FINANCIAL MANAGEMENT

IN
POWER PROJECTS OF KARNATAKA :

Case Study of Karnataka Power Corporation Limited.

Dr. Tanaji G. Rathod

Manager (Finance & Accounts)
Karnataka State Industrial Investment & Development Corporation Limited
(KSIIDC),
th
No.49, Khanija Bhavan, 4 Floor, East Wing, Racecourse Road,
BANGALORE – 560001.
Mobile No.9845381805, Office Phone No.: 080 22258131-2-3. (Extn:248),
Email. tanajirathod@gmail.com

Dr Hiremani Naik,
Reader and Chairman of MBA Dept,
Institute of Management Studies, Kuvempu University,
Shankaraghatta,Shimoga.

1
 BIOGRAPHICAL NOTE OF AUTHOR.

Dr. Tanaji Rathod, is Postgraduate degree in Commerce(M.Com)

and a Gold medalist in MBA–Finance from IBMR, Bangalore. He holds
Ph.D in Finance and Investments of Power Projects from Karnatak
University Dharwad. His 12 research papers on “Power sector and
Corporate Finance” have been published in reviewed journals and
magazines. He has presented many technical papers in national and
international doctoral conferences.

He has worked in NBFC at various financial services domain like

Project finance, Appraisal of industrial projects, NPA Management,
Merchant banking & financial services, IPO, Disinvestment of equity
etc. He is actively involved in PPP projects such as Bangalore
International Airport Limited (BIAL) Project, High-speed Rail Link
Project, IT/BT Park at Rajajinagar, Khanija Bhavan at Bangalore,
Tourism Projects of Karnataka etc.,

********

2
 ABSTRACT

For the last two decades in Indian economy, there is a high trend in
urbanization, industrialization, IT boom and in agriculture sector. To cope up
with this growth trend, the power sector of Karnataka has not been paced up
with the rising demand. Due to several hurdles like lack of focus on new
and existing projects, dearth of large funds, high T&D loss prevail in the
system. In order to support the economic growth in Karnataka, the power
sector needs to be focused more. Karnataka Power Corporation Limited
(KPCL) is one of the state owned electric utilities which holds more than half
of the total installed capacity of the State as of FY 2006-07 and supplying
more than 70 percent of electricity to the consumers in the State. To assess
the financial health and operational performance of the KPCL, a research
study has been conducted for a period of five years (FY 2002-2007). The
suggestions which were received from respondents (senior officers of KPCL)
have been discussed here. The results which are arrived from analysis of the
operational and financial performance of the corporation are narrated here.
The performance of the KPCL is also compared with the major power
generation companies of India like NTPC Limited, Reliance Energy Limited,
the TATA Power Company Limited, NHPC and APGENCO. Many findings and
suggestions have been interpreted in the study very briefly.

Key words: Finance, Power Projects, Investment, Karnataka.

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1. INDUSTRY STRUCTURE IN THE POWER SECTOR
Electric power is today a basic human need. It is the critical infrastructure on which
modern economic activities are fully dependent upon. The challenge of implementing electricity
restructuring is compounded in most developing countries by unfavorable initial conditions. Due
to major holding by the state-owned-public utilities, privatization has been an essential part of
electricity restructuring in most developing countries. Hence reforms in the industrialized nations
took place in the context of well functioning electricity systems providing reliable power to all
on a financially and commercially viable basis. However, the electricity sector has become both
more complex and deeply controversial across the globe. The reform process has been highly
politicized and in some cases grossly ignorant of the physical realities of operating electric power
projects and grid.

Many of the global changes in the electric industry are changes in ownership and
management. These changes are concerned with putting pressures on enterprises to behave more
commercially, but without necessarily changing the structure of the industry. Many important
economic issues arise when a system is moved from government ownership to commercializing,
corporatizing and privatizing. Hunt and Shuttleworth(1996)3 studied at National Economic
Research Associates in London for government and industry clients around the world for the
changes taking place in the electricity sector and provided the tools needed for the newly
emerging world of competition in the generation of electricity and choice for consumers. They
have focused on four areas viz., alternatives for restructuring; the structuring of contracts; the
development of spot markets; and transmission pricing1. This framework is prevalent across the
globe in the power sector.
3
Sally Hunt and Graham Shuttle worth (1996), “Competition and Choice in Electricity” National Economic
Research Associates., New York, John Wiley and Sons.

4
 They have asserted four reform models to structure an electric industry, which are
defined by the degree of competition. These are as follows. Firstly, the model-1 has no
competition at all. Model-2 allows or requires a single buyer or purchasing agency to choose
from a number of different producers, to encourage competition in generation. Model-3 allows
Distribution companies to choose their supplier, which brings competition into generation and
wholesale supply. And Model-4 allows all customers to choose their supplier, which implies full
retail competition. Based on this, the world of electricity has changed radically in last two
decades. Therefore the overall focus is on the Model-4 which is the world of future in the power
sector. The successful restructuring and privatization of the UK electricity industry caused many
countries around the world to rethink the structure of their own electricity industries and other
public utilities.

The change in the electricity sector has occurred across two dimensions, industry
structure and ownership. On the industry structure dimension, the difference between the
various models is in terms of the extent of competition introduced as under.

INDUSTRY STRUCTURE – OWNERSHIP MATRIX

Ownership Model 1 Model 2 Model 3 Model 4

1991
Government India
Ownership NZ

Public NZ
Corporation UK

Private 1990-98
Corporation
USA

1978 1992

5
 Figure - 1

2. DATA AND METHODOLOGY

The researcher has made a survey study by visiting various power plants in the State. The
audited annual reports of the corporation for the five years (FY 2002-03 to 2006-07) have been
studied in detail. Apart from the survey, the researcher has served questionnaires to test the
operational and financial performance of the corporation. It was served to 200 senior officers
comprise of technical and non-technical area. They were Executive Directors, General
Managers-Finance and Accounts, Chief Engineers, Executives Engineers and Assistant
Executive Engineers and Accounts Officers who are working in various power plants and Head
office of the corporation. The questionnaires were prepared to test he overall operational and
financial health of the corporation.

It has been asked the views of respondents covering on the equity, reserves and surplus
of the corporation, whether it is feasible to enter into capital market through IPO or it has to
resort to government support. How the fixed assets and current assets are managed? Is there any
potential to diversify the business activities with existing manpower and resources? How to
reduce various operating expenses? How to improve the operational performance of the
hydroelectric, thermal power station and wind power plants across the State? Has it prepared to
implement the modern management tools like Economic Value Added and Balance Scorecard?
In the research study, based on the survey results and analysis of financing and investment
behavior of the corporation, the results have been arrived at. For the analysis of financial data
various financial ratios, time series analysis, inter-firm comparisons, cash flow statements,
multiple regression analysis, graphs, percentages etc., have been used. The focus is on the
operational measures and more on financial perspective side which measures company’s
strategy, implementation, improvement in profitability, maintaining liquidity and solvency for
both short term and long term range. The present study has been conducted by applying a three-
fold approach – a survey of the managerial perceptions on financial and operational management
as well as the statistical analysis of published financial data of the Karnataka Power Corporation
Limited and inter-firm comparison study for the FY 2004-05.

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3 OBJECTIVES OF THE STUDY:
In the literature review study, it revealed that most of the power generation utilities of
India are not practicing prudent financing and investment decisions in convergent with global
standards. Hence they are facing all kinds of new emerging issues on account of liberalization,
privatization, and globalization and WTO compulsions. Since the financing and investment
decisions are the most significant and delicate areas in the field of corporate financial
management, the present research study is undertaken to analyze the financial performances of
KPCL and its impact on the business and to identify the problems faced by them and to suggest
ways and means. The present study broadly focuses on Corporation’s financing and investment
decisions i.e., How far the existing financing and investment decisions are prudently taken to
increase returns on capital employed? How the assets are utilized and what is the management
style etc.

Broadly, this study is focusing on stake holder’s interest in the power sector. The
objective of the study is to review the overall status of power sector and to know the impact of
the reform progress initiated by the government under the Electricity Act 2003. Keeping in view
the interest of all the stakeholders, the present study is aimed to diagnose the financial health,
operational performance.

1 To review the performance of power generation sector of Karnataka State.

2 To identify the existing problems associated with the Financing and Investment
decisions in Karnataka Power Corporation Limited.

3 To suggest the ways and means for improving its financing and Investment practices
to enhance the profitability and overall operational efficiency of power plants of the
organization.

The results of the investigation have been focused on financing and investment decisions
contributing to the business performances of the Corporations. However, the geographical
coverage of the study is confined to the Karnataka State. As such, it is presumed that the results
of the present study will be of great value to the companies involved in power generation

7
especially in the developing economies. The outcome of the study would also help the company
to improve the financial performance, to formulate suitable strategies and programmes and set
benchmarks, which may lead to become world-class power generating company. The findings of
the study are expected to be benefited to the corporate managers, policy makers, fund managers,
investors, economists and researchers.

4 BRIEF REVIEW OF POWER SECTOR IN INDIA

The power sector in India falls in the Concurrent List under Entry 38, List III of the
Seventh Schedule read with Article 246(2) of the Constitution of India, 1950 and hence, both
Union and States of India have jurisdiction over this sector. The State Legislature has full power
to legislate regarding the power sector, subject to the provision that the State enactment does not
conflict with any Central enactment. Till 1995. After the liberalization and reform process
initiatives, it has come down significantly with the advent of private sector participation. For the
last fifty years, the installed capacity has increased more than 100 times. The installed power
generation capacity in the country which was at 1,400 MW in 1947 increased to 1,41,080 MW as
on 31st January 2008 ( Table-1). But in reality as of now, the status is Electricity generation by
power utilities during 2007-08 was targeted to go up 7.2 per cent to 710 billion KWh.

The government of India had targeted capacity additions of about 41,110 MW during the
plan .However it was able to achieve only 6853 MW which represents at 17% of projected. In
the 11th Fie Year Plan (2007-12), it is projected to add 78,577 MW. The peak demand and
energy requirement by the end of the 11th Five Year Plan (2007-2012) has been projected at
1,57,107 MW and 9,75,222 MU respectively. The Government of India plans around 1,00,000
MW of additional capacities during the 10th and 11th Five Year Plan periods. These ambitious
plans have certainly insurmountable tasks before the country. To achieve this, the programme on
Ultra mega power projects has been initiated.

5 GROWTH OF POWER SECTOR IN KARNATAKA.

The State has been scarcely endowed with resources like coal, oil or nuclear power
compared with the hydro-electric power. The west-flowing rivers are all gifted with hydro-
power potentially which is estimated at 5,500 MW. Karnataka’s wind electricity future appears

8
far brighter than it does to the supply-side. Karnataka is blessed with long coastal line of 400
kms where the possibilities of power generation by using tidal motion of the Arabian Sea may be
examined by making studies to determine the mode of development and the economic viability
for the state. As of now, the Karnataka State has 8,794.67 MW installed capacity as on 31st
January 2008. It comprises of 3,2,88 MW Hydro electric (37%), 3,757 MW thermal power
(43%), 1,558 MW renewable energy (18%) and 190 MW (2%) from nuclear energy at Kaiga in
Karwar. Karnataka Power Corporation Limited which holds 57% of the total installed capacities
(Table-3).

INSTALLED CAPACITY OF KARNATAKA (MW)

AS ON 31.01.2008

RES, 449.10,
8%
NUCLEAR, 0,
0%
THERMAL,
2097.92, 36%

HYDRO,
3288.20, 56%

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 SECTOR WISE BREAK-UP (MW)
AS ON 31.01.2008

Central, 1263.57,
14%

Private, 1695.88,
19%

State, 5835.22,
67%

State Private Central

Many organizations such as KPTCL, Power ministry, Central Electricity authority and
planning commission of Government India etc., have carried out the detailed study on power
sector of Karnataka and projected that there is a huge gap in demand and supply of electricity in
Karnataka. As per the KPTCL projection, based on the forecast of scenario approach, it has been
estimated for the end of FY 2012 that it would be required at least 10,964 MW with energy of
60,894 MU respectively. As per the projection of 11 th Five year plan of government of India, in
the next four years (2007-08 to 2010-11) it shows that nearly 2080 MW is going to add in the
installed capacity in the State. Therefore the corporation has to contemplate to set up new Units
at least 500 MW of installed capacity per annum. It requires at least about Rs.2000 crores for this
investment. Therefore, the financing and investment programmes to be drawn up the corporation
separately. If the State Government is serious about achieving a growth rate in the State
domestic product of 8 per cent, then the power availability in the State will have to increase by
at least 10 per cent of installed capacities each year.

6 INITIATIVES ON POWER SECTOR REFORMS IN KARNATAKA

The Government of Karnataka has recognized the situation of acute power shortage. The
careful analysis of its root causes and a wide debate on options available has decided to
accelerate the reform process of power sector. Government of Karnataka announced its general

10
policy on power reforms during January 1997. Karnataka Electricity Reforms Act 1999 was
brought into effect in June 1999. In November 1999 the Karnataka Electricity Regulatory
Commission was constituted. The Memorandum of Agreement was entered into with
Government of India during February 2000 to implement reforms in the power sector.. The
ultimate objective of the power sector reforms is for the government to withdraw from the power
sector as an operator and regulator of utilities.

Erstwhile KEB restructured and new entities viz, Karnataka Power Transmission Corporation
Limited, and Visveswaraiah Vidyuth Nigam Limited were incorporated in August 1999.
Karnataka Electricity Regulatory Commission was established and made functional in November
1999. Further to the reform process, distribution function was taken out from KPTCL and
established four distribution companies viz, BESCOM, MESCOM, HESCOM and GESCOM
and monde operational from 1st June 2002. Further a three year metering programme and energy
audit was launched. An Anti-theft law to curb and reduce theft of power was brought into force
in April 2002.

The Government of Karnataka on the Power Sector reform process specifically proposed the
grant of maximum autonomy to the restructured companies to manage their business along with
commercial lines. However, this has not yet been provided, which is obviously a major
impediments to the reform process. According the Chairman of the KERC, ‘the restructuring of
the power sector is a failure since electricity companies are not functioning independently. The
way forward for power sector reform in the State is the political commitment. And the feasibility
of linking central government assistance with the progress of effective implementation of the
reform will be one such possible measure. The improving recovery from agricultural sector is
needed which is main reason for the continued poor financial performance of the restructured
electricity supply companies in the State. Planning and monitoring agency or ministerial
committee under the chairmanship of Chief Secretary should be set up to review the
implementation of reform policies. An advisory group of experts and professional with vide
experience and expertise in the field must be established to assist the Steering Committee in its
tasks. Efforts should be in place to develop a competent cadre of professionals to man senior
positions in the power companies. There should be an establishment of a detailed financial action
plan for continuing the reform efforts with clear objectives and process after getting approval of

11
KERC. There should be enforcement of performance contract with the public sector power
utilities so that efficient performance can be obtained. And the power supply companies should
be encouraged to outsource the non-core activities. It helps them to reduce cost of operation and
improve collection efficiency.

7. BRIEF PROFILE OF KPCL

Karnataka was the first State in the country to conceive and setup a professionally
managed power corporation to plan, construct, operate and maintain power generation projects in
the State. The Karnataka Power Corporation Limited was incorporated on 20 th July, 1970.
Starting from an installed capacity of 746 MW at its inception, it has now reached an installed
capacity of 4995 MW and generated 26,635 MUs as on 31.3.2007(Table-4). Its profit merely of
Rs.13 lacs in 1970 rose to Rs.322 crores in 2006-2007. At present, it owns and operates 31 dams
19 power generating stations with capacity ranging from 0.35 MW to 1470 MW. In terms of
installed capacity as of now, hydel capacity accounts at 3393 MW accounts for 66 percent of the
total installed base, while thermal capacity at 1598 up to 32 per cent of the total and wind mills at
0.10 per cent.

The Plant Load Factor at the thermal power station has achieved at 89.17% in the FY
2006-07 with auxiliary consumption of 8.22%. The specific coal consumption was at 0.65
Kg/Kwh and specific oil consumption was at 0.44 Ml/Kwh. whereas the plant availability factor
ahs achieved at hydroelectric power plant at 93.25%. The installed capacity has increased at
14.81% whereas the electricity generation has increased at 55.42% during the five year period.
As of February 2008, it has manpower of total 6231 persons comprise of 2390 officers and 3841
workmen. The Corporation contributes more than 65 per cent of the electricity requirements of
the State.

8 OPERATIONAL ASPECTS OF KPCL

On detailed study and analysis of the operational and financial performance of the KPCL
for the FY 2002-03 to FY 2006-07. The total installed capacity which was at 4350.48 MW in FY
2002-03 has increased to 4994.82 MW in FY 2006-07 with an addition of 644.34 MW which
represents 14.81% over the base year. Whereas the electricity generation which was at 17138

12
MU in FY 2002-03 has rose to 26635.44 MU in FY 2006-07(Table-4). It represents the increase
of 55.42% over the base year. The Plant Load Factor which was at 88.23% in FY 2003-04 has
increased to 89.17% in FY 2006-07. It was also maintained at 100.50% during the March 2007.
The respondents have said that there is a chance to improve overall operational efficiency of the
power plants. Though the power plants are operating at comfortable level, it should make further
efforts optimum utilization of power plants. Based on the type of energy sources, the power
plants and efficiency are narrated here below.

8.1 HYDROELECTRIC POWER STATIONS

Installed capacity of 3,392.35 MW as on 31.3.2007 has generated 14,997 MUs. As per
the opinion of respondents, nearly 71% of them they have said that there is a chance for
further improvement of efficiency in hydroelectric power projects of KPCL by putting
efforts in Renovation, Modernization and Up rating programmes. Therefore it should put
further efforts on increasing of efficiency of power stations.

8.2 RAICHUR THERMAL POWER STATION

These seven Units of 210 MW each have generated 10,292 MU in FY 2002-03 and have
increased to 11,483.43 MU in FY 2006-07. It represents the improvement of at 11.57%
over the base year. These power plants were operated at PLF of 89.18% with an
availability factor of 93.26% during the FY 2006-07. As per the opinion of respondents
nearly 66% of them have said that there is a chance for further improvement of efficiency
in RTPS.

8.3 WIND POWER PROJECTS

In the wind power projects, the installed capacity which was at 4.53 MW has been
increased hardly to 4.55 MW over the five years. It has generated 14.93 MU in FY 2006-
07. The Karnataka has huge potential of wind power of 7500 MW. Out of which only 252
MW has been tapped in the State so far. There is need for greater momentum and rapid
increase in volumes in the wind power capacity.

13
 Therefore to bring down the overall operational and maintenance cost of power stations,
it has to evolve and implement a separate cost control programme. A steering committee under
the chairmanship of Chief Engineer (Electrical Designs) has to be constituted at corporate office
and at project areas or power stations and submits quarterly report to the Management for
review. Since most of the hydroelectric, RTPS power plants are older more than 15 to 20 years,
the corporation has to pay more attention on Renovation, Modernization and UP-rating
(R,M&U) Programme.

9 FINANCIAL ASPECTS OF KPCL

Next coming to the analysis of financial performance based on the audited balance sheets
of Karnataka Power Corporation Limited for the period of year 2002 to 2007. Respondents have
told that the corporation is in need of government support by way of financial assistance of
budgetary support and some have told that the KPCL may like to go to primary capital market to
raise the required funds through IPO and to list it on the Stock Exchange. Therefore the
corporation has to envisage increasing the equity paid up capital for long term use so as to
maintain debt equity ratio at comfortable level. It should also explore possibilities to enter into
capital market through Initial public offerings (IPO) with requisite government approvals. There
is no dearth of funds in the capital market.

9.1 DEBTS
On the debt management side, since most of the bonds and loans are raised on
government guarantee and repayment has to be done from time to time. The corporation has to
contemplate to create Debenture Redemption Reserve. The loan funds have been increased from
Rs.2845.27 crores in FY 2002-03 has increased to Rs. 5055.52 crores in FY 2006-07 which
represents the increase of 77.68% over the base year. The increase was due to investment in new
power plants at Bellary thermal power station and other ongoing projects.

9.2 FIXED ASSETS:

The Capital Work-in-Progress which was at Rs.668.85 crores in FY 2002-03 has
increased to Rs.2151.50 crores in FY 2006-07. The net increase of Rs.1482.65 crores represents

14
at 221.67%. It shows that huge amount of fixed assets has been lying in the Capital Work-in-
Progress. It means that many of the projects are under the stage of construction, renovations and
modernizations. The projects should be completed as much as possible and the amount should be
converted into fixed assets so that the depreciation benefits can be availed. If the work-in-
progress is not completed in time, it will lead to time and cost over runs, wear and tear etc. the
total respondents have stated that the fixed assets are not properly utilized. And many replies
received in writing from the various respondents which are narrated. Stating that a lot of old
scrap materials which are lying in project sites should be disposed off immediately and old plants
to be modernized to increase the efficiency. The Fixed Assets Turnover Ratio which was at
0.81:1 in FY 2002-03 has reduced to 0.68:1 in FY 2006-07. The frequency of verification and
system of reconciliation of physical balance with book balance needs to be improved keeping in
view the volume and value of fixed assets. Therefore the corporation has to give more attention
on proper and effective utilization of power plants

9.3 CURRENT ASSETS:

The current ratio which was at 3.19:1 in FY 2002-03 has increased to 5.09:1 in FY 2004-
05 and again increased to high at 8.32:1 in FY 2005-06. However in the next FY 2006-07, it has
been maintained at 3.72:1. Therefore 29% of the respondents have said that the current assets
have not been sufficient for utilization. Therefore the huge amount has been blocked in the
sundry debtors (KPTCL and ESCOMs), inventories, loans and advances etc., Therefore it should
focus on the current assets especially at RTPS.

9.4 INVENTORIES:
An action has to be taken to reduce the overall inventory level by exercising control
before new purchases. Strict control has to be exercised on overall purchases by constituting
purchase committee. It has to be identified of non-moving, slow moving and obsolete items of
inventory at all projects and dispose it off through auctions. Physical verification of inventory by
applying ABC Analysis to be done and regular and perpetual inventory programme has to be
drawn up. Enforcement of strict vigilance on each item of expenses by way of issuing circulars

15
and discussions should be held during monthly review meetings. Therefore it should place
additional control system in the corporation at all power plants.

9.5 SUNDRY DEBTORS:

The more and more attention has to be kept on debtor’s management. Because the entire
generated electricity is sold to five public sector distribution companies in the State. And
realization of bills is becoming very difficult to the organization. Therefore the management
should accelerate recovery actions with the government support. There is an increase in working
capital due to huge amount of funds is blocked in receivables. It has suggested that the
securitization of receivables from KPTCL and ESCOMs to be done or 100% payment of current
monthly bills to be ensured. KPCL is selling power based on Power Purchase Agreements. The
Tariff has not been increased for the last ten years to the KPCL. The KPTCL and ESCOMS are
approaching KERC every year and requested to enhance their tariffs. But it has not happed on
the KPCL end. Therefore rationalization of tariffs on the generation side has to be done.

It is suggested to take initiative in trading of power; project consultancy. There is a

possibility for diversifications in business activities of the corporation. It has 6237 employee
work force with vast amount of experience and skill sets in the power project management.
Therefore it should endeavor to exploit the man power in the productive activities and try to
control the major expenditure items such as;

1. Consumption of coal and fuel: It represents 52.27% of total turnover in FY 2002-

03 has reduced further reduced to 47.72% of total turnover in FY 2006-07. This is the
major component which contributing from the operation of RTPS. The corporation
should exploit other type of energy sources and endeavor to generate low cost of power
from Hydel, wind and biomass if any. RTPS should be kept for base load as much as
possible to mitigate the high cost of power generation and to improve the profitability.
respondents have told that there is a possibility of reducing coal and fuel cost in the
power plants.

16
 2. Administrative and other expenses: It accounts 24.14% of total turnover and
26.78% of total expenditures in the FY 2006-07. it is highest over the previous five years
because there were bad debts written off, donation of assets, pension, gratuity, VRS etc.,
Respondents have told that there is a possibilities of reducing the administrative and other
expenses.

3. Financial charges: It represents 10.22% of total turnover and 11.32% of total

expenditure respectively in FY 2006-07. The corporation has to give more attention to
reduce financial charges, by way of swapping of high cost borrowings, financial
engineering. It should raise funds whichever is low cost and off-load which is high cost.
It should prune down the unnecessary expenses on inventories, working capital
management, delayed period payment on borrowings etc.,

4. Depreciation: It is the non-cash expenses, which work out to 9 to 10 percent of the

total turnover. It is accounted as per the rates specified in the Electricity Supply Act 1948
but not as per the Electricity Act 2003. The debate is still going on whether depreciation
has to be accounted based on the old Act or new Act. It has to ensure that what are the
consequences thereby especially on the old power projects. The clear framework has to
be placed in the corporation after studying the various provisions of The Companies Act,
1956, The Income Tax 1961 and The Electricity Act 2003.

The Debt equity ratio, Earning Per Share, Debt Service Coverage ratio and current ratio are
to be maintained at optimum level. It should put pressure on ESCOMs with necessary
government support. It should increase the other income or miscellaneous from non-core
activities. It should try to reduce the coal and fuel cost, administrative and financial charges. It
should nurture the human resources so that talented pool can be retained.

In a nutshell, on reviewing overall observation of the operational and financial parameters of

performance, the corporation has to try to utilize full capacity of the power plants by increasing
PLF and try to reduce the auxiliary consumption. The procedure of physical verification of
inventory followed by management needs to be strengthened in relation to the size of the

17
corporation and nature of the business. The corporation needs to be strengthened the internal
control system to make them commensurate with the size of the corporation and nature of its
business for purchase of fixed assets, inventory, sale of energy including execution of works
contracts and accounting of coal. The corporation has to create debenture redemption reserves.
As required under section 117(C) of the Companies Act, 1956. Capital work-in-progress should
be finish it off early and depreciation should be claimed thereof. Equity capital should be raised
for funding of new projects. It should put efforts to increase Return On Capital Employed
(ROCE), since it is making reasonable profits, it should make dividend payments to the
shareholders (increase dividend pay-out ratio).

10 INTER-FIRM COMPARISION STUDY

For the comparison study, it was carried out only for one financial year 2004-05.
However, it may construed that there would not be much difference on year to year except in the
abnormal cases. Especially in the power generation companies, the financial performance would
be on steady growth or maintenance from year to year. This study brings out quite interesting
results of the power generation companies of India. The following observations were arrived at.
In terms of size, the NTPC Limited is the number one in the highest installed capacity of 23,435
MW with a generation of 1,58,271 MU. Secondly the Andhra Pradesh Power Generation
Corporation limited with installed capacities of 6,555 MW with generation of 28,720 MU. And
thirdly, the KPCL stands at 4,640 MW with a generation of 18993 MU during the year.

On comparison of book value of the equity shares, it is maintained at the highest value in
the private sector companies. First of all it is the highest of Rs.342 per share in Reliance Energy
Limited which is at face value of Rs.10 per share. Secondly in the TATA Power Company
Limited at Rs.260 per share of face value of Rs.10 each. Thirdly the public sector undertaking,
the NTPC Limited is maintaining at high of Rs.51 per share of face value of Rs.10 each. And in
the fourth position, KPCL would come at Rs.3413 per share of face value of Rs.1000 each. Fifth
is of NHPC Ltd at Rs.1464 per share of face value of Rs.1000 each. The AndraPradesh Power
Generation Corporation Limited (APGENCO) is yet to take its shape which suffering with debt
burden (Table-6).

18
 EPS is also highest in the Reliance Energy Limited and at the Tata power company
Limited which are maintained at Rs.28 per share respectively. Whereas the return on equity is
highest in the NTPC Limited at 14% secondly it comes to KPCL and Tata Power Company at
11% respectively. The debt equity ratio is quite low in the NPTC compared to all other
companies. And on the dividend pay-out ratio it is highest level of 34.08% at NTPC Limited and
secondly at The Tata Power Company Limited which at 26.86%. That means these two
companies paying more dividends to the shareholders when the profit is earned. On review of
overall efficiency rating of selected companies, the TATA Power Company stands first, NTPC
Limited at second position, Reliance Energy Limited at third, NHPC at fourth, KPCL at fifth and
APGENCO stands at sixth position.

11 PRACTICE OF MANAGEMENT

The corporation has adopted professionalism in the management practice to meet the
challenges of a competitive scenario in the power sector. It has cost consciousness and
transparency in the day to day transactions. It is consistently maintaining time and cost element
in project execution benchmarking with the best in India and abroad. The financial and
commercial systems to ensure fair play for stakeholders like vendors, contractors and lenders.
It is focusing on importance for obtaining lawful consents, permits and clearances in the
activities. Contractors, suppliers and other business associates are expected to comply with
relevant legal requirements for smooth running of business. Unnecessary wastages are
eliminated and savings are obtained through a professional approach inn design, execution and
operation and maintenance of power projects. It is consistently upgrading the knowledge and
skills of employees through conducting continuous in-house training programmes. The
Corporation, as a public authority, has taken steps towards the compliance of the Right to
Information Act 2005.

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 The Corporation has created separate task forces to take up research and development
activities in order to optimize generation from the existing power plants thorough
improvements and also to adopt new technology for higher efficiencies in operation and
maintenance of power plants. Some other areas where newer technologies have been
adopted like Renovation and modernization of existing power plants are contemplated on a
continuous basis. The level monitoring to Talakalale Dam with GSM based technology has
been implemented for optimum usage of water resources. Condition monitoring of generator
transformers healthiness has been initiated which will decrease the failure rate.

12. POTENTIAL FOR POWER PROJECTS IN KARNATAKA

Considering the growing need for power, GoK has entrusted KPCL with the development
of new thermal power projects and Hydel projects totaling to 7500 MWs. Governments of
Karnataka vide GO No. EN 76 PPC 2006 dated 13.7.2006 has allotted six new coal based
thermal plants to KPCL. Out of six, two power projects have been entrusted to KPTCL. The
Government should make attempts to promote expeditiously the coal-based power projects. This,
in turn, would have a beneficial impact on the growth of the State domestic product (SDP). The
State Government's move to add capacity through liquefied natural gas or liquid fuel gas route
was also not in the long-term interests because of the cost implications, unstable oil price at
international market and turmoil in the Middle East countries. Thereby the per-unit tariff could
be at Rs 6 a unit, more expensive than captive generation costs and may also lead to the bad
experience of as Dhabol power project in Maharasthra. As per the programme of Government of
India, one Ultra Mega power project is sanctioned to the State to set up in coastal Karnataka.
However, due to resistance from environmentalist, it is unable to launch.

India has estimated 45,000 MW of wind energy potential assuming 1% of land

availability for wind energy potential identified by the Ministry of Non-Conventional Energy
Sources (MNES). Karnataka is bestowed with good renewable energy potential of about 10,650
MW, which includes 7,500 MW of wind energy. The technical potential has been estimated at
13,390 MW assuming 20% grid connections. At present, Karnataka has 266 MW installed
capacity in 252 projects throughout Karnataka. There is need for greater momentum and rapid
increase in volumes in the wind power capacity in the state. The potential site for the wind

20
power projects identified are:1) Kappatagudda (Dharwad), 2) Jogimatti (Chitradurga) 3) Gokak
(Belgaum District) 4) Malagatti Hanumasagar Raichur District) and 5) Bommanahalli
Hanumanamatti (Dharwad District).

Among all the districts in the Karnataka, Chitradurga district is found to the best and is at
its forefront in development of wind power. With the pace of development going in this district
it appears that the entire power requirement of the district could be met from wind energy alone.
Due to advancement of wind turbine technology, there has been upward trend for the
optimization of space and energy, which is the new mantra in wind power development today.
There are different categories of high wind turbine ratings in recently installed that the Indian
companies vying with their foreign collaborators in catching unit ratings.

The fiscal benefits or incentives to the promoters yield high rates of return on capital
investments in the wind and thermal power projects. If the Karnataka government wants the state
to be the most favoured destination of private promoters, it should swiftly remove bottlenecks
from the power sector, and implement the infrastructure projects without any time slippage. The
differential tariff which will be determined on a cost of serving power to a particular category of
consumer or area, plus profit has got a lot of positives. Mainly to drive efficiencies in distribution
companies through stake holders and to drive down the cross subsidy level. The cost of serve is
constituted of direct and indirect costs incurred to the electricity supply companies.

13. IMPACT OF ELECTRICITY ACT 2003 ON POWER SECTOR

The power sector falls in the Concurrent List under Entry 38, List III of the Seventh
Schedule read with Article 246(2) of the Constitution of India, 1950 and thus, both Union and
States of India have jurisdiction over this sector. Hence, the State Legislature has full power to
legislate regarding the power sector, subject to the provision that the State enactment does not
conflict with any Central enactment. The Act is moving towards creating a market-based
regime in the Indian power sector and consolidates the laws relating to generation, transmission,
distribution, trading and use of electricity. It generally takes measures to develop the electricity
industry, thereby promoting competition, protecting interests of consumers and supply of
electricity to all areas. It also takes care of rationalization of electricity tariff ensuring transparent
policies regarding subsidies and promotion of environmentally friendly policies. The provisions

21
in the Act will finally change the present Single-Buyer model; to Multi-Buyer model. There
would be several players operating at all the different stages of the power industry: generation,
transmission and distribution. Open access to transmission and distribution system will create
market for power. This will provide tremendous potential for investment in all the segments
resulting in strengthening infrastructure which is critical for the Indian power sector.

On Generation: The Act will permit free entry into generation thereby de-licensing the
generation. However, hydroelectric power projects will require usual clearances from CEA
(Sec.7), Environment ministry and state governments. Any generating company may establish,
operate and maintain a generating station and have grid connectivity it is complied with
technical standards laid by CEA. The IPPs can have access to transmission lines without any
discrimination or can construct their dedicated lines and have complete commercial autonomy
to sell its power to any entity. The open access mechanism may lead to declining electricity
prices in line with the international experiences. For example, electricity prices, in UK alone
have fallen by over 30% over the last decade and similar trends have been observed in USA and
European countries (Haldea, 2003).

The Electricity Act 2003 should have some provision for exemption of statutory duties
on Captive Generation in Remote and inaccessible un-electrified villages to encourage owners
of such facilities. Provision should also be kept in the act for Stand Alone System of
Generation and local Distribution in Rural Areas by allowing owners of Electric Power
Producers to have own Generation Systems and also own consumers. The mode of generation
of Power could be by Fuel, Small Hamlets or waterfalls or other Non-Conventional Energy
Sources. Broad consensus amongst the delegates was that a National Policy on Electrification
and local Distribution in Rural Areas has also to be evolved and spelt out as per the Act.

14. FINDINGS AND CONCLUSIONS

Electricity industry has worked for over 50 years with a set of framework of regulation
Excessive government involvement has had its effect. The industry needs to be reformed and
restructured to achieve technical, commercial and financial soundness, growth; competition and
efficiency have to be secured to take care of larger interest of consumers. Over the past decade

22
new financing and advanced technology along with privatization and liberalization process,
Reforms have shown dramatic growth in telecommunications but not in power sector owning to
its own peculiarity such as huge investment with long gestation period, shortage of energy
resources, socio-economic issues etc. The Karnataka has to create additional installed capacity at
least at 4500 MW for the period of 2 to 3 years. It requires nearly 18,000 crores. It may arrange
finance, but the coal availability for thermal projects is very difficulty in the near future. Country
is already facing acute shortage of coal to all the thermal power plants. Hence the Karnataka has
to promote or put more emphasis on renewable energy sources for short term and hydal power
projects for the long term planning. To utilize indigenous technology in wind turbine project
available with National Aerospace Laboratories Limited so that 50% cost reduction can be
achieved. . Implement advanced technologies of IT tools, better feeder/energy management
techniques in the system so that it can be made sustainable and a profitable center. Apart from
power generation initiatives, it has to tackle down on energy saving mechanisms, bring down the
T&D Loses at distribution channel s and proper billing improves collections.

Due to onset of the Electricity Act 2003, there are huge opportunities opened up for the
efficient players. Government of India and many State governments wants infuse competition in
this sector. However due to its own inherent bottlenecks, like large amount of capital
requirements, leakage in Transmission and Distribution losses, poor recovery in agriculture
sector, the sector could not move forward to the expected level. If the effective management
tools are implemented, the plugging of loop holes is possible. A central policy goal in the filed of
electricity is that of shifting to a competitive market framework, where electricity is bought and
sold across an ecosystem of producers, consumers and intermediaries. This framework
emphasizes choices by consumers, and competition being infused amongst producers. Under
this framework, patterns of energy conservation, and time -of-day characteristics of consumption
would be shaped by price-based incentives. The mechanism of the availability based tariffs
(ABT) is yet to be made use of the opportunities and challenges which were opened up by the
Electricity Act 2003.

Note that the financial measures alone not sufficient to guide and gauge the performance
in creating value to the organization; they depend on non-financial measures like customer

23
satisfaction, internal business processes for performance improvement, innovation, skills and
learning attitudes of the employees etc., The corporation should implement modern management
tools such as Economic Value Added and Balance Scorecard. Respondents have said that the
corporation should set up a separate risk management committee to evaluate the risk exposure
and report to the management from time to time. And it should set benchmark of international
standard and perform on par with NTPC, Reliance Energy Limited and the TATA Power
Company limited so that the consumers and stakeholders will be benefited at large ultimately.
Since the power sector especially electricity generating companies are contributing much of the
carbon dioxide, the corporation should take effective measures in the protection of environment.
Because the concern on global warming is hot up across the globe. Most of the developed
countries are pointing towards the developing countries and pressuring to mitigate the global
warming.

****O0O****

ANNEXURE

INSTALLED CAPACITIES FROM FY 2002 TO 2008.

Table: 1 (in MW)
Financial Thermal Hydel RES Nuclear Total Gener-
Years ation
(BU)
2002-03 76,607 26,910 1,628 2,720 1,07,973 515
2003-04 77,968 29,500 2,488 2,720 1,12,058 531
2004-05 80,902 31,135 3,811 2,770 1,18,619 558
2005-06 83,982 33,599 6,192 3360 1,27,673 617
2006-07 86,015 34654 7,761 3,900 1,32,329 662
31.01.2008 90,896 35,209 10,855 4,120 1,41,080 586*

Source: Annual Report 2006-07 of Central Electricity Authority.

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* For the FY 2007-08, it is targeted to achieve electricity generation at 710 BU by the end of
March 2008.

2. ALL INDIA INSTALLED CAPACITY AS ON 31.01.2008

(Table – 2) (MW)
SECTOR THERMAL HYDRO NUCLEAR RES TOTAL
State 46475.33 25896.76 0 2081.67 74453.76
Private 9271.52 1230.00 0 8773.57 19275.09
Central 35148.99 8082.00 4120.00 0.00 47350.99
TOTAL: 90895.84 35208.76 4120.00 10855.24 141079.84

Source: Ministry of Power Website: http://www.powermin.nic.in/ , Last accessed on 22.2.2008

3. INSTALLED CAPACITY OF KARNATAKA AS ON 31.01.2008

(Table – 3) (MW)
SECTOR THERMAL HYDRO NUCLEAR RES TOTAL
State 2097.92 3288.20 0 449.10 5835.22
Private 586.5 0 0 1109.38 1695.88
Central 1072.67 0 190.90 0 1263.57
TOTAL: 3757.09 3288.20 190.90 1558.48 8794.67

Source: Ministry of Power Website: http://www.powermin.nic.in/ , Last accessed on 22.2.2008

4 OPERATIONAL PERFORMACE OF KPCL

(Table –4)
PARTICULARS 2002-03 2003-04 2004-05 2005-06 2006-07
Installed Capacity (MW) 4350.48 4365.48 4640.50 4640.50 4994.82
Capacity addition during year 228.00 15.00 275.00 0 354.32
Total Electricity Generation
(MUs) 17138 18426 18993 19888.93 26635.44
- Thermal 10292 11393 10731 9164.72 11483.43
- Hydel 6835 7017 8247 10709.12 14997.45
- Wind 11.00 16.00 15.00 15.09 14.93

5. FINANCIAL PERFORAMCE OF KPCL

(Table – 5) (Rs. in Crores)
SOURCES OF FUNDS 2002-03 2003-04 2004-05 2005-06 2006-07
Equity Paid up Capital 662.98 662.98 662.98 662.98 662.98
Reserves & Surplus 1315.22 1375.48 1599.81 1836.27 2262.37
Total Loan Funds 2845.27 3391.34 4038.14 4756.14 5055.52
Total Fixed Assets 3635.10 3777.81 4046.21 4483.56 5489.99

25
Net Current Assets 1146.07 1616.32 2199.01 2739.00 2472.70
Total Turnover 2164.04 2496.68 2617.04 2669.56 3750.37
Total Expenditure 1916.12 2227.48 2349.59 2325.00 3379.31
Profit After Tax 240.69 223.23 239.46 251.58 322.32
Book Value per share (Rs.) 2983.79 3074.69 3413.05 3769.71 4412.42
ROCE (%) 12.17 10.95 10.58 10.07 11.02
EPS (Rs) 363.04 336.71 361.19 377.47 486.17
Dividend (%) 2 2 2 2 2.24
Debt Equity Ratio 1.44:1 1.43:1 1.72:1 1.82:1 1.66:1
Current Ratio 3.19:1 4.63:1 5.09:1 8.32:1 3.72:1
DSCR 1.03:1 2.44:1 2.61:1 2.19:1 2.20:1

6. INTER-FIRM COMPARISION STATEMENT (Table – 6)

PARTICULARS APGE TATA
KPCL NCO NTPC NHPC REL POWER
Book Value Per Share (Rs.) 3413 100 51 1464 342 260
Face Value per share (Rs.) 1000 100 10 1000 10 10
Earning Per Share(EPS) 361 2 7 73 28 28
Return on Equity (%) 11 2 14 5 8 11
Dividend Per Share (Rs.) 20 0 2 15 5 7
Debt Equity Ratio 1.72 4.72 0.41 0.53 0.65 0.63
Dividend -Payout Ratio (%) 5.54 0.00 34.08 20.47 16.73 26.86

REFERENCES:

1. Haldea G. 2003, ‘Access Bijli – ‘How to electrify our power sector’ ,Times of India, June
5, 2003, New Delhi edition.

2. Joskow, P.L.and Schmalensee, R. 1983, Markets for Power, an Analysis of Electric

Utility Deregulation, Massachusetts Institute of Technology Press, Cambridge, MA, pp
14-45.

3. Pandey K.P, Chairman, Karnataka Electricity Regulatory Commission (KERC), quoted

in The Hindu, dated 26 May, 2006.

4. The Electricity Act 2003. The Companies Act 1956..

5. Annual Reports of Karnataka Power Transmission Corporation Limited for FY 2003-04.

6. Annual Reports of Karnataka Power Corporation Limited for FY 2002-03 to FY 2006-

07.

26
7. Annual Reports for FY 2004-05 of NTPC Limited, Reliance Energy Limited, the TATA
Power Company Limited, National Hydroelectric Corporation Limited, Andhra Pradesh
Power Generation Corporation Limited.

8. Power sector review,

http://: www.cea.nic.in, www.kerc.org, www.karnatakapower.com, Last accessed on
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9. Sixteenth Electric Power Survey of India published Report by the Central Electricity
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10. The Economic Times, (Bangalore edition) dated 5.2.2008, Pp.13.

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Karnataka – A Case study of KPCL”, Renewable Energy and Environment for
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Pp.239-244.

14. Tanaji G Rathod 2008, “Impact of Availability Based Electricity Tariffs (ABT) on the
Power Sector - Case Study of Karnataka” in The ICFAI University Journal of
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15. Tanaji G Rathod 2006, “International Financial Reporting Standards (IFRS) - Emerging
Opportunities and Challenges for India”, CHARTERED ACCOUNTANT, New Delhi,
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Impact of the Electricity Act 2003” PARLIAMENTARY AFFAIRS, Bangalore, Volume
25, Issue 12, December 2005, Pp 23-33.

17. Tanaji G Rathod 2005,“Wind Power Development in Karnataka – A Micro Study”

published in monthly Journal SOUTHERN ECONOMIST, Bangalore, October 15, 2005,
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