Investors' sentiments about the Indian power sector have significantly improved in recent years, with the Central government showing its resolve to open up the industry for private competition by moving ahead with the operationalisation of the key provisions of the Electricity Act, 2003. This is reflected in the enthusiastic response received from private players to the bidding held for the selection of the ultra mega power projects. However, the states are still dragging their feet on implementing measures to unshackle their power distribution sector from pricing distortion and policy anomalies, threatening to nullify the central government's efforts to turn the Indian power scenario around.
Due to the slow pace of reforms by the states, most of the electricity boards (SEBs) are unable to generate enough revenue to cover the cost of electricity procurement and remain heavily dependent on subsidy payouts by state governments to stay afloat.
The gross subsidy burden of the states has been constantly rising. It is projected to reach Rs 46,087 crore in this financial year. According to latest statistics compiled by the Union power ministry, subsidy accounts for as much as 25 per cent of the SEBs' revenues in most of the states. Already reeling under resource crunch, most of the states are unable to bear the entire subsidy burden, forcing the SEBs to carry over a big chunk as losses.
The Electricity Act - which came into effect in June 2003 - provides a framework for comprehensive reform of the Indian power sector. It has led to delicensing of power generation, decontrol of captive generation, recognition of electricity trading as an independent business operation and open access in transmission and distribution.
But, although guidelines for implementation of these reform measures have been notified, full-fledged operationalisation of stipulated reforms like open access is being held due to lack of cooperation from the states.
The states are putting in conditions to allow open access for transmission of power outside their boundaries, says Bhanu Bhushan, member, Central Electricity Regulatory Commission (CERC). It is because they do not want surplus power from captive power plants within their jurisdiction to go to other states, he adds.
CERC is trying to resolve key issues impeding operationalisation of open access with state electricity regulatory commissions (SERCs). To this effect, a mechanism, Forum of Regulators, has been put in place. The CERC chairman holds meetings on a regular basis with SERCs for consultation through this platform.
The Act stipulates measures like unbundling of electricity boards for separation of generation, transmission and distribution business and phase-out of cross subsidy, constitution of SERC to supervise fixation of tariff for power plants and electricity wheeling charges and setting up of special courts for trial of power theft cases by the states.
Of these, the provisions for mandatory unbundling of SEBs and elimination of cross-subsidy have proved most contentious in the face of strong opposition from trade unions like the Electricity Employees Federation of India (EEFI). The trade unions have opposed implementation of these provisions on apprehension that it might lead to retrenchment of SEB employees on a large scale.
The states were required to completely unbundle SEBs by June 10, 2004, and also to take measures to move towards elimination of cross-subsidy in a time-bound manner. But many states expressed difficulties in unbundling SEBs and approached the Union power ministry for extension of the deadline. The Manmohan Singh-led United Progressive Alliance (UPA) that came into power in May 2004 agreed to extend the deadline pending emergence of a broader consensus over further power reforms.
As a first step in this direction, it decided to undertake a study to assess the impact of power reforms, including SEB restructuring. And based on the findings of the study, the further course of action was to be decided.
At the behest of the Prime Minister, the Union power ministry commissioned the Indian Institute of Public Administration (IIPA) to do a study in this regard. IIPA presented its study report to the government in January 2007. According to IIPA, a team of 12 power sector experts worked on it. The team did a detailed performance analysis of 12 states and as many as 60 power utilities, spread over all regions of the country.
The study found that further reforms in the power sector were crucial to maintaining the growth momentum of the economy. It also recommended building a national consensus on power reforms. To achieve that, it suggested involving the top leadership of the Central government.
It said that at least Rs 1,00,000 crore of annual investment must come into the power sector if gross domestic product (GDP) growth of eight per cent was to be maintained. Further reforms would be crucial to attracting that kind of investment, the study said. The report also said that private investment flows had increased to the states that implemented the SEB restructuring plan. It was because the generation, transmission and distributions entities born out of the SEB unbundling were financially viable.
However, the report added that though necessary, SEB restructuring is not a sufficient condition for turnaround of the power sector. "It is important to note that restructuring is only the beginning and not the end of the process. It must be accompanied by concomitant complementary efforts to enhance efficiency in the sector and improve the quality of service to consumers," the report said. It also clarified that restructuring should not be mistaken for privatisation.
However, the report became controversial, with SEB trade unions trashing its key findings. As a fall-out of the controversy, eight major states, including Punjab, Kerala and Tamil Nadu, have put implementation of their restructuring plans on hold. Tamil Nadu, for one, has said it is doing better compared to many other states that have restructured their SEBs.
Privatisation of power distribution in metros has also halted, with states expressing difficulties in implementation, despite the Union power ministry linking accordance of mega status to power projects with the privatisation programme.
For the fear of stalling power generation capacity addition in the state sector, the ministry has decided to stop treating this mega status condition as sacrosanct and granting exemption to such projects on a case-to-case basis.
Meanwhile, in a change of strategy, the Central government is trying to encourage the states to undertake further reforms by providing fiscal incentives under the Accelerated Power Development and Reform Programme (APDRP). Under the scheme, states are provided incentives to franchise out their loss-making power distribution circles to private players.
Kuljit Singh from global consultancy firm Ernst and Young (E&Y) believes privatisation of power distribution circles is no longer a feasible option, and getting SEBs to turn around their loss-making distribution circles is a time-consuming process. In these circumstances, the franchise model remains an attractive option, Singh adds.
The APDRP was initially envisaged as a one-off scheme for implementation under the 10th Plan period. The scheme was set to expire on March 31, 2007. However, the exigency of further cutting power distribution losses has forced the government to extend the scheme to the 11th Plan but the government has decided to tighten norms for availing APDRP funding by the states.
The Union power ministry has asked the states to bring down their power distribution losses to 15 per cent by availing APDRP funding. The major emphasis is on proper energy metering and accounting to prevent power theft losses. The states have been asked to ensure 100 per cent metering of energy from power plants down to retail consumers by adopting measures like segregation of feeders for different categories of consumers and fixing responsibility for power theft.