Power Sector Reforms: If Wishes Were Horses

Power Sector Reforms : If Wishes were Horses

Madhav Godbole

Comprehensive power sector reforms, particularly in the transmission and distribution segments, have been discussed at least since 1993 when a Committee of the National Development Council comprising six chief ministers was set up. Conferences of chief ministers/power ministers were held in 1996, 1998, 2000 and 2001. However, in spite of the hardy ritual of conferences and resolutions without any seriousness of purpose – just to give the appearance of progress where there is in fact none – there is no light at the end of the tunnel. In fact the tunnel seems to get darker and longer each year.

No one can stop anyone from day-dreaming but if the central government starts day-dreaming and that too in respect of the future of a critical infrastructure sector such as the power sector, it should be a matter of serious concern. By definition, a dream has no relation to reality. But national policy on any subject must be rooted in realities. Importance of this is amply borne out by the provisions of the Electricity Bill, 2001 introduced in parliament which envisages, among other things, functional disaggregation of generation, transmission and distribution with a view to creating independent profit centres and accountability; competition, economy and efficiency to be promoted in the best interests of the consumer and the national economy; creation of transmission highways that would enable viable public and private investments in the electricity industry; trading in electricity; choice to the consumers, especially large consumers, to take power from the cheapest and most reliable source; rational tariff fixation based on cost of supply; transparent subsidies; steep reduction in transmission and distribution (T and D) losses and substantial reduction in theft of power; and privatisation of the sector. Before we turn to the feasibility of the proposed reform programme, even in the medium to long term, it may be useful to take stock of some of the more worrisome
developments in the power sector. It is necessary to underline that, under the Constitution, power is in the concurrent list and the primary responsibility for the sector is with the state governments. In particular, distribution of power is their exclusive responsibility. This fact is often lost sight of by the central government while announcing national policies on the subject. Keeping this in view, intensive discussions need to be held with the state governments, at the political level as opposed to merely the administrative level, on the Electricity Bill, 2001, as otherwise the bill, even after it
becomes an Act, will remain on paper as has been the fate of several other legislations in the country. Unfortunately, no such effort appears to have been made by the central government, though the bill underwent at least eight revisions.

At the Wrong End
It must be stated at the outset that the reforms in the power sector, which began in 1991, were started at the wrong end of generation instead of distribution of power. Perhaps this was due to the fact that opening generation for private sector was considered to be simpler and easier to handle, though this did not stop Enron, Cogentrix and other projects becoming objects of major controversy. This essay is, therefore, largely confined to the power sector reforms which are in the purview of the state governments. Comprehensive power sector reforms, particularly in the transmission and distribution segments, have been under discussion at least since 1993 when a committee of the National Development Council (NDC) comprising six chief ministers was set up. Conferences
of chief ministers/power ministers were held in 1996, 1998, 2000 and 2001. Some of the
important recommendations/resolutions of the conferences/committees included: rationalisation of tariffs through independent regulatory commissions, adoption of transparent policies on subsidies, acceptance of a minimum all-India agricultural tariff, benchmarking of tariff at the minimum of 50 per cent of cost of supply and agricultural tariff not to be less than 50 paise per unit, 100 per cent metering and energy audit, reduction of T and D losses through elimination of theft and strengthening/upgradation of sub-transmission and distribution system, privatisation of distribution in major / medium sized urban and semi-urban areas, and decentralised distribution management in rural areas. On the face of it, this reform agenda is no different from most of the provisions of the Electricity Bill. But the reality is far removed. There has been practically no worthwhile action on any one of these items except for setting up of electricity regulatory commissions (ERCs) in some 15 states. Of these 12 have become functional and more than seven have issued their first tariff orders.1 Orissa has gone ahead with a series of reforms including unbundling of the state electricity board (SEB) and privatisation of distribution. However, these reforms have run into major roadblocks and have, in fact, raised questions about their suitability in the Indian context. In spite of the hardy ritual of holding conferences of chief ministers and power ministers each year and passing resolutions, without any seriousness of purpose so as to show progress where there is none, there is no light at the end of the tunnel. In fact, the tunnel seems to get darker and longer each year.

Agricultural Tariff
Though over four years have elapsed since the time the decision was taken in the chief ministers’ conference to charge a tariff of at least 50 paise per unit for the agricultural sector, so far only nine states, namely, Assam, Delhi, Haryana, J and K, Kerala, Orissa, Manipur, Goa and Tripura, have implemented this decision. In most of these states, except Haryana and Tripura, agricultural consumption is negligible. None of the larger states have taken any action in the matter. It was also expected that by 1999, that is within three years of the decision of the chief ministers’ conference as above, the tariff would be raised to 50 per cent of the average cost of supply. There has been no progress in this regard. On an all-India basis, the tariff charged to agricultural consumers has increased marginally from a level of 12 paise per Kwh in 1991-92 to only 28.5 paise per Kwh in 2000-01. The subsidy on account of sales to agricultural consumers is estimated to have increased from a level of Rs 15,585 crore in 1996-97 to Rs 27,144 crore in 2000-01. It is important to note that the share of domestic and agricultural consumers in total energy sales has been increasing over the years. This share was about 52 per cent in 2000-01 as against 49 per cent in 1996-97. The subsidy on account of energy sales to domestic consumers is likely to increase from a level of Rs 4,386 crore in 1996-97 to Rs 10,062 crore in 2000-01.
There has been no progress regarding payment of subsidies to the SEBs in a transparent manner. Subvention given by the state governments to partly compensate the subsidised sales to domestic and agricultural consumers is estimated to have gone down to Rs 5,793 crore in 2000-01 as compared to Rs 6,631 crore in 1996-97. Uncovered subsidy, after taking into account the subvention received from state governments and surplus generated from sales to other consumers, is estimated at Rs 23,638 crore during 2000-01 as compared to just Rs 5, 800 crore in 1996-97. Gross subsidy (subsidy for domestic consumers, agricultural consumers and on inter-state sales) has gone up from Rs 20,210 crore in 1996-97 to Rs 37,037 crore in 2000-01. Gross subsidy per unit of sale has increased from 75.4 paise per Kwh in 1996-97 to 108.4 paise per Kwh in 2000-01. These are mindboggling figures by any standards but such is the mindset and profligacy of our rulers that no one is prepared to lose his sleep over the issue.
It is estimated that the surpluses generated by way of cross-subsidisation for the year 2000-01 were Rs 7,606 crore. Cross subsidy as a percentage of subsidy to agriculture and domestic
sectors has come down steeply from 41.7 per cent in 1992-93 to 20.8 per cent in 2000-01. This is due to the fact that the share of domestic and agricultural consumers, who get power at
subsidised rates, has been progressively increasing over the years as compared to the decline in the share of industrial sector consumption. Cross-subsidisation has become so unsustainable
that the industrial sector is taking recourse to setting up captive generation capacity. As a result of this as also the slow down of economic activity, industrial demand for electricity, which is the
most paying segment of the SEBs’ consumers, has declined over the last few years even in the
fastest growing states such as Gujarat, Maharashtra and Karnataka. On an all India basis, the
share of industry in the total energy sales has declined from a level of more than 50 per cent in
the past to 33 per cent in 1996-97 and 31 per cent in 2000-01. The tariffs for industry in most
states range between Rs 4 to Rs 5 per unit. In international terms, this is approximately 10 cents
per unit whereas industrial tariffs in most other countries range from 3 to 5 cents. Clearly, such
a high tariff will handicap Indian industry in competing internationally in the globalised environment.
T and D losses, which include technical and commercial losses, of 10-15 per cent are considered
reasonable by the central electricity authority (CEA). According to one estimate, out of the total
energy generated in 2000-01, only 55 per cent was billed (Rs 62,000 crore), while 41 per cent
(Rs 46,000 crore) was realised. Of the total energy generated, 20 per cent was accounted for by
theft (Rs 22,500 crore) and 4 per cent was commercial losses (Rs 4,500 crore). The remaining
(21 per cent) was technical losses. Since only a small part of the energy sold is metered (about
40 per cent), over the years part of the T and D losses are being hidden in the name of agricultural consumption which is mostly unmetered. Several recent studies in various states show that actual
agricultural consumption is much lower than what was estimated earlier. As a result, it is seen that
the actual T and D losses are as high as 55 per cent in Delhi, 51 per cent in Orissa, 47 per cent in
Haryana, 45 per cent in Andhra Pradesh, 43 per cent in Rajasthan and 39 per cent in Maharashtra.
It is necessary to note in this context that most of the losses take place in the sub-transmission and
distribution segment (66 KV and below) which is the most value-added stage in the entire power
sector. This is therefore the most crucial area calling for urgent reforms.
The pace of rural electrification has slackened considerably. As against the electrification of 1.20 lakh villages and 1 lakh villages in the Sixth and Seventh Plan respectively, only 18,000 villages were electrified in the Eighth Plan. This number is expected to come down further to 15,000 villages in the Ninth Plan. In this connection, it is important to note that only 31 per cent of the rural households have access to electricity. The central government has now accepted supply of electricity as a basic minimum service under the prime minister’s Gramodaya Yojana and it is targeted to supply electricity to all villages by the end of the Tenth Plan and to all households by the end of the Eleventh Plan. The per capita electricity consumption in India increased from 178 Kwh in 1985-86 to 360 Kwh in 1998-99, registering an annual growth rate of 6.5 per cent. The per capita consumption in 1997 of 348 Kwh compared poorly with that of a number of other countries — China (719), Brazil (1,783), Egypt (787), UK (5,843), Australia (6,606) and USA (8,747). This brings out the importance of this sector for the future and the stakes involved in ensuring that it is not permitted to falter due to short-sighted and populist policies.
If the published data are to be believed, the elasticity of consumption of electricity with respect to GDP increased from 3.14 per cent in the First Five Year Plan to 5.04 per cent in the Third Plan. Thereafter, however, it has declined rapidly and was 0.97 per cent in the Eighth Plan.

SEBs: Root of the Problem
It must be appreciated that the root of the problem in the power sector is the declining financial viability of the SEBs. The cost of supply has increased from 215.6 paise in 1996-97 to 303.8 paise in 2000-01. The gap between average cost of supply and average tariff has increased from 28 paise per Kwh in 1991-92 to 92 paise per Kwh in 2000-01. The recovery of cost of supply through tariff has declined from 76.7 per cent in 1996-97 to 69.8 per cent in 2000-01. In order to break even, the average tariff increase required during 2000-01 was about 93 paise per Kwh. Thus every additional unit sold by the SEBs adds to their losses. In the Maharashtra context, for example, nine out of every 10 consumers are being currently subsidised. As a result, the management by objectives (MBO) statement of SEBs is to minimise the sale of power to the subsidised categories of consumers. This has important implications for the demand estimates for the future. This was also borne out by the assessment made by the Negotiating Committee of Government of Maharashtra in the context of the Enron power project in the year 2001. It was seen that though there was considerable shortage of power in several states, no SEB was prepared to take Enron power unless it was made available at a tariff of about Rs 2.5 per unit.2
It is not surprising that the estimated commercial losses of SEBs (without subsidy) have more than doubled by 2000-01 and stood at Rs 26,013 crore as compared to Rs 11,305 crore in 1996-97. The commercial losses, with subsidy, for the above years are Rs 20,220.5 crore and Rs 4,674.3 crore respectively. The net internal resources (IR) of SEBs, which refer to the surplus left after meeting the revenue expenditure and loan repayment obligations, continue to be negative. They were expected to be Rs (-) 13,092 crore in 2000-01 as compared to Rs (-) 2,091 crore in 1996-97.
The working of SEBs is marked by very poor collection efficiency in terms of the billed amount
actually collected. Collection efficiency is as low as 85 per cent in some cases. A 45 per cent T and D loss, combined with 85 per cent collection efficiency means that an SEB collects revenue on only 46.75 per cent of the power generated by the system. No commercial entity can be viable if it collects revenue on less than half the output it produces. It is not surprising, therefore, that most
SEBs are bankrupt.4 The uncovered revenue arrears of state utilities outstanding against various
consumers increased from a level of Rs 9,014 crore in 1994-95 to Rs 18,786 crore in 1998-99.
These arrears worked out to 34 per cent of the annual sales turnover in 1998-99. This is equivalent
to locking up of nearly four months of revenue with the consumers at any point in time. In the case of
MSEB, the arrears are equivalent to practically six months of revenue!
The outstanding dues to be paid by the SEBs to the major central sector undertakings such as the
National Thermal Power Corporation (NTPC), National Hydro Power Corporation (NHPC), Damodar Valley Corporation (DVC), Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and others, as on March 31, 2001, were reported to be as large as Rs 27,760 crore. The receivables of certain central sector undertakings are quite substantial – NTPC (Rs 16,063 crore), NHPC (Rs 3,299 crore), REC (Rs 3,520 crore) and DVC (Rs 2,788 crore).
In terms of section 59 of the Electricity (Supply) Act, 1948, the SEBs are required to earn a
minimum rate of return (ROR) of 3 per cent on their net fixed assets in service after providing for depreciation and interest charges. The state governments are free to prescribe a higher ROR if considered necessary. There has been a sharp deterioration in the ROR of SEBs (without subsidy) from (-) 12.7 per cent in 1992-93 to (-) 35.1 per cent in 2000-01. Though subventions received from the state governments have increased the ROR, it still remains negative. It is interesting to see that even if the suggested national minimum agricultural tariff of 50 paise per Kwh had been implemented by all SEBs, the ROR would still have been (-) 28 per cent. The additional revenue mobilisation required to bring the ROR to 3 per cent was as high as Rs 28,239 crore in 2000-01. This brings into sharp focus the severity, complexity and enormity of the problem.
Unrealistic Resolutions
It is interesting to note against this background that the conference of chief ministers and power
ministers on power sector reforms held on March 3, 2001, which was acclaimed as a ‘landmark event’, is reported to have once again taken a series of decisions of ostensibly far-reaching consequences. One of these was to reach a break-even point in the current operations of SEBs in two years’ time and to achieve positive returns returns thereafter. The expert group on restructuring of SEBs (July 2001) has observed that, “even on highly optimistic assumptions about the pace of reforms, losses [of SEBs] will continue and could actually add up to about Rs 100,000 crore over the Tenth Plan period!” This shows how unrealistic, illusory and far-fetched are the deliberations of these conferences. Equally ridiculous and removed from reality was the decision to achieve 100 per cent metering of crores of presently unmetered consumers all over the country by the end of 2001. It is also pertinent to invite attention to the fact that the chief ministers of Punjab and Tamil Nadu did not agree with the following resolution of the conference on agricultural tariff: “It is necessary to move away from the regime of providing free power. The past decision of CMs of a
minimum agricultural tariff of 50 paise may be implemented immediately.” The government of Tamil Nadu has, in fact, reiterated in January 2002 its resolve to continue to supply power free of charge to agricultural consumers. So much for the so-called landmark event! The conference suggested the easy option of securitisation of past dues of central public sector undertakings (PSUs). Yet another totally unrealistic resolution of the conference pertains to “identifying and eliminating power thefts in the next two years”. Looking to the gigantic size and the complexity of the problem, it will be meaningless to wish it away in this manner. Surprisingly, the resolutions of the conference do not make even a passing reference to the Electricity Bill which is expected to become the law of the land soon.
Against this distressing background, it may be useful to discuss a few specific issues. First, let us turn to the proposal aimed at achieving the objective of ‘power for all’ by the year 2012. It may be best to examine it with reference to the performance in the recent past. As on March 31, 2001, the installed generation capacity in the country was 1,01,660 MW. Of this, 24.73 per cent was hydel, 60.03 per cent steam, 10.32 per cent gas, 0.86 per cent diesel, 1.25 per cent wind and 2.81 per cent nuclear. In terms of ownership, about 61 per cent was in the state sector, 29 per cent in the central sector and 10 per cent in the private sector.
While the hopes for a large step up in the private sector investment have been belied, public sector investment has come down steeply in the recent years. Thus, the share of power sector outlay, for both the centre and the states together, has come down progressively from 20.13 per cent of the total outlay in the Sixth Plan (1980-85) to 14.49 per cent in the Ninth Plan (1997-2002).
There have been large slippages in the targets set for addition to the generation capacity. This can be seen from the fact that in the Sixth Plan period, capacity addition was only 72.3 per cent of the target. This percentage came down steeply to 53.77 per cent in the Eighth Plan and is expected to come down further to just about 52 per cent of the original target (40,245 MW) in the Ninth Plan. Only in the Seventh Plan was the achievement reasonable (96.2 per cent).
Both these aspects — availability of Plan funds and implementation capacity – are relevant in the context of the large generation capacity addition of 106,700 MW which is being projected by the ministry of power for the period from 2002 to 2012. The target proposed is of 55,000 MW for the Tenth Plan (2002-2007) and 51,700 MW for the Eleventh Plan (2007-2012). This objective of ‘power for all’ by the year 2012, which effectively involves doubling of the generation capacity with associated transmission and distribution in the country in a decade, will require massive investment of about Rs 8,00,000 crore at the current price level. This needs to be seen against the achievement of capacity addition of about 14,200 MW in the Sixth Plan, 21,400 MW in the Seventh Plan, 16,400 MW in the Eighth Plan and the expected addition of just about 20,900 MW in the Ninth Plan. Clearly, the proposed targets, based on GDP growth rate of 9 per cent per year, are unreasonable and excessively ambitious. The assumed GDP growth rate itself is unrealistic.
The central sector and the private sector are expected to contribute approximately 42 per cent and 40 per cent of the total addition to the generation capacity respectively. Looking to the
achievement of the private sector so far, which was only 9.7 per cent of the total generation
capacity in March 2001, this is unlikely to be realised. This is further reinforced by the fact that
capacity addition in the private sector in the Ninth Plan is expected to be just about 6,735 MW or 38.3 per cent of the target of 17,589 MW. A note also needs to be taken of the fact that a large number of foreign companies have decided to leave their projects due to the bleak prospects in the sector. These include Mission Energy of the US, Cogentrix, Electricite de France, the UK-based Powergen, and more recently Enron. Several others like AES Corporation, Daewoo of Korea and UK-based National Power may also be on the way out. It is necessary to underline that with the bankrupt SEBs as sole buyers of their power, no sensible private sector investors will have any incentive or courage to invest in power generation or major transmission. It is thus doubtful if the private sector will be able to add generation capacity of 14,000 MW and 26,000 MW in the Tenth and Eleventh Plan respectively. Of the additional generation of over 1,06,700 MW, as much as 32 per cent is expected to be contributed by hydro generation. Looking to the time and cost over-runs on the hydro projects in the past, this too raises doubts about the feasibility of achieving the targets.

Exaggerated Demand Estimates
Attention may be invited to yet another aspect which is of critical importance in planning for the future. As has been seen time and again, the demand estimates made by the SEBs or the all-India power surveys have proved to be way off the mark. Thus, though the generation capacity addition in the Ninth Plan is likely to be just 52 per cent of the target, as in March 2001, there was a peak deficit of only 13 per cent and energy deficit of only 7.8 per cent at the all-India level as against a peak deficit of 18 per cent and energy deficit of 11.5 per cent during 1996-97. This is partly due to a marked improvement in the plant load factor (PLF) of thermal plants as well as inter-regional transfer of power through the national grid. The increasing contribution of service sector to GDP and the sharp decline in the elasticity of electricity consumption referred to earlier are other factors which need to be reckoned with. The price at which electricity will be made available is also important in assessing the demand. For example, the large demand, by way of theft of power or unmetered supply at highly subsidised tariff, will not remain at the same level if power supply is to be metered and charged at a reasonable cost-based tariff. Slogans such as ‘electricity for all at any cost’ or ‘better to have power at any cost than no power at all’ are not borne out to be true. The significant contribution which demand side management (DSM) can make to containing the demand also needs to be taken note of in making projections of demand for electricity. It hardly need be emphasised that reasonable accuracy of demand projections is particularly important due to the highly capital intensive nature of this industry.

We are now living in an era of MOU (memorandam of understanding). There is a touching belief in the government of India that signing MOUs is an answer to all our problems. This is in spite of the poor record of central PSUs which had signed MOU with the government year after year. The central government, through several ministries and organisations, is now compelling the state governments to sign MOU for availing of central assistance for various sectors. This is a new variant of conditionalities imposed by the World Bank and the International Monetary Fund which the central government used to find so abhorrent and repelling. In the recent past, the state governments have been made to sign such MOU with the ministry of finance, ministry of power, ministry of home affairs and so on. Twelve states are reported to have signed MOU pertaining to power sector reforms and similar MOU with most of the remaining states are stated to be at an advanced stage.5 This new practice raises some important issues pertaining to centre-state relations in the context of the autonomy of the states in a federal set-up. Time alone will tell whether any of the undertakings given by state governments in these MOU ever get implemented or they meet the same fate as the pious resolutions passed by the successive conferences of the chief ministers and power ministers. It will be pertinent in this context to refer to the tripartite agreement entered into by the government of Maharashtra with the central government and the Reserve Bank of India in connection with the counter-guarantee given by the central government for the Enron power project in September 1994. Under this agreement, the state government had agreed, inter alia, to undertake restructuring of MSEB, maintain ROR of three per cent on net fixed assets, and a receivable and payment position of three months from FY 1998-99 onwards.6 None of these undertakings have been fulfilled by the state government.

The combined fiscal deficit of the states and the central government of over 10 per cent of GDP
has already become a matter of serious concern. However, the real deficit, in totality, is much
larger and more alarming if one takes into account the oil pool deficit and the losses of PSUs
at the centre, and the off-budget borrowings through special purpose vehicles (SPVs) and the
losses of SEBs in the states. Any programme of containing the fiscal deficit will have to deal
firmly with the ever-growing losses of the SEBs brought out above. However, the persistent
question still remains – who will bell the cat? The only motto of the opposition parties in the centre
and the states is to oppose whatever may be the proposal on the table. As a result, all parties in
the opposition behave in the same way whatever may be their ideology or programme nationally.
In such an environment, where there is opposition for the sake of opposition, economic reforms
such as in the power sector will always find no takers. It is a tragedy of monumental proportions
that there is no national consensus on basic economic reforms or, for that matter, even the
national security interests of the country.

Rationalisation of Tariffs
Among all the reforms in the power sector, perhaps the most crucial is of rationalisation of the tariff structure. The best instrument for the purpose is establishing independent and autonomous ERC in every state. It is necessary to underline that if ERCs fail to come up to the expectations, it will be a big setback to power sector reforms. Unfortunately, the experience of ERCs so far is a mixed one.
First, in the selection of the chairman and members of the ERC, the net has not been cast-wide
enough. A predominant number of chairmen and members are drawn from power engineers and the judiciary and bureaucracy. The power sector requires a multi-disciplinary approach and persons having expertise in a number of other areas such as accountancy, finance, management and economics also need to find a place on ERCs. A step in this direction will enrich the ERCs and help them address the tasks on hand much more capably.
Second, at present, there are no arrangements for organising training and refresher courses for the chairmen and members of the ERCs. Looking to the complexity of the problems in the sector, it is necessary that such arrangements are made to keep the ERCs abreast of the national and international best practices and latest developments in the field.
Third, there have been inordinate delays in making either the first appointments or filling up the vacancies arising in the ERCs, whether of the chairmen, members or the staff. Thus, for example, the post of chairman, CERC, has been lying vacant for months together after the former chairman retired. The same was the case in respect of secretary, CERC. This needs to be avoided scrupulously.
Fourth, the original intention of giving a status of high court judges to the chairman and members of ERC seems to have been given up, perhaps in the interest of economy. However, this is clearly a shortsighted approach.
Fifth, there have been inordinate delays in the issue of tariff orders by some of the ERCs. For example, the Maharashtra ERC has taken nearly a year, from the time the original proposal was made by MSEB, to give its decision. Such delays further aggravate the already precarious financial position of SEBs.
Sixth, not all ERCs have been given all the powers as envisaged in the Act. In several cases, their jurisdiction is confined to fixation of tariffs. This is shortsighted and the ERCs need to be given the wider powers to approve investments in the sector, to issue licences and so on.
Seventh, the present practice of deciding tariffs on an annual basis needs to be given up as soon as possible. There is no reason why multi-year tariff setting cannot be done by the ERCs.
Eighth, the state governments must learn to respect the orders of the ERC and not override them by agreeing to give subsidies to certain categories of consumers from the state budget. Thus, for example, the government of Maharashtra agreed to give subsidy of Rs 750 crore to the MSEB in the year 2000-01 for supplying power to agriculture and powerlooms at a concessional rate, as compared to the tariffs for these categories fixed by MERC. The same is likely to be the case in respect of the tariff order issued by MERC in December 2001. The experience in Andhra Pradesh was no different. Such actions frustrate the basic objective of rationalisation of tariffs by setting up the ERCs.
Ninth, ERCs must be made financially self-supporting by levy of a small cess on power distributed in the state. The ERCs must have powers to appoint their own staff, undertake studies and hire consultants as and when necessary.
Tenth, all ERCs must appoint advocates to represent the interests of consumers in matters coming up before them for a decision.
Eleventh, conscious steps need to be taken for building of civil society institutions, consumer
organisations and non-government organisations (NGOs) to enable them to plead the interests of consumers more effectively.
Twelfth, it has been seen that in some cases the state governments have been prevailing on SEBs not to make proposals to the ERC for revision of tariffs. In certain other cases, such as in Maharashtra, the state government has formally opposed the proposals of MSEB for revision of tariff under the pretext that the increase in tariffs will lead to law and order problems in the state. Such actions go to show that the state governments are trying to undercut the ERCs. Such tendencies must be avoided scrupulously as this will further delay the rationalisation of tariffs and making the SEBs, or for that matter, their successor organisations financially viable and self-sustaining.
Thirteenth, the provision in the ERC Act as also that contained in the Electricity Bill, 2001
empowering the states and the centre to give directives in matters of public policy to the ERCs is totally misconceived and needs to be done away with if the ERCs are to be made independent watchdogs of the larger interests of the power sector. It is high time we give up the notion that it is only the government which knows what is in the best public interest.
Fourteenth, the expert group, in its report on restructuring of SEBs (July 2001), has observed that, “the nature and extent of independence and discretion granted to the ERCs in India does not seem to confirm to the legislative framework in countries such as the UK and the US. This is also a cause for the regulatory uncertainty prevailing in India”. This matter requires further detail study.

Rural Electrification
Undue emphasis on 100 per cent metering during the last few years has created the impression that this is the answer to all our problems pertaining to the correct assessment T and D losses on the one hand and more economical use of energy on the other. It is necessary to appreciate that in a large and continental size country like India with crores of agricultural and rural consumers, it is going to be humanly impossible to undertake meter reading and billing on a regular basis in far-flung rural and tribal areas. For example, in Maharashtra alone, there are more than 20 lakh agricultural pumps which have been electrified and this number is expected to go up by at least 1 lakh agricultural consumers each year in the foreseeable future. This problem will be particularly severe if all rural households are to be provided electricity by the end of the Eleventh Plan (2012). It is necessary to remember that a large number of these households will be consuming less than even 30 units a month. It will thus be cost-inefficient to undertake meter reading, maintenance and testing of meters and billing on a monthly or bi-monthly basis. The seriousness of this problem can be seen from the fact that even in urban areas, more than 50 per cent of billing is currently done on the basis of average consumption on grounds such as meter not found or read, faulty meter, etc. It is interesting to note that even in a city as large as Pune, the municipal corporation has given up
meter-based tariff for water supply for the same reasons as above and has instead introduced
a flat rate tariff based on a percentage of the property tax for the premises. It is necessary that
some further thought is given to this matter before the idea of 100 per cent metering of all
consumers is pursued. What is more important than metering is energy audit at all levels on all feeders and transformers. This will be much more practical and cost-effective and will give results in the shortest period of time. This is particularly true of the audit of industrial consumers. It should not be difficult to undertake scientific stratified sample surveys to make an assessment of the consumption of unmetered consumers from time to time. The other objective of more efficient use of energy can be achieved by fixing tariffs in a rational manner and doing away with the large and unwarranted subsidisation of power for certain categories of consumers. This brings us to the question of rural electrification and its financial implications. The share of agriculture in total sales of SEBs was 30.9 per cent in 2000-01. In Gujarat, Haryana, Karnataka and Madhya Pradesh it was more than 40 per cent and in Andhra Pradesh it was nearly 39 per cent. Looking to the size of the problem and its impact on the viability of SEBs or, for that matter, any successor private or co-operative sector distributor, it is necessary to understand what are the best international practices in terms of funding of such programmes, their subsidy burden, organisational structure, etc. This is important as rural electrification will have to be subsidised for a long time to come, whether the distribution is with the SEBs or private sector or cooperatives. Any facile talk of doing away with cross-subsidisation even in the medium to long term is clearly unrealistic. It is interesting to see that even in a highly developed country such as the United States, there are around 900 electricity cooperatives and about 60 generation and transmission cooperatives for power supply to 34 million residents. Nearly 45 per cent of power distribution networks are under the control of co-operatives and cooperatives collectively own over $65 billion in assets. Nearly three-fourths of the co-operatives serve less than 20,000 consumers each.7 Reportedly, a portion of hydro generation in the US is reserved for supplying power to the rural areas. It is high time we go into these issues in some depth. Mere privatisation or co-operativisation of distribution in rural areas is not an answer to the problem. This is evident from the experience of privatisation of distribution in Orissa and the far from satisfactory performance of the few rural electrification co-operatives which were started in the country. This is a large and complex subject which requires closer attention so as to evolve a sustainable national policy.
The Electricity Bill, 2001, which seeks to replace the Indian Electricity Act, 1910, the Electricity
(Supply) Act, 1948, and the Electricity Regulatory Commission Act, 1998, contains a number of forward-looking features. But, more importantly, it leaves the phasing and sequencing of reforms
to be determined by the respective state governments. States would have the freedom to retain
the SEBs until they decide to restructure the electricity industry. The states are to determine the
extent, nature and pace of privatisation. Public sector entities may continue if the states find them sustainable. Thus, even after the passage of the Electricity Bill, we may just be languishing where we are today!

Lessons for the Future
The above discussion brings out some of the complex issues facing the power sector. The
experience so far clearly underlines a few important lessons.
First, it will be best not to rely on replicating the experience of other countries by blindly imitating
them. India is a case apart, sui generis, and must be treated as such. The model of reforms in the power sector propagated by the World Bank too needs to be examined critically in the Indian context where the axiom is what is good in economics is bad in politics.
Second, privatisation is not a panacea for all ills. Recent report of the Reserve Bank of India shows that incremental Non-Performing Assets (NPAs) of private sector banks are even higher than those of the public sector banks. In the power sector itself, the controversies surrounding the generation projects of Enron, Congentrix and Spectrum bear a testimony to this. Privatisation of distribution in Orissa has raised a number of doubts about the practicability, feasibility or even advisability of privatisation of power distribution on an all-India basis.
Third, what is important is not public or private ownership but the policy framework in which any institutions in the sector will have to operate. The importance of this is further underlined by the large-scale exodus of foreign companies.
Fourth, creating and sustaining investor confidence is the key to power sector reforms. This would imply viable and rational policies implemented in a transparent manner. Guarantees by state governments, counter-guarantees by the centre and escrow accounts are not substitutes for
properly designed policies.
Fifth, temporary palliatives such as securitisation of dues of SEBs to central PSUs or writing off
loans given by the state government to SEBs or converting them into equity are not the answers to the problems on hand as they merely mean postponing the day of reckoning.
Finally, the role of state governments is critical in power sector reforms. Unfortunately, this is the weakest link in the chain and a chain is only as strong as its weakest link. The critical factor in the power sector is one of governance. Unless the issues in this regard are addressed, the forward looking Electricity Bill, 2001,even if it becomes an Act, may prove to be a dead letter.

Notes
1 See Ministry of Power, Government of India, Agenda Notes of the Conference of
   Chief   Ministers/Power Ministers, March 3, 2001.
2 Government of Maharashtra, Report of the Negotiating Committee on Enron Power
   Project, August 31, 2001.
3 Planning Commission (Power and Energy Division), Government of India, Annual Report
on the Working of State Electricity Boards and Electricity Departments, June 2001.
4 Government of India, Report of the Expert Group on Restructuring of SEBs, July 2001.
5 Ministry of Power, Government of India, Major Initiatives for Power Sector Development,
   May 2001.
6 Government of Maharashtra, Report of the Energy Review Committee (Godbole Committee),
    Part I, April 10, 2001, pp 50-51.
7 Government of Maharashtra, Report of the Energy Review Committee (Godbole Committee),
    Part II, July 11, 2001.
This article of Madhav Godbole ( an eminent scholar and former civil servant ) appeared in
'The Economic and Political Weekly', a prestigious journal.

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