This has a number of inherent benefits.
1. It results in higher customer satisfaction as actual readings are printed on
the bill.
2. It also ensures reduction in the chances of malpractices like over or under
billing by MSEDCL's own employees.
For this purpose, it has developed an indigenously devised software programme
that captures the details which, besides showing the readings, also ensure that
the meters are not tampered with or manipulated by magnetic devices. This
scheme has reduced the number of disputes over billing, which ultimately leads
Distribution Reforms in Maharashtra | 193
to better collections and reduced litigations. MSEDCL has covered more than
1 crore consumers under this scheme till September 2008.
4
The new format also included past consumption patterns in the bill sent to
consumers. This was helpful as earlier, consumers were not sure of past
consumption and this had led to disputes.
Complaint handling initiatives: MSEDCL has initiated various activities for
improving its response to consumers and improving complaint handling:
1. To take care of consumer complaints and give feedback to the consumers,
11 Consumer Grievance Redressal Forums have been established at various
locations and internal grievance redressal units were established in all
O&M circles.
4
Central Grievance Redressal System has been set up at the
Head Office.
2. For handling supply-related consumer complaints 15 call centres have been
set up.
4
3. About 50 Consumer Facilitation Centres (CFCs) have been set up for
resolution of billing and related matters at sub-division level.
4
4. Grievance redressal meetings with industries and consumer associations
are also organized.
5. Single coordinating agency set up to deal not only with customers but also to
monitor the operational resolution of the complaints within MSEDCL.
Ease of billing: MSEDCL has started a number of initiatives to make it easy for
consumers to access and pay their bills. All bills have been put on the internet
to provide easy access to consumers. The payment gateways available to
consumers have been increased by commissioning ATM cash collection centres,
drop boxes and offering consumers the facility to make e-payments.
MSEDCL started all these initiatives to ensure the economic viability of the
business and to provide better services to its customers. The decision to
unbundle MSEB had made employees apprehensive, as they saw unbundling
as the first step towards the eventual privatization of the utility. Employees
also feared mass layoffs from the utility. Therefore, one of the most important
tasks before MSEDCL was to increase employee morale.
To ensure the success of the initiatives, MSEDCL's decisions had to be backed
by the dedication and drive of its employees. Hence, the first thing that
MSEDCL did was to strengthen communication initiatives towards internal
employees. To this end, it undertook
194 | Indian Infrastructure: Evolving Perspectives
Workshops with field staff and with unions
Workshops conducted by unions for members
Staff meetings at division/circle level
In-house journal Maha Vitaran Veej Varta was used to convey the
management's viewpoint to the employees, communicate new
initiatives/plans, etc.
OUTCOME OF REFORMS AND INITIATIVES
The overall impact of reforms and initiatives taken by MSEDCL has started producing
favorable results. While the success of each initiative cannot be measured
individually, a number of parameters indicating the overall health of power
dstribution sector in the state are discussed below:
Figure 12.3: AT&C losses (%)
Source: PFC report,
5
MSEDCL website
Aggregate technical and commercial losses (AT&C): AT&C losses
reported by MSEB in 200506 were very high at 50.4 per cent.
5
These
losses have been reduced to 24.8 per cent through various initiatives taken
by MSEDCL.
8
Collection efficiency: The collection efficiency has improved to the level of
96.57 per cent in FY 200809
8
from 82.96 per cent in 200506.
4
Subsidy by state: The subsidy provided by the state government to MSEDCL
has been increasing over the years as shown in the graph below. Growth in
subsidy despite the reforms is a cause of concern for the state.
60.0
50.0
40.0
30.0
20.0
10.0
0.0
200405 200506 200607 200708 200809
54.3
50.4
39.4
26.3
24.8
Distribution Reforms in Maharashtra | 195
Financial viability of MSEDCL
1. Profitability: MSEDCL registered a profit of Rs 117 crore during the year
200708 as compared to losses of Rs 303 crore in 200506. However,
without subsidy from the state, MSEDCL is still making losses. This loss
has decreased since MSEDCL has come into existence but the change has
not been significant.
2. Arrears: MSEDCL's arrears have increased from Rs 9288 crore in
March 2007 to Rs 12547 crore by March 2009. Increase in arrears over
the years reflects MSEDCL's inability to collect earlier dues.
Figure 12.4: Collection efficiency
Source: PFC report,
5
MSEDCL website
120.0
100.0
80.0
60.0
40.0
20.0
0.0
200506 200607 200708 200809 200405
80.9
83.0
93.8
97.4
96.6
2000
1800
1600
1400
1200
1000
800
600
400
200
0
200405 200506 200607 200708 200304
1,100.8
1,553.5
1,562.5
1,684.0
1,829.2
Figure 12.5: Subsidy from state (Rs crore)
Source: PFC report,
5
MSEDCL website
196 | Indian Infrastructure: Evolving Perspectives
Table 12.3: Profits of MSEDCL (in Rs crore)
200506 200607 200708
Profits with subsidy (-) 303.4 (-) 133.9 117.2
Profits without subsidy (-) 1865.9 (-) 1817.9 (-) 1712.1
Source: PFC report,
5
MSEDCL Annual Report 200708
Table 12.4: MSEDCLs arrears (in Rs crore)
March 07 March 08 March 09
Receivables 9288.5 10719.0 12547.4
Source: MSEDCL Annual Report 200708, MSEDCL website
3. Gap in cost and revenue realized: The gap in ACS and ARR has declined
from 11 paise/kWh in 200405 to 3 paise/kWh in 200708 as shown in the
graph below.
Figure 12.6: Average revenue realised (ARR), average cost of supply (ACS) and
gap between them over the years for Maharashtra
Source: PFC report,
5
MSEDCL Annual Report 200708
The gap between ARR without subsidy and ACS however is still high at
26 paise/kWh in 200708.
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0.12
0.10
0.08
0.06
0.04
0.02
0.00
200203
R
s
/
k
W
h
R
s
/
k
W
h
200304 200405 200506 200607 200708
ACS ARR Gap
Data prior to unbundling Data post unbundling
Distribution Reforms in Maharashtra | 197
Quality of Supply (QoS): Investment in infrastructure and other load
management initiatives have led to better quality of supply. Reliability
indicators like SAIFI, SAIDI and CAIDI have improved due to decreased
load shedding and tripping. SAIFI, SAIDI and CAIDI improved from 10.30,
292.96 and 28.46 in April 2007 to 8.02, 159.78 and 19.92 respectively in
March 2009.
Figure 12.8: SAIFI
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
R
s
/
k
W
h
R
s
/
k
W
h
200506 200607 200708
ACS ARR Gap
Figure 12.7: Average revenue realised (ARR) without subsidy,
average cost of supply (ACS) and gap between them over the years
for Maharashtra post-reforms
Source: PFC report,
5
MSEDCL Annual Report 200708
12.0
10.0
8.0
6.0
4.0
2.0
0.0
10.3
April 2007 March 2008 March 2009
9.0
8.0
198 | Indian Infrastructure: Evolving Perspectives
Figure 12.9: SAIDI
Figure 12.10: CAIDI
CONCLUSION
MSEDCL has been in existence for a little over four years and it will be too soon
to comment on the sustainability of the reforms undertaken. However, given
the scale and the kind of problems it inherited, MSEDCL has done a
commendable job in improving the situation of power distribution sector in
Maharashtra. This improvement has been reflected by decrease in AT&C losses,
improved collection efficiency and better QoS parameters.
However rising arrears are a cause of concern for MSEDCL. Also, the subsidy
from the state has risen over the years for MSEDCL. MSEDCL is still far from
breaking even without subsidy and the gap in ARR (without subsidy) and ACS
is quite high.
MSEDCL's sales mix has not reflected any significant change over the years
whereas revenue mix shows a declining contribution from agriculture and
domestic sectors (refer to Annexure). This reflects that commercial and
industrial sectors are still cross-subsidizing these sectors. Revenue contribution
from agriculture and domestic sector has to increase to improve MSEDCL's
financial viability.
April 2007 March 2008 March 2009
293.0
238.50
159.8
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
April 2007 March 2008 March 2009
28.5
26.6
19.9
Distribution Reforms in Maharashtra | 199
Power deficit faced by Maharashtra from April 2008 to March 2009 was
21.4 per cent.
15
Going forward, MSEDCL has to cater to remote and rural areas
facing load shedding and bad quality of supply. With increasing arrears and huge
gap in ARR and ACS, MSEDCL has a tough task ahead of itself to achieve the target
of being financially viable and of providing quality customer service.
REFERENCES
1. Maharashtra Power Sector Reforms, White Paper: Industries, Energy and
Labour Department, 28 August 2002
2. Annual Report (200102) on the Working of State Electricity Boards and
Electricity Departments: Planning Commission (Power and Energy Division)
Government of India, May 2002
3. All India Electricity Statistics General Review 2006, CEA
4. http://www.mahadiscom.in/aboutus/abt-us-01.shtm
5. Report on the Performance of the State Power Utilities for the Years 200405
to 200607, Power Finance Corporation Limited
6. Report on the Performance of the State Power Utilities for the Years 200203
to 200405, Power Finance Corporation Limited
7. http://www.mahadiscom.in/interpole_upload/Dailygap.pdf
8. http://mahadiscom.net/emp/Sale_Demand_%20Collection_Loss_Report/
STATE/COLLEFF.htm
9. http://www.indiaenvironmentportal.org.in/node/28548
10. Problems before Mahavitaran Action Plan, Achievements and Future Plans
towards Reforms
11. Demand Side Management to Support Electricity Grids, MSEDCL's
Perspective, 26 March 2008
12. Challenges of Electricity Sector in a Developing Economy, Maharashtra Case
Study, 23 April 2009
13. http://www.karmayog.org/library/libartdis.asp?r=152&libid=655
14. http://www.mahadiscom.in/AnnualPerformanceReview_13may.shtm
15. http://www.cea.nic.in/god/gmd/Monthly_Power_Supply_position/
Energy_2009_03.pdf
16. http://www.mahadiscom.in/soa/Final_statementofaccounts0607.pdf
17. http://www.mahadiscom.in/soa/final_statementofaccount0506.pdf
18. http://www.mahadiscom.in/Gaothan_Feeder_Separation_Scheme_
Project-01.shtm
19. http://www.mahadiscom.in/Infrastructure_Project-02.shtm
200 | Indian Infrastructure: Evolving Perspectives
ANNEXURE
Sales mix, revenue mix and cost components of MSEDCL
Sales mix: Sales mix has not changed significantly over the years after the
reforms. As shown in the table below, the share of agriculture has declined and
that of industrial and commercial segment has grown over time.
Table 12.5: Sales mix (as percentage of total units sold)
200405 200506 200607 200708
Domestic 16.7% 16.6% 17.1% 16.4%
Commercial 4.3% 4.2% 4.5% 5.1%
Agricultural 22.5% 21.8% 19.2% 22.1%
Industrial 43.0% 45.6% 50.2% 47.8%
Others 13.6% 11.9% 9.0% 8.6%
Source: PFC report,
5
MSEDCL annual reports
Revenue mix: After the reforms, MSEDCL has witnessed a change in its revenue
mix. Revenue contribution of industrial sector has gone up from 48 per cent
in 200405 to 55 per cent in 200809. Consequently, despite insignificant
change in sales mix, the revenue share of agriculture and domestic sector has
decreased over the years.
Table 12.6: Revenue mix (as percentage of total revenue)
200405 200506 200607 200708
Domestic 16.1% 15.7% 15.8% 15.0%
Commercial 6.7% 6.3% 6.5% 6.8%
Agricultural 12.9% 12.6% 11.0% 11.1%
Industrial 48.4% 51.0% 56.3% 55.2%
Others 15.9% 14.4% 10.4% 11.9%
Source: PFC report
,5
MSEDCL annual reports
Cost components: The cost components of MSEDCL's total expenses are as
shown in the table below.
Over the years, power purchase cost has not changed much as a percentage
of total cost. However, MSEDCL has seen a significant rise in its
interest and financing costs. Rise in interest costs is due to capital
expenditure being incurred by MSEDCL for upgrading its infrastructure.
MSEDCL's administration expenses have also increased due to rise in
vigilance activities.
Distribution Reforms in Maharashtra | 201
Table 12.7: Expenses as percentage of total expense
200506 200607 200708
Purchase of power 83.01% 81.09% 81.76%
Repairs and maintenance 1.49% 2.07% 2.53%
Employee costs 9.34% 10.15% 8.63%
Admin & general expenses 0.91% 1.03% 1.32%
Depreciation 2.89% 2.50% 2.60%
Interest and finance charges 2.36% 3.15% 3.17%
Source: PFC report,
5
MSEDCL annual reports
202 | Indian Infrastructure: Evolving Perspectives
INTRODUCTION
The Gujarat Electricity Board (GEB) was established under Section 5 of the Electricity
(Supply) Act 1948 along with the formation of Gujarat State in the year 1960.
It commenced operations with a generation capacity of 315 MW and a consumer
base of 1.40 million.
During the 1970s and 80s, the major thrust was on the supply of electricity in the
rural areas. It was largely due to GEBs unwavering focus on rural electrification
that Gujarat became the first state to achieve the landmark of 100 per cent
electrification of villages. As per the 1991 Census, 17,940 out of 18,028 villages
were electrifiedwhich was notified as close to 100 per cent.
1
The impetus for reforms
Over time, the emphasis of GEB on electrification, particularly in the rural areas,
new connections and maintenance activities resulted in divergence from
concentrating on profitability. Recovery of revenue was then considered as a
secondary function. As a result, GEB faced minimum growth of revenue, rising
arrears and heavy financial losses. It was also a drain on public resources due to the
states policy of supplying electricity to agricultural consumers at extremely
subsidized levels.
The tariff for about 0.5 million agricultural consumers, prior to October 2000, was
Rs 350 per horsepower of load connected per year, which led to a revenue realization
of only Rs 0.15 per unit during 200001. Each incremental unit of agricultural
consumption required a subsidy of at least Rs 3.00 per unit. The provision of heavily
subsidized electricity to agriculture consumers boosted its share of consumption
POWER DISTRIBUTION
REFORMS IN GUJARAT
October 2009
13
Distribution Reforms in Gujarat | 203
from 16.7 per cent of all electricity sold in the state in 197071 to 43 per cent in
199900. The loss incurred by GEB on this account was estimated at Rs 14 billion
during 199900.
2
Though GEB started certain initiatives in 2000, conditions did
not improve much by the year 200405 (as shown in Figure 13.1).
3
As a result, GEB
faced recurring financial deficits and was unable to raise resources for investments.
Figure 13.1: Average revenue realization in Rs/kWh
for various consumer categories
The inefficiencies in the sector manifested themselves in the form of chronic shortages
and unreliable service. During FY 199899, load shedding ranging between 50 MW
and 1,450 MW was experienced on 362 days of the year.
4
The Government of Gujarat (GoG) initiated an ambitious policy of inviting private
sector participation (PSP) in the power sector. But the desired PSP did not materialize
because the revenues generated by the sector were insufficient to service the large
inflow of capital that was required.
5
Due to the drain on its resources caused by
supporting an inefficient power sector, the GoG was not able to increase spending
on other important areas of infrastructure as well as for social services.
In view of the above, GoG decided to reform the power sector in the state with the
following objectives:
1. Addressing the concerns of the investors
2. Creating a business environment conducive to improving the sectors
operational efficiency, financial viability, and service to consumers
GoG proposed to achieve its objectives through a number of reforms. Some of the
important measures which GoG decided to take in order to achieve the targets were:
1. greater competition at all levels of the sector wherever practicable
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Domestic Commercial Agricultural Industrial Bulk Others
ARR =
Rs 2.05/kWh
ACS =
Rs 2.49/kWh
R
s
/
k
W
h
2.96
4.65
0.97
4.30
2.77
3.03
204 | Indian Infrastructure: Evolving Perspectives
2. corporatization and commercialization of existing sector entities
3. private sector participation in the generation and distribution segments
4. tariffs enabling cost recovery as well as reasonable profits
5. an independent regulator
6. transparent, reasonable, direct, and quantified subsidies to vulnerable sections
of consumers.
Implementation of reforms
The promulgation of the Gujarat Electricity Industry (Reorganization and
Regulation) Act in 2003 for reorganization of the electricity industry in Gujarat
and for establishing an Electricity Regulatory Commission in the state paved
the way for the organizational restructuring of GEB. The vertically-integrated
GEB was unbundled into seven companies; one each for generation and
transmission, four distribution companies (discoms) and a holding company
known as Gujarat Urja Vikas Nigam Limited (GUVNL). The generation,
transmission and distribution companies have been structured as subsidiaries
of GUVNL. GUVNL acted as the planning and coordinating agency in the sector
when reforms were undertaken. It is now the single bulk buyer in the state as
well as the bulk supplier to distribution companies. It also carries out the function
of power trading in the state.
All companies became fully operational from April 2005 and began conducting
their activities independently. Distribution in the cities of Ahmedabad and Surat
has historically been with a private sector entity, viz. Torrent Power, through
its fully-owned subsidiaries, Ahmedabad Electricity Company and Surat
Electricity Company.
A noteworthy feature of reforms in Gujarat was inclusion of representatives of the
unions and associations of the staff in the restructuring process from the initial
stage, i.e., from the time the decision was taken on reforming the sector. It convinced
the staff that the GoG and GEB were not pursuing any hidden agenda. It thus
cultivated a high level of trust and confidence amongst the staff about the aims and
objectives of reforms and the process proposed to be followed to achieve them.
This ensured full co-operation of the staff of GEB in the reform process. No cases of
strikes or protests by employees of the erstwhile GEB were reported.
Transition support by the state government
As is typically the case with structural reforms of power utilities, GoG prepared a
Financial Restructuring Plan (FRP) to enable the newly formed distribution
companies to start with a clean balance sheet. Under this FRP, the losses of the
Distribution Reforms in Gujarat | 205
erstwhile GEB were inherited by GUVNL. GoG took over the debt payment liability
of GEB. It settled outstanding dues of Rs 1627.71 crore payable to central public
sector units (CPSUs) up to September 2001 and in lieu, issued bonds to these CPSUs.
This payment to CPSUs since then has been regularly made through Letter of Credit
without having any further problems resulting in zero outstanding dues payable to
any of CPSUs.
Further, GoG converted its loan to GEB, aggregating to Rs 623 crore, into equity
shares in GUVNL. It also allowed a moratorium period of six years (from
FY 200506 to FY 201011) on interest payment liabilities on the remaining
outstanding loan of Rs 842 crore.
1
The objective of this moratorium period was to
enable early recovery of financial health of GUVNL. Besides this, GoG sanctioned
a capital grant of Rs 250 crore per annum from FY 200506 to FY 201011 with
the objective of strengthening the power sector. Such grants can be utilized for
capital expenditure purposes, rural electrification projects, maintenance of quality
human resources and expansion of generation capacity.
1
Figure 13.2: Restructuring of GEB
EARLY REFORM INITIATIVES IN GUJARAT
Several states had undertaken the process of structural reforms to varying degrees
before Gujarat embarked on this path. These states include Orissa, Haryana, Andhra
Pradesh, Delhi, Karnataka and Uttar Pradesh. On the other hand, states like Madhya
Pradesh and Maharashtra were undergoing this process around the same time as
Gujarat. However, unlike other states that waited to complete structural reforms
PGVCL
(Paschim Gujarat Vij
Company Ltd)
MGVCL
(Madhya Gujarat Vij
Company Ltd)
DGVCL
(Dakshin Gujarat Vij
Company Ltd)
VGVCL
(Uttar Gujarat Vij
Company Ltd)
GSECL
(Gujarat State Electricity Corp. Ltd)
Generation company
Structure prior to reforms
Structure post reforms
GETCO
(Gujarat Energy Transmission Corp. Ltd)
Transmission company
DISTRIBUTION
COMPANIES
GUVNL
(Gujarat Urja Vikas Nigam Limited)
Holding company
GEB
(Gujarat State Electricity Board)
206 | Indian Infrastructure: Evolving Perspectives
before taking up comprehensive measures to address the problems facing them,
Gujarat started the process of reforms in early 2000 during the GEB days.
GEB undertook several initiatives to improve revenue as well as efficiency and
control expenditure. A brief overview of the measures undertaken by GEB is
provided below.
Revenue improvement measures
GEB made significant efforts to improve its revenue through greater monitoring
of the revenue situation and fixing of accountability for the same on its employees.
It started monthly meetings at the zonal levels which were attended by the chief
engineer and the members of the board. The objective of the meetings was to
familiarize all officers concerned with the extent of the problem, fix performance
parameters for the succeeding month and monitor past performance.
GEB adopted the feeder manager approach to make field-level officers accountable
and through monitoring of their performance, achieve results through reduction
in transmission and distribution (T&D) losses. Similarly, it held deputy engineers
and junior engineers responsible for sub-division-wise revenue performance
parameters such as reduction in arrears.
Efficiency improvement
One of the biggest achievements of GEB was its drive against power theft. GEB took
stringent measures to curb theft of power and dealt sternly with cases of theft and
non-payment of bills, whether by individuals or by companies. It appointed
500 retired army personnel to check power offenders and set up a vigilance
department headed by an IPS officer in the rank of additional director general of
police on deputation from GoG. Further, it introduced a cash reward scheme (based
on the recovered amount due to submission of information) as an incentive to
encourage people to come forward and submit information on theft. The informer
was required to submit detailed information in a prescribed format. The name,
address and amount paid to the informer were kept confidential.
Besides this, GEB formed 74 inspection squads under this vigilance department.
Eleven squads were dedicated to checking HT installations and the remaining were
required to check LT industrial, commercial, and residential installations.
These squads conducted raids during odd hours.
Cases of theft led to disconnection immediately upon detection; reconnection
happened only after arrears were paid by violators; many violators were convicted
by the court. Managers were appointed by GEB to look into settlement of cases, and
support was also to be had from GoG in the form of five dedicated police stations at
Surat, Baroda, Sabarmati, Rajkot and Bhavnagar which were set up exclusively to
Distribution Reforms in Gujarat | 207
deal with cases of power and power property theft. Officers of the rank of DSP, PI,
PSI, and ASI from the state police department are working on deputation to these
police stations. Some retired officers from the state police department are also posted
here as officers on special duty.
In a span of four years, almost all connections, both High Tension (HT) and Low
Tension (LT), have been checked and verified. Consequently, sealing of connections
was carried out and by 2005 GUVNL had sealed almost 13.89 lakh connections.
In 200405, GUVNL recovered Rs 16 crore by settling 36,982 civil suits of power
theft and malpractice.
1
DISTRIBUTION REFORMS IN GUJARAT AND THEIR IMPACT
The focus areas of distribution reforms in Gujarat have been as follows:
Reduction of distribution losses
Commercial loss reduction
Improvement in revenues
Improvement in customer services
Reduction of distribution losses
The distribution companies in Gujarat have focused on reducing distribution losses
by a combination of measures such as implementation of technology, strict measures
to tackle theft, strengthening of the network, and changing processes and procedures.
Jyoti Gram Yojana
Though the villages in the state were largely electrified as per prescribed parameters,
there was a significant gap in the quality of power supplied to the villages. This was
attributable to the use of power through illegal means resulting in frequent
transformer failures, poor voltage stability and unreliability of supply. Further, there
was a rapid increase in demand for power in the rural areas. Against this backdrop,
the GoG launched the Jyoti Gram Yojana (JGY) as a pilot initiative in eight districts
in September 2003 with the objective of supplying reliable and quality power. This
scheme was part of the bigger objective of facilitating growth of the rural economy
in the state. The pilot was successfully completed in October 2004 and in November
2004 the scheme was extended to the entire state.
The JGY had the following characteristics:
Bifurcation of rural feeders into:
agricultural feeders catering solely to demand for agricultural purposes
rural feeders catering to load other than agriculture
208 | Indian Infrastructure: Evolving Perspectives
erection of 11/22 kV HT lines in rural areas to separate the agriculture
load from the village transformer centre
metering of transformers on JGY feeders
providing round-the-clock 3-phase power supply to consumers other
than agricultural consumers while ensuring improved quality of a
minimum of 8 hours continuous power supply at a pre-determined
schedule to agriculture.
At the end of FY 200708, 17,839 villages were covered under the JGY. It involved
laying a parallel rural transmission network across the state involving the erection
of 15,500 transformers and 75,000 km of lines at an investment of Rs 1,200 crore.
The investment was almost entirely funded through grants from GoG
(Rs 1017 crore) with the remaining funds being contributed by the discoms
concerned, the Asian Development Bank and schemes such as the APDRP, the
MLA Fund, etc.
6
The Jyotigram Yojana has been successful in providing multiple benefits to both
the residents of villages as well as the discoms. Some of the prominent effects seen as
a result of implementation of this scheme are:
Improved standard of living: The Jyotigram Yojana has led to a substantial
improvement in the standard of living of the people in the rural areas, as they
are now able to access and use a wider variety of goods and instruments.
Development of small-scale industries in the rural sector has come about due to
better and improved availability of power supply.
Local employment: The industrial and economic development in rural areas
has led to greater employment opportunities in villages.
Reduced emigration from rural areas: Schemes like Jyotigram Yojana help
check ruralurban migration as a result of the above-mentioned benefits.
Non-farm activities, both trade and industry, have benefited significantly
from the scheme. The rural population has been provided avenues to increase
earning power and improve standards of living. Besides, there has been
improvement in the availability of medical, water supply and sanitation
services. This check on migration out of rural areas has also eased the pressure
on urban infrastructure.
Initiatives for technical loss reduction
In order to minimize distribution losses, various distribution companies in Gujarat
started upgrading their infrastructure. A number of steps were taken to adjust existing
infrastructure so as to optimize costs and minimize losses.
Distribution Reforms in Gujarat | 209
Feeder bifurcation: Feeder bifurcation done under JGY has had an impact on
technical losses as well by reducing load on transformers and conductors.
Also, reduced ampere loading of feeders has meant reduction in I
2
R losses.
Reduction of HT/LT ratio: Distribution companies in Gujarat took steps in
order to improve their HT/LT ratio in order to reduce technical losses.
Some of the steps taken were:
Use of HVDS: Discoms introduced use of high voltage distribution system
(HVDS) in Gujarat. HVDS is a practice in which the HV line is extended
up to the load. Required supply is then tapped off from 3-phase HV mains
in proximity of a load point through a distribution transformer of lower
capacity. This kind of arrangement reduces the length of LT line to just
that of the service cable.
Implementation of HVDS also leads to better reliability in the system as
the unauthorized connections, if any, are now connected to HV line.
The HV line has the capacity to handle the extra load during peak hours
and hence tripping of electricity caused due to overloading is reduced.
Replacement of low capacity lines with HV lines and usage of conductors
of adequate size.
Optimum loading of transformer: The loading and positioning of distribution
transformers was done so as to reduce copper losses/iron losses. Usage of
amorphous transformers was also introduced.
Commercial loss reduction
The main reason for commercial losses suffered by distribution utilities is power
theft. Gujarat was no exception; strict measures were taken to check theft.
The initiatives started by GEB have been continued by GUVNL as well as the discoms.
The Vigilance Department is now part of GUVNL and keeps a watch on pilferage of
electricity in the state. It continues to have provisions for submission of information
regarding power theft. Engineers from the discoms were deputed to GUVNL to
coordinate centralized mass checking drives in so-called strong areas. Based on the
consumption patterns of the feeders, theft-prone areas were identified and massive
anti-theft drives organized with the help of police squads.
The move was unpopular and there was stiff resistance from the people, so much so
that in one instance an official was kidnapped by some locals.
Other steps that were taken to avoid future occurrences of theft were:
Installation of new meters: Approximately 11.8 lakh
1
metal meter boxes were
installed for better energy audit and prevention of power theft. Meters were
210 | Indian Infrastructure: Evolving Perspectives
shifted outside the premises with separate services, particularly in towns.
For heavy consumers or seasonal consumers, meter reading was done on a
weekly basis.
Metering of feeders and transformers was also undertaken. Energy audit to ensure
zero theft was done regularly. Also, billing data was analyzed for irregularities.
Improved cash collection services: To boost cash collection, GUVNL set up
almost 1,000 centres, outsourced to private agencies. To further improve
cash collection, 9000 rural post offices were also used. The collective result
of these efforts was increase in collection from Rs 10,204 crore in 200405 to
Rs 14,767 crore in 200708.
7
Figure 13.3: Improvement in cash collections over the years
Source: GUVNL Annual Report 200708
Insulated/aerial bunch conductor: Insulated conductors were used to reduce
the instances of power theft by unauthorized connections. In aerial bunched
conductors, three conductors are twisted into a thicker insulated cable which
makes tampering with the power line difficult.
Revenue improvement measures
To improve its financial health, Gujarat discoms took a number of steps starting
from reducing costs to increasing the number of connections. Some of the revenue
16000 1400
1200
1000
800
600
400
200
0
Collections per year Collection per month
14000
12000
10000
8000
6000
4000
2000
0
200304 200405 200506 200607 200708
R
s

c
r
o
r
e

p
e
r

y
e
a
r
R
s

c
r
o
r
e

p
e
r

m
o
n
t
h
9176
10204
11506
13101
14767
765
850
959
1,092
1,231
Distribution Reforms in Gujarat | 211
improvement measures taken up along with reduction in distribution and
commercial losses were:
Reduction in power purchase cost: In 200304, renegotiating of power purchase
agreements (PPAs) began with the four independent power producers (IPPs)
Essar Power, Gujarat Paguthane, GIPCL and GSEG. This led to savings of
Rs 4.95 crore in that financial year. Considering the fact that dues to the IPPs
were at a staggering Rs 1,300 crore in 200304, IPPs were asked to work out a
compromise. The alternative would have been yet another sick state corporation
and suspension of operations. In another round of negotiations in 200506,
they managed to get a further reduction of Rs 64 crore.
1
Centralized purchase cell: A centralized purchase cell was created to take the
responsibility of timely and cost-effective procurements of materials and
inventory planning. A development which came more in the form of a boon
was the notification from the Ministry of Environment and Forests to use
washed coal with ash content of less than 34 per cent, which is less polluting
for power plants. This step led to savings of almost Rs 137.93 crore over the
period 200206.
1
Releasing new connections: Camps were arranged in poor areas and slums for
on-the-spot sanctioning of of connections. A number of schemes, like TASP
(Tribal Area Sub-Plan), Kutir Jyoti and Zupadpatti, were started to provide
connections to the poor.
Settlement of old dues: Voluntary disclosure schemes and one-time settlement
schemes were also initiated to clear old dues. One-time settlement scheme was
availed of by 28,793 consumers.
6
Customer service improvement
Providing better consumer services is one of the major challenges faced by
distribution companies in the country. Consumers face a number of problems like
delay in release of new connections, delay in redressal of complaints and replies to
queries. To address these, discoms in Gujarat took the following measures:
Customer care centres: were set up at all sub-divisions, divisions and circle offices
of distribution companies. These centres took care of all the customer queries
related to new connection, billing, change of name procedures, technical
parameters, etc.
Trouble call management centres: were set up to register and resolve
power-supply related complaints through telephone. Consumers can register
212 | Indian Infrastructure: Evolving Perspectives
their complaints which are dispatched to the sub-division concerned.
Once the problem is resolved, the status is updated by site/sub-station.
Consumers can check status of their complaints and other details through
their customer number.
Bill collection arrangements: Distribution companies in Gujarat have taken a
number of measures to facilitate bill payment by consumers. All-time
payment centres have been set up to allow payment 24 hours a day.
Bill collection arrangements have been made with post offices, banks and
other private agencies to increase the number of collection centres.
Retired employees have been hired so as to increase the number of booths
and shorten queues.
Introduction of Geographical Information System (GIS): GIS is a technology
which integrates diverse information within a single system by putting maps
and other kinds of spatial information in digital form, making connections
between activities based on geographic proximity and helping decision making
for system planning and maintenance.
GIS is helpful in locating consumer complaints immediately as it can index
consumers directly to poles based on the geographical and spatial data
available. GIS also allows identification of voltage and regulation problems
relating to HT & LT network.
OUTCOME OF REFORMS AND INITIATIVES
Post reforms, Gujarat has turned out to be one of the few states in India which can
boast power availability round-the-clock in most of its towns, cities and villages.
Reforms in Gujarat led to the formation of four power distribution companies.
Performance across these companies, however, varies according to the demography
of the distribution areas. Various parameters indicating the performance of power
distribution companies in the state are discussed below:
AT&C losses: The distribution companies in Gujarat inherited a distribution
network with high AT&C losses. In the year 200405, GEB reported AT&C
losses at 35.2 per cent.
3
Post reforms, a number of initiatives were taken to
reduce both technical and commercial losses. AT&C losses for the state were
reported at 22.6 per cent in the year 200708 by GUVNL.
7
AT&C losses reported by individual distribution companies have also declined
over time, as shown in Table13.1. While other distribution companies have
AT&C losses less than 20 per cent, PGVCL still has very high losses. PGVCL
reported AT&C losses at 33 per cent for the year 200607.
3
Distribution Reforms in Gujarat | 213
Figure 13.4: AT&C losses (%)
Source: GUVNL Annual Report 200708
Table 13.1: AT&C losses for distribution companies
200506 200607 200708
DGVCL 18.1% 16.5% 15.2%
MGVCL 19.74% 15.2% 17.2%
PGVCL 37.1% 35.8% 32.7%
UGVCL 23.6% 15.9% 17.2%
Source: PFC Report on Performance of the State Power Utilities for the Years 200506
to 200608
Distribution losses: Gujarat Electricity Regulatory Commission (GERC) sets
target distribution losses for each discom separately. While distribution
losses for the discoms have decreased from what they had inherited, all
discoms, except DGVCL, reported increase in distribution losses for the
year 200708.
9
Table 13.2: Distribution losses of discoms
200506 200607 200708
DGVCL 20.0% 16.5% 15.5%
MGVCL 20.2% 15.1% 15.9%
PGVCL 38.7% 32.5% 32.8%
UGVCL 23.0% 15.8% 17.3%
Source: GERC Website
22.6
23.7
26.5
35.2 35.4
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
200304 200405 200506 200607 200708
214 | Indian Infrastructure: Evolving Perspectives
Table 13.3: Collection efficiency of distribution companies
200506 200607 200708 200809
DGVCL 102.5% 100.1% 99.8% NA
MGVCL 99.8% 97.2% 100.3% 98.7%
PGVCL 98.1% 97.0% NA 100.3%
UGVCL 99.2% 99.8% 87.1% 100.0%
Source: PFC Report on Performance of the State Power Utilities for the Years 200405
to 200607 GERC Website
Collection efficiency: The collection efficiency of GEB in Gujarat has been high
at about 97 per cent in 200304 and 200405. Post-reform efficiency has
improved and was reported around 98.6

Data for Gujarat has been calculated
on the basis through weighed average using units sold per cent for the
year 200607.
3
Collection efficiency for different distribution companies is as
shown in Table 13.3.
Subsidy: Subsidy received by GEB was Rs 1,527 crore in 200304.
After unbundling this declined to Rs 1,178 crore in 200506.
3
However, there
has not been any significant reduction in subsidy received since then.
The total subsidy received by four distribution companies for the year
200708 was Rs 1,182 crore
8
.
Subsidy received by individual distribution companies has not declined
significantly since reforms. Only MGVCL has seen a decreasefrom
Rs 101 crore in 200506
3
to Rs 58 crore in 200708.
8
Figure 13.5: Subsidy received (in Rs crore)
Source: PFC Report on Performance of the State Power Utilities
2000
2500
1500
2017
1527
2026
1178
1000
500
0
200203 200405 200506 200607 200708 200304
1182
1206
Distribution Reforms in Gujarat | 215
Table 13.4: Subsidy received by distribution companies
200506 200607 200708
DGVCL 74 79 81
MGVCL 101 58 58
PGVCL 427 474 466
UGVCL 576 595 578
Gujarat 1,178 1,206 1,182
Source: PFC Report on Performance of the State Power Utilities for the Years 200405
to 200608, Annual Report of Distribution Companies.
Financial viability of the distribution companies
Gap in cost and revenue realized: Gap in ACS and ARR has declined from
Rs 0.51/kWh in 200203 to Rs 0.24/kWh in 200708
*
(as shown in Chart 5).
This decrease is attributable to a number of initiatives taken to reduce
commercial as well as technical losses.
Figure 13.6: Average revenue realised (ARR) without subsidy, average cost of
supply (ACS) and gap between them over the years for Gujarat (in Rs/kWh)
*Data for year 200506, 200607 and 200708 has been calculated
through weighted average using units sold.
Source: PFC Report on Performance of the State Power Utilities
The gap in ARR and ACS for distribution companies varies by a great
margin. While DGVCL had a gap of 5 paise/kWh in 200708, the gap for
UGVCL was 44 paise/kWh.
R
s
/
k
W
h
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.51
0.70
0.44
0.26
0.26
0.24
0.0
200203 200304
ACS
ARR
Gap
200405 200506* 200607* 200708*
216 | Indian Infrastructure: Evolving Perspectives
Table 13.5: Gap between ARR & ACS for distribution companies without
subsidy (in Rs/kWh)
200506 200607 200708
DGVCL 0.07 0.06 0.05
MGVCL 0.16 0.10 0.09
PGVCL 0.25 0.27 0.26
UGVCL 0.47 0.48 0.44
Source: PFC Report on Performance of the State Power Utilities for the Years 200405
to 200607, Annual Report of Discoms and GUVNL
Profitability: Without subsidy, distribution companies in Gujarat have
been making losses. These have increased in the case of DGVCL and
PGVCL. MGVCL has seen a decrease in losses from Rs 84 crore in
200506 to Rs 55 crore in 200708. For UGVCL, losses have increased
marginally from Rs 575 crore in 200506 to Rs 577 crore in 200708.
Table 13.6: Profits of distribution companies without subsidy (in Rs crore)
200506 200607 200708
DGVCL (64) (63) (79)
MGVCL (84) (69) (55)
PGVCL (401) (457) (465)
UGVCL (575) (578) (577)
Source: PFC Report on Performance of the State Power Utilities for the Years 200405
to 200607, Annual Report of Distribution Companies
However, when subsidy has been provided all the discoms have shown profits.
Table 13.7: Profits of distribution companies with subsidy (in Rs crore)
200506 200607 200708
DGVCL 10 16 1.6
MGVCL 17 (11) 2.4
PGVCL 27 18 1.2
UGVCL 2 17 0.9
Source: PFC Report on Performance of the State Power Utilities for the Years 200405
to 200607, Annual Report of Distribution Companies
Distribution Reforms in Gujarat | 217
CONCLUSION
Gujarat is one of the few states where several reforms were initiated before the
actual unbundling of the SEB. A number of new initiatives were taken post
restructuring by the discoms to tackle the many problems facing the distribution
system. Some of these have now been adopted by other states in one form
or other.
The impact of distribution reforms can be felt in decreased losses and improved
collection efficiencies. Also, the deficit condition of the state has improved over the
years. Peak deficit for the state declined from 30 per cent in 200607 to
24 per cent in 200809. Energy deficit for the year reduced from 13 per cent in
200607 to 10 per cent in 200809.
Table 13.8: Gujarat state peak deficit and energy deficit
200607 200708 200809
Peak deficit 30.2% 26.7% 24.3%
Energy deficit 13.4% 16.2% 9.8%
Source: Central Electricity Authority (CEA)
Individual performance of distribution companies in Gujarat has varied.
Among the factors responsible is the different customer mix they inherited (refer to
Annexure). The agricultural sectors contribution to revenue has been less than
their percentage share in the sales mix; the industrial sector contributed to more
than half the revenues for all the companies. This reflects the cross-subsidization
being done and hence an advantage for companies having higher percentage of
involvement with the industrial sector. DGVCL and MGVCL require lower subsidy
than PGVCL and UGVCL which can be attributed to lower percentage of agricultural
sector in their sales mix. The performance of DGVCL and PGVCL has lagged behind
that of MGVCL and UGVCL respectively in terms of reduction in AT&C losses and
containment of subsidy requirement. Difference in performance is also apparent
with regard to Quality of Service (QoS) parameters. In the absence of data on the
QoS parameters prior to restructuring, and, currently, quality data on
QoS parameters on an annual basis, it is difficult to comment on the extent
of improvement.
Finally, the profitability of discoms without accounting for subsidy remains in doubt.
Lowered dependence on the state government as far as subsidies are concerned is a
must in order to achieve the ultimate goal of a financially sustainable power
distribution system.
218 | Indian Infrastructure: Evolving Perspectives
Table 13.9: Quality of service parameters* for discoms
Mar08 Mar09
SAIFI SAIDI CAIDI SAIFI SAIDI CAIDI
DGVCL 13.9 0.5 0.0 5.0 3.9 0.8
MGVCL 1.7 0.3 0.2 0.8 0.3 0.4
PGVCL 0.6 2.7 4.8 NA NA NA
UGVCL 0.4 0.5 1.2 0.8 1.2 1.6
Source: http://www.gercin.org/sop1.php
* SAIDI and CAIDI are in hours
ANNEXURE
Sales mix: The distribution sector in Gujarat was divided into four companies
and all these companies inherited a different mix of consumers depending on
the area served. While DGVCL and MGVCL got a mix with predominantly
industrial consumers, PGVCL and UGVCL inherited a consumer mix with a
high percentage of agricultural consumers. Over the years, all the companies
have seen a marginal decline in sales to agricultural consumers as percentage
of total sales. The share of industrial consumers has increased significantly for
PGVCLfrom 32.4 per cent in 200506
3
to 41.6 per cent in 200708.
9
Revenue mix: The revenue mix of companies varies according to their sales
mix. However, approximately half of the contribution to revenue is made by
the industrial sector for all the companies. Contribution by the agricultural
sector is quite low despite its accounting for a large share of sales in PGVCL
and UGVCL.
Cost components: The cost components as percentage of total costs have not
varied much for the distribution companies. However, most of the companies
have seen a rise in employee costs as percentage of total costs.
Distribution Reforms in Gujarat | 219
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220 | Indian Infrastructure: Evolving Perspectives
REFERENCES
1. Presentation by Madhya Gujarat Vij Company Ltd. Available in the Report on
Loss reduction strategies, September 2008, Forum of Regulators.
2. Co-management of Electricity and Groundwater: Gujarats Jyotirgram Yojana,
Strategic Analyses of Indias NRLP, Tushaar Shah, Regional Workshop at
Hyderabad, August 2007.
3. Presentation by Gujarat Urja Vikas Nigam Limited on Gujarat Power Sector
Initiatives at the Regional Conference on Excellence In Public Service
Delivery, YASHADA, Pune, October 2007.
4. http://www.karmayog.org/electricitynews/electricitynews_11067.htm
5. Study on Impact of Restructuring of SEBs by the Indian Institute of Public
Administration (IIPA), September 2006.
6. Gujarat electricity boards turnaround: Complete rural electrification in
Gujarat, London Business School, October 2008.
7. Reforms and Loss Reduction StrategiesGujarat Experience,
P. R. Chaudhary, Officer on Special Duty, Uttar Gujarat Vij Co. Ltd.
8. Co-Management of Electricity and Groundwater: An Assessment of Gujarats
Jyotirgram Scheme, Economic & Political Weekly, February 2008.
9. Asian Development Bank: Reports available under Technical Assistance: 29694,
Gujarat Power Restructuring
10. http://www.gercin.org/orders_tariff.php
11. http://www.gercin.org/sop1.php
12. http://www.gercin.org/rims1.php
NOTES
1. Report on Gujarat Electricity Board A benchmark in the progress of SEB reforms,
by the Indian Institute of Planning and Management (IIPM) Ahmedabad, 2006.
2. Asian Development Bank, RRP:IND 29694, Report and recommendation of the President
to the Board of Directors on proposed loans and technical assistance grants to India for
the Gujarat Power Sector Development Program, November 2000.
3. Report on the Performance of the State Power Utilities for the years 200405 to
200607, Power Finance Corporation Limited.
4. Asian Development Bank, RRP:I ND 29694, Report and recommendation of the
President to the Board of Directors on proposed loans and technical assistance grants to
India for the Gujarat Power Sector Development Program, November 2000.
Distribution Reforms in Gujarat | 221
5. Asian Development Bank, RRP:IND 29694, Report and recommendation of the President
to the Board of Directors on proposed loans and technical assistance grants to India for
the Gujarat Power Sector Development Program, November 2000.
6. Reforms and Loss Reduction StrategiesGujarat Experience by P.R. Chaudhary,
Officer on Special Duty, Uttar Gujarat Vij Co. Ltd
7. GUVNL Annual Report 200708
8. Annual reports for the financial year 200708 of the UGVCL, DGVCL, PGVCL and
DGVCL
9. http://www.gercin.org
222 | Indian Infrastructure: Evolving Perspectives
INTRODUCTION
India has set out on the path of harnessing renewable energy (RE) sources like
never before. The reasons are many and not hard to findchronic shortage of
power, energy security and environmental concerns. The countrys energy
strategy is moving strongly in favour of RE technologies. This strategy has made
India a leader in a number of renewable energy technology (RET) applications
such as grid-connected wind energy generation, decentralised solar PV for rural
applications, decentralized distributed generation, etc. India has now set itself
very aggressive targets for RE capacity addition. The Eleventh Five-Year Plan
(FYP) (FY 200712) envisages the addition of 14,050 MW of additional capacity,
which means adding, in five years, more capacity than what India has added
since Independence.
However, RE capacity addition and development of the sector suffers on account
of a number of constraints, overlaps and gaps prevalent in the current policy and
regulatory environment. It is becoming clear that the policy and regulatory
framework introduced so far has been appropriate only for accelerating the early
growth of the sector from a small base and helping mainstream RE. However, this
policy and regulatory environment has now (with changing market conditions
and imperatives) become outmoded for the sector. Though the Ministry of New
and Renewable Energy (MNRE) has been taking proactive steps to improve this
environment, its initiatives have been able to address specific problems and
constraints but have not been successful in helping the RE sector as a whole in
India to leapfrog ahead.
BARRIERS TO DEVELOPMENT
OF RENEWABLE ENERGY IN
INDIA AND PROPOSED
RECOMMENDATIONS:
A Discussion Paper
February 2010
14
Barriers to Development of Renewable Energy | 223
There is, therefore, a need to review the existing environment for development of
RE and propose a new approach to the development of this sector. With this objective
in view, this paper examines the current status of RE development in India and the
existing environment for such development. It examines the barriers to further
development as well as gaps constraining investments in this sector of renewable energy.
It then makes recommendations towards removing such barriers and adopting new
mechanisms for the promotion of RE. In sum, the paper identifies the issues that have
to be addressed in order to achieve a widespread use of RE, so that determined and
practical steps can be taken to increase their application substantially.
RE technologies (RETs) in India can be divided into two categories: 1. near-
commercial and commercial technologies such as wind, small hydro power (SHP),
solar PV, biomass and co-generation (cogen) that have matured and are being
deployed or are close to deployment, and 2. emerging technologies such as solar
thermal and biofuels that will need time to mature. The latter will also have to
undergo pilots before commercial deployment. This paper focuses on the RETs
that fall in the first category. The paper also restricts itself to grid-connected RE.
STATUS OF RE DEVELOPMENT IN INDIA
Today, the RE sector contributes a very small percentage of the total installed power
capacity of the country (approximately 9 per cent at the end of FY 200809)
(see Figure 14.1). The share of different technologies in the total RE capacity existing
in the country is presented in Figure 14.2. It is clear that wind energy makes up the
Figure 14.1: Role of RE in Indias power generation capacity as
on 31 March 2009 (in MW)
1
Source: MoP
36878
13242
4120
Hydro RES Nuclear Thermal
93725
224 | Indian Infrastructure: Evolving Perspectives
largest proportion of RE. It has also overtaken the installed nuclear power capacity
by nearly a factor of two. On the other hand, solar powerwhether PV or thermal
is yet to gather momentum.
The growth in RE capacity addition picked up pace during the Tenth Plan. In this
Plan, the sector was not only able to achieve its targets but also exceeded them by
almost 120 per cent. A review of the physical achievements during this Plan indicates
that RE capacity of 6795.44 MW was added as against a target of 3583.50 MW.
Of this, 5426.4 MW came from wind power, 536.83 MW from small hydro, 785 MW
from bio-energy and 46.58 MW from waste to energy.
RE potential in India
The contribution of renewable energy to the power sector has increased and is
expected to increase in the future. MNRE is targeting a huge capacity of renewable
energy and aims to add almost four times the present capacity by 2017. Table 14.1
highlights the potential and target cumulative capacity addition for each of the
RETs in India till FY 201617. It is evident that wind will continue to dominate
the future capacity addition from RE and the country is expected to harness around
88 per cent of its available potential of wind by 2022. SHP is also expected to be
harnessed up to 43 per cent of its potential. Further, the potential for each of the
RETs is expected to increase in future with more resource assessments and
technological advancements.
Figure 14.2: Technology-wise grid-interactive RE capacity in India
as on 31 October 2009 (in MW)
Source: MNRE
5.3%
0.4%
0.04%
16.2%
8.0%
70.1%
Biomass (5.3%) Waste to
energy (0.4%)
Solar power (0.04%)
Small hydro power (16.2%)
Cogeneration-
bagasse (8.0%)
Wind power (70.1%)
RET-wise installed capacity
RET Installed Capacity
Small hydro power 2,519.88
Cogeneration-
bagasse 1,241.00
Wind power 10,891.00
Bio power 816.50
Waste to energy 67.41
Solar power 6
Total 15,541.79
Barriers to Development of Renewable Energy | 225
Table 14.1: RE potential and target cumulative capacity addition (in MWeq)
Type of RET Estimated Target Target Total
potential as on addition addition capacity
March 31, till 2011 till 2017 in 2017
2009
Wind 45,195 17,600 35,000 45,243
SHP 15,000 3,376 6,500 8,930
Biomass 16,881 1,025 1,500 2,203
Cogeneration-
bagasse 5,000 2,016 3,400 4,449
Waste to energy 2,700 244 600 659
Solar 50,000 53 10,000 10,002
Total 1,34,776 24,314 57,000 71,485
Source: MNRE
Table 14.1 makes it clear that there is a huge potential for RE, and only a small part
of it has been tapped so far. Going by the past record, these anticipated capacity
additions may not materialize in their entirety as the development of RE is critically
dependent on a variety of factors (which will be touched upon later in this paper).
To get realistic estimates about the capacity addition that would be possible, it may
be useful to consider that only 15,000

MW
2
of the planned incremental capacity
would be added in the country by 2017.
Drivers of RE in India
The main driver for RE at the global level, particularly in Europe and North America
is the reduction of emissions. Increased levels of greenhouse gases have primarily
been held responsible for global warming and, consequently, climate change. Europe
and North America being the largest emitters of greenhouse gases in the world, the
need to reduce emissions of these gases provides a very compelling reason for them
to make use of alternative and cleaner sources of energy. While the need to protect
and preserve the environment has come to the forefront in India, concerns over
energy security and the stability of the energy supply continue to be the main drivers
of RE in the country.
The Expert Committee of GOI on Integrated Energy Policy (IEP) notes that to
deliver a sustained growth of 8 per cent through 2031, India would need to
augment its primary energy supply by three to four times and electricity supply
by five to seven times the 200304 levels.
3
The country currently imports about
72 per cent of its oil consumption and this is expected to reach 90 per cent by
226 | Indian Infrastructure: Evolving Perspectives
203132. The scenario for coal imports is not going to be very different. It is
envisaged that India will import 50 to 60 million tons (MT) of coal every year
by the end of the Eleventh Five-Year Plan. According to scenarios developed by
the Expert Committee on IEP, imports could increase to as much as 45 per cent
of the total coal requirement. Besides issues of energy security, such growing
dependence on imports also raises concerns of price shocks and vulnerability to
supplying countries.
Long-term energy security is just one aspect. The country also needs to address
the shortage of power that has engulfed it over the years and access to electricity.
The peak power shortage in June 2009 was 14 per cent and has been upwards of
11 per cent every year since 199798.
4
The scenario varies from state to state
with some states facing a peak power shortage of 35 per cent in June 2009.
5
While the level of village electrification for the country as a whole reached
83 per cent at the end of June 2009,
6
the level of household electrification
continues to remain poor. Last available estimates indicate that 90 per cent of
urban households and only about 55 per cent of rural households are electrified.
7
No doubt, efforts are being made to increase electrification. But given the
shortage of power prevailing in the country, increased electrification would
perhaps make no difference.
Allied benefits of energy security are savings in foreign exchange on account of
reduction in import of conventional fuels. Another offshoot of any scale-up in RE
investment and development would be more investment in RE manufacturing. This,
in turn, would lead to savings in foreign exchange (from import of RE equipment),
spur development of equipment manufacturing and ancillary industries specific to
renewable energy technologies, and generate employment.
Promoting renewable energy resources also has a positive impact on the net
creation of jobs. Rough estimates indicate that a 4000 MW ultra mega power
project (thermal power) would create employment for approximately 300 people.
One MW of RE necessitates the employment of a minimum of five people, which
means that about 20,000 people would get employment through 4000 MW of RE.
International experience also bears this out. For instance, RE jobs in Germany
shot up from 160,500 in 2004 to 249,300 in 2007.
8
Policy and regulatory framework for RE
Overall environment for development of RE
India is one of the few countries in the developing world which has pioneered the
development of renewable energy. Following the first oil shock in the 1970s which
brought to light concerns about energy access and energy security, India recognized
the relevance of these natural sources of energy. Thereafter, the sector witnessed
Barriers to Development of Renewable Energy | 227
slow but steady growth over the next three decades. The milestones in the RE sector
in India can be summarized as follows:
Establishing the Commission for Additional Sources of Energy in 1981 for
promoting research and development in renewable energy.
Establishing the Department of Non-conventional Energy Sources (DNES) in
1982 in the Ministry of Energy
Wind-resource assessment and publication of a databook in the early 1980s
Research and development, capacity building and demonstration programmes
in the areas of biogas, cooking stoves and solar energy in the 1980s
Installing the first grid-connected wind turbine in 1985 and beginning of the
demonstration programme by DNES in 1986
Establishing the Indian Renewable Energy Development Agency (IREDA) in
1987 to finance renewable energy projects.
Upgrading DNES into a full-fledged Ministry of Non-conventional Energy
Sources (MNES; now MNRE) in 1992.
Recognition of renewable technologies for power generation in 1992, by their
inclusion in the Eighth Five-Year Plan (199297)
Policy to encourage private sector investment in renewable energy and
guidelines for renewable energy tariffs by MNES in 1993
Until 199394, the primary approach for development of RE was through the
provision of subsidies. After that, the approach has shifted to include the provision
of fixed tariffs for purchase of power from RE. In 1993, the MNRE issued policy
guidelines prescribing a price of Rs 2.25/kWh with a 5 per cent annual escalation
(with 1993 as base year). It also allowed wheeling and banking of energy generated
by RE sources to facilitate private investments in the sector. These guidelines were
valid for a period of 10 years. The guidelines were adopted with variations by utilities
in different states. Several states even brought out their policies for RE, based on the
MNREs guidelines; some even offering additional incentives for RE investments.
The enactment of the Electricity Act 2003 (EA 03) has radically changed the legal
and regulatory framework for this sector by providing for policy formulation by the
Government of India and making it mandatory for state electricity regulatory
commissions (SERCs) to take steps to promote renewable and non-conventional
sources of energy within their area of jurisdiction. Section 3 of EA 03 clearly mandates
that the formulation of the National Electricity Policy (NEP), Tariff Policy and Plan
thereof for development of power systems shall be based on optimal utilization of
all resources, including renewable sources of energy. Further, EA 03 has specific
provisions for determination of feed-in tariffs for renewable energy sources as well
228 | Indian Infrastructure: Evolving Perspectives
26
67
266
411
220
142
172
298
337
431
849
1366
2011
2138
1899
3213
MNRE policy
& tariff
guidelines
National wind
resource monitoring
& demonstration
programme
Policy on
hydro power
development
Electricity
Act 2003
Guidelines
for tariff &
interconnection
for captive &
third-party
sales
Generation-
based
incentives
Policy framework
to push
indigenisation
Renewable Purchase Obligations
Feed-in tariffs
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
MW
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as for creation of renewable portfolio standards for states. Annexure 1 describes the
provisions of EA 03 and the policies formulated therein for RE.
Figure 14.3 maps the capacity addition in RE with the main events that have driven
this sector forward.
Figure 14.3: Events influencing RE development and
RE capacity addition (in MW)
Source: MNRE, others
Policies for promotion of RE
Over the years, the GOI through the Ministry of New and Renewable Energy (MNRE;
earlier known as the Ministry of Nonconventional Energy Sources), the Ministry of
Finance, and the state governments have used a number of policy instruments
towards promotion of RE. A summary of these initiatives is provided in Table 14.3.
Annexure 2 discusses these initiatives in detail.
Regulatory framework for promotion of RE
Regulatory measures have mainly taken two forms: Renewable Purchase Obligation
(RPO) and Feed-in tariffs. A summary of these measures is provided in Table 14.4.
Annexure 3 discusses the initiatives in detail.
Barriers to development of RE
The barriers to development of RE in India, in general, are described below. Some
of these may be specific to a technology, while some may be specific to a policy,
site or a region.
Barriers to Development of Renewable Energy | 229
Policy and regulatory barriers
Policy framework for RE
There is no single comprehensive policy statement for RE in the country. Policies
have been issued as and when necessary to facilitate the growth of specific RETs.
Further, the plans for development of RE do not match these policies. Table 14.2
indicates that the RE capacity addition targeted by MNRE and the capacity addition
planned under the Jawaharlal Nehru National Solar Mission (JNNSM), also known
as Solar India, is inadequate to meet the target for RE generation mandated under
the National Action Plan on Climate Change (NAPCC)
Table 14.2: Mismatch between RE capacity envisaged under policy
and capacity addition targeted
200910 201011 201112 201617
Energy Requirement
(in MU)
a
820920 891203 968659 1392066
Share of RE as mandated
under NAPCC (in %)
b
5% 6% 7% 12%
Quantum of RE required
(in MU) 41046 53472 67806 167048
RE capacity addition
targeted by MNRE
(in MW) 15542
c
20376 25211 57000
Solar capacity targeted
under JNNSM (in MW) 1000 10000
Quantum of RE available
(in MU)
d
29952 39269 50514 129122
Additional RE required
to meet RE share
mandated under
NAPCC (in MU) 11094 14203 17292 37926
a. As per 17th EPS
b. 5% in 200910 & 1% increase each year
c. As on 31.10.2009
d. Assuming a capacity utilization factor of 22%
The policy framework at the state level is no better. In fact, in many states policies
have only created uncertainty for investments in RE. For example, in Madhya
Pradesh, the policy for promotion of non-conventional energy sources waives
230 | Indian Infrastructure: Evolving Perspectives
wheeling charges as well as cross-subsidy surcharge for RE. The state government,
to encourage RE, would provide subsidy to the distribution utilities towards wheeling
charges at 4 per cent of the energy injected at the rate of prevailing energy charges
for the user. The policy also exempts wind energy from the payment of electricity
duty for a period of five years from CoD provided actual generation is at least
70 per cent of the energy generation declared in the DPR. However, the policy is
applicable only for a period of five years. Therefore, there is a high degree of policy
and regulatory uncertainty for investment in RE.
In case of biomass projects, most states do not have defined policies with regard to
the radius within which such plants can be established. It has been seen that biomass
plants have come up in close proximity to each other, thereby affecting the availability
of fuel to each other. As a result, these plants have been rendered unviable.
Provision of accelerated depreciation to wind developers
Wind power growth has hinged on the 80 per cent accelerated tax depreciation
that is provided by the GOI. In view of this, a bulk of wind power capacity has
been set up on the balance sheets of existing companies which wanted to save
income tax. Many of these projects are in fact located in low wind speed areas and
have failed to deliver on the kind of energy production that was expected of them.
Foreign investors who had no income tax to save did not find it lucrative to invest
in wind energy assets.
It has also been seen that buyers take decisions from investment in wind power
projects at the last moment (just before September 30 and March 31 every year to
avail themselves of the accelerated tax depreciation); the equipment suppliers in
the country have evolved as developers themselves and typically undertake all
development activities, including land acquisition, construction, PPA finalization
and transmission tie-up. In fact, many equipment suppliers have bought vast areas
of land in high wind potential sites and sold these as part of the deal to buyers. After
the commissioning of the project, they even undertake operation and maintenance
(O&M) for the buyers. Therefore, readymade projects are sold off-the-shelf by
equipment suppliers. Since the equipment suppliers are undertaking the functions
of developers as well, buyers are forced to pay a premium for the wind power projects.
This has resulted in wind power projects being more expensive and even restricting
competition for equipment supplies.
Regulatory framework for promotion of RE
Definition of RPO
A review of the RPO determined by different SERCs indicates that there are
differences in the definition of the framework for RPO. There is little consensus
Barriers to Development of Renewable Energy | 231
on whether a single RPO percentage should be specified for all RE sources, or
RE source/RE technology-specific percentage needs to be specified. There are
some issues which merit discussion here. In case technology-specific RPO is
specified and there is limited availability of a particular RE source in a year, will
the SERC allow such shortfall in RE procurement to be met through another
type of RE source? If not, the discoms concerned may have little incentive to
explore other RE sources; indirectly limiting investments in such other RE
sources/RETs. Further, if the discom can meet its RPO through RETs/RE sources
not specified by the SERC, it should not be liable to pay penalty for
non-achievement.
Another issue is that of the level of RPO. This has to be carefully determined by
SERCs. While a high RPO target would incentivize discoms to purchase more RE
power, thereby encouraging investments, such targets may be ambitious in the short
term. On the other hand, a low target may put a restriction on the amount of energy
purchased by a discom from RE sources. This was the case in Gujarat where the
discoms reportedly stopped signing energy purchase agreements with wind
developers as they had met their RPOs (2.28 per cent as against the mandated
2 per cent in FY 200708). Moreover, the discoms currently have little incentive
to exceed their RPO.
Finally, some states such as Maharashtra, Gujarat, Madhya Pradesh and Karnataka
do not allow the procurement of RE power from outside the state. This is detrimental
to the overall development of RE in the country.
Applicability of RPO
Section 86(1)(e) of EA 2003 provides for specification of RPO on consumption
within the area of discoms. This implies that the RPO should be applied on
entire consumption in the area of discoms and not to procurement of energy by
the discoms alone. Currently, only Maharashtra, Rajasthan and Andhra Pradesh
impose RPO on open access (OA) and captive consumers.
Enforcement of RPO
Thus far, only a few states such as Rajasthan and Maharashtra have specified penalty
mechanisms on distribution licensees in case the RPO is not met by them.
Table 14.5 indicates the extent of penalty levied in these states. In the case of
Rajasthan, the penalty is called an RE surcharge and is to be paid to the State
Transmission Utility (STU). The surcharge so collected will be credited to a fund to
be utilized for creation of transmission system infrastructure of RE plants.
232 | Indian Infrastructure: Evolving Perspectives
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Barriers to Development of Renewable Energy | 235
Table 14.5: Penalties for non-achievement of RPO
Penalty clause Levied on
Maharashtra Rs 5/unit for FY 200708; Distribution licensee, open access
Rs 6/unit for FY 200809 consumer & captive power plant
Rajasthan RE surcharge of Rs 3.59/ Distribution licensee, open access
unit for FY 200708; consumer & captive power plant
to continue until revised
Source: SERC orders in states concerned
Few instances of penalties on distribution licensees (discoms) for non-achievement
of RPOs have been reported so far. Only the Maharashtra Electricity Regulatory
Commission (MERC) has penalized the discoms for not meeting the mandated
RPOs (refer Table 14.5). MERC has introduced an enforcement charge for shortfall
in compliance with RPS obligations at the rate of Rs 5.00/kWh during FY 200708,
at Rs 6.00/kWh for FY 200809, and at Rs 7.00/kWh for FY 200910. It was further
clarified that this enforcement charge, if levied, shall not be allowed as pass through
expense while approving the annual revenue requirement (ARR) of the discom.
Table 14.6: Status of RPO across Maharashtra
Licensees RPO (4% RPO Shortfall Actual Penalty
quantified (MU) (MU) percentage
in MU) achieved (Rs crore)
MSEDCL 3058.07 2658.52 399.54 3.48 % 199.77
TATA Power 107.54 125.00 N/A 4.65 %
REL 368.29 1.02 367.27 0.01 % 183.63
BEST 184.33 3.49 180.84 0.08 % 90.42
MPECS 24.04 0 24.04 0.00 % 12.02
Total 3742.27 2788.03 971.69 2.98% 485.84
Source: MERC
Role of FiTs/tariff orders
Table 14.7 provides an analysis of the impact of a sound regulatory framework on
RET-wise capacity added at the state level. The table maps the RET-wise capacity
addition with the tariff orders/FiTs issued.
9
It is clear that almost all biomass and
wind potential addition has been in states which have determined a FiT. In case of
small hydro, nearly 83.4 per cent of the capacity has been added in states which
have issued a tariff order.
236 | Indian Infrastructure: Evolving Perspectives
Table 14.7: RET capacity added across states with tariff orders/FiTs
RET Number of states Number of these Percentage of
with potential states with capacity added
of >100 MW tariff orders across states with
tariff orders
Small hydro 25 24 14
Wind 10 9 10
Biomass 16 15 13
Source: MNRE, SERCs
Orissa makes for an interesting case as far as the impact of the regulatory
framework on RE investments is concerned. The state has a wind potential of
255 MW. The information on state-wise cumulative wind generation available
from MNRE indicates that Orissa does not (perhaps barely) contribute to wind
generation. Likewise for SHP, only 44.3 MW is installed against a potential of
295 MW. It is important to note that the state does not have a proper regulatory
framework for these RETs.
While determination of FiT is one aspect of the regulatory framework, adequacy
of this FiT is another important aspect to be addressed. In May 2006, TNERC
determined the FiT for wind as Rs 2.9 a unit in 2006. This tariff was largely
perceived as inadequate and is reflected in the pace of capacity addition of wind
power in the state. While the state added 858 MW of wind capacity in
FY 200506, capacity addition fell to 577 MW in FY 200607 and 381 MW in
FY 200708.
10
TNERC, in March 2009, revised the FiT to Rs 3.39/unit for windmills
commissioned after 1 April 2009. Another case of inadequate FiT can be seen in
AP. FiT determined by the Andhra Pradesh Electricity Regulatory Commission
(APERC) in 2004 were ceiling tariffs. As a result, the discoms in AP were offering
to procure power from RE projects at rates that were much lower than those
prescribed by APERC. These tariffs, not being economically viable, several
developers dropped their investment plans. Table 14.8 provides an overview of
wind power capacity addition in AP to illustrate this point.
Table 14.8: Year-wise wind power capacity addition in
Andhra Pradesh (in MW)
200203 200304 200405 200506 200607 200708
Capacity
addition 0.0 6.2 21.8 0.5 0.8 0.0
Barriers to Development of Renewable Energy | 237
It has been seen that many SERCs tend to use proxies instead of working out tariffs
on a cost-plus basis. For example, among the nine SERCs that have issued tariff
orders for solar PV-based power generation, only two have provided details of the
parameters used for determining the tariff (Chhattisgarh and Uttar Pradesh). Some
SERCs have taken the tariff of other RE technologies in the state as a reference point
and added the level of subsidy (as declared by MNRE) to arrive at the tariff for solar
PV-based IPPs (West Bengal). There are two issues here. Similarly, there are SERCs
that have provided details of parameters used for determination of FiT of some
other RETs. First, if the FiT does not reflect the underlying costs, no capacity addition
will take place. Second, subsidieswhere declared by MNREare payable for
limited periods; beyond that the FiT will be inadequate.
Finally, many SERCs have determined FiTs for limited periods. For instance, the
West Bengal Electricity Regulatory Commission (WBERC) has prescribed FiT for
five years from the date of regulations coming into force. This FiT is clearly
inadequate given that the life of the power plants is 20 years, thereby giving rise to
regulatory uncertainty and impacting on the bankability of the project. For any
project developer and lender, it is important that the project revenue stream be
known in advance, at least for the period of debt servicing (10 to 12 years).
While CERC has issued regulations on the terms and conditions for determination
of tariffs for different RETs, many states are yet to decide on adopting CERC tariffs.
The states and developers have argued that the tariff norms adopted by CERC are
inadequate. For example, in the case of solar projects, CERC does not distinguish
between location/region or technology as far as PLF is concerned. In reality, the
PLF would vary across locations/regions and technologies. This is also true of wind
projects. Therefore, they have argued for a review of the CERCs tariff framework.
The impact of regulation and FiTs needs specific mention in case of SHPs. Almost
all states determine cost plus tariffs for SHPs. As a result, to ensure high returns
through high tariffs, developers have been pushing up capital cost or have not been
allowing capital costs to decrease.
Third party sales through open access
Section 39 of the Act directs the State Government to set up an STU which shall
own the transmission network in the state and provide non-discriminatory Open
Access (OA) to its network. Section 42 of the Act directs the discoms to provide
non-discriminatory OA to its distribution network to eligible customers on payment
of wheeling charges and other applicable surcharges. This has been imbibed in the
regulatory framework in many states.
However, state utilities are averse to allowing OA to RE sources. In fact, it has been
seen in many cases that the distribution utilities are resenting export of RE power to
238 | Indian Infrastructure: Evolving Perspectives
other states and are trying to block OA to RE-based generators with the intent of
forcing them to sell this energy to the state utilities at dictated prices.
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states, OA for RE generators is restricted to consumer categories with lower tariffs.
For example, in Gujarat, though the wind power policy of the state allows third-
party sale (TPS) to any consumer in the state, in practice RE generators are allowed
to sell power only to industrial consumers and not to commercial consumers. This
is because commercial consumers have higher tariffs than industrial consumers
and the state does not want to lose such high-paying consumers to OA. In a case
such as this, developers/investors have no incentives by way of profit margins to
supply to industrial consumers.
Besides the above issue, states also restrict OA citing difficulty in scheduling due to
the unpredictable nature of such generation. Further, even though RE generation
can be predicted with 70 per cent probability, utilities insist on predictability of
generation with 90 per cent probability. Another issue is the absence of firm policies
or regulatory framework for wheeling charges for RE. The case of Madhya Pradesh
as highlighted earlier, is an example of the lack of regulatory certainty on wheeling
charges for OA in the case of RE. In the case of SHP, TPS becomes unviable after
taking into account wheeling charges and free power to the state government.
Institutional barriers
Inter-institutional coordination
Lack of coordination and cooperation within and between various ministries,
agencies, institutes and other stakeholders delays and restricts the progress in RE
development. A case in point is the implementation of the GBI announced for wind
projects by the MNRE. IREDA started accepting applications from wind projects
under the GBI scheme soon after the announcement of this scheme. However, the
GOI has rejected applications that were made before the notification of the scheme
through the gazette and is considering only applications made after such notification.
While this justification may hold ground in principle, in practice IREDA should
not have started accepting applications before the notification through gazette. Such
gaps in implementation of policies on account of absence of inter-institutional
coordination reduce the faith of investors in the investment climate for RE.
Single-window clearance system
Several states have adopted a single-window project approval and clearance system
for RE. These include Punjab, Himachal Pradesh, Haryana, Rajasthan and
Uttarakhand. However, the effectiveness of this system is questionable. The issue is
sometimes complicated by the fact that delays in obtaining clearances for projects
awarded through competitive bidding (such as SHP) result in the levy of a penalty
on the developer. It is understood that Punjab is one of few states where this system
Barriers to Development of Renewable Energy | 239
is robust as it sets a time-bound target for getting all approvals (a period of
60 days has been specified by Punjab) and RE developers do not have to follow up
with different state government departments.
Pre-feasibility reports for hydro
It is well known that in most states, the state utility or a government-owned
entity entrusted with the responsibility of hydro power development is given
the task of preparing the pre-feasibility reports (PFRs) for hydro projects. Several
problems have been observed in this arrangement. First, the PFR is not a big
priority for many state utilities, thereby leading to a delay in the preparation of
the PFR and allocation of the project. Second, most of these entities follow very
conventional norms which do not incorporate possible innovations from the
perspective of cost reduction or capacity enhancement. As a result, developers
find it difficult to rely on the state nodal agencys PFR and have their own PFR
developed. Development of PFRs may be a barrier to small and local developers
seeking to implement such projects. Examples of this can be seen in Sikkim where
Polyplex Industries was allocated three project sites of 40, 80 and 90 MW each.
The developer was able to convert these into three projects of 100 MW each through
better engineering.
Fiscal and financial barriers
Budgetary constraints
The GOI has announced BGI for wind, rooftop PV and for solar power plants that
do not qualify under the JNNSM and sell to the state utilities. However, the extent
of fund allocation towards payment of such GBI remains to be seen. The budget for
FY 201011 is awaited in this regard and would be an indicator of GOIs seriousness
to this end.
Financing of RE projects
RE projects face several difficulties as far as financing is concerned. In general, the
development of RE faces barriers in obtaining competitive forms of finance due to
lack of familiarity with and awareness of technologies, high risk perception, and
uncertainties regarding resource assessment. These have been elaborated below:
RE projects tend to have little or no fuel costs and low operation and
maintenance (O&M) costs but their initial unit capital costs tend to be much
higher than those of fossil generation systems. The higher ratios of capital cost
to O&M cost are significant because they indicate that these projects carry a
disproportionately heavy initial burden that must be financed over the life of
the project. This makes exposure to risk a long-term challenge (which also has
policy and regulatory-risk implications).
240 | Indian Infrastructure: Evolving Perspectives
The risk of non-provision of subsidies on account of limited or non-availability
of resources with the government is also significant since these subsidies may
be the lifeline of the project.
The generally smaller nature of RE projects results in lower gross returns, even
though the rate of return may be well within market standards of what is
considered an attractive investment.
Developers of RE projects are often small, independent and newly established
developers who lack the institutional track record and financial inputs necessary
to secure non-recourse project financing. Lenders therefore perceive them as
being high-risk and are reluctant to provide non-recourse project finance. They
wish to see experienced construction contractors, suppliers with proven
equipment, and experienced operators.
Some RETs are newly commercial and are, subsequently, not widely known
among lenders (although this is changing rapidly). This results in inaccurate
perceptions of risk with respect to these projects amongst lenders, thereby
making financing difficult.
The intermittent generation characteristics of RETs may place them in an
unfavourable position regarding structuring of contracts for power
transmission as compared to conventional power projects.
For small and local developers seeking to implement RE projects, the lack of
financial support for working capital requirements hinders O&M of the
equipment.
The development and operation of small-scale RE projects involves the same
business and financial risks as any enterprise. Variability in earnings and
therefore in returns to the equity investors does not enthuse many local
entrepreneurs to get involved with such projects.
The paperwork and soft costs associated with identifying and obtaining access
to financing for small- and medium-scale RE projects is high relative to the
financing needs.
Issues relating to underperformance or below par PLF and uncertainties
inherent to such projects (like those on account of hydrology or wind pattern
assumed at the time of financing) also pose a barrier to funding of projects.
Since any delay in payments by offtaking state utility would directly impact
debt serviceability, lenders often seek credit enhancement mechanisms such
as Debt Service Reserve Account (DSRA) or bank guarantee (BG) which may
be beyond small and local developers reach.
Limited understanding/expertise on RE in the financial institutions also acts
as a barrier to financing.
Barriers to Development of Renewable Energy | 241
Market-related barriers
Level playing field for RE
The current structure of subsidies in the power sector is such that subsidies are
effectively being provided to conventional fossil fuel resources. These give
conventional fuels an unfair advantage over RE, thereby giving the impression
that the difference between the price of conventional power and RE based power
is too high.
Market for RE
The market for RE projects/products in India can be classified into four segments:
Government market: where the government buys the output of the projects as
a consumer, often providing budgetary support for it
Government-driven market: where the government pursues the use of RE in
establishments outside its control for social reasons, often providing budgetary
support or fiscal incentives for the same. For example, the government
promotes the use of solar applications in schools, malls and hospitals.
Loan market: where people take loans to finance RE-based applications since
self-financing is limited
Cash market: where high networth individuals (HNI) can buy RE-based
applications to meet personal energy needs
India is currently at an initial stage of the first two segments. The GOI is not focusing
on promoting the third and fourth categories of RE, which may offer high potential
for RE-based applications.
Fuel costs for biomass
In the case of biomass-based projects, unreliable biomass supply, absence of an
organized fuel market and frequent price fluctuations threaten project viability.
It was seen that in early 2000, the cost of biomass was nominal (Rs 300 to
Rs 400 per tonne) in most states. Over the years, the increase in demand of biomass
for power generation as well as alternative uses has resulted in a demandsupply
gap in this sector and resulted in spiralling biomass prices.
The type of biomass available differs from state to state and so do the alternative
uses for biomass. For instance, in Andhra Pradesh, rice husk is used by the fisheries
industry for packaging for export purposes. But by and large biomass is
alternatively used by the SME sector to replace coal for heating (operating boilers),
cattle fodder and household usage in rural areas. The availability of biomass and
coal in a state determines the change in price of biomass. For example, in
Chhattisgarh where coal is available in abundance and at no transportation cost,
242 | Indian Infrastructure: Evolving Perspectives
the degree of price elasticity for biomass is relatively very low in comparison to
coal. Not surprisingly, the price of biomass is at around Rs 1615 per MT as
compared to the coal price of Rs 2100 per MT (including cost of transportation).
12
On the other hand, due to their geographical location, northern states such as
Punjab and Haryana, have a critical constraint of coal supply to small scale industry
and, therefore, the demand and price elasticity of biomass is very high. The
biomass price has reached Rs 3500 per ton in these states. It may be argued that
the potential for biomass-based power projects in both these states is significantly
high. While that is true, the alternative usage of such biomass is also high. For
instance, almost the entire quantity of wheat stalks collected is used as cattle
fodder in both the states.
Inadequate market prices
The price of RE power is determined on a cost-plus basis with the objective of
ensuring cost recovery for RE projects. Pricing does not reflect environmental
costs, thereby masking the striking environmental advantages of the new and
cleaner energy options. As a corollary, it can be said that undertaking life cycle
assessment costs of fossil fuels and RETs would serve to reduce the gap between
the price of fossil fuel based power and RE power.
Transmission network
Availability of evacuation infrastructure and grid integration are amongst the biggest
problems affecting the development of RE projects, particularly SHP projects or
wind projects that are located at remote locations with limited or no evacuation
infrastructure. Though states are required to provide the infrastructure for
evacuation of power from RE projects, in practice it is the RE developer who has to
provide for such infrastructure. This has an impact on the cost of the project. Even
where states provide evacuation infrastructure, such infrastructure is inadequate.
In fact, instances of scaling down of RE projects due to inadequate evacuation
infrastructure have come to light. For example, Sai Engineerings 20 MW project in
Toos, Kullu (HP), was scaled down to 10 MW due to the absence of adequate
evacuation infrastructure. Similarly, in FY 200708 Tamil Nadu was unable to
utilize all the power generated from wind due to lack of adequate evacuation
capacity.
13
It had to consequently buy more expensive power from other states to
meet its needs. The small size of many RE projects and seasonality of generation
add another dimension to the problem as the size of the project does not lend
adequate economic viability for extending transmission lines for such projects.
The issue needs to be addressed.
The development of evacuation infrastructure and provision of measures for
connectivity to the grid for RE sources is considered the responsibility of the
Barriers to Development of Renewable Energy | 243
transmission utility. However, the distribution licensees also have a major role to
play in evacuation of RE generation, as many RE sources are often connected at
distribution voltages. The Forum of Regulators (FOR) has noted that except for a
few utilities, such as Maharashtra State Electricity Transmission Company Ltd
(MSETCL), Rajasthan Vidyut Prasaran Nigam (RVPN) and Himachal Pradesh State
Electricity Board, others have not included evacuation infrastructure for RE as part
of their overall transmission or distribution capex plans. Even in the case of these
utilities, lack of funds is a major issue in being able to realize such plans. It is also
understood that the utilities are not well aware of the transmission requirements
for evacuation of RE-based power.
High equipment costs
It is generally believed that volumes and advancement in technology would drive
down capital costs. However, this is not always true. Several examples exist to
this endthe automobile sector being, perhaps, the best example. Similarly, it
has been observed that the capital cost of even the commercially deployed RETs
has not declined over the years, despite increasing capacity. On the contrary, it
has been observed that developers or equipment providers have been quoting
increasing capital costs over the last few years. For example, a trend analysis in
terms of movement of capital cost for wind projects funded by IREDA for the
period from the FY 200405 to FY 200809 indicates that the average capital
cost has gone up from Rs 4.79 cr/MW to Rs 5.76 cr/MW.
14
Several reasons have
been cited for thisthe main ones being the huge demandsupply gap due to
exports, inadequate built-up capacity in the Indian RE equipment industry and
cartelization of equipment suppliers. As a result, the cost of power from these
RETs remains high.
Inputs for RE plants
Many RE projects suffer from problems similar to those faced by conventional power
plants. Wind and solar thermal projects require vast areas of land. In addition to
land, solar thermal projects also require huge quantities of water. The absence of
water in several states having high solar power potential such as Rajasthan may
complicate the task of capacity addition.
Absence of serious developers for SHP
The SHP segment has seen several non-serious players who have primarily bid for
projects or entered MoUs and got project allocations only to make short-term gains
through the sale of projectspost-clearanceto the buyer who pays the largest
premium to them.
244 | Indian Infrastructure: Evolving Perspectives
Technological barriers
Technology risk
In the case of many new RETs such as solar thermal, the risks related to technology
are high. Since the technology is at a development stage, the risks are not clearly
known. Further, even though the technology may have been deployed elsewhere in
the world, its performance under Indian conditions remains to be seen. Moreover,
the risk of technology obsolescence is high.
Absence of minimum standards
Some RETs are characterized by the lack of minimum standards in terms of durability,
reliability, performance, etc., thereby affecting their large-scale commercialization.
R&D and manufacturing capabilities
One of the biggest problems confronting RETs such as solar power is the high upfront
cost of establishing a solar plant. Investments in R&D with the objective of cost
reduction and scaling up of operations to utilize economies of scale have long been
advocated as solutions to these problems. Around the world, companies and
government-backed research projects are engaged in advanced R&D and are
continuously setting up bigger, more advanced manufacturing facilities. In India,
however, manufacturing facilities are only focused on replicating existing
technologies and are limited to small processing units. Indias manufacturing
capacity is about 700 MW for PV modules as compared to facilities in countries like
USA, China, Germany, Malaysia, etc., capable of multi-giga watt production. India
is relying on international suppliers for equipment as well as technology. However,
there is no indigenous capacity/capability for solar thermal power projects.
Non-availability of local technology
In many cases, the technology or equipment is imported. This implies that spare
and replacement parts when required may not necessarily be readily available
especially in more remote locations.
Information barriers
Lack of skilled manpower
Lack of trained personnel for training, demonstration, maintenance and operations,
along with insufficient awareness and information programmes for technology
dissemination, impedes renewable energy penetration. Experience indicates that
subsequent to installation of RE projects/applications, no proper follow-up or
assistance was available for their maintenance, thereby impacting their working.
The impression that has been formed from such experiences is that RE installations
do not work.
Barriers to Development of Renewable Energy | 245
Lack of information and awareness
General information and awareness in relation to new technologies and
understanding the practical problems in implementing and maintaining RE projects
is limited.
REVIEW OF SELECT PROGRAMMES/POLICIES OF GOI FOR PROMOTION OF RE
Jawaharlal Nehru National Solar Mission
As mentioned earlier, the JNNSM announced in November 2009 has brought about
significant changes in the way solar power will be developed in the country. Key
provisions of JNNSM are summarized in Box 14.1 (for more details, refer to
Annexure 4). While the intent of the JNNSM is not under doubt, there are several
issues that require greater clarity and further action. This section discusses the status
of the key policy and regulatory actions being undertaken to implement the JNNSM
and the concerns emerging therein.
Status of implementation of JNNSM
Solar power purchase policy
The GOI has appointed NVVN as the nodal agency for purchase and sale of grid-
connected solar power under Phase I of the JNNSM. The solar plants participating
under the scheme have to be connected to the grid at 33 kV and above. For each
MW of solar power procured by NVVN under a PPA, NVVN will be allocated an
equivalent amount of capacity from the unallocated power of NTPC coal-based
stations. The tariff for the sale of this bundled power will be determined by CERC.
In addition to this tariff, utilities will have to pay a facilitation charge to NVVN.
MNRE and NVVN have estimated that the bundled power would be sold in the
range of Rs 5 to Rs 5.50 per unit (see Figure 14.4). Since this price would be lower
than the price of electricity purchased through the power market, discoms would
be willing to buy this bundled power (see Table 14.9). Prima facie, this seems to
be a good solution. By purchasing this bundled power, states/discoms would get
thermal power to meet some amount of the power shortage faced by them. At the
same time, they would be able to meet their RPO.
MNRE and NVVN are in the process of devising guidelines for the
implementation of this policy. Two distinct schemes have been devised: a
Migration Scheme for existing projects, i.e., Solar Power Developers (SPDs)
who have already initiated a definite process of setting up solar power plants
and have made arrangements for sale of power to utilities and a scheme for new
projects, i.e., SPDs approaching with new proposals for setting up solar power
projects. The time frame for the signing of PPAs and power sale agreements
(PSAs) under both schemes is indicated in Figures 14.5 and 14.6 and the
246 | Indian Infrastructure: Evolving Perspectives
Box 14.1: Salient features of JNNSM
Achieving installed capacity of 20,000 MW in a phased manner by the end of the
13th Five-Year Plan in 2022
Phases Target for grid solar power including Target for off grid
rooftop solar applications
Phase I (201013) 10002000 MW 200 MW
Phase II (201317) 4000 MW (10,000 MW based on 1000 MW
enhanced international finance &
technology transfer)
Phase III (201722) 20,000 MW 2000 MW
Demonstration projects focused on CSP in Phase I
50100 MW solar thermal plant with 46 hours storage (which can meet both
morning and evening peak loads and double plant load factor up to 40%)
A 100MW capacity parabolic trough technology based solar thermal plant
A 100150 MW solar hybrid plant with coal, gas or bio-mass to address
variability and space constraints
2050 MW solar plants with/without storage, based on central receiver
technology with molten salt/steam as the working fluid and other emerging
technologies
Shift away from GBI-based framework to one that relies on reducing the cost of
delivered solar power for grid-connected solar projects
NTPC Vidyut Vyapar Nigam (NVVN) to purchase the 1,000 MW solar power
(connected to 33 kV or more grid) planned in Phase I
GOI to allot another 1,000 MW capacity of thermal power from unallocated
quota of NTPC stations, i.e. from power available under GOIs discretion to
allocate to states that are in shortage
NVVN to bundle this power and sell it at a rate determined by CERC
Solar-specific RPO to be fixed for states after modification of the National Tariff
Policy 2006 RPO may start with 0.25% in Phase I and increase to 3% by 2022
Provision of a GBI to rooftop solar PV and other small solar power plants connected
to LT/11 kV grid
GBI rate: tariff fixed by CERC minus notional tariff of Rs 5.5 per unit, with
3% annual escalation
Provisions for technology development, fiscal incentives, indigenization requirement
and human resource development
Barriers to Development of Renewable Energy | 247
minimum requirements for SPDs to qualify under the schemes is listed in Table 14.9.
It is important to note that out of the 1000 MW proposed to be developed under
this route, 250 MW will be contributed by NTPC from its proposed solar thermal
plants at Anta and Suratgarh.
Figure 14.5: Time frame for completion of migration scheme under solar power
purchase policy of JNNSM
Figure 14.6: Time frame for completion of scheme for new projects under solar
power purchase policy of JNNSM
Figure 14.4: Bundling mechanism for sale of solar power under JNNSM
* Given the higher capacity factors of coal-based generation
For illustration purposes only

Solar power developer NTPC unallocated power
PV: Rs 18.44/unit
CSP: Rs 13.45/unit
NVVN
Rs 2/unit
X kWh
3X kWh*
Price of bundled power or weighted price
PV: (18.44X + 6X)/5X = Rs 6.1/unit
CSP: (13.45X + 6X)/5X = Rs 4.9/unit
Sale price of power
If ratio of PV to CSP is 40:60 = Rs 5.36/unit
If ratio of PV to CSP is 50:50 = Rs 5.49/unit
Utility
MNRE
requested
states for
information
on SPDs
interested in
migrating
Circulation
of draft
MOU
to be
signed
with SPDs
& discoms
Meeting of
MNRE, MoP,
NVVN, SPDs
& discoms
for signing
MoUs
Signing of
PPAs &
PSAs
Jan 11,
2010
Feb 1st
week
2010
Feb 24-
26,
2010
Mar 31,
2010
Invitation
of EOI
Last date for
applications &
registrations
SPDs to submit
documents
required for MOU
Selection of SPDs
by a Central
Empowered
Committee
Forwarding of
details to states
for validation/
recommendation
Confirmation of
preparedness of SPDs
& recommendations
by states
Sep
2010
Sep 30,
2010
Signing of MoUs
with SPDs
Signing
of PPAs
& PSAs
Mar 10,
2010
Apr 30,
2010
Jun 30,
2010
Jul 15,
2010
Aug
2010
Oct 31,
2010
248 | Indian Infrastructure: Evolving Perspectives
Table 14.9: Salient features of the schemes proposed under the solar power
purchase policy of JNNSM
Migration scheme Scheme for new projects
Minimum
qualification
requirement
for SPDs
Criteria for
participation
under the
scheme

Clear title and


possession of land
(say, @ approx. two
hectares/MW)
Approval from STU
for evacuating power
to the grid at 33 kV
and above
Confirmation from
states concerned/
discoms for purchase
of all the power from
the solar power plant
through NVVN
Necessary water
linkage from the
state authorities
concerned
(for CSP plants)
Letters of comfort for
funding the project
Bank guarantee
@ Rs 50 lakh per MW
to NVVN, out of
which Rs 25 lakh per
MW to be given at the
Net worth of the SPD for the past three
years (level to be determined)
Turnover of SPD for the past three years
(level to be determined)
Technical requirement (to be
determined)
Confirmation for plant CoD to be on or
before March 31, 2013
Confirmation from STU for evacuating
power to the grid at 33 kV and above
Availability of statutory and other
clearances as applicable
Complete Detailed Project Report
Letter of comfort for equity/debt from
promoter(s)/financial institution(s)
Letter of confirmation from the state
authority regarding identification/
notification/allotment of land for setting
up of the solar power plant
Necessary water linkage from the
state authorities concerned
(for CSP plants)
Submission of bank guarantee (to be
determined)
No change in equity holding permitted
from MOU signing till PPA execution
Barriers to Development of Renewable Energy | 249
Table 14.9: Salient features of the schemes proposed under the solar power
purchase policy of JNNSM (contd...)
Migration scheme Scheme for new projects
Features of
PPA with
SPDs
time of signing of
MOU & balance
Rs 25 lakh per MW to
be given at the time of
signing of PPA
No change in equity
holding permitted
from MOU signing till
PPA execution
PPAs to be the same as
that signed with
discoms
PPA for 25 years as per CERC regulations
Tariff to be determined by CERC
SPD to deliver power at 33 kV or above
substation of discom/STU
Discoms to bear transmission charges,
losses, RLDC/SLDC charges, scheduling
charges or any other charges for supply of
solar power beyond delivery point
Billing & payment cycle as per energy
accounts issued by RPC/SLDC
Scheduling of power as per Indian
Electricity Grid Code
NVVN to establish irrevocable revolving
letter of credit in favour of SPD prior to
commencement of electricity supply
from the plant
Payment Security Mechanism as per
Tripartite Agreement and open
irrevocable revolving letter of credit
Aggregate shareholding of promoter not
to go below 51% for 3 years after COD.
Any reduction thereafter to be approved
by NVVN
250 | Indian Infrastructure: Evolving Perspectives
Generation-based incentive
Under the JNNSM, GBI is available to solar PV installed on residential rooftops,
and commercial, institutional, industrial and on other rooftops, as well as to tail-
end grid-connected projects. The payment of GBI to these installations will be made
by utilities on net metering basis and the GBI will be paid/reimbursed to utilities by
the GOI through IREDA. The duration of the PPA to be signed between the
establishments deploying rooftop PV and the utilities would be determined by the
SERCs. The SERCs are also required to formulate guidelines/regulations for the
metering and billing arrangements between the utility and the rooftop PV operator.
It is learnt that the FOR is formulating standardized billing and payment guidelines
in this regard. The FOR is also preparing a Model PPA which would be issued to the
utilities by March 2010. The Central Electricity Authority (CEA) is in the process of
issuing technical guidelines for the connection of such installations with the grid.
Technology to be promoted
In the case of the scheme for new projects under the Solar Power Purchase Policy,
the ratio of solar PV to concentrated solar power (CSP) or solar thermal is
proposed at 40:60.
Demonstration projects
The MNRE aims to set up these projects through the competitive bidding route.
The Power Finance Corporation (PFC) is preparing bid documents for award of
these projects and the bidding is expected to be initiated by the end of 2010.
Key concerns over JNNSM
While the objectives of JNNSM are laudable, and so too the GOIs intention
and efforts towards its implementation, there are several concerns that need to
be addressed to ensure its smooth implementation. These concerns are as follows:
The target of 20,000 MW under the JNNSM appears unrealistic given the
domestic capability for solar projects, technology risks associated with solar
energy and financial implications of the target. Further, the JNNSM does not
provide concrete plans on the manner in which the target of 4000 MW would
be scaled to 10,000 MW at the end of the Twelfth Plan.
What should be the appropriate technical and financial criteria for qualification
of SPDs under the scheme for new projects in the Solar Power Purchase Policy?
The GOI is keen to encourage only serious players to come forward under this
scheme and is therefore contemplating rigid qualification criteria. This may,
however, be detrimental to smaller players who may have genuine intent as
well as the ability to set up projects.
Barriers to Development of Renewable Energy | 251
Some developers have proposed the setting up of projects over smaller areas of
land than contemplated by GOI. For example, while GOI is considering land
requirement of approximately two hectares/MW, some developers have come
forward with proposals involving land requirement of 1.2 hectares/MW. Lower
land requirement translates into lower time for land acquisition and, therefore,
faster project implementation. The question, therefore, is how the GOI should
choose developers who propose projects with lower land requirements.
Several developers have expressed concern over the GOIs focus on solar thermal
technology in the first phase of JNNSM. It has been argued that the GOI is
ignoring global trends which indicate that solar thermal is a new and yet to be
commercialized technology. However, some experts do not subscribe to this.
They assert that solar thermal technology is in no way new or unproven.
Another argument against the focus on solar thermal technology is the long
time frame for commissioning of projects. This has an implication for
commissioning solar thermal plants by 2013 to meet the targets of the first
phase of JNNSM. Therefore, there is a need for GOI to back its focus on solar
thermal techonology with adequate evidence.
The time frame proposed for the application and registration of new projects
under the scheme for new projects in the solar power purchase policy is
aggressive. This is also significant in light of the proposed conditions of the
PPA which state that the aggregate shareholding of the promoter has to be
more than 51 per cent for three years after COD. Given the little time given
for making applications under the scheme, developers who are not able to
meet the qualification requirements may tie up with anyone meeting the
same to ensure qualification. However, this may become a problem in view
of the PPAs conditions. Moreover, bringing in a serious investor or partner
may become difficult. Therefore, there is a need to examine the proposed
time frame.
Though the mission lays a lot of thrust on R&D, the R&D strategy may actually
take a long time to finalize. The GOI must fix a time frame for the setting up of
the high-level research council described in the Mission, the development of
the technology road map by them to achieve more rapid technological
innovation and cost reduction, and the establishment of the National Centre
of Excellence (NCE) to implement the technology road map.
Another aspect where the Mission is weak is the scaling up of R&D
demonstration projects or pilots to the commercialization stage. The Mission
talks about funding support from the NCE for performance-linked solar R&D
programmes, including such demonstration projects. However, it remains silent
on the support required to take projects or R&D to commercialization stages.
252 | Indian Infrastructure: Evolving Perspectives
Such support is important in keeping with the past experience of demonstration
projects in RE in India where a number of pilot projects have been undertaken
but have not been pursued further.
The implementation of the Mission may also face barriers due to the absence
of the solar supply chain in India. There are no manufacturers for silicon crystals
and wafers in the country and limited number of equipment suppliers for cells
(this is true even globally). The quality of equipment is often uneven due to
the absence of industry standards and the spares are expensive. In the case of
rooftop PV, the lead time for balance of supply (BOS) materials such as inverters
is very high. These problems are compounded by the absence of local service
capability. While the Mission focuses on the creation of local capacity to build
technically qualified manpower, interventions such as creation of a supply
chain are weak.
The issues related to land acquisition for solar thermal projects would be the
same as those for any conventional power project. Unless the issues
surrounding land acquisition are addressed in the overall context of
infrastructure projects, it is unlikely that the capacity addition targeted for
the first phase would be met.
The Mission does not provide any incentive to states to enable speedy
implementation. The only perceptible role for states is provision of land and
water, and provision of infrastructure for evacuation of power from solar
projects. No clarity has been provided and no mechanism spelt out on the
manner in which power purchased under the solar power purchase policy by
NVVN would be allocated to states. Certainty in this regard is crucial for states
as they would be required to meet solar RPOs determined by SERCs going
forward. A related issue here is the migration of existing projects to the solar
power purchase policy. Developers are concerned that in the absence of clarity
on allocation of power by NVVN, states may not allow them to migrate under
this policy. It may be argued that in the event of shortage in procurement of
solar power, states can fulfil their RPOs by purchase of solar RECs. But the
uncertainty in the level of RPOs in future, quantum of RECs generated and
price of RECs poses a barrier here.
The Mission only recommends the provision of fiscal incentives from
the Ministry of Finance (MoF) in the form of customs duties and excise
duties concessions/exemptions on specific capital equipment, critical
materials, components and project imports. There is no commitment
from the MoF to this end. This issue is critical for developers in light of
the deadline for application and registration of new projects proposed
by MNRE and NVVN.
Barriers to Development of Renewable Energy | 253
The Mission proposes the creation of a single-window clearance mechanism
for solar power projects. However, states as well as the CERC have opined that
provision of single window clearance is difficult.
Increased RPOs for solar energy would imply the need to increase consumer
tariffs which may be difficult for most utilities. It may be argued that the share
of solar energy in the total power purchased by a state utility would be relatively
low and therefore should not have a significant impact on consumer tariff.
However, in a scenario where state regulators and utilities increasingly find it
difficult to make any tariff hikes, they would find it difficult to pass on even
the smallest impact of increased solar RPOs to consumers.
The availability of transmission infrastructure to evacuate and transmit
power that would be generated if the planned capacity addition materializes
is in doubt.
The Mission provides for GBI for rooftop PV. The extent of GBI has been
linked to the tariff to be determined by CERC. However, there is no mention
of the time frame for which this GBI would be provided. Further, this GBI
would be routed through the state utilities. The intention of utilities towards
this end is doubtful. The absence of a regulatory framework for rooftop PV at
the state level is also a cause for concern. Unless states are active and issue
regulations enabling rooftop PV in line with the guidelines issued by FOR, the
deployment of rooftop PV would not make much headway.
Finally, an issue that is of concern is that projects that do not qualify under the solar
power purchase policy will have to supply directly to state utilities. Even though the
GOI has stated that GBI would be available to these projects as per the GBI scheme
announced by GOI before the announcement of the JNNSM (see Annexure 2),
developers are concerned about the poor payment security mechanism made
available by state utilities as well as the financial viability of utilities.
GBI for wind
As indicated in Annexure 2, MNRE is providing GBI to grid-connected wind
power projects at Rs 0.50 a unit for a period not less than four years and a
maximum period of 10 years in parallel with accelerated depreciation on a
mutually exclusive manner, with a cap of Rs 62 lakh/MW. However, GBI will be
provided only to wind projects selling power to state utilities as well as captive
wind power projects. Projects undertaking TPS by way of merchant power or
open access are excluded from the purview of the scheme. The GOI should
reconsider the exclusion of projects undertaking TPS as this would enable the
expansion of the wind power market.
254 | Indian Infrastructure: Evolving Perspectives
RECOMMENDATIONS
Policy
GOI must formulate a comprehensive policy or action plan for all-round
development of the sector, encompassing all the key aspects. The action plan
should be prepared in consultation with the state governments. It is understood
that the Energy Coordination Committee of GOI has approved the preparation
of an umbrella RE law to provide a comprehensive legislative framework for
all types of RETs, their usage and promotion. However, GOI has fixed no
time frame for the formulation and enactment of such a law. The GOI must
speed up this task and ensure that the desired law be enacted expeditiously.
Must Run Status for REGOI should accord a Must Run Status for RE-
based power to ensure effective utilization of this power. The CERCunder
the (Terms and Conditions for Tariff determination from Renewable Energy
Sources) Regulations, 2009has determined that all RE plants except for
biomass power plants with installed capacity of 10 MW and above, and non-
fossil fuel-based cogeneration plants shall be treated as must run power
plants and shall not be subjected to merit order despatch principles. To
ensure that states adopt this provision in their regulatory framework, a
statement to this effect in a comprehensive policy for RE by GOI would be
more effective.
States must be encouraged to remove policy and regulatory uncertainty
surrounding RE. They must be encouraged to identify their thrust areas as far
as RE development is concerned. Punjab is a good example here. The NRSE
Policy of the state clearly specifies the objective, targets, thrust areas, and
measures to achieve the targets. It also provides short-and long-term targets
for the RE sector in the state. Gujarat is another example. The state government
has identified wind and solar power as its thrust area. In the case of biomass,
states must be encouraged to have clear policies on the radius for setting up
biomass plants. Strict adherence to such a policy must be encouraged in order
to ensure the viability of biomass projects.
Provision of GBI may be considered for SHPs as well. The tariff determined by
CERC with normative capital cost may be adopted for this purpose.
In the case of solar thermal, a UMPP-like mechanism may be adopted for the
award of projects. A special purpose vehicle (SPV) may be set up for a project
wherein this SPV is responsible for all initial project activities, including land
acquisition, obtaining of clearances, preparation of DPRs, tying up of basic
facilities required for the implementation of the project, etc., before handing
over the project to a selected developer.
Barriers to Development of Renewable Energy | 255
In the case of biomass projects, developers must be encouraged to involve the
farming or fuel supply community by providing them with a share in the
revenues earned from the project.
There is a need for stronger initiatives at local body levels for the promotion of
RE. For example, local bodies must be discouraged from granting municipal
approvals for commercial buildings in urban areas unless they house a solar
application. Solar installations should be a precondition for a power connection
from the utility.
The commercial success of RETs depends significantly on adoption and
enforcement of appropriate standards and codes. GOI must prescribe
minimum performance standards in respect of durability, reliability, and
performance for different RETs to ensure greater market penetration.
Regulation
As discussed earlier, only sixteen states have notified RPO. States must be
mandated to set RPO targets in a defined time frame, failing which the CERC
may be given the task of determining the RPO for them.
There is an urgent need for clarity on the RPO framework. It may be better to
specify the overall RPO percentage rather than technology-specific percentages.
This in turn would encourage investments in RE on the basis of techno-
economic analysis. Further, there should be no cap on RPO.
RPO must be levied on OA and captive consumers as well.
For RPO to be effective and their objectives to be met, it is imperative that an
enforcement mechanism be introduced in all states.
SERCs must monitor the compliance of RE obligation through the ARR/Tariff
approval process. Further, SERCs must consider monitoring compliance with
RPO, subject to availability of energy from renewable sources (not restricted
to the state), by invoking Sections 142 and 146 of EA 03 against the responsible
officer of the utility.
Suitable incentives should be devised to encourage utilities to procure RE power
over and above the RPO mandated by the SERC.
SERCs may amend the licence for power distribution which should be amended
to include fulfilment of RPO. This would imply that non-fulfilment of RPO
would be treated as violation of licence conditions and would attract suitable
actions under EA 03.
A number of states (such as Maharashtra, Gujarat, Madhya Pradesh and
Karnataka) do not allow the procurement of RE power from outside the state.
This raises an artificial barrier in the way of RE power generation and investment
256 | Indian Infrastructure: Evolving Perspectives
across the country. Instead, regulators can identify ways and means of selling
this power to neighbouring states short on RE resources or RPO at a mutually
agreed upon rate.
All state governments/SERCs may consider concessional transmission on RE
being sold within the state.
CERC has issued tariff guidelines covering critical aspects related to renewable
energy sources from the long-term perspective of harnessing of available
renewable energy potential. These guidelines provide clarity on each component
of the FiT for different RETs as well as the useful life of different RETs. The
control period for these guidelines is three years. States must align their FiTs
to the provisions of these guidelines.
Transmission requirements
Grid connectivity to RE generation should be provided by STUs through their
capex plans that are approved by the SERCs. Transmission system plans
prepared by STUs should cover evacuation and transmission infrastructure
requirements for RE sources.
There is a need to provide funds and capacity to STUs for this purpose.
STUs should also be made accountable and penalized if they fail to fulfil this
responsibility. A possible penalty mechanism in this regard can be making the
STU responsible for deemed generation if evacuation is not in place by the
time of commissioning of the projects. This mechanism has been adopted in
Himachal Pradesh.
There is a need to establish specific norms for grid connectivity for RE
projects. SERCs can take this up under Section 86(1)(e) of EA 2003.
However, since these aspects would need to be addressed as part of the
larger issue of grid standards and standards for construction of transmission
lines, the CEA may undertake this exercise under Sections 34 and 73(b) of
EA 03.
There is a much stronger need for coordination and consultation between the
STU and the nodal agency responsible for development of RE at the state level
for the development of transmission infrastructure for RE projects that are in
the process of being allotted or developed or are likely to be bid out in the near
future.
Fiscal incentives
GOI may consider fiscal incentives in the form of excise and customs duty reduction/
exemption for RE equipment.
Barriers to Development of Renewable Energy | 257
Financing of RE
In order to increase the availability of funds for RE projects, GOI may consider
mandating insurance companies and provident funds to invest 10 per cent of
their portfolio into RE. Such investments, in fact, make business sense for the
insurance companies. RE, given its benefits, will cause less damage to the
environment and human health, thereby implying a lower risk of insurance
payouts for these companies.
RE should be declared a priority sector. At present the priority sector
broadly comprises agriculture, small-scale industries and other activities/
borrowers (such as small business, retail trade, small transport operators,
professional and self-employed persons, housing, education loans,
microcredit, etc.). The inclusion of RE in priority sectors will increase the
availability of credit to this sector and lead to greater participation by
commercial banks in this sector.
GOI should ask banks to allow an interest rebate on home loans if the
owner of the house is installing an RE application such as solar water heater,
solar lights or PV panel. This would incentivize people to integrate RE
applications into their home, thereby encouraging the use of RE. The rebate
could vary depending on the number of applications installed or the type
of installations installed.
GOI may consider allowing a higher exemption on the rate of interest of
home loans under income tax rebates for individuals who instal RE
applications in their homes. Once again, the extent of rebate could vary
depending on the number of applications installed or the type of
installations installed.
Manufacturing
To achieve low-cost manufacturing and therefore lower capital costs, and to
capitalize on its inherent advantages in the solar sector, India needs to
consider revamping and upgrading its solar R&D and manufacturing
capabilities. In this regard, GOI may consider promoting a core company to
produce wafer and silicon. This will enable substantial reduction in the costs
of solar technologies.
Given the continuing high capital costs of even the commercially deployed
RETs despite increasing capacity, there is an urgent need to encourage price-
reduced capital cost manufacturing through policy.
258 | Indian Infrastructure: Evolving Perspectives
Development of a fuel cost adjustment methodology for biomass projects
In a scenario of fixed FiT, the volatility in biomass prices suppresses the PLF of
power plants. Though many SERCs have revised the FiT and would do so in future,
they may consider putting in place a fuel cost adjustment methodology to pass
through any increases in fuel costs in tariff as has been done in the case of coal-
based plants.
The CERCunder the (Terms and Conditions for Tariff determination from
Renewable Energy Sources) Regulations, 2009has specified the price of biomass
and bagasse for different states and determined a fuel price indexing mechanism. It
has also provided the option of normative escalation of 5 per cent per annum for
each subsequent year of the three-year control period. SERCs need to adopt this
approach. Such fuel cost adjustment in tariff will, however, need a strong institutional
set-up for monitoring the price of biomass as well as the costs of its collection,
transport and storage.
Better location analysis for biomass projects
In order to achieve continuous and reliable fuel supply for biomass plants, their
location must be optimized. State nodal agencies must, therefore, develop a plan
for development of biomass projects indicating the number and location of such
plants by considering the total biomass potential available in each district, the density
of such availability and potential collection centres.
Capacity building and information dissemination
There is an urgent need for technical assistance programs designed to increase
the planning skills and understanding of RETs by utilities, regulators, local
and municipal administrations, and other institutions involved.
Information specific to viable RETs needs to be made easily accessible both to
increase general awareness and acceptability as well as to aid potential investors
and sponsors of such projects.
Capacity-building initiatives should be undertaken to train people/workers to
operate and maintain RE facilities
There is a need to improve the maintenance support mechanism for RE
products/plants to redress the post-installation problem faced by the users.
For RE plants, the after-sales service network can be strengthened by
encouraging the setting up of service centres by the manufacturers which are
involved in the supply of the systems. For RE applications, the same can be
done through the Akshaya Urja shops.
Barriers to Development of Renewable Energy | 259
ANNEXURE 1
Provisions for development of RE under Electricity Act 2003 and policies
issued therein
Electricity Act 2003
The EA 03 has the following provisions for promotion and development of RE:
Section 3(1) requires GOI to prepare the National Electricity Policy and tariff
policy, in consultation with the state governments and the authority for
development of the power systems based on optimal utilization of resources
such as coal, natural gas, nuclear substances or materials, hydro and RE.
Section 61(h) requires electricity regulatory commissions (ERCs) to consider
the promotion of co-generation and generation of electricity from RE when
determining the terms and conditions for the determination of tariff in
their jurisdictions.
Section 86 promotes RE by ensuring grid connectivity and sale of renewable
electricity. It mandates SERCs to promote cogeneration and generation of
electricity from RE by providing suitable measures for connectivity with the
grid and sale of electricity to any person, and also specify, for purchase of
electricity from such sources, a percentage of the total consumption of electricity
in the area of a distribution licensee (discoms).
National Electricity Policy
The NEP was notified by GOI in February 2005 as per provisions of Section 3 of
EA 03. Clause 5.12 of NEP contains several conditions in respect of promotion of
RE. The salient features of the said provisions of NEP are as follows:
Clause 5.12.1 targets the reduction in capital costs of RETs and identifies
competition as one of the means for such reduction. It also specifies the need
for adequate promotional measures for development of RETs and their
sustained growth.
Clause 5.12.2 requires SERCs to determine tariffs for purchase of power from
RE by discoms (until RE can compete with conventional sources in terms of
cost), specifying percentages that progressively increase the share of electricity
purchased by discoms from renewable sources.
Clause 5.12.3 highlights the benefits of cogeneration and promotes its use by
suggesting that SERCs promote arrangements between a co-generator and a
discom for purchase of surplus power from such plants.
Clause 5.2.20 states that efforts will be made to encourage private sector
participation through suitable promotional measures to increase the overall
share of non-conventional energy sources in the electricity mix.
260 | Indian Infrastructure: Evolving Perspectives
Tariff policy
The National Tariff Policy (NTP) was notified by GOI in January 2006 as per
provisions of Section 3 of EA 03. This policy has further elaborated the role of
regulatory commissions, the mechanism for promoting harnessing of renewable
energy and the time frame for implementation, etc. The salient features of NTP
with regard to RE are as follows:
SERCs to specify minimum percentages for electricity to be purchased from
RE sources by 1 April 2006.
Future procurement of RE by discoms to be done, as far as possible, through
competitive bidding process (as specified under Section 63 of EA 03) by
suppliers offering energy from same type of RE sources.
GOI to lay down guidelines within three months for pricing non-firm power,
especially from RE sources, to be followed in cases where such procurement is
not through competitive bidding.
ANNEXURE 2
Policy interventions for promotion of RE
Fiscal incentives
Capital subsidy: The MNRE has been running several capital subsidy
programmes. These subsidies are provided on installation of the equipment;
they are not linked to the use or performance of the equipment.
Interest subsidy: The GOI has been providing subsidies in the form of reduction
in the interest rate for financing installation of equipment. Currently, interest
subsidy is available to end-users of solar thermal programme, for both domestic
and commercial applications.
Direct tax benefits: The GOI has offered a 10-year tax holiday under Section 80
IA of the Income Tax Act for all RE projects, including solar. It also has a scheme
for accelerated depreciation under which tax savings can be claimed against
investments in solar up to 80 per cent of the asset value, starting from Year I.
Indirect tax benefits: Indirect tax benefits such as reduction or exemption of
electricity duty (ED), VAT, octroi or other local taxes have been used as an
instrument by state governments for reducing the price the consumer pays for
using RE-based power, including solar. States such as Madhya Pradesh and
Punjab have exempted such projects from the payment of VAT and octroi or
other local taxes. Others such as Gujarat and Madhya Pradesh (MP) have
exempted consumption of electricity generated by solar power projects from
payment of ED. In the case of MP, the exemption of electricity duty and cess is
applicable for the first five years of the project. In Rajasthan, consumption of
Barriers to Development of Renewable Energy | 261
electricity generated by solar power projects for captive use or for sale to a
nominated third party attracts reduced ED (50 per cent of ED that would
otherwise be applicable) for a period of seven years from the date of
commissioning of the project.
Production subsidies
The MNRE introduced generation-based incentives (GBI) to back up the feed-in
tariffs for grid-connected solar and wind power in 2008. GBI is an attempt to change
the nature of the RE industry in India, especially wind. Hitherto, wind investors
primarily included Indian corporations or individuals who could offset their income
tax liabilities by investing in wind or solar power through accelerated depreciation.
However, few foreign firms or Independent Power Producers (IPPs) found this
market attractive on account of limited or no income tax to offset. Brief descriptions
of the GBI schemes are provided below.
GBI in solar projects
Prior to the announcement of JNNSM, the GOI had announced the provision of
GBI for grid interactive solar projects up to a maximum capacity up to 50 MW
(including solar photovoltaic as well as solar thermal power generation) during the
Eleventh Plan period subject to minimum installed capacity of one MW per plant.
Under the scheme, a maximum cumulative capacity of 10 MW of solar PV power
generation projects and 10 MW of solar thermal power generation projects could
be set up in a state. The scheme envisaged provision of GBI of a maximum of
Rs 12 a unit for solar PV and Rs 10 a unit for solar thermal after taking into account
the per unit power purchase rate provided by the SERC or utility for that project.
The GBI for a project would be determined after deducting the power purchase rate
offered by the utility under the PPA from a notional amount of Rs 15 a unit for
solar PV and Rs 13 a unit for solar thermal projects. The power generation plant is
to be commissioned by 31 December 2009 after which the incentive will reduce by
5 per cent and the ceiling rate for the incentive would become Rs 11.40 a unit for
solar PV and Rs 9.50 a unit for solar thermal projects.
GBI in wind
Under this scheme, the MNRE is providing GBI to grid-connected wind power
projects at Rs 0.50 a unit for a period not less than four years and a maximum
period of ten years parallel with accelerated depreciation in a mutually exclusive
manner, with a cap of Rs 62 lakh/MW. This implies that companies may avail
themselves either of accelerated depreciation or GBI, but not both. Once a company
has opted for one benefit, it cannot change the option later. The total disbursement
in a year will not exceed one-fourth of the maximum limit of the incentive, i.e.,
262 | Indian Infrastructure: Evolving Perspectives
Rs 15.50 lakh/MW during the first four years. The scheme will be applicable to a
maximum capacity limited to 4000 MW during the remaining period of the
11 FYP. The provision of GBI will continue till the end of the Eleventh Plan.
The GBI will cover wind projects selling power to state utilities as well as captive
wind power projects. But projects undertaking third party sale by way of merchant
power or open access are excluded from the purview of the scheme.
State-specific policies for promotion of RE
A number of state governments (Karnataka, Punjab, Rajasthan, and Madhya Pradesh,
to name a few) have introduced state-level policies for the promotion of RE. Some
have issued policies specific to certain RETs. Gujarat and Maharashtra are cases in
point, with Gujarat having issued policies specific to wind and solar energy, and
Maharashtra policies for wind, waste-to-energy and cogen. The state policies
encourage investments in RE through measures such as single-window clearance
system, creation of green energy funds, streamlined procedures for allocation of RE
projects and project sites, and other incentives such as relaxation in state taxes, etc.
RE funds
In an effort to promote investment in RE, states like Maharashtra and Rajasthan
have created Green Funds to provide soft loans for RE technologies. The Maharashtra
Energy Development Agency (MEDA) has created a Clean Energy Fund by taxing
conventional energy sources (see Box 14.2). In the case of Rajasthan, the Rajasthan
Electricity Regulatory Commission has determined that any shortfall to meet the
RE obligation by the distribution licensees, open access consumers and captive power
users involves the payment of an RE surcharge to the State Transmission Utility
(STU). The RE surcharge will be as notified by RERC from time to time. This
surcharge collected by the STU is credited to a fund to be utilized for creation of a
transmission system infrastructure of RE-based power plants. The state of Madhya
Pradesh is also in the process of setting up a green energy fund. The fund would be
financed through the cess collected from power consumers within the state.
Box 14.2: Urjankur Nidhi Fund in Maharashtra
The Government of Maharashtra and the Infrastructure Leasing & Financial Services
(IL & FS) have jointly promoted the Urjankur Nidhi Trust Fund to boost non-
conventional energy projects in Maharashtra. This fund would develop and take up
equity in RE projects.
The fund has a corpus of Rs 418 crore of which Rs 218 crore would be contributed by the
Government of Maharashtra. This fund would be replenished through the imposition of a
green cess of of 4 paisa/unit on industrial and commercial power consumers in Maharashtra.
The other Rs 200 crore would be contributed by private institutional investors.
Barriers to Development of Renewable Energy | 263
The fund would initially promote bagasse based cogeneration power projects which have
a significant potential in Maharashtra. These projects will be developed, implemented
and operated through separate Special Purpose Vehicle (SPV) on BOOT basis, and the
Urjankur Nidhi Fund along with financial institutions and private investors will take up
equity in the SPV. The Trust has identified nearly 18 sugar factories and three of these
sugar factories have already entered into project development agreement with the Trust.
The trust would provide financial support in the form of equity with maximum support
per project of up to 20 per cent of the project cost or 20 per cent of the corpus, whichever
is lower. The fund will also provide crucial support functions during project
development, project management and distribution of resulting power.
Source: MEDA
Demonstration programmes
Tail-end Grid Connected Solar Power Generation: The tail-ends of the grid in
rural areas experience voltage drops and power outages. A solar PV plant
connected at the tail-end can provide power there and also improve the quality
of power in the grid. In order to meet these objectives, the MNRE started a
new demonstration programme, permitting utilities, generation companies
and state nodal agencies to set up grid-connected solar PV plants of 25 kW to
1,000 kWp capacity. MNRE provides support of 50 per cent of the basic cost of
the plant, subject to a maximum of Rs 10 crore per MWp. Assistance will be
available to set up 4 MWp aggregate capacity projects in the country during
the Eleventh Plan period.
Wind power: About 26 project sites have been developed in states with high
potential for wind power under the Demonstration Programme to establish
technological viability of wind farms, resulting in the establishment of around
57 MW of capacity.
Others
Use of solar water heating systems in buildings: The GOI has been
promoting solar water heating systems (SWHS). However, implementation
of the scheme is tardy as several authorities are involved in implementation
of any scheme involving SWHS. First, the states have to issue orders to
their respective municipalities on making the SWHS compulsory. As of
date, thirteen states and two union territories have issued orders making
installation of the SWHS mandatory in certain categories of new buildings.
The states are Andhra Pradesh, Chhattisgarh, Delhi, Haryana, Himachal
Pradesh, Madhya Pradesh, Maharashtra, Nagaland, Punjab, Rajasthan,
Tamil Nadu, Uttar Pradesh, and Uttarakhand, the Union Territories being
Chandigarh and Dadra and Nagar Haveli.
264 | Indian Infrastructure: Evolving Perspectives
ANNEXURE 3
Regulatory framework for RE
Renewable purchase obligations
Section 86(1)(e) of the Electricity Act 2003 (EA 03) empowers SERCs to specify
the percentage of electricity to be procured by the obligated entities (distribution
licensees, open access consumers and captive power users) from the RE sources.
Accordingly, many SERCs have issued orders/regulations specifying such
percentages. This percentage is referred to as Renewable Purchase Obligation
(RPO). At present, 17 SERCs have notified RPO targets for their respective states.
Most states have remained technology neutral while specifying these RPOs. But
a few, such as Rajasthan, Madhya Pradesh, Karnataka and Chhattisgarh, have
specified RPOs from individual RE sources. While most states have advocated
an RPO between 1 per cent and 5 per cent, MP has advocated a 10 per cent RPO.
Moreover, the states of Karnataka and Rajasthan have specified a maximum cap
for RE-based procurement. Table 14.10 provides an overview of the RPOs in
different states and their achievement. With the exception of Andhra Pradesh,
Maharashtra and Rajasthan where RPO has been levied on discoms, open access
consumers and captive power plants, it has been levied only on discoms in
other states.
Table 14.10: Summary of RPOs at state level for select states
States RPO (in %)
2007-08: 4.88%
200809: 6.25%
Rajasthan 200910: 7.45%
201011: 8.50%
201112: 9.50%
200708: 1%
200809: 1%
Punjab 200910: 2%
201011: 3%
201112: 4%
200708: 3%
Haryana 200809: 5%
200910: 10%
Barriers to Development of Renewable Energy | 265
Maharashtra* Percentage RPO for each licensee shall be the same as the
Percentage RPO for the state as a whole. The Percentage
RPO for the State for a financial year shall be the ratio of
total RE generation in the state to the sum of gross input
energy units for all licensees for that financial year,
excluding any inter-se sale/ consumption of electricity
amongst the licensees
Gujarat 200708: 1%
200809: 2%
Chhattisgarh Biomass-based plants: 5% each year from 200809 to 201011
Small hydel plants: 3% each year from 200809 to 201011
Solar, wind, bagasse-based cogeneration & others: 2% each
year from 200809 to 201011
Andhra Pradesh 5% each year from 200910 to 201314
Karnataka Minimum of 5% and a maximum of 10%
Uttar Pradesh 7.5%
200809: 4.8%
West Bengal** 200910: 6.8%
201011: 8.3%
201112: 10%
Himachal Minimum 20% of total consumption during a year
Pradesh
** For the purposes of determination of Percentage RPO, generation from all types of renewable
energy sources as approved by MNRE is considered; Only RE generation from grid-connected
RE projects is considered; RE generation excludes RE generation by developers meant for self-
consumption and third-party sale purposes to a licensees consumers.
* For WBSEDCL
Feed-in tariff (FiT) or preferential tariff
The existing regulatory framework requires SERCs to determine FiTs for procurement
of RE power by the distribution licensees under the RPO regime. It is envisaged that
SERCs will determine tariff separately for each type of technology adopted for
harnessing any of the RE sources. Accordingly, many SERCs have determined the
FiTs for various RETs. These SERCs have generally followed a cost-plus approach
Table 14.10: Summary of RPOs at state level for select states (contd...)
States RPO (in %)
266 | Indian Infrastructure: Evolving Perspectives
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Barriers to Development of Renewable Energy | 267
for determination of FiTs. States that are yet to adopt FiTs include Orissa, Bihar,
Jammu and Kashmir, Jharkhand, and the Northeastern states. Tables 14.11 to 14.14
summarize the FiT determined by different SERCs for different RETs.
Table 14.12: FiTs for solar power across states
Preferential Solar PV Solar Thermal
tariffs for solar
energy CoD up to CoD after CoD up to CoD after
Dec 2009 Dec 2009 Dec 2009 Dec 2009
Rajasthan
Covered under Rs 15.78 /kWh Rs 15.18 /kWh Rs 13.78 /kWh Rs 13.18/kWh*
GOI Policy
Not covered Rs 15.60 /kWh Rs 15 /kWh Rs 13.60 /kWh Rs 13 /kWh
under GOI Policy
West Bengal
Covered under Rs 4/ Kwh + GBI Rs 4/ kWh + GBI Not determined
GOI Policy
Not covered under Rs 11 / kWh Rs 10 / kWh Not determined
GOI Policy
Uttar Pradesh Rs 15/ kWh Rs 15 / kWh
#
Rs 13 / kWh Rs 13 / kWh
#
Gujarat Rs 13 / kWh Rs 12 / kWh Rs 10 / kWh Rs 9 / kWh
(112 years) (112 years) (112 years) (112 years)
Rs 3 / kWh Rs 3 / kWh Rs 3 / kWh Rs 3 / kWh
(1325 years) (1325 years) (1325 years) (1325 years)
Haryana* Rs 15.96 / kWh Rs 15.16 / kWh
Andhra Pradesh *Rs 3.70/ kWh + WPI Not determined
Maharashtra** Rs 3/ kWh + GBI Rs 3/ kWh + GBI Rs 3/ kWh + GBI Rs 3/ kWh + GBI
Punjab Rs 7/kWh (with base year 200607) + annual escalation @ 5% up to 201112
Karnataka Rs 3.40/ Kwh + Rs 3.40/ kWh + Rs 3.40/ kWh + Rs 3.40/ kWh +
GBI GBI GBI GBI
Chhattisgarh*** Rs 15.84/kWh Rs 13.26/kWh
Tamil Nadu Rs 3.15/kWh
#
commissioned before 31.12.2011
* 5 years
** 10 years; commissioned up to 31.3.2010
*** commissioned up to 31.12.2010
268 | Indian Infrastructure: Evolving Perspectives
Table 14.13: FiTs for SHP and assumptions for FiTs across states
Tariff (Rs/kWh) Capital Return Auxiliary O&M Escal-
cost on consu- expenses ation in
(Rs/MW) equity mption (% of O&M
capital expenses
cost)
Punjab Rs 3.49 (with base year
200607) with five
annual escalations
@ 3% up to 201112.
Haryana Rs 3.67 for 200708,
Escalated at 1.5% per
annum 10.25 16% 0.5%
Maharashtra Tariff of Rs 2.84 in first
year, which increases by
Rs 0.03/unit every year
till the debt repayment
is over (10th year)
Tariff of Rs 3.11 between
years 1015 after which
it again increases
annually at a constant
rate of Rs 0.03/unit 4.4 16% 0.5% 3% 4%
Andhra Tariff from yr 110:
Pradesh 2.60, 2.52, 2.44, 2.36,
2.27, 2.19, 2.11, 2.03,
1.95, 1.88 3.625 15% 1% 1.5% 4%
Karnataka Rs 2.80 without any
escalation for the first
10-year period from
the year of commercial
operation of the plant 3.9 16% 0.5% 1.5% 5%
Uttar Tariff determined for
Pradesh each of the 20 years of
the life of plant for
plants commissioned
between 200506 to
200910
Himachal Rs 2.87 for SHP
Pradesh projects up to 5 MW;
project specific rates
for SHP with capacity
more than 5MW and
up to 25 MW 6.5 14% 0.5% 2% 4%
Barriers to Development of Renewable Energy | 269
Table 14.14: FiTs for biomass and bagasse, and assumptions for FiTs across states
Biomass tariff (Rs/kWh) Bagasse tariff (Rs/kWh)
Rajasthan Project specific tariff for new plants Project-specific tariff for plants
Punjab Rs 3.49 (with base year 200607) Rs 3.49 (with base year 200607)
with five annual escalations @ 5% with five annual escalations @ 3%
up to 201112 up to 201112.
Haryana Rs 4 for 200708, escalated at Rs 3.74 for 200708, escalated
2% per annum at 2% per annum
Fixed: (11.70; 21.67; 31.63;
41.59; 51.54; 61.49; 71.43;
8 1.37; 91.32; 101.25; 111.18;
121.11; 131.02);
Maharashtra Variable: 200506 1.34; 200607 1.41;
200708 1.48; 200809 1.55; Rs 3.05 for the first year of operation,
200910 1.63; 201011 1.71; escalation of 2% per annum
201112 1.80; 201213 1.89;
201314 1.98; 201415 2.08; 201516
2.18; 201617 2.29; 201718 2.41)
Gujarat Rs 3.08 for entire project life Rs 3.00 for entire project
of 20 years life of 20 years
Chhattisgarh Fixed (11.78; 21.75; 31.73;
41.68;51.63; 61.58; 71.53;
81.48; 91.43; 101.38);
75:25Variable: 200506 1.20;
200607 1.26; 200708 1.32;
200809 1.39; 200910 1.46;
201011 1.53; 201112 1.61;
201213 1.69; 201314 1.77;
201415 1.86); 75:15Variable
(200708 1.27; 200809 1.34;
200910 1.40; 201011 1.47;
201112 1.55; 201213 1.62;
201314 1.71; 201415 1.79)
Karnataka Rs 2.85 per unit in the first year of Rs 2.80 per unit in the first year of
commercial operation of the plant, commercial operation of the plant,
annual escalation of 2% per annum annual escalation of 2% per annum
for subsequent period of 9 years for subsequent period of 9 years
Fuel price of Rs 1000/- per MT
escalated at 5%
Uttar Variable cost for 200506 Rs 1.2821, Variable cost for 200506 Rs 1.2821,
Pradesh escalation of 6% per annum for each escalation of 6% per annum for each
subsequent year. subsequent year.
270 | Indian Infrastructure: Evolving Perspectives
Green power
Green power is a concept wherein the utility supplies consumers with RE-based
power and charges the consumers the actual cost of this power, the supply of which
is aimed at consumers who are environmentally conscious and is priced higher
than normal retail tariffs. Within India, only the Andhra Pradesh Electricity
Regulatory Commission (APERC) has introduced the Green Power under its
FY 200809 retail tariff order. APERC has fixed the tentative Green Power tariff at
Rs 6.70/kWh for FY 200809, and the difference between this tariff and the normal
tariff would be used to create a Green Power Fund. It has further determined that
consumers buying green power have the option of obtaining Clean Development
Mechanism (CDM) benefits and Renewable Energy Certificates (RECs), whenever
these are introduced.
Barriers to Development of Renewable Energy | 271
ANNEXURE 4
Box 14.3: Detailed provisions of National Solar Mission
Solar RPS
Renewable Purchase Obligation of utilities
to be split into solar and non-solar
RPO may start with 0.25% in Phase I and
increase to 3% by 2022
RPO to be fixed after modification of the
National Tariff Policy 2006
RE Certificates to meet RPO
Demonstration projects
Technology configurations not covered under
1,000 MW capacity
Projects to be set up following competitive
bidding to enable price discovery.
Maximize indigenous content
Technology transfer
Fiscal/financial incentives
Increase competitiveness of solar projects &
provide enabling environment for solar
manufacturers
Recommendation to MoF for customs and
excise duty concessions/exemptions on
specific capital quipment, critical materials,
components & project imports.
SEZ-like incentives to manufacturing parks
R&D
Improve efficiency of existing/new materials
& applications & develop cost effective storage
technologies.
Development of National Centre of
Excellence & Centres of Excellence to
undertake & fund R&D.
High-level Research Council to guide
overall strategy.
Support incubation & innovation through
a venture fund
Solar power purchase policy
NVVN appointed the nodal agency for
purchase & sale of grid-connected solar
power at 33 kV & above under Phase I
For each MW of solar power, MOP to
allocate equivalent MW capacity from
unallocated quota of NTPC stations
NVVN to bundle solar & thermal
power & sell it at regulated tariff plus
facilitation charges
Generation-based incentive
Provision of GBI to 100 MW capacity solar
project sconnected to LT/11 kV grid
Eligibility: own consumption as well as
power fed into the grid.
GBI rate: tariff fixed by CERC minus
notional tariff of Rs 5.5 per unit, with 3%
annual escalation
Off-grid opportunities
Promote solar home lights & other power
applications to cover 10,000 MW villages &
hamlets.
Refinance facility/soft loans up to 5%
annual interest rate by IREDA.
30% subsidy for select applications.
90% subsidy for niche applications to
special category areas
HRD
Build technically qualified manpower of
international standards
Develop specialized courses at engineering
colleges.
Ministry of Labour to introduce training
modules/course materials for technicians.
100 fellowships a year to support students/
groups.
National Centre for PV Research &
Education at IIT, Mumbai
272 | Indian Infrastructure: Evolving Perspectives
NOTES
1. According to the MNRE, the total RE capacity in the country as on 31 March 2009 was
14,485 MW. The difference in magnitude of RE capacity addition as reported by different
agencies in the country arises on account of discrepancies in reporting of data and the
different time frames when such data is reported. The objective here is to give a fair idea
of the extent of RE capacity existing in the country.
2. Current RE capacity is a little less than 15,000 MW and it may be assumed that only
another 15,000 MW is doable till 2017.
3. Integrated Energy Policy, 2006.
4. Ministry of Power, Annual Report, 200809.
5. Central Electricity Authority, Power Supply at Glance, July 2009.
6. Ministry of Power, www.powermin.nic.in accessed at 2.55 p.m. on October 23, 2009.
7. Shonali Pachauri and Adrian Muller, A Regional Decomposition of Domestic Electricity
Consumption in India: 19802005. Presented at the annual IAEE conference at Istanbul
on 20 June 2008; available at http://www.iiasa.ac.at/Research/PCC/recent-events/
Pachauri&Mueller_Istanbul_June2008_Final.pdf
8. http://www.renewableenergyworld.com/rea//news/article/2008/04/renewable-energy-
jobs-soar-in-germany-52089
9. While this may be sufficient to indicate the importance of the state-level regulatory
framework on RE capacity addition, it is important to note that the MNRE-determined
tariff which was valid till 2004 may have played a significant role in this capacity addition.
10. Most of the capacity additions in FY 200607 and FY 200708 would be those where
installation started in earlier years. Capacity addition in future years would reflect the
impact of TNERCs order. However, given the time required to commission wind
projects, this may broadly reflect the impact of TNERCs order.
11. CERCs discussion paper on promotion of co-generation and generation of electricity
from renewable sources of energy (May 2008).
12. http://cserc.gov.in/pdf/25-2009-Interim.pdf
13. It is understood that TNEB is addressing this problem now by developing the requisite
transmission network.
14. Explanatory Memorandum issued by CERC for Draft Terms and Conditions for
Determination of Tariff for Renewable Energy Sources, May 2009.
Distribution Reforms in Delhi | 273
INTRODUCTION
The electricity distribution business has been privatized in only two states in the
countryOrissa and Delhi. The privatization in Delhi has been successful as far as
the efficiency improvements are concerned. Irrespective of improved efficiency,
divergent views exist on the success of privatization. Many believe it has not been
effective in Delhi. Against this backdrop, this study attempts to assess and evaluate
the privatization of the distribution business in Delhi.
IMPERATIVE FOR REFORMS IN THE STATE
Traditionally, power supply in Delhi was the responsibility of the Delhi Electricity
Supply Undertaking (DESU), which was an integrated utility, with generation,
transmission and distribution functions, serving the entire State of Delhi except the
New Delhi Municipal Corporation (NDMC) and Military Engineering Services
(MES), or Cantonment areas (to which DESU supplied power in bulk). The poor
performance of DESU led to its being succeeded by the Delhi Vidyut Board (DVB)
in 1997, which was established as a State Electricity Board under the Electricity
(Supply) Act 1948. The creation of DVB proved to be merely a change in the legal
status of the organisation without any structural changes. The change did not affect
the functioning and the work culture of the organization. Its performance continued
to deteriorate.
The power sector suffered from problems of high technical losses due to poor
maintenance of existing infrastructure and very little augmentation, high commercial
losses attributable to theft, and high receivables for DVB. During FY 199596 to
FY 19992000, operating losses of DESU/DVB rose from Rs 578 crore to Rs 1100 crore.
1
POWER DISTRIBUTION
REFORMS IN DELHI
April 2010
15
274 | Indian Infrastructure: Evolving Perspectives
Transmission and distribution (T&D) losses during the same period were around
50 per cent. This poor commercial performance of the DVB due to high T&D losses
made it incapable of raising the resources required to improve its services and
rendered it a drain on the public exchequer.
Figure 15.1: T&D losses and commercial losses pre-reforms
Source: Annual Report on the Working of State Electricity Boards & Electricity Departments:
Planning Commission, Government of India, May 2002
The state also suffered from a severe demandsupply imbalance. Generating stations
in Delhi had an installed capacity of 694 MW, but availability was lower at
300350 MW. Capacity addition remained relatively stagnant, leading to
overdependence on purchased power.
Not surprisingly, public discontent continued to rise. All these factors required that
the Government of the National Capital Territory of Delhi (GNCTD) formulate a
strategy to bring about a structural change in the Delhi power sector. It was perceived
that the present vertically integrated structure had failed to deliver the desired
outcomes and the time was ripe to restructure the sector.
THE REFORM STRATEGY
In view of the above considerations, the GNCTD brought out a Strategy Paper on
Power Sector Reforms in February 1999 for reforming the power sector in the state.
A fast-track reform process was followed that ultimately resulted in the unbundling
of DVB into seven companies: one holding company called the Delhi Power
Company Limited, two generation companies, viz. Indraprastha Power Generation
Company Limited (IPGCL) and Pragati Power Company Limited (PPCL), one
transmission company, viz. Delhi Transco Limited (TRANSCO), and three
distribution companies (discoms). Subsequently, the GNCTD issued policy
directions indicating its intent to disinvest majority shareholding in the discoms to
private investors, with the balance 49 per cent remaining with the GNCTD.
T&D losses as % of availability Commercial loss (without subsidy) in Rs cr.
60
50
40
30
20
10
0
1200
1000
800
600
400
200
0
199596 199596 199697 199697 199798 199798 199899 199899 19992000 19992000
Distribution Reforms in Delhi | 275
The GNCTD believed that a long-term definitive loss reduction or efficiency gain
programme needed to be settled at the very start of the privatization process to
reassure private sector investors. It further believed that to attract them it would be
appropriate that reduction in losses/efficiency gains be determined through market
forces rather than being predetermined unilaterally in the bidding documents.
Therefore, loss reduction or efficiency gain to be achieved by the distribution
companies in the first five years, viz. 200203 to 200607, became the basis of
privatization or the bidding criteria for the selection of the private entity.
The GNCTD was of the view that losses of any kindtechnical, non-technical or
non-realisation of paymentsultimately amount to loss in revenues. Efficiency gains
must embrace all these aspects. Therefore, losses should be measured as the difference
between the units input and the units realised (units billed and collected), wherein
the units realised will be equal to the product of units billed and the collection
efficiency, where collection efficiency is defined as the ratio of actual amount collected
to amount billed. The difference between the units input and the units realized are
referred to as aggregate technical and commercial (AT&C) losses.
The GNCTD, as a matter of policy, decided that the AT&C loss shall be the basis for
determination of tariffs and also for computation of incentives for better
performance. It asked the Delhi Electricity Regulatory Commission (DERC), vide
Policy Directions, to determine the opening level of AT&C losses and the bulk supply
tariff (BST) for each discom.
PRIVATIZATION OF DISCOMS
GNCTD initiated the bidding process for selection of the private investors for each
of the three discoms. Upon opening of bids, it emerged that the loss-level trajectory
as submitted by the bidders was not in the range acceptable to the GNCTD.
Consequently, the bidders were called for negotiations. After a number of discussions,
the bidders and the GNCTD came to an agreement on the accepted year-wise AT&C
loss reduction trajectory over the five-year period.
These discussions also resulted in other changes to the terms and conditions of
privatization. Prime amongst these was the method of computation and treatment of
overachievement and underachievement for the years 200203 to 200607 (see Box 15.1).
Box 15.1: Computation and treatment of over/underachievement
of target AT&C loss levels
i. In the event the actual AT&C loss of a distribution licensee in any year is better
(lower) than the level based on the minimum AT&C loss reduction levels
stipulated by the government for that year, the distribution licensee shall be
276 | Indian Infrastructure: Evolving Perspectives
allowed to retain 50% of the additional revenue resulting from such better
performance. The balance 50% of additional revenue from such better
performance shall be counted for the purpose of tariff fixation.
ii. In the event the actual AT&C loss of a distribution licensee in any year is worse
(higher) than the level based on the AT&C loss reduction levels indicated in the
Accepted Bid for that year, the entire shortfall in revenue on account of the same
shall be borne by the distribution licensee.
iii. In the event the actual AT&C loss of a distribution licensee in any year is worse
(higher) than the level based on the minimum AT&C loss reduction levels
stipulated by the Government for that year, but better (lower) than the level
based on AT&C loss reduction levels indicated in the Accepted Bid for that year,
the entire additional revenue from such better performance shall be counted for
the purpose of tariff fixation.
Provided further that for paras (i), (ii) and (iii) above, for every year, while
determining such additional revenue or shortfall in revenue, the cumulative net
effect of revenue till the end of the relevant year shall be taken, in regard to
overachievement/underachievement and appropriate adjustments shall be made
for the net effect.
After the negotiations and the incorporation of the resulting changes, revised bids
were submitted by the bidders. Consequent to this round of bidding, GNCTD
appointed TATA Power as the distribution utility for the North & North-West circle
and BSES for two circlesCentral & East and South & West. The opening loss
levels as well as the loss reduction trajectory that were accepted by the investors for
each discom and the minimum AT&C loss reduction level as indicated in the
accepted bids are as shown in Table 15.1. The three distribution companies were
privatised with effect from 1 July 2002.
Table 15.1: Accepted bid loss reduction trajectory
200203 200304 200405 200506 200607 Total
BSES Rajdhani 0.55 1.55 3.30 6.00 5.60 17.00
BSES Yamuna 0.75 1.75 4.00 5.65 5.10 17.25
NDPL 0.50 2.25 4.50 5.50 4.25 17.00
Minimum bid loss reduction trajectory
BSES Rajdhani 1.50 5.00 5.00 5.00 4.25 20.75
BSES Yamuna 1.25 5.00 4.50 4.50 4.00 19.25
NDPL 1.50 5.00 4.50 4.25 4.00 19.25
Source: Jagdish Sagar: Power Sector Reforms in Delhi: The Experience So Far
Distribution Reforms in Delhi | 277
INITIATIVES TAKEN POST-REFORMS
The discoms undertook a number of initiatives to bring about changes in the
distribution business and achieve the reduced loss-level targets set for privatisation.
Initiatives taken by NDPL
Automation initiatives and GIS
The NDPL embarked on automating all its 66 kV and 33 kV grids, and in line with
this has already automated 34 grids with a view to operating all equipment from the
central command centre. This has expedited the resolution time for faults.
The entire electrical network has been mapped through GIS to enable quicker fault
location and speedy redressal; the outage management system is being upgraded
for automation on a GIS platform.
Complaint management system
The NDPL has a unique SMS-based fault management system using GSM which
ensures that the No supply complaints lodged by a consumer get addressed quickly
and consumer feedback is also institutionalized as part of the process.
In July 2002, the NDPL had very poor consumer care facilities. Now, each of the
12 districts has an online consumer care centre, each handled by customer care
executives under the supervision of customer relation officers and customer
service officers.
Online connection management by consumer
The NDPL uploaded the billing details of all its consumers on its website,
www.ndpl.com. Consumers can view their bill, know the consumption pattern and
even print duplicate bills and make online bill payments.
Doorstep delivery of new connections
To ensure hassle-free new connections, an NDPL representative visits the consumers
premises and completes all formalities there itself.
Privileged consumer scheme
As incentive for prompt payment, NDPL has institutionalized a privileged consumer
scheme through which discounts are offered.
The NDPL has also institutionalized a structured approach towards consumer
relationship management as it organizes regular meetings with consumer
representative groups, such as RWAs and IWAs, on the first Saturday of every month
in each district.
278 | Indian Infrastructure: Evolving Perspectives
Automated bill payment kiosks for consumer convenience
The NDPL has introduced Automated Bill Payment Kiosks, a first in Delhi and the
National Capital Region (NCR). These unique ATM-like kiosks accept both cash
and cheque payment towards electricity bills and even issue a receipt to the consumer.
They are operational 365 days a year from 8 a.m. to 8 p.m.
Initiatives taken by BSES
Consumer related
Setting up customer help desks (CHDs) in all the 33 divisions for online
registration of consumer complaints, and commercial call centres to address
complaints
In-house developed CRM software (CAS) which provides the facility of
single-window resolution of complaints
Setting up of a 24-hour control room at the CMs office to provide immediate
information on faults/breakdowns
Bifurcation of the existing 21 districts into 33 divisions
Centralised helpline numbers have been created for all queries related
to power supply/meter/billing/anti-corruption/vigilance/anti-power
theft/enforcement
Starting of the Bill Amendment Module (BAM), a billing software module
through which customer complaints are addressed on the spot
Facility of raising one composite bill for bulk consumers like MCD and DJB
for convenient payments
Meter reading is now being done by meter reading instruments (MRIs).
Location of a BSES office in a 3-km radius from each point. Consumers may
go to any of the 143 BSES offices.
The following facilities for key consumers have been created:
Creation of a special cell for customers having a load of over 45 KW
Single-window ease and preparation of composite bill for bulk consumers
like DJB and MCD for convenient payments
Bill dispatch by e-mails and special couriers
Distribution Reforms in Delhi | 279
Supply and streetlighting related
Approximately hundred breakdown vans; cable restoration on a 24 by 7 basis
Online connectivity between technical call centre, system and circle control
25 Genset vans and mobile transformers made available round the clock
A special drive, Roshini, which provided uninterrupted illumination during
the entire festive season
Metering related
Mass meter replacement drive was undertaken for all large industrial power
(LIP) consumers. Electronic meters have also been introduced for domestic
consumers.
Faulty meters are being replaced on a priority basis with tamper-proof electronic
meters. A Special Meter Testing Drive was undertaken. Only 0.01 per cent of
electronic meters were found defective.
A month-long voluntary disclosure scheme (VDS) was undertaken.
Payment related
Point-of-sales (POS) machines installed at the cash collection counters with
bar code scanners for speedy service; tie-ups with collection agencies, like Easy
Bill and Skypak, for cheque payments and with bill desk and bill junction for
online payments
120 cash collection centres, 150 Skypak drop boxes and 1050 Easy Bill outlets
across BSES; 150 drop boxes installed on RWA premises
OUTCOME OF PRIVATIZATION AND REFORMS
The overall impact of reforms and initiatives taken has started producing favourable
results. Various parameters indicating the overall health of the power distribution
sector in the state are discussed below:
Aggregate technical and commercial losses
AT&C loss reduction was the parameter used for privatisation of distribution
companies in Delhi. Opening AT&C levels were given for the three distribution
companies, and annual targets for reduction were set. Post-privatisation, a
number of initiatives were taken by distribution companies to reduce AT&C
losses. The AT&C losses for Delhi have declined from 56 per cent in 200203
to 38 per cent in 200708.
2
The AT&C losses reported by various discoms are as shown in Figure 15.2.
The NDPL has reported the lowest AT&C losses for the year 200809.
280 | Indian Infrastructure: Evolving Perspectives
Figure 15.2: AT&C losses (%)
Source: Forum of regulators (FOR)
3
Financial viability
a. Profitability
The financial position of discoms has improved post-privatisation. All
the discoms started reporting profits from 200405. While NDPL has
shown a consistent improvement in profits generated, BSES slipped into
losses in 200708.
Table 15.2: Profits (in Rs crore)
200203 200304 200405 200506 200607 200708
BSES Rajdhani -57 -32 60 89 27 -449
BSES Yamuna -101 -55 7 46 48 -55
NDPL 22 29 57 113 186 282
Source: PFC Report
2
Both NDPL and BSES registered a significant increase in the power purchase
cost in 200708 over 200607. The power purchase cost per unit of energy
input was higher for BSES as compared to NDPL. BSES discoms also
reported increase in their interest costs for FY 2007 and FY 2008.
2
b. Average cost of supply (ACS) and average revenue realized (ARR)
NDPL has seen an increasing difference between ARR and ACS from
10 paise/kWh in 200203 to 50 paise/kWh in 200708.
2
70
60
50
40
30
20
10
0
200203* 200304 200405 200506 200607 200708 200809
BSES Rajdhani BSES Yamuna NDPL
Distribution Reforms in Delhi | 281
BSES discoms registered better revenue realized than cost of supply for
FY 2005 and FY 2006. However, in FY 2007 and FY 2008 their cost of
supply was higher than revenue realized. This deterioration was reflected
in their financials as they slipped into losses for FY 2008.
Quality of Supply (QoS)
Quality of supply in Delhi has improved post reforms. NDPL registered best
figures for quality of supply parameters in FY 2007 (namely, outage duration,
number of outages and average duration of outage). Data is available from
FY 2005 to FY 2007, and BSES had much worse conditions than NDPL at the
start of this period.
Figure 15.3: ARR & ACS (Rs per unit)
Source: PFC Report
2
Deficit situation
The deficit situation in Delhi has improved in terms of both peak and energy
deficit. Peak deficit has reduced from 9.2 per cent in 200203 to 0.0 per cent in
200809. Energy deficit has reduced from 1.9 per cent in 200203 to 0.6 per cent
in 200809.
Table 15.3: QoS parameters
Outage duration per feeder
(hh:mm) 200405 200506 200607
NDPL 49:33 13:34 3:54
BYPL 105:14 77:40 37:05
BRPL 98:07 82:31 33:29
200203 200304 200405 200506 200607 200708
BSES Rajdhani ACS BSES Yamuna ACS
BSES Yamuna ARR
NDPL ACS
NDPL ARR
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
BSES Rajdhani ARR
282 | Indian Infrastructure: Evolving Perspectives
Table 15.3: QoS parameters (contd...)
No. of outages per feeder
200405 200506 200607
NDPL 26 10 4
BYPL 68 77 38
BRPL 60 76 34
Average duration of an outage
(hh:mm) 200405 200506 200607
NDPL 1:55 1:22 0:54
BYPL 1:33 1:01 0:58
BRPL 1:38 1:05 0:59
Source: http://www.cea.nic.in
Table 15.4: Peak and energy deficit (%)
Peak Energy
deficit deficit
200203 9.2 1.9
200304 3.0 1.4
200405 1.9 1.0
200506 3.3 1.5
200607 6.6 1.7
200708 1.1 0.6
200809 0.0 0.6
Source: http://www.cea.nic.in
Table 15.5: Loan to TRANSCO (in Rs cr.)
FY 2003 FY 2004 FY 2005 FY 2005 FY 2006 Total
1364 1260 690 138 0 3450
CONCLUSION
Distribution reforms in Delhi and privatization of discoms have led to positive results.
This is being reflected in reduced AT&C losses, low deficit situation, improving
quality of supply parameters and no subsidy to discoms. The only subsidization of
discoms post-privatisation was a loan of Rs 3450 crore from GNCTD to TRANSCO
during 2003 and 2006 (Table 15.5). This loan was given to bridge the gap between
Distribution Reforms in Delhi | 283
their revenue requirement and revenue received from discoms through bulk supply
tariff. However, compared to annual losses of the order of Rs 1000 crore that existed
before reforms, the financial burden has reduced significantly.
NDPL has reported minimum losses and best figures for QoS parameters amongst
the discoms in Delhi. It has also been the only discom to register profits for all the
years from FY 2003 to FY 2008. All the discoms have made capital investments to
achieve the target reduction in loss levels (Annexure 2). Capital expenditure per
unit of energy input is higher for NDPL. Actual AT&C loss reduction by discoms
along with government-specified minimum bid and accepted bid is shown in
Annexure 3. For the period FY 2003 to FY 2007, total loss reduction by NDPL was
more than BSES discoms. Also the total reduction was more than the government-
specified minimum bid.
While the distribution reforms have given positive results in Delhi, there are a few
areas of concern. For the first five years (FY 2003 to FY 2007), loss level targets and
bulk power purchase tariffs were specified. Going forward, discoms will be vulnerable
to fluctuations in bulk purchase tariffs. Further, AT&C loss reduction will be harder
to achieve as they have already reduced considerably, and collection efficiencies will
not remain more than 100 per cent for a long period.
In 200708, both the BSES discoms registered financial losses driven by high power
purchase cost and interest cost (Annexure 1). Only NDPL registered profits after
tax of Rs 282 crore, that too on the back of Rs 225 crore recoverable by truing up of
earlier year revenues. This income resulted from NDPL winning an appeal to use
6.69 per cent depreciation for FY 2003, FY 2004 and FY 2005 as compared to the
3.75 per cent rate specified by DERC. Hence, the financial viability of discoms needs
to be examined under high power purchase cost scenarios.
284 | Indian Infrastructure: Evolving Perspectives
ANNEXURE 1
Table 15.6: Expenses break-up of discoms (in Rs crore)
BSES Rajdhani
200203 200304 200405 200506 200607 200708
Power purchased 846 1,244 1,654 1,877 2,103 2,899
Employees 97 119 113 122 147 164
O&M 76 80 92 69 88 70
Interest 1 2 6 32 153 205
Depreciation 82 115 125 116 139 155
Admin & general 11 32 41 60 63 67
Other 0 133 0 -23 77 92
Total 1,113 1,724 2,031 2,253 2,770 3,652
BSES Yamuna
200203 200304 200405 200506 200607 200708
Power purchased 479 638 798 922 993 1,973
Employees 80 100 92 94 111 129
O&M 43 47 65 52 47 49
Interest 2 8 13 29 76 132
Depreciation 20 32 42 49 57 72
Admin & general 7 21 27 35 39 45
Other 0 95 0 -31 63 77
Total 632 941 1,037 1,150 1,386 2,476
NDPL
200203 200304 200405 200506 200607 200708
Power purchased 599 868 1,105 1,204 1,309 1,882
Employees 82 103 131 146 155 152
O&M 20 91 59 53 51 57
Interest 0 4 20 23 57 75
Depreciation 66 87 113 110 129 155
Admin & general 13 19 24 29 30 33
Other 45 40 27 2 -3 -202
Total 824 1,213 1,478 1,566 1,727 2,152
Source: Report on the Performance of the State Power Utilities for the Years 200405 to
200708, Power Finance Corporation Limited
Distribution Reforms in Delhi | 285
Expenses break-up (as % of total expenses)
BSES Rajdhani
200203 200304 200405 200506 200607 200708
Power purchased 76.0 72.2 81.4 83.3 75.9 79.4
Employees 8.7 6.9 5.6 5.4 5.3 4.5
O&M 6.8 4.6 4.5 3.1 3.2 1.9
Interest 0.1 0.1 0.3 1.4 5.5 5.6
Depreciation 7.4 6.7 6.2 5.1 5.0 4.2
Admin & general 1.0 1.9 2.0 2.7 2.3 1.8
Other 0.0 7.7 0.0 -1.0 2.8 2.5
Total 100.0 100.0 100.0 100.0 100.0 100.0
BSES Yamuna
200203 200304 200405 200506 200607 200708
Power purchased 75.8 67.8 77.0 80.2 71.6 79.7
Employees 12.7 10.6 8.9 8.2 8.0 5.2
O&M 6.8 5.0 6.3 4.5 3.4 2.0
Interest 0.3 0.9 1.3 2.5 5.5 5.3
Depreciation 3.2 3.4 4.1 4.3 4.1 2.9
Admin & general 1.1 2.2 2.6 3.0 2.8 1.8
Other 0.0 10.1 0.0 -2.7 4.5 3.1
Total 100.0 100.0 100.0 100.0 100.0 100.0
NDPL
200203 200304 200405 200506 200607 200708
Power purchased 72.7 71.6 74.8 76.9 75.8 87.5
Employees 10.0 8.5 8.9 9.3 9.0 7.1
O&M 2.4 7.5 4.0 3.4 3.0 2.6
Interest 0.0 0.3 1.4 1.5 3.3 3.5
Depreciation 8.0 7.2 7.6 7.0 7.5 7.2
Admin & general 1.6 1.6 1.6 1.9 1.7 1.5
Other 5.5 3.3 1.8 0.1 -0.2 -9.4
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: Report on the Performance of the State Power Utilities for the Years 200405 to
200708, Power Finance Corporation Limited
286 | Indian Infrastructure: Evolving Perspectives
Expenses break-up (in Rs/unit of energy input)
BSES Rajdhani
200203 200304 200405 200506 200607 200708
Power purchased 1.51 1.54 1.97 2.17 2.31 3.13
Employees 0.17 0.15 0.13 0.14 0.16 0.18
O&M 0.14 0.10 0.11 0.08 0.10 0.08
Interest 0.00 0.00 0.01 0.04 0.17 0.22
Depreciation 0.15 0.14 0.15 0.13 0.15 0.17
Admin & general 0.02 0.04 0.05 0.07 0.07 0.07
Other 0.00 0.16 0.00 -0.03 0.08 0.10
Total 1.99 2.13 2.42 2.61 3.04 3.94
BSES Yamuna
200203 200304 200405 200506 200607 200708
Power purchased 1.32 1.23 1.49 1.71 1.87 3.66
Employees 0.22 0.19 0.17 0.17 0.21 0.24
O&M 0.12 0.09 0.12 0.10 0.09 0.09
Interest 0.01 0.02 0.02 0.05 0.14 0.25
Depreciation 0.06 0.06 0.08 0.09 0.11 0.13
Admin & general 0.02 0.04 0.05 0.06 0.07 0.08
Other 0.00 0.18 0.00 -0.06 0.12 0.14
Total 1.74 1.82 1.94 2.13 2.62 4.60
NDPL
200203 200304 200405 200506 200607 200708
Power purchased 1.52 1.56 2.00 2.11 2.19 3.00
Employees 0.21 0.19 0.24 0.26 0.26 0.24
O&M 0.05 0.16 0.11 0.09 0.09 0.09
Interest 0.00 0.01 0.04 0.04 0.10 0.12
Depreciation 0.17 0.16 0.20 0.19 0.22 0.25
Admin & general 0.03 0.03 0.04 0.05 0.05 0.05
Other 0.11 0.07 0.05 0.00 -0.01 -0.32
Total 2.10 2.18 2.67 2.75 2.89 3.43
Source: Report on the Performance of the State Power Utilities for the Years 200405 to
200708, Power Finance Corporation Limited
Distribution Reforms in Delhi | 287
ANNEXURE 2
Table 15.7: Capital expenditure by discoms
Capex (in Rs crore)
2003 2004 2005 2006 2007 2008* Total
BSES Rajdhani 72.00 115.00 538.00 711.00 399.00 239.00 2464.00
BSES Yamuna 58.00 85.00 416.00 357.00 283.00 164.00 1663.00
NDPL 49.00 299.00 338.00 431.00 271.00 248.00 1899.00
*Provisional data
Capex (in Rs/unit of energy input)
200203 200304 200405 200506 200607 200708 Total
BSES Rajdhani 0.13 0.14 0.64 0.82 0.44 0.26 2.43
BSES Yamuna 0.16 0.16 0.78 0.66 0.53 0.30 2.60
NDPL 0.12 0.54 0.61 0.76 0.45 0.40 2.88
Source: http://www.derc.gov.in/ordersPetitions/orders/Misc/2009Order%20on%
20Physical%20Verification%20of%20Assets.pdf
ANNEXURE 3
Table 15.8: AT&C loss reduction by discoms
BSES Rajdhani loss reduction trajectory
200203 200304 200405 200506 200607 Total
Govt. specified minimum bid 1.50 5.00 5.00 5.00 4.25 20.75
Accepted bid 0.55 1.55 3.30 6.00 5.60 17.00
Actual 0.70 2.35 4.41 5.11 5.62 18.19
BSES Yamuna loss reduction trajectory
200203 200304 200405 200506 200607 Total
Govt. specified minimum bid 1.25 5.00 4.50 4.50 4.00 19.25
Accepted bid 0.75 1.75 4.00 5.65 5.10 17.25
Actual -4.69 7.60 4.16 6.26 4.84 18.17
NDPL loss reduction trajectory
200203 200304 200405 200506 200607 Total
Govt. specified minimum bid 1.50 5.00 4.50 4.25 4.00 19.25
Accepted bid 0.50 2.25 4.50 5.50 4.25 17.00
Actual -1.02 4.26 11.05 7.29 2.78 24.36
288 | Indian Infrastructure: Evolving Perspectives
ANNEXURE 4
Table 15.9: Sales & revenue mix
NDPL
Sales mix: Sale in MkWh to total sales
(%) 200304 200405 200506 200607 200708
Domestic 47.1% 42.1% 41.5% 41.9% 37.5%
Commercial 20.1% 18.7% 18.7% 19.2% 17.3%
Agricultural 0.9% 0.6% 0.5% 0.2% 0.2%
Industrial 26.8% 32.4% 33.9% 33.0% 32.2%
Others 5.1% 6.1% 5.4% 5.7% 12.8%
Revenue mix
(%) 200304 200405 200506 200607 200708
Domestic 31.8% 28.8% 28.4% 27.5% 29.0%
Commercial 29.3% 25.7% 25.6% 27.4% 24.9%
Agricultural 0.3% 0.2% 0.2% 0.1% 0.1%
Industrial 33.4% 40.0% 43.2% 40.3% 39.0%
Others 5.1% 5.3% 2.7% 4.7% 7.1%
REFERENCES
1. Planning Commission (Power & Energy Division) Government of India. 2002.
Annual Report (2001-02) on the Working of State Electricity Boards & Electricity
Departments.
2. Power Finance Corporation Limited. Report on the Performance of the State Power
Utilities for the Years 200405 to 200708.
3. http://www.forumofregulators.gov.in/Data/policy_Imp/AT% 20&% 20C% 20LOSS%
20DATA% 20-% 20STATE% 20&% 20UTILITES% 20WISE.pdf
4. Sagar, Jagdish. Power Sector Reforms in Delhi: The Experience So Far.
5. http://delhigovt.nic.in/power.asp
6. Central Electricity Authority, Planning Wing. 2009. Power scenario at a glance.
7. http://www.ndpl.com/Display Content.aspx? RefTypes=3 & RefIds = 149 & page =
Pioneering Initiatives
8. http://www.bsesdelhi.com/Aboutus/in_undertaken.asp
9. http://www.bsesdelhi.com/Aboutus/bsesataglance.asp
Distribution Reforms in Delhi | 289
10. http://www.cea.nic.in/god/dpd/RELIABILITY_INDICES_MONTHLY.pdf
11. http://www.cea.nic.in/power_sec_reports/executive_summary/2009_04/25-26.pdf
12. http://www.derc.gov.in/ordersPetitions/orders/Misc/2009/Order%20on% 20Physical%
20Verification%20of%20Assets.pdf
13. Tariff orders of discoms; from DERC website (http://www.derc.gov.in)
290 | Indian Infrastructure: Evolving Perspectives
POWER DISTRIBUTION:
Being Driven to Insolvency
by a Governance Crisis
April 2011
16
INTRODUCTION
The financial health of distribution utilities in the country is deteriorating at an alarming
level once again. A handful of states account for the lions share of increased financial
losses. There is a tendency to attribute the rising financial losses to increasing Aggregate
Technical and Commercial (AT&C) losses.
1
But AT&C losses have reduced from
33 per cent in 200506 to 28 per cent in 200809. Clearly, the problem lies elsewhere.
Analysis indicates that the sector is undergoing a severe governance crisis. Inefficiency
of utilities is another, albeit lesser, problem. Losses of distribution utilities are estimated
to range between Rs 93,000 and Rs 150,000 crore in 201213. Given that state
governments are not in a position to support the sector in the long run, the impact
of the rising losses on the financial system of the country is a matter of grave concern.
The financial system would get affected not only because of its direct exposure to
the distribution sector but also because of debt servicing by generation project
developers. Therefore, there is an urgent need to restore good governance in the
sector and prevent the insolvency of the distribution business from jeopardizing
not only future capacity addition but also the health of the financial system.
Financial losses of distribution utilities
2
are mounting once again
The increase in losses of distribution utilities from Rs 3,000 crores to Rs 30,000 crores
in the ten years between 199192 and 200102 had forced the attention of policy
makers on reforming the distribution sector with the objective of reducing transmission
and distribution (T&D) losses and improving the commercial viability of the
distribution utilities (herein after referred to as utilities). The many reforms initiated
in the early 2000s helped reduce and contain financial losses between 200203
and 200506. However, between 200506 and 200809, losses (without subsidy)
Power Distribution: Being Driven to Insolvency | 291
Losses on subsidy booked basis
Losses on subsidy received basis
Losses without subsidy
60000
50000
40000
30000
20000
10000
0
200203 200304 200405 200506 200607 200708 200809
1
9
5
7
9
1
7
5
5
5
2
3
3
7
1
2
0
9
1
4
2
7
8
9
3
3
4
2
3
7
5
0
5
8
5
200203 200304 200405 200506 200607 200708 200809
Cash losses - on subsidy received basis
Cash losses - before subsidy received
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1213
12790
229
10352
350
12022
3268
14206
8283
21119
10869
27341
25671
44059
have more than doubled (see Figure 16.1) and are expected to reach Rs 68,600 crore
at the end of FY 201011.
3
A bigger concern is the rising level of cash losses
4
before
subsidy received. These losses have trebled from Rs 14206 crore to Rs 44059 crore
between 200506 and 200809 (see Figure 16.2).
Further analysis indicates that Rajasthan, Tamil Nadu (TN) and Andhra Pradesh
(AP) have shown the maximum increase in losses between 200506 and 200809.
Table 16.1 provides a snapshot of states that have exhibited significant worsening of
losses. On the other hand, Chhattisgarh, Gujarat, Himachal Pradesh (HP), Kerala,
West Bengal (WB), and most of the north-eastern states have reduced their financial
losses or are earning profits (see Table 16.2).
Figure 16.1: Losses without subsidy for distribution utilities have risen
sharply in 200809 (Rs crore)
Source: Power Finance Corporation Ltd
Figure 16.2: Cash losses before subsidy received for distribution utilities
have trebled between 200506 and 200809 (Rs crore)
Source: Power Finance Corporation Ltd, IDFC analysis
292 | Indian Infrastructure: Evolving Perspectives
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Power Distribution: Being Driven to Insolvency | 293
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294 | Indian Infrastructure: Evolving Perspectives
AT&C losses have reduced significantly
It is commonly believed that high levels of AT&C losses are the main reason for
the high financial losses of utilities. There is no doubt that AT&C losses are high
in absolute terms; with 23 out of 52 utilities recording AT&C losses over
30 per cent in 200809 (see Table 16.2). This is resulting in revenue losses to the
utilities. But overall AT&C losses have reduced over the years and now stand at
less than 30 per cent (see Figure 16.3). A closer look at AT&C losses since 200506
indicates that the majority of utilities have shown considerable reduction in AT&C
losses, though the pace of reduction may still be slow (see Table 16.3) and need to
be accelerated. Amongst the states that have exhibited high increases in financial
losses, AP and TN have low AT&C loss levels. Utilities in Rajasthan and some
utilities in Karnataka, Haryana and Madhya Pradesh (MP) exhibit high loss levels,
but they have been reducing losses.
Table 16.3: Most utilities have shown considerable reduction in AT&C losses
between 200506 & 200809
AT&C loss Increase in Percentage points reduction in AT&C losses
levels in losses
200809 Up to 5% 510% 1015% 1520% > 20%
< 20% Reliance Punjab, NDPL, Uttar Bangalore Upper
Mumbai, All AP utilities, Madhya Gujarat, Assam
Torrent Tamil Nadu, Gujarat Lower Assam
Ahmedabad, Dakshin
Torrent Gujarat,
Surat BEST Mumbai,
Mangalore
2025% Kerala Himachal BRPL BYPL
Pradesh,
MSEDCL
2530% WBSEDCL, Ajmer, Jodhpur,
Dakshin Haryana, Jaipur, Chamund-
Paschim UP eshwari
3040% Chhattisgarh Northern Orissa, Western Orissa, Meghalaya Dakshin UP Bihar
Uttar Haryana, Hubli,
Madhya UP, Paschim Gujarat,
Uttarakhand, Madhya MP,
Paschim MP Central Assam,
Tripura
> 40% Southern Central Orissa, Arunachal Gulbarga Jharkhand
Orissa, Purv MP, Pradesh
Manipur, Poorv UP,
Mizoram, Nagaland
Sikkim
Sources: Forum of Regulators, Power Finance Corporation Ltd, IDFC analysis
Power Distribution: Being Driven to Insolvency | 295
Note: * AT&C loss levels for some utilities were fairly low in 200506 because they
had reduced their losses in earlier years. The extent of reduction indicated here may
not reflect this. Further, for some utilities AT&C losses rose between 200506 and
200809. In some cases, this was not a result of poor performance but a result of
better availability of data on the exact level of AT&C losses prevailing in their service
area. Reliance Mumbai, Torrent Ahmedabad and Torrent Surat have traditionally
had low levels of losses. Some fluctuation in losses is bound to occur and this
fluctuation does not indicate poor performance in AT&C loss reduction.
For detailed names of utilities, refer to Annexure.
Figure 16.3: All-India AT&C losses are below 30%
Source: Power Finance Corporation Ltd
However, AT&C loss levels as reported here may not reflect the true situation
5
since
the information base of distribution utilities still remains poor and sales to the
agriculture sector continues to remain unmetered (see Table 16.4) though
agricultural sales form a sizeable portion of sales in many states (see Table 16.5).
Agriculture accounts for 2324 per cent of electricity consumption in the country.
6
Utilities such as Punjab, Uttar Haryana, Uttar Gujarat and Paschim MP, where
agriculture accounts for over 25 per cent of total electricity consumption, have poor
levels of metering as far as agricultural consumers are concerned. Even in TN where
agriculture accounts for 22 per cent of total electricity sales, metering is abysmally
low. It is also interesting to note that utilities that have very low levels of agriculture
consumption have higher levels of metering for agriculture consumers. Examples
to this end can be seen in Uttarakhand and West Bengal, and in utilities in Orissa
and Gujarat.
40
36
32
28
%
200203 200304 200405 200506 200607 200708 200809
38.77
37.75
34.33
33.02
30.62
29.58
28.44
296 | Indian Infrastructure: Evolving Perspectives
Table 16.4: Agricultural consumption continues to remain unmetered
status in select states
State Distribution utility Percentage of agricultural
consumers that are metered
Haryana Dakshin Haryana 61%
Uttar Haryana 32%
Gujarat Uttar Gujarat 27%
Paschim Gujarat 35%
Madhya Gujarat 56%
Dakshin Gujarat 43%
Mysore 24%
Madhya Pradesh Purv MP 30%
Madhya MP 37%
Paschim MP 2.3%
Maharashtra MSEDCL 44%
Orissa Central Orissa 9%
Northern Orissa 21%
Western Orissa 95%
Southern Orissa 96%
Punjab PSEB 9.7%
Tamil Nadu TNEB 3%*
Uttarakhand Uttarakhand 87%
West Bengal WBSEDCL 61.5%
Source: Forum of Regulators
Note: *As mentioned in the tariff order issued by the Tamil Nadu Electricity
Regulatory Commission on July 31, 2010, meters are provided to 3% of the service
connections in each distribution circle of TNEB and consumption is recorded on a
sample basis.
Power Distribution: Being Driven to Insolvency | 297
Table 16.5: Level of agricultural consumption in select states in 200809
Agricultural sales as Utilities/states
a share of total sales
< 10% WBSEDCL, Orissa utilities, Kerala, Dakshin Gujarat,
Himachal Pradesh, Uttarakhand, Jharkhand
1025% Bihar, UP utilities, Eastern AP, Tamil Nadu, Madhya
Gujarat, Purv MP, Chhattisgarh
2540% Dakshin Haryana, Punjab, Ajmer, Jaipur, Central &
Southern AP, Bangalore, Mangalore, Paschim Gujarat,
Madhya and Paschim MP
Over 40% Uttar Haryana, Jodhpur, Northern AP, Gulbarga, Hubli,
Chamundeshwari, Uttar Gujarat
Sources: Power Finance Corporation Ltd, IDFC analysis
Poor levels of metering of agricultural consumption may also impact the financial
health of the utilities on account of under provision of subsidy by state governments.
In the absence of metering of agricultural consumption, it is not possible to determine
the accurate consumption in each service connection. Since the subsidy provided
by state governments towards agricultural consumption is based on the estimation
of this consumption by utilities, poor metering may lead to a situation where the
subsidy is under estimated.
7
Reduction in AT&C losses requires investments in augmentation and modernization
of the distribution infrastructure for reducing technical losses, energy audits and
improved governance for controlling electricity theft. The momentum of loss
reduction made possible by these measures has slowed down. Several Electricity
Regulatory Commissions (ERCs) have made observations to this end in the orders
issued by them. For example, the ERC in Haryana has lamented the absence of
remedial measures to address high feeder losses in some districts in the states.
The ERC has also observed that theft cases have been rising and that the utilities do
not fully implement the capital expenditure plan drafted by them. The ERC in MP
has also pointed out the abnormally low progress in capital expenditure by the
utilities. Actual investments vis--vis investment plan prepared by utilities in MP
varied between 26 per cent to 54 per cent during 200708 and 200809.
8
Progress on metering of distribution transformers (DTs) remains poor across states
(see Table 16.6). Though energy audits have been initiated in many states, these
audits can be carried out only in feeders where all DTs are metered. Thus, in the
absence of 100 per cent DT metering, energy audit would have limited benefits.
Moreover, in several states energy audit is being conducted only on a sample basis.
298 | Indian Infrastructure: Evolving Perspectives
These initiatives which had gathered impetus under the Accelerated Power
Development and Reforms Program (APDRP) that aimed to improve the financial
viability of utilities and reduce AT&C losses to around 10 per cent has also slowed
down. Given the shortcomings of APDRP and the problems in its implementation
of reasons,
9
the GOI restructured the programme into the RestructuredAccelerated
Power Development and Reforms Programme (RAPDRP) in December 2008. The
objective of RAPDRP is to reduce AT&C losses to less than 15 per cent over five
years, by automating and integrating various utility processes like asset
management; maintenance management; metering, billing and collection; energy
audit; and GIS-based consumer indexing. However, achieving the targets would
also take time given that the establishment of reliable and automated systems for
sustained collection of accurate base line data, and the adoption of information
technology in the areas of energy accounting takes time. Further, the implementation
of the programme has already seen several ups and downs.
10
Unless the strategy for
reduction of AT&C losses is redefined and initiatives stepped up, AT&C loss
reduction would continue to be slow and the financial health of the distribution
would take time to improve.
Table 16.6: Status of implementation of select distribution reform
initiatives as of April 2010
Extent of metering Extent of metering Initiation of energy
for 11 kV feeders for distribution audits for segregation
transformers of technical &
commercial losses
Haryana Uttar Haryana: Uttar Haryana: Uttar Haryana:
99.74%, 2987 nos. Initiated in
Dakshin Haryana: Dakshin Haryana: Gurgaon and
100% 20.88% Faridabad,
Dakshin Haryana: for
inter utility interface
points of feeder
Punjab 100% 5% Yes
Rajasthan 91% NA No
Uttar Pradesh 100% In part in urban areas Yes
Madhya Pradesh 100% Most urban DTRs Yes, at division level
are metered; for rural
DTRs: work in
progress
Power Distribution: Being Driven to Insolvency | 299
Maharashtra* 99.93% NA Yes, division-wise
Gujarat 100% Uttar Gujarat: Not by state owned
52.3%, utilities
Paschim Gujarat:
17.31%,
Madhya Gujarat:
54.54%,
Dakshin Gujarat:
56.18%
Andhra Pradesh Being done on All have not been Yes
sample basis provided with meters
Karnataka 100% for Bangalore Bangalore: Yes
and Chamun- 39.5%,
deshwari, NA for NA for other
other utilities utilities
Kerala 100% 31.92% In 46 out of 65
divisions
Tamil Nadu 100% 49.68% No
West Bengal
#
92% 26% Yes
Source: Central Electricity Authority
Notes: * For MSEDCL;
#
For WBSEDCL; NA Information not available
So why are utilities incurring rising financial losses?
AT&C losses, though important as an indicator of efficiency, are not a complete
indicator of the financial health of distribution utilities. The financial health of
utilities is also dependent on the extent to which they can recover their costs through
the tariffs charged for electricity consumption. Since the establishment of the
independent regulatory framework in the late 1990s and the enactment of the
Electricity Act 2003 (EA 03), ERCs have been entrusted with the mandate of
examining and approving the costs incurred by utilities on the basis of certain norms
and electricity sales, and setting efficiency parameters such as target distribution
loss levels. However, given that costs such as those for power purchase, which form
Table 16.6: Status of implementation of select distribution reform
initiatives as of April 2010 (contd...)
Extent of metering Extent of metering Initiation of energy
for 11 kV feeders for distribution audits for segregation
transformers of technical &
commercial losses
300 | Indian Infrastructure: Evolving Perspectives
the majority of the costs, are often beyond the control of the utilities and sales cannot
always be accurately forecast, costs may exceed the revenues of utilities, leaving a
revenue gap.
To allow the utilities to recover all genuine and uncontrollable increases in expenses,
a process of truing up is followed wherein the variances in actual costs incurred by
utilities or revenues earned vis--vis those projected by utilities and approved by
ERCs are allowed to be recovered by utilities. This truing up takes place with a lag
because the audited accounts of utilities that form the basis of truing up are finalized
only after the end of a financial year. To put it simply, the annual accounts for a
year, say FY 200607, would be available only during FY 200708. Therefore, variation
in expenses incurred by a discom during FY 200607 would be recovered only in FY
200809. This indicates that variations in costs and revenues do get adjusted and
the financial losses of utilities should not escalate to unmanageable levels.
The question that then arises is why losses have escalated.
The gap between tariffs (represented by average revenue realized or ARR) without
subsidy and average cost of supply (ACS) has doubled between 200506 and
200809 (see Figure 16.4). Further, cost recovery through tariffs deteriorated
from 85 per cent to 77 per cent in this period. The situation is not much different
if subsidies are considered. ARR with subsidy continues to be inadequate to
cover ACS and the revenue gap with subsidy has doubled from Rs 0.16/kWh to
Rs 0.33/kWh in this period.
Figure 16.4: Gap between ARR (without subsidy) and
ACS at the all-India level has increased (Rs/kWh)
Sources: Power Finance Corporation Ltd, IDFC analysis
Detailed analysis indicates that the majority of utilities recover less than 90 per cent
of costs incurred (see Table 16.7). Amongst the states that have exhibited increasing
4
3
2
1
0
200203 200304 200405 200506 200607 200708 200809
0.43
0.36
0.45
0.39
0.49
0.54
0.78
1.95
2.03
2.21
2.27
2.39
2.62
2.38 2.39
2.54
2.60
2.76
2.93
3.40
2.09
Gap
Average cost of supply
Average revenue realized
without subsidy
Power Distribution: Being Driven to Insolvency | 301
financial losses, utilities in Rajasthan, TN and MP exhibit cost recovery of less than
70 per cent. The utilities in Haryana, AP and Karnataka have varying levels of cost
recovery, but cost recovery remains below 80 per cent. A few points need to be
noted here. First, some utilities belong to states that are resource-rich and therefore
have surplus power (governed by the policy of the state government to take free
power or first right of refusal for a certain quantum of power at cheap rates). These
utilities end up selling power at high rates in the market, adding to their revenues.
Second, there is a trend to maintain uniform tariffs within a state despite the existence
of more than one distribution utility. Even though utilities have different sales mixes
and cost structures, and consequently revenue mixes, tariffs are set using the weakest
utility as the benchmark. As a result, the utilities with a favourable consumer mix
show better cost recovery and are in a better financial position while utilities which
do not have such a consumer mix continue to perform poorly. Exceptions to this
trend of uniform retail tariffs include Karnataka.
Table 16.7: Cost recovery in 200809
Cost recovery through Utilities
revenue realized
(without subsidy)
< 50% Northern AP, Manipur, J&K
5070% Bihar, Jharkhand, Mizoram, Nagaland, Ajmer,
Jodhpur, Jaipur, Dakshin UP, Madhya UP, Poorv UP,
Hubli, Uttar Haryana, Central AP, Southern AP,
Northern AP, Chamundeshwari, Tamil Nadu, Madhya
MP, Paschim MP, Purv MP
7080% Arunachal, Dakshin Haryana, Punjab, Paschim UP,
Uttarakhand, Gulbarga, Mangalore
8090% Kesco, Eastern AP, Bangalore, Puducherry, Uttar
Gujarat
90100% Central Orissa, Northern Orissa, Southern Orissa,
Meghalaya, BRPL, Dakshin Gujarat, Madhya Gujarat,
Paschim Gujarat, MSEDCL
> 100% Western Orissa, Sikkim, WBSEDCL, Tripura, BYPL,
NDPL, HP, Kerala, Chhattisgarh, Goa
Sources: Power Finance Corporation Ltd, IDFC analysis
Note: For detailed names of utilities, refer to Annexure
302 | Indian Infrastructure: Evolving Perspectives
Historically, one of the major problems facing the power sector is the inadequacy
of tariffs to meet the cost of supply. In the initial years of regulatory reforms,
tariffs were keeping pace with costs (see Figure 16.5). But, in recent years, tariff
increase has once again not kept pace with the increasing ACS. While ACS increased
by 31per cent between 200506 and 200809, ARR without subsidy increased by
only 17 per cent.
Figure 16.5: In recent years, tariff increase has not
kept pace with increasing ACS
Source: Power Finance Corporation Ltd, IDFC analysis
Why have costs risen?
Power purchase costs have increased sharply
The cost of supply has been increasing mainly due to the increases in power purchase
costs. A sample analysis of the power purchase costs of utilities in 12 major states in
India (see figure 16.6) indicates that power purchase costs have increased by
47 per cent between 200506 and 200809. This increase was mainly on account of
increase in short-term power prices, increase in fuel costs, and higher cost of power
from new projects. Of course, increase in fuel costs would also lead to some increase
in the price of short-term power as well as in new power being more expensive.
Since power purchase costs account for the lions share of costs of utilities
(89 per cent of the total expenses in 200809), increases in these costs are bound to
lead to a huge increase in the overall ACS.
18
16
14
12
10
8
6
4
2
0
200304 200405 200506 200607 200708 200809
%
Increase in average cost of supply
Increase in average revenue realized
without subsidy
0.4
4.1
6.3
3.0
2.4
5.7
6.2
2.7
6.2
5.3
16.0
9.6
Power Distribution: Being Driven to Insolvency | 303
Figure 16.6: Power purchase costs have increased (Rs/kWh)
Note: For SEBs, cost of post purchase includes the cost of own power generation
Source: Power Finance Corporation Ltd, IDFC analysis
Short-term power procurement by utilities
Power procured by utilities through short-term trades increased by nearly 75 per cent
in volume terms between 200506 and 200809, though its share as a percentage of total
electricity generation in the country remained low. There has been a significant jump in
this procurement between 200809 and 200910; with short-term power accounting
for 8.6 per cent of the total electricity generated in FY 200910 (see Figure 16.7).
4.50
4.00
3.50
3.00
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200506 200809
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200506 200607 200708 200809 200910
10
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%
2.45
2.41
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8.63
Volume of short term
transactions
As % of electricity
generated
1
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.
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9
1
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.
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.
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6
4
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.
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0
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5
.
9
0
Figure 16.7: Procurement of short-term power is increasing*
Source: Central Electricity Regulatory Commission, IDFC analysis
Note: * Includes UI
304 | Indian Infrastructure: Evolving Perspectives
The price of short-term power has also exhibited a significant upward trend over
the years, with FY 200809 registering a particularly sharp increase
(see Figure 16.8). This may be attributed to the shortage of power (see Figure 16.9),
increase in maximum Unscheduled Interchange (UI)
11
charges to Rs 10/kWh in
January 2008 from Rs 7.45/kWh, and the socio-political compulsions on utilities
to provide power to agriculture or compulsions to ensure uninterrupted power
supply in the run up to general elections (held in AprilMay 2009) even at the
cost of sourcing expensive short-term power.
Figure 16.8: Short-term power prices have shot up (Rs/kWh)*
Sources: Central Electricity Regulatory Commission, IDFC analysis
Note: * Average price of electricity transacted through UI during the calendar years 2008 and
2009 have been used as proxy for FY 200809 and FY 200910, respectively for analysis
Figure 16.9: Peak and energy deficit in India (%)
Source: Central Electricity Authority
8
7
6
5
4
3
2
1
0
200506 200607 200708 200809 200910
3.23
4.51 4.52
7.11
5.09
18
16
14
12
10
8
200506 200607 200708 200809
8.4
200910
Peak deficit
Energy deficit
9.6
9.9
11.1
10.1
12.7
11.9
16.6
13.8
12.3
%
Power Distribution: Being Driven to Insolvency | 305
Though short-term power accounts for less than 10 per cent of the power generated
in the country, the high rates at which this power is procured have significantly
affected the financial viability of many utilities. Amongst the states that have shown
high increases in financial losses, AP, MP, Rajasthan, Karnataka, and TN have
seen short-term power purchase volume double between FY 200708 and
FY 200809 (see Figure 16.10). Rajasthan particularly stands out here.
In FY 200809, between August to March, Rajasthan procured the highest quantum
of short-term power amongst all states, accounting for 14 per cent of the total
short-term power purchase in the country. The Government of Rajasthan, in a
note dated December 2009,
12
has identified this as one of the main problems
affecting the financial viability of utilities in the state. It has noted that the utilities
procured short-term power at an average rate of Rs 9/kWh during April to
December 2009 and estimates that a subsidy of Rs 2254.25 crore would need
to be provided to the utilities against this power purchase.
Figure 16.10: Purchase of short-term power in select states (MU)*
Sources: Central Electricity Regulatory Commission, IDFC analysis
Note: * Includes UI, 200809 data is for the period August to December
Reliance on imported coal
Over the years, domestic availability of coal has become inadequate for meeting the
growing requirement for electricity generation. Therefore, power plants are
increasingly resorting to coal imports. The Ministry of Power even assigns generating
entity-wise targets for coal imports in consultation with the Central Electricity
Authority. Though imported coal accounts for only 3.2 per cent of the total coal
consumed by power plants in the country, the import of coal for power plants has
more than doubled since 200506 (see Figure 16.11). The increase in imports has
6000
5000
4000
3000
2000
1000
0
200708 200809
3
9
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6
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306 | Indian Infrastructure: Evolving Perspectives
been particularly significant in FY 200809 and FY 200910. The price difference
between domestic and imported coal after adjusting for calorific value can be
estimated at about 26 per cent.
13
Figure 16.11: Coal imports for power plants have
doubled between 200506 and 200809
Source: Ministry of Power
Figure 16.12: Trends in price of imported coal (in rupees)
Source: Ministry of Finance
Employee costs have increased
At the all-India level, employee costs for distribution utilities have increased by
76 per cent between 200506 and 200809. The increase has been largest in 200809
200506 200607 200708 200809 200910
10.4
9.7
10.2
16.1
23.2
25
20
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200506 200607 200708 200809 200910
Coal, Australia
Jul-
Sep
Jul-
Sep
Jul-
Sep
Jul-
Sep
Jul-
Sep
Jan-
Mar
Jan-
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Jan-
Mar
Jan-
Mar
Jan-
Mar
48 47
50
53
68
116
163
71
95
72
Power Distribution: Being Driven to Insolvency | 307
(see Figure 16.13) and can be attributed to the revision in employee cost as per the
recommendations of the Sixth Pay Commission.
Figure 16.13: Increase in employee costs for distribution utilities in India
Sources: Power Finance Corporation Ltd, IDFC analysis
Why are tariffs not keeping pace with costs?
Tariffs are inadequate to cover costs for two reasons. First, tariff increases have not
been timely. Some states have not raised tariffs for the past five years (See Table 16.8).
There are instances of utilities not filing tariff determination petitions before state
electricity regulatory commissions (SERCs) or delaying such filings.
Table 16.8: Status of tariff revision in states/union territories at the end of 2009
Tariffs last revised No. of states/UTs States/UTs
1 year 13 Andhra Pradesh, Assam, Chhattisgarh,
Gujarat, Himachal Pradesh, Karnataka,
Madhya Pradesh, Orissa, Punjab, West
Bengal, Arunachal Pradesh, Sikkim, Delhi
12 years 6 Bihar, J&K, Maharashtra,* Meghalaya,
Uttar Pradesh, Uttarakhand
23 years 2 Kerala, Tripura
35 years 5 Rajasthan, Jharkhand, Mizoram,
Nagaland, Chandigarh
> 5 years 5 Haryana, Tamil Nadu, Goa, Manipur,
Puducherry
Sources: Economic Survey of India 201011, IDFC analysis
Notes: *for MSEDCL; States such as Haryana and Tamil Nadu have undertaken tariff
revisions during 200910 or 201011. However, given the huge revenue deficits to be
40
35
30
25
20
15
10
5
0
200607 200708 200809
20
9
34
308 | Indian Infrastructure: Evolving Perspectives
covered through tariff hikes and the consequent tariff shock to be faced by consumers,
some ERCs have had to resort to the creation of regulatory assets. Examples include Haryana
and Tamil Nadu.
Second, even when tariff revisions have taken place, the gap has not been reduced.
This is on account of several reasons.
Lack of information
The absence of reliable and adequate data or studies on the part of the
utilities implies that ERCs do not have a solid basis to determine and
approve costs and efficiency-improvement targets.
The annual accounts of utilities are not finalized on time, implying the
absence of authentic information on the costs and consumption base
of utilities.
Delays in tariff orders
The issue of tariff orders is often delayed due to utilities not following the
process timelines for submission of related petitions and additional
information or due to inadequate data submission by utilities.
Tariff revisions are therefore ineffective.
Limitations of truing up
ERCs may not follow the practice of truing up. For instance, in case of
power purchase costs, only few states such as AP, Assam, Gujarat,
Haryana, Kerala, Maharashtra and Punjab have laid down principles
or methodology for automatic adjustment of fuel and power purchase
cost in tariff. These principles are known as Fuel Cost Adjustment (FCA)
formula or Fuel and Power Purchase Price Adjustment (FPPPA)
formula or Fuel Surcharge formula. However, states have either recently
started cost recovery through such a formula (such as Kerala in January
2010 and Assam in December 2010) or face delays in cost recovery on
account of delays in filing of claims and obtaining necessary regulatory
approvals. If there is no automatic adjustment of these costs, utilities
have to wait for the annual truing up exercise to recover them in case
such an exercise is conducted.
ERCs do not allow the inefficiency of utilities to be passed to consumers.
ERCs set efficiency targets for utilities. Further, they allow only
uncontrollable costs to be trued up. In the event that utilities are not able
to achieve their performance targets or contain costs, and they are not able
to justify such non-achievement, ERCs do not allow the under-performance
to be passed on through higher tariffs. For instance, the level of distribution
Power Distribution: Being Driven to Insolvency | 309
losses affects the power purchase quantum and costs of a utility. If a utility
does not achieve the distribution loss reduction set by the ERC, the ERC
disallows the power purchase expenses on account of high distribution
losses. Another example of inefficiency of utilities is not following the merit
order schedule for procurement of power i.e. cheapest sources of power be
offtaken first by the utility. ERCs may not accept purchase of expensive
power in such case.
ERCs may not recognize the true extent of even the genuine and
uncontrollable costs. For example, in the case of states such as Assam
and Maharashtra, the FPPPA is subject to a ceiling of the variable
component of tariff. In Assam the adjustment is subject to a ceiling of
25 per cent of the variable component of tariff while in Maharashtra,
the ceiling is 10 per cent. Similarly, ERCs may disallow unmetered sales
by utilities and consequently allow lower power purchase requirement
and costs.
Utilities do not approach ERCs for truing up of actual costs and revenues
either due to non-finalization of annual accounts or to avoid further tariff
hikes. Examples of states where utilities have not approached ERCs for
truing up include UP, Haryana, and TN.
Utilities do not implement truing up as allowed by the ERCs even though
this is in their own commercial interest. Examples here include UP.
Creation of regulatory assets
ERCs may resort to the creation of regulatory assets wherein the
recovery of costs through tariff hikes is postponed to future years to
avoid tariff shocks to consumers. Examples of states where SERCs have
created regulatory assets are Bihar, Haryana, Tamil Nadu, West Bengal
and Orissa.
To sum up, the inadequacy of tariffs has led to an increase in revenue gap
in case of many utilities (see Table 16.9).
Table 16.9: Increase in revenue gap without subsidy for utilities
between 200506 and 200809*
Increase in revenue Utilities
gap without subsidy
Decrease in gap Southern Orissa, Western Orissa, Sikkim, WBSEDCL,
Arunachal, Lower Assam, Upper Assam, Manipur,
Meghalaya, Nagaland, Tripura, HP, J&K, Paschim UP,
310 | Indian Infrastructure: Evolving Perspectives
Poorv UP, KESCO, Kerala, Chhattisgarh, Goa, All
Gujarat utilities
< 10 paisa Central Orissa, Northern Orissa, BYPL, Gulbarga
1020 paisa Jharkhand, Dakshin UP, Uttarakhand, MSEDCL
2050 paisa Bihar, Central Assam, BRPL, Dakshin Haryana, Punjab,
Bangalore, Hubli, Puducherry
50100 paisa Mizoram, Madhya UP, Eastern AP, Southern AP,
Mangalore, Chamundeshwari, Tamil Nadu, All MP
utilities
> 1 Rupee Uttar Haryana, Ajmer, Jodhpur, Jaipur, Central AP,
Northern AP
Sources: Power Finance Corporation Ltd, IDFC analysis
Notes: *NDPL reported zero revenue gap in 200506 and 200809 and has
therefore not been included in the above table. Decrease in revenue gap does not imply
that these utilities are necessarily performing better than the others. It only indicates
the trend. These utilities may continue to have substantial revenue gaps. Therefore, this
table needs to be read along with Table 16.6. For detailed names of utilities, refer to
Annexure.
Tariff rationalization has also been slow
An important contributor towards the financial viability of the
distribution business is tariff rationalization. The goal of tariff rationalization
is cost-reflective tariffs and reduction in cross subsidies. The National Tariff
Policy mandates SERCs to notify a road map for tariffs to be within 20 per
cent of the average cost of supply by end of FY 201011. While SERCs have
taken steps to rationalize tariffs, the progress is inadequate. In 200809, the
cross subsidy levels were high as compared to the target laid down by the Policy
(see Table 16.10). Progress in tariff rationalization would help mitigate the
problem of rising financial losses, particularly when agricultural sales increase.
More importantly, it would reduce the dependence of utilities on subsidies from
state governments.
Table 16.9: Increase in revenue gap (contd...)
Increase in revenue Utilities
gap without subsidy
Power Distribution: Being Driven to Insolvency | 311
Table 16.10: Consumer tariffs as percentage of Average Cost of Supply
approved by SERCs in FY 200809
Domestic Agriculture Non-domestic/ HT industry
commercial
Andhra Pradesh 88% 4% 214% 140%
Assam 80% 72% 130% 110%
Bihar 52% 27% 116% 101%
Chhattisgarh* 58% 54% 145% 115%
Delhi
#
76% 41% 145% 129%
Gujarat 82% 27% 129% 144%
Haryana 80% 6% 100% 100%
Himachal Pradesh 50% 20% 154% 111%
Jharkhand
#
42% 48% 155% 124%
J&K* 31% 46% 53% 60%
Karnataka 100% 17% 162% 129%
Kerala 59% 26% 150% 155%
Madhya Pradesh 92% 72% 148% 128%
Maharashtra 100% 40% 170% 120%
Punjab 93% 73% 138% 126%
Rajasthan 90% 41% 131% 99%
Uttar Pradesh 71% 49% 96% 137%
Uttarakhand 69% 24% 123% 116%
Sources: Forum of Regulators/CRISIL Risk and Infrastructure Solutions Ltd report on Study
on Analysis of Tariff Orders & Other Orders of State Electricity Regulatory Commissions
Notes: *FY 200708;
#
FY 200607
Subsidies required from state governments are rising
Another area of concern is the sharp rise in subsidies from state governments to
utilities. The subsidy booked by utilities to the state governments has shot up
from Rs 12,000 crore in 200506 to almost Rs 30,000 crore in 200809
(see Figure 16.14). But the subsidy payouts by the state governments are much
less than determined. In 200809, only 60 per cent of the subsidy booked by the
utilities was released to them. In many cases, subsidies are not released in a
timely manner.
312 | Indian Infrastructure: Evolving Perspectives
Figure 16.14: Subsidies booked by distribution utilities are rising
but payment by state governments is inadequate
Sources: Power Finance Corporation Ltd, IDFC analysis
Rajasthan and AP have exhibited the maximum increase in subsidy between
200506 and 200809 (see Figure 16.15). While both states subsidize several
categories of consumers, AP has introduced free power for agriculture since
FY 200607. Not surprisingly, the payment of subsidy by the state governments
to the utilities has been falling drastically in these two states. It is pertinent to note
that the Government of Andhra Pradesh paid a subsidy of Rs 2,146 crore during
200910 against the total committed subsidy of Rs 3,486 crores to the utilities.
14
The subsidy committed for 201011 has increased further to Rs 3,652 crores.
15
On the whole, except Rajasthan, AP and Jharkhand, state governments have been
paying the full amount of subsidy due to utilities (see Figure 16.16).
Figure 16.15: Top ten states exhibiting the maximum increase in subsidy
booked (in Rs crore)
Source: Power Finance Corporation Ltd, IDFC analysis
8000
6000
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2005-06 2008-09
361
944
1179
1832
915
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200506 200607 200708 200809
105%
100%
95%
90%
85%
80%
75%
70%
65%
60%
84%
94%
89%
Subsidy booked by utilities
R
s

c
r
o
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13590
19518
62%
12233
29665
Power Distribution: Being Driven to Insolvency | 313
Figure 16.16: States not paying full amount of subsidy to utilities
Source: Power Finance Corporation Ltd, IDFC analysis
What are the specific reasons for increasing losses in the worst performing states?
As seen from Table 16.1, the states that have exhibited the most deterioration in
financial health are Uttar Pradesh (UP), Punjab, Karnataka, Haryana, MP, Rajasthan,
TN and AP. Analysis of the underlying causes helps identify three clear reasons
behind such deterioration.
Poor governance
In case of Andhra Pradesh, increasing dependence of the utilities on subsidy and
non-payment of this subsidy by the state government is the reason behind the
worsening financial health of utilities. The State Government has been providing
free power to agriculture from FY 200607. This implies that as per the provisions
of EA 03, the state government has to provide subsidies to the utilities in lieu of
provision of free power. Therefore, given the dependence on subsidies, losses without
subsidy have spiraled between FY 200506 and FY 200809. Further, while losses
on subsidy-booked basis have been fairly low for the utilities (see Table 16.1), losses
on subsidy-received basis have shot up between FY 200506 and FY 200809,
thereby indicating that the state government has not been able to provide the
requisite subsidies to the utilities (see Figure 16.15 also).
In the states of TN, Rajasthan, Haryana and UP, poor governance on the part of utilities
and state governments by way of not seeking/allowing tariff revision (see Table 16.7)
has been responsible for the increasing financial insolvency of utilities. This does
not imply that inefficiency of utilities has no role to play in their weak financial
health. But the root cause of the problem in these states is the failure of governance.
In Tamil Nadu, post the issue of the first tariff order in March 2003, the Tamil
Nadu Electricity Board (TNEB) approached the Tamil Nadu Electricity Regulatory
100%
80%
60%
40%
20%
0%
200506 200607 200708 200809
Rajasthan
Karnataka
Jharkhand
Andhra Pradesh
Tamil Nadu
100%
100% 100%
62%
94%
66%
98%
84%
38%
96%
86%
58%
14%
7%
37%
314 | Indian Infrastructure: Evolving Perspectives
Commission for revision of retail tariff only in July 2010; this despite manifold
increase in TNEBs input cost and accumulating revenue deficit since 200304.
Similarly, utilities in Rajasthan have not approached the ERC for a tariff revision
since FY 200405. The Rajasthan Electricity Regulatory Commission (RERC)
in all tariff orders since then has left the revenue gap