REFORMS IN
INFRASTRUCTURE IN INDIA – A CASE STUDY OF ELECTRICITY SECTOR
(The views expressed in this write up represent writer’s own views and
not of any organization or institution or any party nor are intended to offend
or defend any constitutional institution or governmental instrumentalities)
By
Prahalad Rao, Consultant, B-10F, Vatika Apartments (MIG), Mayapuri, New
Delhi -110064 (Mob: 9212151469 Email: prahaladrao76@gmail.com)
1. Meaning and objectives of Reforms
1.1
Reforms in their ordinary parlance is to change for the better, improve by alteration
or correction of errors or defects and put into a better condition and action
to improve social and economic conditions without radical or revolutionary
change.
1.2
GOI Reform Policy, 1991 stated that the central objective of transition
through economic liberalization is to improve the competitive efficiency of the
economy in the global marketplace to sustain accelerated rates of economic growth
and thereby continuously improve the security and well being of the people.
2. Pre-suppositions of Reforms
2.1 Makers of the
Reform Policies beginning 1991 made the move with newer ideas and good
intentions which broadly could be said to consist:
a.
Freedom for business - liberating it from license, controls, regulated
prices etc.
b.
Ardent hopes that the people would seize the opportunity to develop a
hale and healthy environment and business culture conducive to the people and
the society embracing the sectors liberalized.
c.
Facilitate creation of technological benefits and qualitative products
and services as well as competitive markets with affordable prices to the
people of the country specially needed for the poorer section of the society.
d.
Extend to the Governments a supporting
hand in producing the products and services in abundance maintaining
high degre of workmanship for boosting exports and enhancement of foreign exchange
earnings.
e.
Everyone including the Governments and their people placed great faith
in the reform measures hoping to reap the fruits to make their living comfortable.
f.
Governments also thought genuinely to generate and collect higher levels
of revenue with the expected expansion and widening production base in the all
the sectors and development of vibrant
markets in the country.
g.
Governments believed that similar reforms had been made in western and
eastern countries with success which should act as proof of success for our country as well.
h.
This was the spirit of the makers of the Reform Policies.
2.2 Foundation of
reforms of any infrastructure sector had twin goals. One, charge to recover the
cost of service plus margin and the other, use latest available technology and
innovations to ingrain efficiency in the operation, maintenance and management.
It also assumes that if the cost of service is Rs. 100.00, at least up to 25%
of it should be generated internally through efficiency management leaving 75%
of it to be recovered from the consumers as User Charges. This is a functional
management balancing of the operation and supply to demonstrate to the people
that the reforms are beneficial and not detrimental to their interests.
3. Reforms Status
3.1 Infrastructure,
according to Government publication, includes Transport covering Road, Rail,
Inland Sea & Coastal, Air, Energy Infrastructure covering Coal Mining &
Quarrying, Petroleum & Natural Gas, Electricity, Communication covering
Telecommunication, Postal communication, Irrigation, Water Supply,
Sanitation and Storage Infrastructure.
Education which is in all its attributes also is an infrastructure activity but
excluded.
3.2 Reforms were
introduced in the above sectors from time to time.. About two and a half decade
passed since the initiation of the forms. It is time one could look at the
progress, as is visible to the eye.
3.3 A cursory look
suggests that real reforms have taken place in Communication sector and its
subsectors which are open to eye and have revolutionized the rural, semi-urban
and urban scenario providing quality products and services at an affordable
price from poorest to the richest persons in the country. Telecommunication
companies are hale and healthy and are doing well.
3.4 The sectors like
transport covering rail, inland sea and coastal are yet to realize the intended
reforms. Air subsector under the Transport Sector has made a leap forward under
the privatization policy of the Government but reform is not real in the sense
it intended to be under the reforms. As already noted, the crux of the reforms
is to facilitate competition in the products and services which should result
in best services at reasonable and affordable prices. Reality tells a different
storey. The services are much below expectations. Air travel costs have
increased multifold and continue to increase. New methods are introduced for
sale of tickets such as timings of travel, auctioning, numerous additions to
pricing structure with no breakfast, food or snacks (supply of water which was
also priced is now being given free of cost) all of which are available at cost
which is an irony when the air charges are soaring. Here, the modernization and
competition acted in totality against the spirit and intent of the reforms.
3.5 Energy sector and
its subsectors (except Electricity Sector which is dealt in detail below) have
not made any dent and, on the other hand, have been creating shocks and tremors
in their pricing in the market with
cascading effects on all the products and services to the people. It is also
a irony of this country while we boast
of our independence of sixty seven years, the independence available to the
people and, among them, to the middle class and the poorest in terms of
shelter, food, energy, water, all of which are essential for survival is far
from the sight. Same is the status of other sectors mentioned above.
3.6 A simple question
which needs to be asked to the political parties which ruled this country for
the last sixty six years is why they brushed aside all the way indigenous potentials
and explorations available abundantly in the various parts of the country and
why we have always preferred imports in almost all spheres of economy while the
country endowed with as many as seventy types of natural resources awaiting
their economic exploitation. Funds accounting in millions and billions have
been poured on unproductive activities aiding the country to sink economically
and financially and continue to remain in a state of poverty, begging,
malnutrition with denial of basic ingredients for survival of the citizens.
This is the precise cause for continued widening of the BOP of the country and
fiscal deficient – an insult to the country and its citizens at the age of
sixteen seven years of its independence.
3.7 India is invested
with great knowledge and in depth sense of understanding of the developmental
pre-requisites, research, innovations, technology break through, economic and
financial management, business acumen and so on but where to find such people
very much residing within the country. Those of such persons who have settled
in various countries in the world have shown their worth beyond one’s
expectations. Existing environment and culture of working embracing all the
government functional areas is dismaying and disgusting and desisting such of
the above described people to involve. This
is like having jewels in home and enquiring and searching about them outside.
3.8 This way, the
reforms that were positioned in the past and those waiting their launching will
remain a distant dream unless everyone from top to bottom self realize the
present plight of the country and energize themselves to rebuild the country to
make people to live with economic means and dignity of life and feel
themselves proud of being a citizen of
India. Sluggishness should be thrown out and every one in discharge of duties
or otherwise every citizen should be aroused and made to rise to the challenges
facing the country.
4. Effects of Reforms so far
4.1 The fruits of the
reforms to the people of the country today are either unavailable or
unaffordable with sole exception of telecommunication sector which has
transformed the country and its geographical distance reaching out to even
smallest villages thus bringing about a sense of oneness among the people of
the country. Usage of the system has shot up dramatically in a short span of
time.
4.2 As noted above,
reforms status in other sectors is pathetic. These sectors have not been able
to come out of psychological abrasions, physiological pinches and inextricable cage
created around themselves for inexplicable reasons. The economic and
sociological benefits envisaged under the reforms in those sectors have been
belied and denied. Conversely they have placed unmanageable financial burden
upon the very people for whose sake reforms were brought in. The people are in
a state of shock and sadness as the prices of goods and services available
today to them are beyond their means which is the impact of the sulking
attitude of those involved in those infrastructure activities which are
supposed to act as catalyst with economical provisioning of the services.
4.3 Typical sector of
this nature is the Electricity Sector. This sector landed itself in a state of total
mess and chaotic conditions, not on account of lack of realization of cost of
services or user charges which are fully assured to the utilities under the
regulatory system but on account of
their insatiable demands day in and day out appearing in the news papers and
the aggressiveness they have developed in resisting any move for sliding down
their charges, even before the regulatory authorities, operational and
managerial efficiency management and opening up their accounts to Government
audit system. This is other part of the reform initiatives. Let us deal a
little more.
4.4 The provisions of
Reforms Acts enacted by the Centre and the States lay great emphasize that
besides compensating the service provider to the level of current costs of
service, ensuring efficiency in operation, administration and management to
cushion the rising costs and providing economic relief to the users to the best
extent possible must be maintained.
4.5 The costs
overweigh the efficiency in determination of tariff or cost of service plus
return margin. Tariff orders deal extensively the expenditure claimed by the
service providers with truing up process but such expenditure is not screened
through the eyes of efficiency mainly giving considerations to increase in
costs every year linked to so-called inflationary conditions and of perquisites
and benefits to employees and managerial positions. Control of leakages, thefts
and pilferages are part of the administrative and legal measures but are being
treated as commercial losses merging with technical losses differently in
different Sectors and adjusting the same in the tariff determination.
4.6 Above method is
found to be the most suited method for the power utilities with its
acceptability to the regulatory system to recover the cost of thefts,
pilferages and revenue arrears committed by others by in-building it in the
tariff structure and making it pass through to honest consumers. This method is
yielding to the power utilities much more benefits, without the need for
incurring any administrative and legal expenditure which would have been
necessary if they had to recourse to administrative and legal remedies under
the provisions of the applicable laws. This is wholly contrary to the
principles of tariff determination.
5. The Electricity Sector
5.1
Before the reforms initiatives were put in the process, the electricity
generation, transmission and distribution was managed and controlled by one
entity by name State Electricity Boards (SEBs) established under the then The
Electricity (Supply) Act, 1948 and the Electricity Rules, 1956. Their
achievements during the period they existed and operated were noteworthy in
that they laid a very firm and strong foundation of electricity infrastructure
through the plan funds mechanism and that foundation of system they laid is
still holding the ground from various shocks the country has been facing and
continues to face even after two decades of induction of the reforms.
5.2
SEBs laid a solid growth trajectory in the power sector from the time
they were established under the active association and assistance of the
Central Government/State Government and the Central Electricity Authority (CEA),
Banks and Financial Institutions. There was one central control point to
regulate the generation, transmission and distribution of electricity essential
for managing smooth functioning of the electricity sector. They produced high
specialists and experts for development of the sector. The army of core
engineering manpower, finance manpower, commercial manpower, human resource had an impeccable record for more than forty
years. It was this manpower that stood the test of times and accepted the challenges faced by the country .
5.3
SEBs maintained a good financial health earning a return of minimum 3%
or more as prescribed under the said Act until end of eighties. The targets and
achievements were matching in the ratio of 100:90/80. All this was possible
because of two factors – one a spirited workforce, unified financial management
and centralized management control and the second, independency from political
interferences and a strong public faith. Their worthy performance remains but
their names have been erased from the national scene. What led their systematic
collapse and rise of severest criticism? To the best of knowledge, this
question is answered as below:
a. From 1985 onwards,
political interference intensely inflicted organizational, financial and
commercial injuries which turned out to be incurable and recognized to be so
both in public and private platforms.
b. Politicians of the
time flooded the people into the SEBs at various levels without seeing their
skills, capabilities and deliverability to the needs of the system, total
disregard of the manpower budget and the SEBs had no option but to faithfully
obey the orders, most of which oral.
c. Free supply of
power was announced as a welfare measure, incentive for increasing agriculture
productivity and for bettering the social life holding assurance to the SEBs
that they would be fully compensated for the loss of revenue on account of the
free supply of power. There was competition among the States to provide free
supply of power which continues.
d. The compensation
held out by the States was mostly in the form of adjustments against interest
and loans outstanding against the SEBs (except few State that provided cash
compensation) which were unable to discharge their obligations obviously for
reasons of their compliance of the requirements of free supply of power without
cash compensations equivalent to the revenue which they would have earned had
they sold the energy commercially,
e. Free supply of
power was more misused rather than better used by select landlords, politicians
and powerful persons depriving the benefit to that class of people to whom it
was intended. There were instances that these big people used high power pump
sets for irrigation availing the free supply of power and sold the water at
cost to the poorer agriculturists and less fortune people.
f.
Economics tells us that a product or service like power is produced at a
unit cost having incurred prior expenditure and it is necessary for the
producer to earn that cost plus minimum margin. If such service is made a free
supply without being compensated by the authorities at whose instance such free
supply was undertaken, even the bluest financial health of a utility is bound
to become red.
g. To this added the
agony of pilferage and theft of electricity at distribution level openly and
brazenly in the rural and urban areas and initiatives and action moved by the
utilities met with strong resistance from one corner or the other, threats and
taking law into their hands by such people. This reached an irreversible level
and posed a big threat to the very survival of the utilities. The revenue or
commercial loss thus being incurred by the utilities started shooting up
sharply and invited intense criticism day in and day out holding the SEBs
solely responsible for this state of affairs. This is something like tying both
hands of a person and asking him work hard and efficiently to produce best
possible results.
i.
Terrorization of the management by the political parties leading to interference in the day to day
working , more so, in the projects selection, procurement of equipment and
machinery, award of contracts etc.
j.
Holding back funds even the plan funds earmarked for the projects for
utilization elsewhere including adjustments against the outstanding amounts to
the States.
5.4
This was how the SEBs became RED in their financial health and earning
capacity. Burden and blames of consequences that arose on above account were
quietly and comfortably placed at the doors of the utilities. They also
advocated that these utilities have become financially bankrupt with a big
sound to be heard by Indian and International Corporate and the International
Agencies including the funding agencies. It was just as bundling up a person
and asking him to perform to the highest expectations. The need for reforms of
the sector gave birth from here. The only voice being heard in those days
around the country from the political leaders, bureaucrats, industrialists,
financial institutions including international financing agencies was reform of
the power sector held by the SEBs. There were strong objections from learned
and specialist class of people who spent whole of their life in developing the
power sector but all such objections were quietly buried.
5.5
It is difficult at this stage to attribute any reason for such a call
for reforms in the power sector from every corner of the country. It could,
however, be inferred that whole object of the reforms in the power sector was
to disfigure the SEBs by breaking them into several parts, independent of their
supervision and control which existed until then and thus established several
entities in the State.. Another reason could be the ambitious offers made by
the financial institutions within and outside country with eagerness to
undertake funding of the reforms and restructuring program.
5.6
In doing so, nobody seemed to had applied his mind the accompanying
financial impact on the tariffs to compensate the rising overheads on account
of establishment of several entities as against one existing entity. The
regulatory system which was also put in place around the same time continued to
welcome the rising cost of the entities covering, generation, transmission and
distribution entities continuously and constantly pleaded by the utilities –
public as well as private without giving much needed attention to operational and
management efficiency which should have been monetized and duly accounted for
in the annual revenue requirement. The
average tariff since then to date has risen about 65%. The services being provided beg for
improvement and the consumers find themselves totally at the mercy of the
utilities.
5.7
The reformed utilities as they stand are unable to discharge their
obligations of generation, transmission and distribution depriving the people
of this basic and essential service as evidenced by the shortage, shutdown
ranging up to 10 hours, unkind cuts even in midnights utterly unconcerned
about the pathetic conditions of the
older people, the newly born and growing children at homes. The newly reformed
and established utilities have only been making loud excuses on their inability
to perform and fulfill their social, economic and national obligations on one
pretext or the other.
5.8
Agriculture, industrial and economic activities – small, medium, large,
cottage, household arts and works are put on hold by erratic and irregular,
uninformed and arbitrary shutdowns during any part of day or the nights at
their sole discretion. How the sectors could make production and generate
revenue to pay back their debt, labor, material and machinery etc. and maintain
their own livelihood? Could anyone imagine a scenario like this staring at?
5.9
There have been ever increasing User charges every year for the stated
reasons of inflation, increasing cost of input and managerial comforts without
even a hint when this would stop. Efficiency is the last word in the management
of their utilities and passing that burden to the User under one guise or the
other is followed as the Best Practice.
5.10Even after earning huge revenue through every year
increasing User charges, their financial health and soundness is stated to be
alarming involving the Central Government for providing financial support package
to State utilities and subsidies to the private utilities. If this could happen
to the private sector and public sector utilities having been established or
formed under the reform measures, how one could say that the reforms are on
line and was it justifiable to have condemned the erstwhile State Electricity
Boards for same reason which continues to plague the present utilities.
5.11For the past a decade or so, the power supply
situation has been worsening day by day with the shut down periods ranging from
two hours to eight to ten hours being the order of the day. Economic
development took a biggest hit because of slow or no industrial, commercial,
services and agriculture sectors growth due to heavy load shedding in place of
an assured and regular supply being the lifeline for the economic development even after reforms
measures having been put in place. The situation is no different even today.
The economic growth is adversely affecting and people are becoming restless
even inviting law and order problems and riots at several places.
5.12Reform of the power sector gone awry and
directionless and loud sounds are emanating from policy corners and big
industrialists for re-reforming the Sector. Even after two decades, if we
continue to work on experiments without any positive outcome, it is better not
to make by the authorities in positions high growth expectations with no
tangible results and later start floating blame games which are highly harmful
for the national growth. The impact so far of reforms include enormous time,
efforts and costs in evolving and finalization of the reforms planning and
implementation under the financial assistance extended by the multilateral and
bilateral financial agencies. Entire Electricity Sector structure built and
then standing had to be dismantled beyond recognition, the dismantling
expenditure overweighing the benefits with additional liability on the
utilities for discharge of debt and interest obligations after the agreed
moratorium.
5.13The underlying essence of the reforms was to move
towards gradual privatization of all the three segments with fervent hopes that
the private sector would be eager to participate in the process. The private
sector did participate in generation, transmission and distributions segments
with the sole voice that the User charges are much less than the costs of
service and should be increased annually through the regulatory process in
disregard of the public interest and capacity to pay. The private utilities
have been achieving their ambitions annually with new innovations like
Aggregate Technical and Commercial Losses
(ATC) adjustable to the tariff without any noticeable improvements and
efficiency in operations and services.
5.14As noted in a preceding paragraph, the private
sector is more concerned with commercial earnings than technical and
operational efficiency to cushion the costs of services and balance the tariff.
It is too much to expect the private sector in infrastructure development to
act for the development of infrastructure while their mindset is commercial
oriented.
5.15Almost all the private sector utilities whether in
generation, transmission and distribution drew their manpower strength
including executives and chief executives from the public sector utilities
including the SEBs and public sector undertakings through head hunting and
offering more attractive pay and perquisites It also so happened in SEBs as
SEBs were being looked at as sinking ship with no scope for sailing back to the
shore.
5.16Establishment of Generation (GENCO), Transmission
(TRANSCO) and Distribution (DISCOMs) corporate entities and the Distribution
companies being further divided based on region/zone basis continue to add more
costs to the service to the Users because of increasing overheads, want of
efficient management, growing weak financial management with no result oriented control of technical
and commercial losses.
5.17Each establishment is required to submit its tariff
petition to the regulator individually for determination of tariff involving
substantial expenditure, time and efforts including public hearings, regulatory
proceedings and regulatory orders.
5.18The reform measures were considered to create more
efficiency, cost reduction, reasonable User charges and assured supply. It has
not been happening from the time reforms were set in and, on the other hand,
the User charges have shot up manifold unaffordable by an ordinary citizen.
This has also multiplying effects on other essential goods and services for the
society in general and ordinary person in particular while the efficiency and
reduction in cost took a back seat.
5.19Intent of establishment of regulatory regime was
well thought with the hope that the exercise of regulatory control and
supervision would lead to efficient working of the utilities, better services
and lower User charges. This also has not been happening for reason of the sole
consideration in determination of tariff being costs shown by the utilities
rather than a combination of costs and efficiency formula not limited to only
operational norms but to all the related aspects of the functioning of the
utilities.
5.20On the whole, the reform process affected faster
economic growth because of the crisis in industrial production, commercial
production and providing of services for want of quality and regular supply of
electricity.. Ordinary consumer is suffering the worst because of rising prices
for want of adequate production and services, higher and higher User charges of
all the services including electricity, gas, water etc., rising medical
treatment and hospital charges and in every other sphere of economic activity
which the ordinary citizen is availing.
5.21Electricity as is well established is an
inter-dependent system rather than an independent system and works through an
integrated operational system in terms of Generation, Transmission and
Distribution. Two decades back reforms of the Power Sector were undertaken and
implemented by almost all the States by now. Each State took on an average
minimum about 4-5 years to reset their organizations and establishments on the
envisaged reform planks The reforms aimed at injecting efficiency through
decentralization process, control expenditure and rural and urban distribution
energy losses to bring them to an acceptable norm or level.
5.22 A realistic and honest assessment of the reform results
of the public and private sector power utilities performance could reveal an
alarming situation and developments that have taken place so far which needs to
be understood in all its sense and serious implications and complications to
come in the economic growth of the country .Time begs policy makers to
understand the ground realities and the enormous additional costs necessary to
bail out the sector even after more than two decades of reforms induction.
5.23It must be appreciated and understood that institutions
and bodies built up over the period of more than fifty years survived strongly
servicing the nation in all the spheres of the activities. It also needs to be
understood that these institutions and bodies laid a very strong foundation in
the sector growth which stood the test of time and have been responsible to
build a most competent and strong technical, financial, commercial and human
resource manpower. It would have been sage and sagacious for the authorities to
have lent them whole hearted support politically, suited policies and
financially to reform them in their existing functional environment rather than
disbanding them altogether. Reforms is to
change for the better, improve by alteration or correction of errors or
defects and put into a better condition and action to improve social and
economic conditions without radical or revolutionary change. This object would
have been well achieved more conveniently by reorientation and rejuvenation and
modernization of the operational and management systems and mechanisms of the
SEBs at half the cost at which the reforms and restructuring had been done.
5.24It takes years to build expertise and
specialization in a profession or in a service sector or in industrial sector
in order to make such profession, service or industry to meet the challenges of
time and to stand firmly and on sound footing to ensure the services and goods
conscious of quality and cost that instills and helps rapid economic growth
most needed for providing employment opportunities and economic relief to the
people and the society. This should have urged the thinking of the policy
makers at the time when they ventured to dismantle a solid and standing system.
5.25Let us recall what Mr. Russell Pittman, Director of
International Technical Assistance Economic Analysis Group Antitrust Division,
Washington states on reforms and restructuring:
“One important determinant of the speed
and success of transition will be the efficiency of transformation and
development of the infrastructure sectors. A great deal of attention has been
paid to issues such as privatization, restructuring, user prices, and terms of
access in these sectors, regarding both developed and developing countries.
Some issues regarding vertical restructuring are notable in the degree to which
in different sectors and in different locations they raise similar questions
that may have very different answers.
In economies around the world, the
infrastructure sectors are in a state of flux. The traditional model of state
ownership and operation has yielded much ground to privatization and long-term
concessions. The traditional model of monopoly service provision has similarly
yielded ground to competitive restructuring in some markets. And the
traditional model of vertical integration that accompanied state ownership and
monopoly provision has sometimes yielded to vertical “unbundling”, to
accounting or functional separation, or even to full vertical separation of
ownership.
Yet the process of change is far from complete.
Although there have been many models presented that suggest how an
infrastructure sector might be best restructured and operated, there is no
consensus that a single model is best. Advocates of various forms of vertical
separation cite the benefits of competition and deregulation and the dangers of
discrimination and favoritism; defenders of vertical integration point to economies
of scope. Most advocates of one model or another would probably admit at least
that model suited to telecommunications, railways may not be suited to other
sector. Indeed the criteria for which model works “best” are different in
different situations: developed countries tend to be seeking increased
efficiency, while developing countries may be more concerned with network reach
and expanded access and usage.
It seems very likely that, for all the
technological changes in the electricity sector in the past few decades, there
remain significant economies of scope between the generation and transmission
stages of this sector. This is a sector probably more intimately interconnected
technologically than any other infrastructure sector, a sector where demand
must equal supply at each moment and a failure at any point in the system can
have significant repercussions throughout the system.
The transmission system is not simply a
transportation that moves power from individual generating stations to demand
centers, but a complex “coordination” system that integrates a large number of
generating facilities dispersed over wide geographic areas to provide a
reliable flow of electricity to dispersed demand nodes while adhering to tight
physical requirements to maintain network frequency, voltage, and stability.
Kaserman and Mayo (1991), using US data
from 1981, find economies in the range of 10 percent for the integration of the
generation stage with a combined transmission and distribution stage, while
Hayashi, Goo, and Chamberlain (1997), using US data from 1983 through 1987 and
(arguably) a superior methodology, find economies in the 13 to 16 percent
range. Lee (1995), using US data from 1990 and a similar methodology to
Hayashi, Goo, and Chamberlain, finds efficiency losses in the range of 4
percent when generation is separated from other stages. The failure to achieve
attainable levels of competition in generation when restructuring the
electricity sector is one of the most serious criticisms of the worldwide
infrastructure reform project.”
5.26Findings of the above studies establish beyond any
doubt on the need for re- integration of the Electricity Sector from the points
of view of operational control and efficiency, minimization of loss of energy
and savings in costs which will have a salutary effect on the User charges and
will bring long awaited economic relief to the people besides ensuring
operational efficiency in supply with minimization of the shut downs essential
for the speedier economic growth.
6. Re-integration of Generation, Transmission and Distribution – Suggested
Measures:
a. State should take
over the generation, transmission and distribution according freedom and
independency of the utilities.
b. Establish State
Holding Companies in each State with 51% Government Holding, 26% financial
institutions, insurance companies, banks and the balance 23% being offered to
the public over a period of time. Public participation ensures greater
accountability of the functionaries and will help develop a congenial working
environment and culture of the organization.
c. 51% of the holding
e by the State in the Holding Company should come from the Central Plan
Assistance and the Holding Companies should invest 51% in its subsidiaries discussed below from out
of the available funds according to the norms approved by its Board of
Directors.
d. The Board of
Directors of the Holding Company will comprise one State Government representative three
directors consisting of one expert each in Environmental Management, Energy Conservation Management, IIMs/IITs one of whom should be a woman
director appointed by the Board of Directors, a representative of each
subsidiary company nominated by its Board of Directors five functional directors including CEO,
Director (Generation), Director (Transmission & Distribution), Director
(Resource & Financial Management), Director (Human Resource Management) and
Director (Commercial & Cost Control)
with lean organizational framework and advanced operational and communication systems.
e. Holding company
should hold controlling interest/management control of not less than 51% in
Generation Company, Transmission Company and the Distribution Companies, each
of which to be the subsidiaries of the Holding Company. Of the balance 49%, 26% to be held
by the State Bodies, Corporations and Institutions and remaining 23%
being offered to the public over a period of time.
f.
Generation Company should have a Joint CEO, Director (Hydro), Director
(Thermal), Director (Renewable Energy Sources), Director (Finance), Director
(Commercial & Cost Control),
Director (Human Resources), a representative of the Holding Company, two independent directors appointed by the Board Directors of which one
will be Environment Management Expert and the other will be Fuel Management
Expert with lean organizational set up with advanced technology, operational
and communication system.
g. The Transmission
Company should have a Joint CEO, Director (Transmission), Director (Finance),
Director (Human Resource) and Director (Commercial & Cost Control) , a
representative of Holding Company, and two independent directors, one
Transmission Technology and one Transmission Management.
h. Each Distribution
Company should have a Joint CEO, Director (Distribution), Director (Finance),
Director (Human Resource), Director (Commercial and Cost Control), Director
(Load Development & Consumer Care) and two independent directors, one
Distribution IT expert and the other Distribution Technology expert.
i.
The above pattern of holding controlling interest/management control
will infuse confidence and better management, accountability and result
oriented performance. The presence of the public investment in companies will
facilitate transparent working, good environment and working culture.
j.
This will enable establishing a unified and centrally controlled
management to effectively monitor the performance, efficiency, minimizing
expenditure, introduction of uniform
policy guidelines and measures,
k. This will integrate
all the three systems under one umbrella management and ensure better
coordination, control and supply of electricity services which is the essence
of the system for speedier economic growth of the country.
l.
This is also in consonance with the provisions of The Electricity Act,
2003 which was enacted to consolidate the laws relating to generation,
transmission and distribution etc.
7. Electricity Sector Regulatory Reforms
7.1 The Electricity
Regulatory Commissions Act, 1998 was the first Act to introduce regulation in
generation, transmission and distribution of the electricity in the country.
The provisions of this Act formed integral part of The Electricity Act, 2003.
The Electricity Regulatory Commissions laid down the regulations on various
operational and service aspects of the electricity which included the
regulations on terms and conditions for determination of tariff.
7.2 The last mentioned
regulation made by the ERCs has been in operation for the last about 16 years
incorporating such modifications as were considered on enactment of The
Electricity Act, 2003. This Act was made to consolidate the laws relating to
generation, transmission, distribution, trading and use of electricity and
generally for taking measures conducive to development of electricity industry,
promoting competition therein, protection of consumers interests,
rationalization of electricity tariff, efficient and environmentally benign
policies etc.
7.3 Experience of last
about fifteen years of the operation of the ERCs and the process of
determination of tariff on Annual or MYT basis show that this process is
burdensome involving also additional expenditure to the power utilities which
is pass -through to the consumers with long drawn process for settlement of
consumer grievances. The very purpose of establishment of ERCs is to regulate
the electricity sector including tariff determination, all of them having a
direct bearing on the consumer interests.
Few reform measures to the existing regulatory process are considered
necessary as suggested below:
7.4 The dominance of
the whole regulatory process being the public and consumer interests, the need
for having a person ( as defined under the Act) as an independent Member
(Consumers Interests) in the Commission to be appointed by the Government of
India in consultation with the Chairman of the ERC so that the consumers are
assured of adequate scrutiny of expenditure and revenue requirements of the power
utilities claiming for revision of tariff and a psychological satisfaction to
them that there is someone to safeguard their interests which is otherwise
absent in the present set up.
7.5 To minimize the
enormous amount of efforts, time and costs involved in preparation, submission
and presentation of the tariff petition annually with or without MYT approach,
which is lengthy process including the public hearings etc. which only add to
the cost of electricity to the consumers, the need for introduction of Five
Year Tariff (FYT) determination system with automatic percentage escalation or
deceleration depending upon the inflationary index to be notified by the ERC,
the date of Order being the base date. Such arrangement exists, as understood,
in the competitive tariff determination process. This will have substantial
saving of efforts, time and costs to the Commission, the power utilities and
the consumers and impact the tariff to that extent. There will also not be any
anxiety and uncertainty prevailing for the power utilities as well as the
consumers which otherwise exists today. This will also help establish stability
in the tariff for all purposes including its impact on the goods and services
availed by the public.
7.6 Aggregate
Technical and Commercial (AT&C) adopted in tariff determination is
arbitrary and has no legal basis, as dealt below:
(i)
Till 1996 or so, the energy losses designated were only Technical Energy
Losses occurring mainly on account of deterioration of the distribution system
over the years. The bench mark fixed by the competent authority was ranging
between 18% to 21% until then. (Rajadhyaksha Committee Report, 1984 and CEA
Guidelines)
(ii)
With the reforms setting in and private sector participation showing
interests in the power sector, the authorities in the governments agreed to the
terms set out by the prospective participators to treat the commercial losses
also as part of the losses to be called them as ‘Aggregate Technical and
Commercial Losses (ATC)’. DERC was the first ERC to introduce this method
ostensibly for reason of an agreement between Government of NCT and the Private
Distributor (s).
(iii)
Around that time the losses thus assessed were in the range of 45% to
55% on an average in the country as against average 18%-21% as per the bench
mark adopted prior thereto.
(iv)
Efficiency in collection of revenue from the defaulters, pilferage,
theft of electricity through administrative and legal measures took a back seat
in the process, the service provider having been assured of recovering such
losses through the tariff itself with total disregard to the ethics and
character of technical losses and commercial losses. This is despite the fact
that the high level expert committees
set up by the Central Government in this regard from time to time and the
National Electricity Policy (NEP) having firmly held the view for separation of
commercial losses from technical losses and restoring the losses to the
technical losses as actually assessed.
(v)
Let us see ATC effect by way of an example – Assuming X generated 100
units and the cost claimed in respect thereof is Rs.300. Taking the technical
loss at the maximum of 21%, the cost of generation works out to :
Rs.300/(100-21)=79 units = Rs. 3.80/unit or kWh whereas if the same is
worked out assuming maximum 55% ATC, the cost of generation would work out to
Rs. 300/(100-55) = 45 units = Rs. 6.66/unit or kWh. Excess cost of recovery
according ATC method would work out to Rs 2.86/unit or kWh. the difference
between the two being Rs.2.86/unit or kWh representing recoverable amount on
account of commercial losses from consumers as claimed by the power utilities.
(vi)
Under the Act, the power utilities can prosecute a person for theft,
pilferage, revenue arrears etc. which course is open to the power utility as a
normally accepted and adopted course in almost all other kinds of activities.
There already being such provision in the Act, it should be followed by the
power utility for recovery of the cost of pilfered or energy taken by theft or
default in payment of revenue and the Act permits both financial recovery and
penal provisions including imprisonment.
In fact, this is being followed by the power utilities besides
recovering the cost through the tariff since it is not possible for the power
utility to segregate that part of the
energy by theft or pilferage included in the tariff determination and exclude
the same while recourse to the legal remedies under the Act.
(vii)
ATC method is virtually legalizing the thefts, pilferages, recoverable
revenue arrears etc. and is being claimed as a legitimate right of the power
utilities recoverable from the consumers. This is helping the thefts,
pilferages, avoidance of payment of electricity charges by the persons engaged
in those activities having been accepted as a practice under the regulatory
system. It is not appreciated that it ultimately results in sizable increase in tariff to honest consumers who
have been regularly and unfailingly paying the electricity charges to the power
utilities. Example given above shows the monetary quantum that is being claimed
by the power utilities as a matter of its right while the government and the
regulatory system is acquiescing to such claims. If this were to be the
approach allowed to be adopted by the erstwhile Electricity Boards, they would
not have become financially bankrupt.
(viii)
Barring few African countries which have followed the Indian example, in
other countries of the World, the energy loss recognized is only the technical
loss which varies in the range of 4% to 10% which is taken into consideration
and accounted for determination of User charges.
(ix)
Energy and Revenue are different in their connotations and recognized
independent of each other in assessment and accounting system. The provisions of
erstwhile The Electricity (Supply) Act, 1948 nor of its successor Act, The
Electricity Act, 2003 contain any provision to treat energy loss and revenue
loss as one for the purpose of determination of tariff. On the contrary, the
Electricity Accounting System introduced sometime in 1985 and notified by the
Central Government as well as the mandatory information required to be given in
the Annual Reports of the Power Utilities as prescribed by the Central
Electricity Authority which continues to be in vogue does not provide for any
such assumption or adoption.
(x)
The difference between the input energy and output energy in physical
and revenue terms is considered as the ATC loss which would include the actual
energy sold and revenue realized as well as the energy pilfered through theft
or misuse not accounted for in revenue termed as illegal energy loss but as a
legitimatized loss through the tariff.
The revenue loss resulting from the illegal use of the energy by
unscrupulous people and reluctance on the part of the utilities to act firmly
and sternly through administrative and legal measures available to them under
above law and rules made there under cannot be equated to energy loss in
physical terms so as to permit it to be accounted for reduction from the total
energy generated for the purpose of tariff determination.
(xi)
Electricity charges are determined on the above basis and every time
there is an ‘EVER INCREASE BUT NEVER DECREASE OF CHARGES.” Public protests are
but natural in such circumstances of the functioning of the Electricity Tariff
System with multiplying effects on goods, services and other usable items
produced by the application of electricity, the electricity being lifeline of
every economic activity, making the condition of the people more and more
miserable. The utility is reluctant even to listen this aspect and the need for
efficiency in its operations and management as evident from the success so far
of the initiation of the CAG Audit of the books of accounts of the private
power utilities in NCT of Delhi.
(xii)
Cost and Efficiency are the twins in operational, administration and
management systems which means an equilibrium has to be maintained between the
two in producing goods or rendering services.
Goods produced and sold or services rendered mainly on expenditure basis
places undue burden upon the consumers which leads unrest and protests.
Efficiency also needs to be accorded equal importance as assigned to the
expenditure as per the provisions of the Act.
(xiii)
For above stated reasons, time has now come to make it mandatory the
efficiency measurement in terms of certain percentage which must be
prescribed and complied with by the
Utilities in all the Sectors including, in particular in the Power Sector and
the expenditure claimed for increasing the User charges should be the “TOTAL
AGGREGATED EXPENDITURE MINUS SAVINGS EQUIVALENT TO PERCENTAGE EFFICIENCY AMOUNT
OF THE TOTAL EXPENDITURE” so that there is an equally imposed obligation to
effect savings through efficiency based on the prescribed percentage just as it
is imposed obligation on the part of the consumers to pay User charges to meet
the expenditure. Efficiency percentage factor should be not less than 25% of
the total aggregated annual revenue requirement
for any given year equivalent of which must be generated by the
utilities through means of internal efficiency measures including control and management of thefts,
pilferage etc. applying appropriate administrative and legal course. The
admissible expenditure to be considered for the purpose of determination of the
User Charges, subject to further scrutiny and truing up should be limited to
75% of the annual aggregate revenue requirement.
(xiv)
It needs to be noted that the arrangement adopted and being followed
accepting ATC as a legitimate measure for reduction in the total net energy
generated to divide the expenditure to arrive at the cost of generation lacks
sanction of relevant law and thus, this cannot be legitimatized by executive or
regulatory process.
8. Way to success of Reforms
8.1 The country has
almost come to stand still on account of
non-availability of requisite infrastructure facilities which were supposed to
have been available fifteen years back. Economy is badly bruised and social
environment in the country is leaning towards unrest. Thanks to the new Government
at the Centre which is laying increasing importance and urgency for the
infrastructure development. In this context, following are few suggestions:
(i)
First step needed for implementation of the reforms introduced by the
Government is to reform the mindset of the people down the line to whom a clear
and strong message should go from the top with time schedule for completing the
assigned part of the reform works.
(ii)
Strict monitoring of the implementation process by through appropriate
mechanism and initiation of action for
any lethargic approach by the person assigned with the work as per the Conduct
Rules.
(iii)
Furnishing of periodical report (say fortnightly) to the next higher
officer.
(iv)
Apprising Hon’ble Minister by the next higher officer and seeking his
appropriate guidance and direction wherever it is so necessary.
(v)
Convening internal meetings for spot understanding of the progress
including the delays, if any and the measures to be taken up for speeding up
for completion within the time specified for implementation of the reform
measure.
(vi)
“Be kind at heart but act sternly and strongly” needs to be the approach
towards the people down the line for
expeditious action on the assigned works.
(vii)
Excuse cannot be a substitute for failure to complete the assigned
works. This needs to be dealt firmly on it merits.
(viii)
The subordinate offices/PSUs responsible for carry forward of the
guidelines/directions/orders etc. must ensure compliance on time and failing to
do so should require an honest explanation from them giving the reasons
together with justification for slackness and inability to fulfill by the
designated officer in the Government in order to bring home the sense of duty
and responsibility on such persons.
(ix)
In case of deliberate avoidance attitude or intent on the part of the
concerned person, consequences thereto to be spelt out.
(x)
Meeting the Target line and ensuring fulfillment of the assigned works
should be the essence of working at all levels.
(xi)
Accountability, secrecy and security are to be essentially to be enforced,
pursued and lapse, if any, to be detected through appropriate mechanism and
dealt with sternly.
9. An Appeal
Sir, every citizen is looking to you for acting swiftly to save further
deterioration of the power sector performance in order to bring the economic
growth back on track and provide relief to the people. Kindly act and do the
needful for betterment of the country and the people.
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