NOTE NUMBER 272 P U B L I C P O L I C Y F O R T H E privatesector SEPTEMBER 2004 Reforming the Power Sector Bhavna Bhatia and Controlling Electricity Theft and Improving Revenue Mohinder Gulati T h e s t at e g ove r n m e n t o f A n d h r a P r a d e s h , I n d i a , l a u n c h e d a c a m p a i g n Bhavna Bhatia i n J a n u a r y 2 0 0 0 t o c o n t ro l t h e t h e f t o f e l e c t r i c i t y f ro m g ove r n m e n t - (bbhatia@worldbank.org) is a senior energy ow n e d p owe r s u p p l y c o m p a n i e s a n d i m p rove t h e i r reve n u e c o l l e c t i o n . economist in the South T H E W O R L D B A N K G R O U P PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY T h e i n i t i at i ve , n ow i n i t s f o u r t h ye a r, h a s re d u c e d l o s s e s , b o o s t e d Asia Energy and Infrastructure Unit, and reve n u e s , a n d i m p rove d c u s t o m e r s e r v i c e . T h e i m p rove m e n t s s e e m Mohinder Gulati l i ke l y t o b e s u s t a i n a bl e : t h e u t i l i t i e s h ave i n s t i t u t i o n a l i ze d n ew (mgulati@worldbank.org) a senior financial analyst b u s i n e s s p ro c e s s e s a n d m a d e v i s i bl e c h a n g e s i n t h e i r o rg a n i z at i o n a l in the Europe and Central c u l t u re . T h i s N o t e rev i ew s t h e ex p e r i e n c e . Asia Infrastructure and Energy Services Many developing countries confront wide- Can utilities improve efficiency even under Department, at the World spread theft of electricity from government- government ownership? Yes, as shown by Bank. owned power utilities. In India electricity theft Andhra Pradesh, where state-owned power leads to annual losses estimated at US$4.5 bil- companies reduced theft and losses. lion, about 1.5 percent of GDP. Who are the los- ers? Honest consumers, poor people, and those The context without connections, who bear the burden of The Andhra Pradesh State Electricity Board, a high tariffs, system inefficiencies, and inade- government-owned vertically integrated power quate and unreliable power supply.1 utility serving about 12 million customers, suf- What stops governments from eliminating fered large and growing financial losses in the electricity theft? Vested interests of such stake- 1990s, adding up to Rs 40 billion (US$0.9 bil- holders as politicians, bureaucrats, labor unions, lion) by 1997. The utility’s operational and utility employees, and consumers. Because of financial performance deteriorated, adversely political interference and weak accountability, affecting the power supply. Power subsidies grew state-owned utilities have little incentive to to 1.6 percent of state GDP while public spend- improve their performance. Privatization could ing on health and education fell from 4.7 per- be a solution. But high political risk, low cost cent of state GDP in 1987 to 3.6 percent in 1998. recovery through tariffs, and large-scale theft In 1998 the government of Andhra Pradesh make the power distribution business in devel- initiated comprehensive reform in the power sec- oping countries unattractive to the private sector. tor, a phased program to establish a new legal, R E F O R M I N G T H E P O W E R S E C T O R CONTROLLING ELECTRICITY THEFT AND IMPROVING REVENUE regulatory, and institutional framework; develop electricity theft, strengthening enforcement a new industry and market structure; and priva- mechanisms, reorganizing the anticorruption tize distribution. So far Andhra Pradesh has function in the utilities, and reengineering busi- enacted an electricity reform law; unbundled the ness processes to improve management control utility into one generation, one transmission, and and customer service. four distribution and supply companies; and In July 2000 the state government amended established an independent regulatory commis- the Indian Electricity Act of 1910 to make elec- sion responsible for licensing, setting tariffs, and tricity theft a cognizable offense and impose promoting efficiency and competition. stringent penalties.2 A separate law, unprece- 2 The new distribution utilities inherited a dented in India, provided for mandatory impris- weak system of energy accounting—and ram- onment and penalties for offenders, allowed pant electricity theft that, together with revenue constitution of special courts and tribunals for leaks and other factors, undermined financial speedy trial, and recognized collusion by utility performance. In fiscal 1999 only 42 percent of staff as a criminal offense. the electricity flowing into the distribution sys- Advance preparations ensured that the gov- tem was billed on the basis of metered con- ernment was able to constitute special courts sumption. The balance was accounted as and appellate tribunals as soon as the new law consumption by the unmetered agricultural came into force. The utility service areas were customers (about 2 million) or as transmission divided into 24 “circles” coinciding with the and distribution losses. The unverifiable esti- state’s 24 administrative districts. A special court mates of sales and losses allowed the utilities to and police station were established in each cir- camouflage inefficiency and theft and thus to cle to ensure rapid detection and prosecution of deflect public scrutiny of their poor perform- electricity theft. And the state police and anti- ance, hide political and bureaucratic corrup- corruption units of other government depart- tion, and obscure the public debate about ments were directed to support utility agricultural subsidy. The theft occurred in sev- employees in inspections to control theft. eral ways, including tapping power lines and The government also initiated institutional tampering with or bypassing meters, often with changes in the utilities. Their anticorruption the connivance of utility staff. Revenue leaks department was strengthened by promoting its resulted from weaknesses in metering, billing head from an advisory to an executive position on and collection, internal control systems, and the board, and the organizational structure was enforcement of the disconnection policy. modified to strengthen the department’s coordi- The first step to reform was to move beyond nation with other departments. In addition, the denial and accept the existence of theft. An anticorruption department’s procedures were energy audit program led to more realistic esti- made simple and transparent. Inspecting officers mates of transmission and distribution losses (at provide an inspection report with an identifica- 38 percent in fiscal 1999, up from an earlier esti- tion number to customers on the spot and carry mate of 18 percent) and recognition of “non- numbered receipts so they can accept payments technical losses”—a euphemism for electricity of fines. Police stations provide public notifica- theft. Public expectations from the reform pro- tion of all theft cases. And a new tracking system gram, and regulatory reviews that increased pub- follows the progress from inspection to payment lic accountability, brought the theft and losses of fine or prosecution. More than 2,000 inspec- under sharper public scrutiny. In January 2000 tion teams were deployed throughout the state to the government launched a major campaign to launch the theft control drive. control theft. To reengineer business processes, a new man- agement control system, the “customer analysis The plan tool,” was developed. The system uses a centralized A comprehensive plan for controlling theft and customer database to analyze metering, billing, improving accountability was prepared, focusing and collection performance—allowing monitor- on four measures: enacting a new law to address ing of staff’s performance against their collection targets—and generates focused management people (including a member of the legislature) reports useful for initiating corrective action. The were charged with electricity theft. The cases substantially faster processing for analyzing data went forward, and the proof that even the most and generating reports allows quick action. powerful were subject to the new law, and that A key capability is the generation of risk pro- utility officials would be protected from interfer- files of customers based on their payment his- ence, generated broad support for the program tory, enabling utility staff to prioritize and target among the public as well as utility employees. nonpayers. While the past practice was to inspect entire neighborhoods to detect a few thieves, the Providing adequate resources 3 new system helps target inspections to defaulting Adequate funds were provided for advertising, customers and high-loss service areas. The para- holding public meetings, purchasing high- digm shift from “inspect and detect” to “detect quality meters and remote meter reading instru- and inspect” has significantly increased the ments, and adopting advanced communications detection of irregularities. Most important, it has technology—all of which helped to sustain the reduced the alienation of honest customers, who momentum and credibility of the change. no longer have to suffer the indignity of police Ⅲ High-quality metering. More than 2 million raids and neighborhood searches. high-quality meters for energy customers were installed in two years, compared with a Implementation past average of 600,000 a year. High-accuracy The campaign has achieved impressive results meters were installed for high-value cus- thanks to careful planning, political commit- tomers, and the old meters recalibrated and ment, and efforts to build a constituency for installed for low-value customers. change through consultation with stakeholders Ⅲ Better information flows for management control. and improvements in customer service. To support energy auditing, electronic meters with data logging devices and facilities Consulting with stakeholders for transmitting the data through a satellite The government launched a communication pro- communications system were installed on all gram through media ads, posters, and videos, and 11-kilovolt distribution feeders. a public outreach program through visits by spe- Ⅲ Transparency in estimating agricultural consump- cial teams and regular public meetings with utility tion. While agricultural customers remain managers. The outreach campaign deployed unmetered for sociopolitical reasons, meters about 600 teams to conduct town hall meetings in were installed on the transformers serving all settlements with more than 200 residents. The mainly these customers to allow better esti- teams informed people about the proposed new mation of sales to agriculture. law and the penalties for electricity theft and gave everyone the opportunity to obtain an authorized Setting priorities connection on the spot after paying a connection In the initial phase the theft control program fee. They also explained the utilities’ deteriorat- focused on high-value customers. Dedicated ing financial situation and the effect of electricity feeders were constructed to supply large indus- theft on their costs and tariffs. trial customers, which were also provided high- In addition, teams held consultations with quality, tamper-proof electronic meters, and the labor unions about the proposed legal pro- protective boxes were installed on transformers. visions for making collusion by utility staff a Meter reading instruments were provided to criminal offense. Assurance that old cases would inspection teams to download monthly data, be excluded under the new law helped secure allowing analysis to identify customers whose the unions’ consent to punitive action against monthly consumption varied by more than 2 staff caught colluding in theft. percent. Irregularities in metering and billing The credibility of the communications, and were found for about 15 percent of the 23,000 the government’s political resolve to combat industrial connections—and 10 percent of the theft, were tested when some politically powerful 36,000 commercial connections—inspected in R E F O R M I N G T H E P O W E R S E C T O R CONTROLLING ELECTRICITY THEFT AND IMPROVING REVENUE fiscal 2001. For residential customers inspections sued more than 150,000 cases, compared with focused on 11-kilovolt feeders with high line 9,200 in the previous 10 years, and arrested more losses and on 114 towns accounting for 53 per- than 2,000 defaulting customers. cent of consumption and 60 percent of revenue. Conclusion Building a constituency for change In an environment of limited commercialization, viewpoint The campaign also gave high priority to connec- deeply entrenched vested interests, and politi- tion delays and poor customer service—two major cized operations and management in the power is an open forum to reasons for customer dissatisfaction. Utilities sector, Andhra Pradesh’s efforts to control elec- encourage dissemination of introduced a spot billing system to allow meter tricity theft are impressive. The program, now in public policy innovations for reading in the presence of customers and thus its fourth year, has sustained the improvements. private sector–led and minimize billing complaints, established a special Whether the program will remain immune to market-based solutions for cell in each operation circle to authorize new con- political interference has yet to be seen; there is development. The views nections and address customer complaints, and always a risk that populist electoral politics will published are those of the opened collection centers at convenient locations undermine governance and accountability. But authors and should not be and mobile collection centers in rural areas. the program includes actions that, together with attributed to the World Utilities also set up computerized customer care strong political commitment, are key to sustain- Bank or any other affiliated centers serving as one-stop windows for handling ing any such initiative: organizations. Nor do any of complaints, receiving payments, and following up Ⅲ Creating a constituency for change through the conclusions represent on electricity supply problems. effective communication with key stakeholders official policy of the World and building confidence in the government’s Bank or of its Executive Monitoring results assurances by ensuring that the communica- Directors or the countries The campaign was closely monitored, including tion is followed by actions that back it up. they represent. at the highest level of the government. All district Ⅲ Modifying the legal framework and enforce- offices were linked to headquarters through the ment mechanisms to remove legal impedi- To order additional copies satellite network for quick transfer of data, and ments and empower enforcement authorities. contact Suzanne Smith, district administrators and engineers submitted Ⅲ Ensuring that punitive actions are seen as managing editor, Room I9-009, daily reports on the connections regularized and judicious and equitable and giving those with The World Bank, fees collected. The information system devel- illegal connections a chance to become law- 1818 H Street, NW, oped to monitor the campaign was improved ful customers. Washington, DC 20433. and integrated into the management control sys- Ⅲ Institutionalizing new business processes by tems of the companies, and continues to be used adopting modern technology, improving Telephone: for monitoring. management information systems, and intro- 001 202 458 7281 ducing new management control systems. Fax: The results Ⅲ Changing the incentives of managers and 001 202 522 3480 The campaign has made a big difference in the staff by punishing collusion and poor per- Email: utilities’ bottom line. Monthly billing has formance. ssmith7@worldbank.org increased substantially, and the collection rate has reached more than 98 percent. Transmission Produced by Grammarians, and distribution losses were reduced from Inc. around 38 percent in 1999 to 26 percent in 2003, Notes in large part through theft control, with the util- 1. While 80 percent of Indian villages are electrified, Printed on recycled paper ities regularizing 2.25 million unauthorized con- only 44 percent of rural households have access to power. nections. Moreover, enforcement of the new 2. The Indian constitution allows state governments to antitheft law has proved effective. Disciplinary amend federal legislation, with the consent of the presi- action has been taken against 218 employees and dent of India, for application in their state. criminal cases launched against 87 employees involved in stealing electricity and misappropri- ating funds and materials. In the first three years after the law’s enactment the authorities pur- This Note is available online: http://rru.worldbank.org/PublicPolicyJournal