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Business Commentary/ Bibek Debroy

The Great Indian Power Heist

Electricity generation in India has been increasing at around 7.5 per cent a year. But in spite of this, there are serious gaps between supply and demand. To cater to demand, capacity needs to grow by at least nine per cent. Otherwise, shortages may reach 25 per cent of peak demand by 2000 and the power sector will constrain growth of the economy.

The state electricity boards are unable to expand capacity as they are financially sick. They make losses and are unable to pay for coal or electricity purchased from central sector plants owned by central government agencies like the National Thermal Power Corporation.

Delhi Vidyut Board owes creditors almost Rs 70 billion. In 1997-98, the gap between DVB's revenues and operating expenses was Rs 8.5 billion.

The private sector can supplement public sector additions to capacity. But private generators have to sell all of their output to the SEBs and in view of the sickness of the SEBs, are unsure about whether they will be paid for the power delivered. This is what led to the demand for counter guarantees.

The SEBs are sick due to several reasons. First, power is sold to agriculture and domestic consumers at below the cost of production. Second, transmission and distribution losses are very high in many SEB systems (the national average is around 22 per cent). The T&D loss figure for Delhi is 43 per cent, with 65 per cent in East Delhi.

The expression T&D loss is a euphemism. These losses include a substantial amount of electricity lost in the form of theft. As the Delhi figures show, this theft is not by poor consumers, the bulk is by commercial and industrial users.

There are many types of theft. First, people draw more power than they are entitled to, meters are tampered with, people who are in unauthorised colonies cannot be given legal connections and others in electrified colonies don't take legal connections.

Second, there is also unaccounted theft, as power to agriculture in some states is charged on a lump-sum basis. Investments in T&D systems have not taken place. There is overloading of transformers and transmission lines and there are inaccurate meter readings and defective meters.

Third, the SEBs are not commercially autonomous. Fourth, the SEBs are grossly overstaffed. There are significant costs associated with non-availability and erratic supply of power.

These transaction costs make Indian industry uncompetitive and consumers will be willing to pay higher prices if such problems are solved. There are no two-way contracts that bind suppliers and consumers. It is not binding on the supplier to provide electricity of minimum quality.

There are no regulatory bodies whom consumers can approach for redressal of grievances and cost-plus tariffs mask inefficiencies. In addition, inappropriate prices do not encourage energy conservation measures.

There is inefficient use of electricity in agriculture and in households. There is an impression that this entire system is pro-poor, but this is not true.

Consider the case of Punjab. What business does Punjab have to grow water-intensive crops like rice? The rich farmer pays nothing for power, installs a pump, irrigates his fields and grows rice. In the process, the water table goes down and the poor farmer who cannot afford a pump, suffers.

The reform agenda in the power sector is fairly clear. The SEBs must function as commercial entities with managerial autonomy. The Electricity (Supply) Act, 1948 in fact recognises this. This may involve corporatisation of the SEBs, equity sales to all stakeholders (like power consumers), deregulating the power market for large high-tension consumers, organising regional power pools and restructuring the regulatory mechanism. Unbundling of various services is also needed.

The regulatory mechanism must be transparent and autonomous. The accountabilty of the regulatory body should be to tariff standards set out in the law and not to ministers. This will permit de-politicisation in the process of setting power tariffs.

Private sector participation in generation, transmission and distribution is needed, with competitive bidding and not with risk-free environments and vertical integration across these three activities should be allowed. Fast-track projects are not necessary.

But the regulatory body should be concerned with broad guidelines and not micro-management of operators and providers. All terms, not subject to periodic change, should be clearly set out in licences or contracts offered to private parties.

Small power projects are efficient and need to be encouraged. Social policies need to be distinct from commercial policies. If poor consumers need to be subsidised, subsidies should come from state government budgets, not through the SEBs.

Other than such social policies, tariff systems should move towards a time-related structure, based on the opportunity cost of electricity.

Integrated grid operation and proper management can reduce system costs, improve system utilisation and meet larger demand. According to the Constitution, power is in the State list and it is up to the states to introduce reforms. Attempts at reform have begun in Delhi, Orissa, Haryana, Andhra Pradesh and Uttar Pradesh.

The Delhi government has just produced a strategy paper for reforming the power sector. These reform attempts span all varieties of the political spectrum. In Delhi and Orissa, it is the Congress, in Haryana it is the Haryana Vikas Party, in Andhra Pradesh it is the Telugu Desam Party and in Uttar Pradesh it is the Bharatiya Janata Party.

This consensus, if it can be called that, is welcome. Note that the present Union Power Minister, P R Kumaramangalam, vehemently opposed privatisation and reforms as long as he was a union leader in Delhi Electricity Supply Undertaking (DVB's earlier name).

But all said and done, we have had enough of strategy papers. It is time for some implementation and getting things done. There has been enough of debate.

Bibek Debroy

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