Power Sector Reforms

Submitted by VK Gupta on Tue, 01/01/2013 - 2:10am

The entire legislation relating to the power supply of industry was changed and the Electricity Act 2003 was enacted to dismember and privatise the State Electricity Boards and to set up independent regulator.

After a decade of enactment of Electricity Act 2003, the recent order of the Government of India for financial restructuring of the States distribution companies is a clear declaration of the failure of the decade old reforms. The Government now admits its failure and has suggested that the State Governments and not the independent regulators should ensure upward tariff revision as a condition for financial restructuring.

The proposed financial restructuring neither addresses the causes of persistent ill health of the power supply industry nor does it seek to remedy the ailment. The restructuring is aimed at securitization the huge losses of the power supply industry and transfer them into bonds which at a later stage could be sold into the international debt market. This would only result in the transfer of huge assets build in the last decade to private and multinational sector for a pittance.

The jettisoning of the legislation and all the institutions that were created after independence was justified on huge private investments coming into the industry. In the last decade very limited investments have come, that too only in the most profitable sectors in the power supply industry resulting in either high tariff or higher losses to the electricity boards. The imbalances in the investment in the various sectors particularly in transmission coupled with a weak politically and bureaucratically dictated regulatory mechanism was the cause of the recent grid failures.

Unlike in the past, where comprehensive fuel - energy policies were formulated for the country and plans in the entire energy industry was based on that, today the policy is formulated and modified to suit investor requirements. The consequence is acute shortfall in coal and natural gas and unrealistic and dangerous plans for nuclear energy.

The Shunglu Committee report on which latest bailout package is based has recognised that tariff increases are an absolute necessity so that the Discoms can meet its revenue expenditure fully and the revenue realization must be sufficient not only to meet the operating expenses but also the debt servicing liabilities such as payment of interest and repayment of loan.

However, Shunglu Committee made a major mistake by assuming that the only way to reduce Transmission & distribution losses was through franchising.

Electricity Distribution Franchisee started from Bhiwandi in Maharashtra has now spreading in almost all states of country. Franchisee model has created more problems than solutions. Instead of increasing revenue of Discoms franchisee is not clearing dues of electricity purchased from Discoms.

In power generation sector the private power producers have given the Chinese big thumbs up, by awarding most of their contracts to them. Do the Chinese really make better equipment than Bharat Heavy Electrical Limited (BHEL)? However, despite BHEL units having better efficiency parameters, the demand for Chinese products isn't showing any signs of a slowdown.

This is where cost and implementation--the two major considerations of Indian power producers--come into play. The Chinese equipment is highly subsidized and is decidedly cheaper and is therefore preferred by some over BHEL, efficiency criteria notwithstanding. Yamunanagar & Khedar power plants performance is an eye opener.

Government should agree that expediting capacity addition target & reducing AT & C losses involves challenging task which cannot be handled by generalist IAS bureaucrats. Only experienced power engineers at the helm of affairs would entail faster decision making which is requirement of time.

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