4 GOVERNMENT OF INDIA MINISTRY OF POWER Jaipur, India October 29-31, 1993 Cospmomors Govrmemt of ndia, Minisy of Powr WWld Bank Ii"& Deptmet ESMAP wlrMli f Emi .nA i i ,cig4 JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) was launched in 1983 to complement the Energy Assessment Programme, established three years earlier. ESMAP's original purpose was to implement key recommendations of the Energy Assessment reports and ensure that proposed investments in the energy sector represented the most efficient use of scarce domestic and external resources. In 1990, an international Commission addressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy in economic growth, concluded that the Programme should intensify its efforts to assist developing countries to manage their energy sectors more effectively. The Commission also recommended that ESMAP concentrate on making long-term efforts in a smaller number ci countries. Today, ESMAP is conducting Energy Assessments, performing preinvestment and prefeasibility work, and providing institutional and policy advice in selected developing countries. Through these efforts, ESMAP aims to assist governments, donors, and potential investors in identifying, funding, and implementing economi- eally and environmentally sound energy strategies. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the governments and institutions providing financial support, and repre- sentatives of the recipients of ESM'APs assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners and economists from the Industry and Energy Department of the World Bank. The Director of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations eagencies, the European Community, Organization of American States (OAS), Latin American Ener-y Organization (OLADE), and countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information or copies of ESMAP reports, contact: ESMAP c/o Industry and Energy Department The World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A. Conference on Power Sector Reforms in India Jaipur, India October 29-31, 1993 Cosponsors: Government of India, Ministry of Power World Bank India Department ESMAP ESMAP c/o Industry and Energy Department The World Bank 1818 H Street, N. W. Washington, D. C. 20433 TJ.S.A. This paper is one of a series issued by the Industry and Energy Department for the information and guidance of World Bank Staff. The paper may not be published or quoted as representing the views of the World Bank Group, nor does the Bank Group accept resportibihty for its accuracy and completeness. Table of contents Preface .........................v................... v Executlve Sumniary. 1 Keynote addrec on state electridty boards: issues and options. 5 Background Papers: International power sector experience: a comparison with the Indian power sector .11 Perfornance of the power sector in India .45 The power sector in India: a macroeconomic perspective .65 Power sector reform in Argentina .83 Power sector reform in China .93 The U.K expeience .101 Levels of competition in the US. power sector .107 Power sector regulation in ndia, U.K and U.S. 113 Regulation and management of the power sector in India ....... ................ ... 121 Commercialization of the power sector in India .155 An approach for trading in the Indian power system .175 Energy financing. an institutional challenge .195 Financing private sector participation in the Indian power industry .223 Closing statement .231 Annex 1: Conference agenda .233 Annex 2: List of participants .237 TJL OF COMNAS il Preface Many developing countries and formerly cen- reforms and the international experiences rele- trally planned economies are considering efforts vant to the Indian context. to restructure their energy sectors as part of their The conference would allow senior Iian overall economic transformation. In most of officials to examine and discuss alternative these countries, the power sector comprises the models of sector organization and the restruc- largest single group of public entities operating turing experiences of other countries that could as natural monopolies, and, consequently, it has assist them in their own efforts to plan and been a focal point of attention with regard to implement appropriate reforms for the Indian reform. power sector. By assembling high-level central In October 1992, the World Ban's India government officials, electricity supply industry Region Energy Operations Division assisted operators from state governments and private India in carrying out a workshop in Goa, power utilities, end-users, representatives of `Implementation Issues in the Power Sector," policy think-tanks, and others, the conference during which participants noted that in the would serve as a forum for informed and pro- absence of an enabling framework for private ductive debate on the various sector issues and participation in the power sector, and without reform options among the diverse participants. clear "rules of the game" and well-established In particular, the participants would be able to principles and nrocesses for restructuring and (a) share their diagnoses of the problems typical regulation, it would be very difficult to promote of India and other developing countries, further private investment. Following up on the (b) review the experience of countries that have interest manifested at one Goa workshop and reformed their power industries, (c) examine the several other meetings, India's Ministry of options most suitable to India, and (d) define an Power, with the assistance of the World Bank's appropriate course of action. India Department and the Energy Sector Man- The conference took place on October 29-31, agement Assistance Programme (ESMAP), began 1993, in Jaipur, and is expected to be part of a preparations in early 1993 for a large-scale series of discussions that wili accompany the conference on institutional policy and regulatory reform process. This volume includes the PREFM=E V VI PREFACE Keynote Address on State Electricity Boards by Mostefal (SA2EG), supported by a core team Shri Sharad Pawar, Chief Minister, Maharashtra, consisting of Alfonso Mejfa and Mohinder Gulati and Chaiman, NDC Committee on Power, and (India Resident Mission). Manju MalLk (EDI), the papers presented and comidssioned for the Jose Escay, Emesto Cordova, and the Visiting conference, as well as capsule summaries of the Mission Support Unit (VMSU) of the World main points of debate. The reader is cautioned Bank Resident Miss;on provided the logistical that the draft background papers provided by support, with the invaluable help of personnel the authors have not been subjWectd to extensive from the Indian Ministry of Power, National review and revi -. We hope that timely Hydro Power Corporation, the Rajasthan State dissemination ot .; proceedings of the con- Electicity Board (SEB) and the World Bank ference will help to sustain its momentum and Resident Mission in New Delhi. the resolve manifested by the particdpants to Funding was provided by the Swedish govern- pursue effective and appropriate reforms in the ment, through its bilateral aid agency, SIDA, and sector. the World Bank. The conference was mnade possible by the close We wish to express our appreciation to the cu,laboration of the government of India with goverment of India, the many enterprises and the World Bank and ESMAP. Spedal thanks go organizations in the power sector, and especially to Mr. R. Vasudevan, Secretaly, Ministry of to Mr. R.C. Dave, chairman of the Rajasthan SEB, Power, and Mr. A. Dua, Joint Secrtary, Ministry for the cooperation and assistance rendered to of Power (Conference Director). On the part of the World Bank and ESMAP staff during the the World Bank, the work was jointly managed organization and development of the conference. by Luis E. Guti6rrez (ENPD) and Djamal Executive Summary India's electty supply industry 0ESI) is facing budget One of the main problems is that elec- numerous difficlties. Despite considerable tricity has for long been priced below its costs, investment and expansion of generating capacity leading not ordy to the final distress of SEBs over the last decade, the operational efflciency, but also to overblown demand, ross-suidies, quality, and reliability of electricity supply have and higher generation requients. Typicaly, deteriorated steadily. This deficiency is evi- the SEBs' tariffs are equivalent to only 50 to denced in the fact that the ESI, with a nominal 60 percent of long-run marginal costs. The .ntled generatng capacity of 70,000 MW, is agriculture and domestic sectors have been the unable to meet reliably a peak demand of orny main beneficiaries of this tariff policy. Given the 43,0 MW. In 1991-92, eney and capacity fiscal situation, both the national pvenment shortages averaged from 9 to 18 percent of the and the states adknowledge the need to raise estimated demand. This situation is exected to power prices to econonmc and financial levels. worsen in the future. The initial target for the Yet movement toward cost-recovery pricing has Eighth Plan was to increase generating capacity been hindered by a long-standing view that by 30,500 MW, wit the private sector to provide electricity is a social benefit and development about 2,800 MW. But the likely achievement is tool rather than a service to be bought and sold about 20,000 MW because of public resource con- commerdally. straints and a slower-than-ecte pace of To overcome the financial gap, India counted partcipation by the private sector. on a substantial increase in local and foreign As *t now stands, India's ESI cannot mobilize private participation. The 1948 Electricity Act the resources required for its development. was amended in 1991. Yet despite the new legis- Almost all power utilities, particularly the State lation, the contribution of private power utilities Electricity Boards (SEBs), are in financial distress. is likely to remain limited because of the lack of Few of the SEBs turn a profit. In recent years, an enabling environment for participation by the the commercial losses of SEBs have been private sector. That is, private investors still increasing; curently, they exceed $1 billion per perceive as unacceptable the risks and costs year and place a heavy burden on the public (including transaction costs) represented by the EzEcxmv SUmMRY 1 2 ExEcUnVE SmUMMAiY existing institutional and regulatory framework e The experiences of Argentina, China, the United and the financial weaknesses of the SEBs, and Kingdom, and the United States provide some this in turn has prevented most potential power useful lessons on how different rform processes investments from going beyond initial expres- ran be conducted, and an understanding of these sions of interest experiences may be of significant valuefor those The government and the World Bank agreed who are working at reforming India's power that a conference on power sector reform would sector. Conference papers described various be an appropriate first step to assist India in reforms -. d the key features of the new bringing progress on the above issues. The main institutional and regulato, structures and objective of the conference was to expose senior highlighted (a) the reform process (why and Indian officials to the alternative sector models how it begun, how it was done, who we.'e and the restructuring experiences in other coun- the muin players); (b) the influence of tries, and in that way to assist them in planning macroeconomic reforms (how conducive and implementing appropriate reforms for the were they to reforms in the power sector); power sector, especially at the state level. (c) the issues and obstacles faced during The conference consisted of an opening ses- and after the reform; (d) the main sector sion, four topical sessions, and a summary of the issues and options; and (e) the tangible lessons learned and the key elements needed tr- results achieved. continue examining the potential for power * Sector reform is a political process, requiring a sector reform in hidia. The four topic sessions new social pact between enterprises, govern- covered (a) the need and conceptual framework ment, and consumers. It will require a coor- for power sector reforms in India; (b) challenges dinated effort to deal with the interrelated faced by the SEBs; (c) four country case studies; issues of markets, institutions, regulation, and (d) commerciality of the SEBs and design of and finance. the reform process. o A rapid pace of rform may be critical for its Some of the salient points brought out at the success. Depending on political circum- conference were as follows: stances, a slow and overdeiberate pace of reform may encourage much opposition and e The Indian power sector will not be able to meet produce few benefits. That is, a protracted the investment challenges unless structural reform may be more institutionally chal- changes are undertaken to enable it to perform lenging than a bolder program of change. on a sound commercial fouting. Without e Regulation is a key factor in power sector drastic measures, the current power gap is reform. Regulatory reform needs to march likely to widen in the future, possibly in step with sector restructuring and intro- reaching some 25 percent of peak demand duction of private sector participation. In by the year 2000. the United Kingdom and the United States, * As it stands, fhe Indian power industty is an emphasis on explicit, independent regu- unable to mobilize the resources requiredfor its lation has promoted reform, albeit in some- development. Alnost all power utilities, what different ways in each case. The particularly SEBs, are in financial distress, emphasir in independent regulation is on placing a heavy burden on the public price, quality of supply, and consumer budget. protection more than on the regulation of e The availability of financial resources from the supply and investment. private sector uill be linked to the pace and * SEBs can supply electricity of appropriate depth of the reform. Under the best of cir- quality at competitive prices only if they can cumstances, private savings will be slow to function as commercial entties. Commer- materialize until confidence and experience ciality implies the ability to (a) meet power are gained. needs efficiently; (b) make decisions without * A major deficiency in the present system is the external interference, along commercial lack of commercial autonomyfor the SEBs. The principles; (c) meet all financial obligations managerial and financial autonomy of the to the suppliers of inputs and power; SEBs has significantly eroded as a result of (d) generate enough revenues to fund a continued political interference in day-to- significant share of their investment pro- day managrial matters (tariffs, recruitment, grams and fully meet debt servicing and extension of distribution systems, etc.). debt redemption obligations; and (e) raise EXECuT VE SUMMARY 3 commercia finance and the freedom to them from operating on a fully commercal contract power supply from the lowest-cost basis. The state and central governnents producer. thus need to develop a workable necha- The solution to the sector's problems lies in nism to protect vulnerable consumers with- effecting structural, institutional,and regulatory out compromising the Boards' abilities to reorganization along market lines, opening the function on commercial terms. In view of sector to competition where possible (i.e., in the growing size of the power sector, the generation and marketing of electricity), and need for transparency in operations is providing arm's-length regulation in the urgent. remaining arems, as a prelude to implementing other financial refom measures. These reor- The broad thrust of the conference, as it ganizations should aim at strengthening the appeared to the World Bank's dosing speaker, financial and managerial autonomy of the was to propose an agenda that would promote SEBs while enhancing competitive condi- corporatization of generation, transmission, and tions in the sector. This involves (a) distribution of electric power; align tariffs with properly demarcating the relative roles of costs of supply; foster competition where pos- central and state goverrnents in power sible and implement regulation where not; effect sector management, based on the manage- bold state-level reforms to encourage commer- rial and financial autonomy of power utili- cialization of the sector; and put in place finan- ties; (b) empowering SEBs to adopt different dal and accounting improvements to manage the options for generation, transmission, and fiscal impact of the reform distribution; (c) corporatizing SEBs and Vigorous and effective implementation of such opening sale of equity to all stakeholders, a comprehensive program of reform, the speaker especially to power consumers; (d) deregu- suggested, would provide the basis for substan- lating the power market for large high- tial short- and medium-term financial external tension consumers; (e) organizing regional support for priority investmer.t programs in the power pools; and (f) restructuring the regu- power sector, including further development of latory mechanism to encourage a trans- renewable energy sources, stepped-up dissemi- parent and autonemous regulatory process. nation of demand-side management techniques; - lectricity has become a basic necessity for increased support for promoting environmentally modern living, but social policies must be clearly more sustainable operation of India's existing spratedfrom commercial activties. The state and new generating capacity; and forward- governments have often implemented social looking use of financial guarantees and cofinan- subsidy policies through the SEBs, thereby cing to give the stronger, more solvent elements compromising the financial viability of the in the sector better access to well-funded capital Boards. In practice, thus, the Boards have mnarkets inside and outside India. Further high- found vital commercial subjects such as level conferences to assess progress and discuss tariffs, new connections, and disconnections challenges along the reform path would also beyond their purview, and this has kept have merit, the speaker concluded. Keynote address on state electricity boards: issues and options by Shri Sharad Pawar Chief Minister, Maharashtra Chainnan, NDC Committee on Power Shri Salveji, Uni&n Minister of Power, distin- report. I am, therefore, particularly happy to be guished guests, and friends, amongst you today when you are exanining te At the out-set, I would like to thank Shri challenges facing the power industry in India NX.P. Salve, Union Minister of Power, for and discussing refoms needed to address these having invited me to this Conference on Power challenges. I would like to congratulate the Sector reforms in India and to share my thoughts Union Ministry of Power, Government of India, with you. In today's world, electricity is prob- for organizing this confernc with the assistance ably the most vital input for economic develop- of the Joint UNDP/World Bank Energy Sector ment. On attaining independence from colonial Management Assistance Program and the India rule in 1947, India took several steps to establish Deartment of the World Bank I am told that, a power network throughout the country. This in the conference, some foreign experts wil sector was given a lion's share of the plan out- present the lessons of power sector reforms in lays in successive Five-Year Plans (FYP) of the different countries and compare the Indian country. However, in spite of the impressive power sector in the context of the other large- growth that was achieved in the sector, power scale power systems around the world. This supply interruptions, power shortages, and poor conference will thus give an opportunity to the voltage conditions are common throughout the power sector in the country to get an overview country. This has a major adverse effect on both of the alternative power sector models and the the agricultural and the industral sectors and restructuring measures adopted by other coun- the nonavailability of power is likely to be the tries. We are at a critical juncture when we single most *;ritical constraint to development in cxpect the power sector to undergo major the coming years. This was recognized at the changes and achieve a momentum that is meeting of the National Development Council required to meet the needs of a fast-developing (NDC) held In April 1993 and it was decided to economy. The conference Is, therefore, timely constitute a committee on power to suggest and as the Chairn of the NDC Committee on measures to reform this important sector. The Power as well as the Chief Mirdster of commnittee has since been appointed under my Maharashtra, I look forward to the conclusions Chaimanshp and we wil shortly present our of this conference. XEYNO ADDMSS ON STAT! BLEE=CTCY RDS: ISSUES AND OtOS 6 KYNOrr AwDORES ON TrATE EL,crrry BoADs: ISUES AND OPONS to 18A percent. More important is the quality of supply that we will be giving to the consumers, who will be fe.cing interruptions, poor voltage _i 1. Background conditions, and power cuts. In order to find answers to all these questions, we must try and analyze some of the reasons for the problems During the British Colonial rule, the emphasis that we face today. I would like to dwell on was on the continuance of the colonial rule. some of these issues now. There was hardly any economic development during this period except that which met their own purpose. This is cl( ar from the fact thtat in 1947 the total installed generation capacity iz the country was only 1,362 MW. This has gone up to 72,319 MW in March 1993, registering an 3. Technical improvements increase of over 53 times. The actual generation of power rose from 4.1 billion units In 1947 to 301 blion units in 1992-93, representing an A major deficiency in the present system is the annual growth rate of about 10 percent. About managrial weakness leading to low technical 489 thousand villages constituting 85 percent of achievements of the SEBs. The plant availability, the total nuinber of villages in the country have the plant load factors, the heat rates, and the baen electrified as against 3,000 at the end of levels of auxiliary consumption of many plants 1950. The number of agricultural pumps that in the country today are mucn below the norms. have been energized in the rural areas is more In some states, the plant load factor is as low as than 10 million. All these impressive achieve- 25 percent to 30 percer.t and auxiliary consump- ments could be possible largely through the State tion as high as 15 percent to 20 percent. The Electricity Boards (SEBs) and the heavy invest- specific oil consumption varies between 3 to ments made by the governments in the public 5 milliliters per unit in the more efficient states sector. Such a massive expansion, particularly in and 23 to 24 in others. In many power plants, far-flung, remote rural areas would not have the normal maintenance works are also not being been possible but for the important role played carried out properly and repairs and renovations by the SEBs. of existing old plants not attended to in time. It is, therefore, imperative that more attention is paid to improve the performance by adopting better operational methods, planned outages, and proper use of spares and manpower. Considerable expenditure is also incurred in 2. Introspection transportatior. of coal with high contents of ash and other material. It is essential to set up coal beneficiation plants at the coal mines immedi- However, It is time to pause and to reflect ately to reduce this expenditure and to improve whether this achievement has been sufficient. the performance of the existing generating If we take into account the growth of the popu- capacity. This will also reduce the . ear and tear lation, the vast changing needs of development, of the equipment at the power stations. and the rising expectations of the people, the answer to this question must, regretfully, be in the negative. By the end of 1991-92, the all-India average energy deficit in the power sector was of the order of 8.5 percent with a peaking 4. Transmission and shortage of 17.7 percent The projected electical L distribution losses enery demand by 1996-97, i.e. by the end of the Eighth FYP, is expected to be 416 billion units. Taking into account the expected capacity addi- The most disturbing aspect of the Indian power tions by various sectrs of only around scene is, however, the high transmission and 31,000 MW until 1996-97, the energy shortage at distnbution (T&D) losses which are at present the end of the Eighth FYP would still be 42 per- around 23 percent. In some states, these are as cent and the peaking shortage would have risen high as 42 percent, while in many of the major KEYoOt ADDRESs ON OTATE ELECrilWY BOARDS: ISSUES AND OPTONS 7 states, these are around 25 percent. Since most chare of the smallest area made answerable for of the states have umnetered supply of electricity all the energy whlih flows through his are. on the basis of HP block tariff for the rural Suitable methods could be introduced to ensute agricultural pumps, a considerable quantum of constant vigllace and supervision of the con- energy may get adjusted on this account. It is, nected load and energy consumption of major therefore, a moot point as to whether even the consumers In the area to check for corctnes T&D losses shown at the present are a correct Computerization of the energy bling system can indication of the actual energy which is lost or greatly help in creating a large database of unpaid for. One major reason for these loses is commercialy valuable information and provide the technical losses. This can be set right only excellent inputs for effective energy audit. All- by strengthening the system through more sub- out efforts to compute the rise in the enea stations, installation of capacitors, and increasing billing for HT and LT industria consumers, the ratio of high-tension (HT) lines to low-ten- commercial consumers, and residential con- sion (LT) lines. This requires considerable sumers in that order, need to be taken and te investments and financial support to the Boards. computerization completed in a timre-bound However, very often we tend to distribute our manner. Along with this, installation of efficient resources thinly over a wider area, in our anxIety meters which cannot be tampered with as well to reach as many areas and consumers as pos- as cross-checking and monitoring of meter sible, rather than conoentrating on spending the readings of commercially important consumes resources more judiciously. A more important by superiors needs to be introduced. The entife reason for the losses is comnercial, i.e. theft of structure of the SEBs needs to be decentralzed energy. A large number of consumers from all and every small unit, right up to the level of sectors, whether industrial, commercial, domes- subdivision, made accountable for the energy tic, or agricultural, do consume electricity with- received and sold by it as well as the revenue out paying for it. Unfortunately, many a time, eamed and expenditure incurred by it. The staff this is done with the collusion of the staff of the and management of the Electricity Boards wil Electricity Boards. Such theft of energy not only have to imbibe a new work culture if we are to affects the financial position of the Electricity obtain better results. Perhaps, if the message Boards, making them ineffective in many areas, goes out that the very survival of the Electricity but also hurts the honest consumer as he gets a Boards and the jobs teein are at stake, the deteriorated supply with low voltage and inter- introduction of this work cuture would be ruptions and also has to pay more for the power. easier. This organized theft of energy needs to be checked immediately else It will not only destroy the entire power sector in the country, but will also destroy the moral fabric of the society. Some half-hearted measures of policing and setting up of vigilance units have been taken up 5. Financial outlay by many of the SEBs. While acknowledging the need for introducing strong punitive measures in dealing with such thefts, the importance of a Another important reason for the SEBs not being systematic effort in accounting of energy right able to render the expected level of service is the unto the subdivisional level in the SEBs needs inadequate annual financial outlays. Electricity hardly to be stressed. This will help in keeping is a costly business and huge investments are a proper account of the use of energy and help required for generation, transmission, and distri- identify areas needing constant vigil. I would bu!ion. In spite of the best vf intentions, It has strongly urge the introduction of Energy Audits not been possible for many of the state goverW which has been undertaken by some SEBs in the ments to provide adequate money for this pur. country. Meters need to be installed at the pose in view of the competing demands from substations to measure the outflow of electricity other sectors. A significant bu.den of sett up through evety feeder. The readings from these generating capacity has been taken by the cenl meters should be cos-checed with the sector corporations such as National Thermad readings obtained from the consumers in that Power Corporation (TPC), Nuclear Power area and the explicit losses worked out in the Corporation, N4ational Hydroelectric Power subdivision. A system of accountability needs to Corporation, etc. In order to further lighten this be introduced in the field and ide person in burden and in response to the Govemment of 8 7KEYNOE ADDRESS ON STATE ELEcrICIY BoARDS: ISSUES AND OPTIONS India's policy, most of the SEBs have started matter to be left to the SEBs, at the same time negotiations with the private sector to set up the state governments should also not take independentgenerating facilities. The Powergrid decision on tariff purely for political expediency. Corporation of India is also setting up major A sound commercial view needs to be taken transmission lines in different parts of the while revising tariff which will take a realistic country and thus, reducing the burden on the stock of the cost, reward efficiency, and protect sta'es. The states can, therefore, concentrate on the consumer. I understand that the Govern- the distribution schemes and a major share of the ment of India has taken a decision on the consti- budget could be earmarked for this area which tution of National and Regional Tariff Boards to has been comparatively neglected so far. The go into the question of tariffs. This is a welcome strengthening of the distribution system will step and I hope they will start functioning early. reduce losses and provide better service to the At the present, in most of the states, the tariff consumers. for the domestic and agricultural consumers is In the past, state governments have been subsidized and higher rates are charged to the providing money to the SEBs largely by way of HT industrial and commercial consumers. The interest-bearing loans which have to be fully agricultural consumers particularly have been repaid. While the terms and conditions of these subsidized heavily and are charged on block loans were comparatively soft at the beginning, tariff based on horsepower instead of metered they became more difficult in later years. As a tariff. Some of the states have gone to the extent result, many of the Boards have to bear a heavy of giving electricity to the agriculturists free of burden of interest and repayment of loans every cost. I am of the opinion that subsidy to some year. In some states, the amounts which the extent for both the sectors is unavoidable. The Boards have to pay are so high that they exceed encouragement given to the agriculturists has the annual budget which the government pro- resulted in the installation of more than 10 vides every year. A number of State Boards million agricultural pumps in the country have, therefore, made a suggestion that the state leading to increased agricultural production. In governments convert at least part of these loans my state alone, more than 1.7 million pumps into equities so as to reduce the financial burden have been installed which has resulted in a of the Boards. dramatic change in the countryside. Many of the farmers have gone in for second or third crops or are producing cash crops like sugar cane and oil seeds. This increased production and pros- perity in the rural areas could not have been possible without the conscious policy of sub- 6. Tariff policies sidizing the energy cost of the farmers. The domestic consumers, particularly of the lower slabs, also require certain subsidies. I, however, In order to understand the working of the SEBs, differ regarding the extent of subsidies to be it is important to understand the tariff policies given. Fixing very low tariff unrelated to the followed by them. As per the Electricity Supply cost of electricity, or worse still, giving it free of Act, the SEBs have the power to fix their own cost, is counterproductive. This results in casting tariffs. However, because of Its diverse implica- an unduly heavy burden on the other consumers tions, in practice, the state government does have who have to cross-subsidize the cost of electric- an important say in the tariffs to be levied. The ity. It also results in indiscriminate waste of proposals are generally initiated by the Boards electricity and use for unproductive purposes. on a cost plus basis and the state governments Subsidies to the consumers should, therefore, be take decisions on the basis of the existing situa- related to the cost of electricity and revised from tion and the likely impact that the tariff will time to time. have on the various sectors of consumers. I feel In many states, due to the extent of subsidies that both these ingredients of tariff structure are and the lack of adequate cross-subsidization, the imperfect. The cost plus basis of tariff only SEBs run into major financial difficulties and are increases inefficiency and burdens the consumers often unable even to get the minimum statutory with high rates. The Boards need to reduce their return of 3 percent on their net fixed assets. At costs, work on efficient lines, and be made such times, it is imperative that the state govern- answerable to some authority for any increase in ments should step in and provide the necessary the tariffs. Also, while tariff is too important a subsidies to the SEBs in time. However, this is KEYNWE ADDREss ON STATE ELCrCIFY BORiD: ISSIE AND OmTIoNS 9 often not forthcoming and the SEBs are left to equipment. The SEBs need to be vigilant manage their own affairs as best as they can. I about the quality of equipment and certain think, in such cases, the state govemmnents are rigid standards as welt as inspection proce- avoiding their responsibilities as the SEBs are dures require to be laid down. The system of merely following a policy laid down by them. I purchases on the basis of lowest quoted tender would personally prefer that subsidies are so along with the policy of protection to certain fixed that the SEBs are self-sufficient with a types of suppliers needs to be studied carefully certain degree of cross-subsidization and do not and revised if necessary. have to come to the state govemnments for assis- tance; however, where this is not possibie, the I would urge that the message of the need to state governments must compensate the SEBs in have the S%Bs run on commercial wor3ing time. requires to be stressed at all levels, from the chairman to that of the lineman. Unless a sense of awareness is created that the govoraiment is serious about this step and will not tolerate .'7. . working of inefficiencies, no improvement will be possible. 7. Commercial workng of Where there is no such change, I would even L the Boards propose that not only the persons be changed but the monopoly of the SEBs ended and they be reorganized or new parties allowed to come in While the SEBs have played an important role in the aea to provide competitiveness and alternate the past, it is vital that they re-orient their service to the consumers. working on commercial lines if they have to have any role in the future. The country just cannot allow the Boards to run with Inefficient management and unsound commercial prin- ciples. The management needs to be given a free [ hand to run on commercial lines and made 8. Private sector accountable for any failure. I would like to give a few examples to illustrate this point: That brings me to the role of the private sector in * Most of the SEBs hardly pay attention to the field of energy. This is not a new concept in project delays and cost overruns. Very few our country. As far back as 1915, Tata set up a projects get commissioned in time and hydro power station to supply electricity to within the budgeted cost. Between the Bombay. In several parts of the country like starting of the project and its comnmis- Bombay, Calcutta, and Ahmedabad, we have sioning, many of the officers are transferred private electricity companies providing electricity or retire and very often, it is very difficult to the consumwer. We have already consciously to fix responsibility for the lapses even if an decided to promote the role of the private sector attempt is made to do so. Some way has to in the field of energy especially in the field of be found out to make the concerned persons generation. This will not be in lieu of the SEBs, responsible for implementation of the proj- but to support them. We have to set up sub- ects in time and within the budgeted cost. stantial generating capdcity and a transmission- * Another example would be that of timely distribution network in the shortest po. ible meter reading and billing to the consumers time. The state goverments just do not have In many of the SEBs, not only is this work the money and the time to do the job in the neglected and left to be decided at a lower traditional way. Most of the SEBs are already level, but many a time, average bills are negotiating with several foreign and domestic issued and that too after a lapse of several private companies for the establishment of this months of consumption of the electricity. new capacity. This should be expedited and This results not only in complaints from clearances from the central agencies granted on many consumers and dissatisfacton all priority. Each state will have to decide its own over, but also loss to the Board as a large plan of action depending on its geographical part of the money remains locked. Similar location, its requirements, and the capacity of its is the case of purchases of material and Elect ^ity Board. Hence, some would go for 10 KEYNOTE ADDRESS ON STATE ELECrrCIY BOARDS: ISSUES AND OPTIONS private hydro capacity, some for thermal, and more than energy generated and so this is the others for imported fuel. Some SEBs would give cheapest form of energy. Unfortunately, in our distribution to the private sector, others may go country, many of our appliances and equipment in for wheeling and banking, while some may are not energy efficient Minimum energy restrict the private sector only to generation. efficiency standards need to be laid down and However, it is important that early decisions are the consumer made aware of these. The con- taken in this regard and the Government of sumer requires to be educated on the high costs India actively help in guidance and early of producing energy and the need to use it clearances. efficiently and economically. The SEBs particu- Along with this initiative, we should also larly face problems of meeting power require- actively take up cogeneration in whatever way ments during peaking hours. For this purpose, we can. Cogeneration, especially where there is time-of-day metering needs to be introduced so waste heat or where there is bagasse, as in sugar that some consumers at least find it economical factories, would be a major fuel saving area for to divert a part of their load to the off-peak the country. There is tremendous untapped hours. potential in this area. Certain modifications in the existing equipments and some investment for new machines will generate substantial energy at a much lower cost than a new power station. We need to promote this sector and give it all the assistance especially regarding the avail- 10. Conclusion ability of finance and technical know-how. Other nonconventiona sources of energy such as wind, solar, etc., also need to be pursued. The To conclude, I would like to stress once again SEBs should offer to purchase all the power from the urgent need to radically change our power such units at a negotiated remunerative price. scenario. Unless we transform this sector to meet the growing challenges of development and the aspirations of our people, we will be left far El 9. Energy conservation behind in the race amongst the nations. We Energy .1 have undertaken an ambitious program and it is and demand side inportant that we should not lose any momen- management tum while making these changes. I am sure that ma -agement the power sector will rise to the occasion and achieve the desired goals. Last but not the least, I would like to emphasize the need to conserve energy. Energy saved is International power sector experience: A comparison with the Indian power sector by Luis E. Gutibrez, Senior Eney Economist Industry and Energy Department The World Bank have developing systems. Still others, such as the People's Republic of China, Indonesia, Pakistan, the Philippines, and Thailad, were 1. Introduction selected for intraregional comparison with India. Tis cross-sample thus should help illustrate how the Indian power sector compares with Comparisons of any kind are always difficult, several types of systems: full of exceptions, and weakened by various shortcomings. But they are the only effective * Developed systems, to see how India may way to judge relative performance. This paper need to change to attain higher perfor- compares the power systems of several countries mance; with that of India. Its main purpose is to * Devekping systems, to examine the breadth provide a frame of reference for understanding of dhallenges these countries face; the many challenges facing India's system. * Refored or reforming systems, to assess The countries included in the comparison were how reforms affect performance; of several types and include both developed and * Neighboring systems, to assess how India is developing countries, ones with vertically inte- doing in comparison with other Asian grated monopolies and open-competitive sys- countries. tems, and ones with public and private utility sstems. Among the countries selected, some. 1.1 Sample of countres have fully developed electicity supply industries (ESIs), such as the United States, the United The firstsubset of countries comprises developed Kingdom,' Norway, and New Zealand, whereas countries with market-based ESIs. Among these, others, such as Turkey, Chile, and Argentina the United States has the world's largest ESI, Ibe power sector In the uy comprises fte two systm of England and Wales (E&W) and that of Scodand. In this paper, referec to the U.K system means only fte E&W system. IJATIONAL POWE SECOR EXPERiEC. A COMPWUSON WmH E TNDA POWER SECTOR 11 12 INTERNATIONAL POWER SECTOR EXPERIENCE: A COMPARISON WrIH THE LVDANO POWER SECTOR comprising both publicly and privately owned The third subset includes China (People's utilities. The country has developed a compre- Republic), Indonesia, Pakistan, the Philippines, hensive regulatory system for monitoring prices and Thailand. These Asian countries are at and performance and has recently implemented various stages in developing and reforming their a series of innovative mechanisms in pricing, power sectors and in addressing the long-term transmission, and the environment that reflect an obstacles to achieving competitive ESIs and evolutionary path toward reform. Also in this sustainable growth. subset is the U.K., which has a large, primarily Although the structures of the ESIs and the coal-based system (similar in this respect to overall energy sectors of each country are quite India), with significant hydro and nuclear gener- different, the data have been aggregated to the ation. The U.K.'s power sector was recently extent possible on a countrywide basis. The data transferred from public to private ownership and focus on the period from 1980 to 1991, where put under regulatory and pricing mechanisms possible. The data have been collected thanks to designed to foster and sustain high levels of the efforts of several people and institutions2 and efficiency through competition. Hence, the from publicly available sources.3 U.K.'s path to reform was relatively rapid and radical. Norway has also recently implemented 1.2 Sector indicators and methodology far-reaching reforms involving unbundling of generation, transmission, distribution, and mar- Most of the power sector data extends through keting of electricity, but without drastic changes 1991, except for Indonesia, Pakistan, the Philip- in ownership; nonetheless, the reform has led to pines, and Thailand, for which 1990 was the extensive competition in the sector, facilitated by latest year information was available. The a profound change in government attitudes- infcrmation and indicators assembled include the reflected in the Energy Act, which explicitly following: recommends that competition replace politically administered control-that has allowed greater * Country background, sector policies, and deregulation and more competition. The last in institutional framework; the developed-country subset is New Zealand, * Supply performance: which has also begun reforming the power - Capacity and generation growth; sector to increase competition and increase - Use of transmission and distribution flexibility in the ESI. (T&D) systems; The second subset represents diverse devel- - Station use and losses; oping countries. As a laboratory of market- - Peak demand and reserve margins; based reforms and privatization of natural - Power and energy shortages; monopolies, Chile has the "oldest" of the - Environmental performance. "newest".ESIs. Also in this subset is Argentina, * Demand indicators: which experienced a serious financial and - Demand growth and structure; operational crisis in the power sector during the - Electricity customers; 1980s that prompted a major restructuring effort. - Tariff levels and structure; Although it may be too early to draw definitive * Productivity indicators: conclusions, Argentina's experience is suggestive - Labor productivity; for India because our data for Argentina com- - Power station performance; prises 1990-91, when the sector was still in crisis, * Financial challenges: as India's is today, and it appears from current - Investment needs; data that the reforms have led the sector out of - Cost and revenue performance. crisis. Turkey, the last country in the subset, has a traditional ESI with a vertically integrated Given exchange rate distortions, value compar- monopoly. Like India, Turkey is considering isons may be misleading, especially for nontrad- alternative institutional models for the ESIs and, ables and domestic prices. Hence, in the price despite significant build-operate-transfer efforts, comparisons we have used World Bank pur- has a poor record in attracting private invest- chasing power parity exchange rates (PPPERs) ment. that take account of the international differences 2 This data base was put together with the help of Ernst & Young and Jose Escay (United States), Tata Energy Research Insfitute Mndia), Jan Moen (Norway), Martha Zhanghini {Argentina), David Butcher (New Zealand), Ye Rongsi (China), JuBan Sondheimer (U.K.), Bruno Philippi (Chile), and TEK (Turkey). 3 See data sources at the end of the report for a list. INTERNATONAL POWER SECTOR EXPERIENCL A COMPARISON WT THE TlDAN POWER SECTOR 13 in prices. All the value comparisons have been achieve economies of scale that would made in constant 1991 prices. reduce generating costs and improve relia- The paper is divided into two sections. The bility of supply. The structure does foster first summarize the study's findings, and the intense competition for subsidies among the second details the observations in each of the customer groups in the different regions. performance areas listed above. * There is a worldwide tendency to reduce govern- ment involvement in the ESI and to promote competition in generation and marketing of electricity, while providing light-handed regula- tion in T&D. The United States is fostering open access to the transmission networks of 2. Study highlights regional utilities; Chile is moving toward separation of transmission from the largest generator in the country; private ownership Although the study's main conclusions are is increasing in Norway; and several devel- derived basically from the data comparisons, oping countries, including India, are taldng they are supplemented with what is necessarily hard looks at their institutional frameworks impressionistic knowledge of some aspects of the with the intention of raising efficiency of ESI in India. The reader thus is cautioned that operations and sustaining it over the long the information contains some "gaps" and areas run. where the data quality is questionable. In addi- * Expansion of supply, especially in India, is tion, differences in accounting practices, power seriously undermined by below-cost tariffs that sector structure, and fluctuations in inflation and lead to an overblown demand and to financial exchange rates reduce some of the validity of the shortfalls. The result is a pattern of uneconomic comparisons. Nonetheless, the major compari- consumption and supply shortage. Given sons and conclusions stated below appear suf- lower levels of electricity consumption per ficiently valid: capita and lower electrification rates, the growth of capacity in developing countries e In India, electricity is treated as a public neces- is and should be higher than in developed sity, and the government is heavily involved in countries. This also is putting strains on the its generation, transmission, and distribution, scarce capital base of these countries. largely to the detriment of performance. The a Although the per capita consumption of elec- data on performance indicate that although tricity in India is low, electricity use per gross the availability of service has grown rapidly domestic product (GDP) is high. This indi- under the present organization of the sector, cates, on the one hand, that further demand this has not been matched by reliable growth can be expected with economic supply, adequate operational and financial development and once reliable supplies performance, optimal use of existing capac- become available, and, on the other, that use ity, and generation of sufficient resources to vf the available supply is inefflcient. finance expansion. * Despite India's high generating plant reserve * Problems in the power sector are not atypical of margin and relatively young system (more than developing countries, but India lags on most half of capacity entered operation in the last ten finaial and operational performance indicators. years), the growth in transmission has not kept Indias sector, of course, must serve a large pace with system requirements, and the system and rapidly expanding population. It also is dearly unable to move power efficiently to the labors under political constraints that major load centers. prevent it from recovering operating costs o Losses are extremely high, reflecting not only from its customers through tariffs. The technical problems on the grid and weaknesses of institutional structure does not provide commercial systems and procedures but also enough independence for management or substantial unauthorized usage. sufficient incentives for optimizing coordin- * Available energy and capacity shortages are ation in the system, minimizing costs, or sevre in India despite the high reserve margins. setting cost-recovery tariff. Moreover, the * The potential for new capacity from renewable presenG structure has produced neither an or environmentaly efficient stations appears optimal transmission grid nor an optimal limited in India. In build mg further coal- coordination of dispatch, and it fails to 14 Ih ANTIONAL POWER SECTOR EXP£RENCE: A COMPARSON Wan THE NDAN POW£R SECTOR fired stations, the environmental considera- face a considerable investment shortage tions could, however, be significant in during the remainder of the decade. impact and costly to control. * The large requirementsfor investment in electric *Despite revenue shorals and the need for power are a drain on public finances in a improvements in electricity supply, agricultural country where education, health, and other social and residential power tar#ft remain well below concerns urgently need additional funding. long-run marginal cost (LRMC), and a signifi- Improved financial performance in the ESI cant portion of the population has unauthorized could enable federal and state governments and unpaid access to the system. to devote additional funding to the Residential tariffs in developed countries are improvement of the country's human capital higher when compared with market exchange and capital infrastructure. rates than in developing countries (India has the * Theessential lesson seems to be that if electricity lowest tariff of US¢3.27/kWh). When using is treated more like a normal business and less PPPERs, however, tariffs in developed countres like one that needs special nrles, it will perform decline relative to the developing countries better and meet more of the objectives of society, (India's tariff increases to 10.36e/kWh). government, and consumer. * Tariff distortions are evident in India, Pakistan, and Turkey. Each cross-subsidizes residential consumption and has rates below LRMC. 3fC aaceitcsolh Among the developmg nations, India has 3. Characteristics of the the lowest residential tariffs and the widest power sector in the margin between residential and industrial sample countries tariffs. This suggests a massive subsidiza- tion of households by industrial customers, highhghting the competitive disadvantage 3.1 Background infornation vis-&-vis other surveyed countries, where quality of supply is better and industrial Table 1 (all tables are presented at the end of this tariffs are lower. paper) presents background information on size, * India and Argentina are the only countres population, and general economic conditions of where average tarifns fail to cover production the countries selected. The sample reflects a costs. Average tariff levels in developed wide variety in these indicators. The U.K and countries are between 5¢ and 10¢ per kWh the United States exhibit far higher GDP and (the U.K. has the highest average rate with intensity of electricity use per capita than do the about 9¢/kWh). Tariffs in most developing six developing countries. India is comparatively nations (except Argentina) are above heavily and densely populated and has a high 10f/kWh, with Thailand, the Philippines, population growth rate. India also has one of Pakistan, and Indonesia above 20¢/kWh. the lowest levels of income per capita yet has a * Unit production costs and average revenue high intensity of electricity use. As Figure 1 vary widely in India. The common feature is shows, the other developing countries in the that costs in almost all state electricity boards sample (except China) use electricity better. (SEBs), except one, are higher than sales revenue. * India is-among the countries surveyed-the Figure 1 second-highest-cost producer (about USe16, E * q kWh) after Indonesia. The comparison uses 19911W PPPER. ,oo * Despite India's low uwge keels, te share of 00 X labor in the total cost of power production is - higher than in the United States, U.K., Norway, _. and the Asian countries in the sample. This B e - _ situafton has not improved in recent years. M - - - * Recent investment in the power sector is low -A compared with other developing countres in 0- -4, I. . . . Asia, on the bass of GDP, and on the size and UDo 030 O0.0 O." 10 1.10 1.40 output of the power sector. At present rates of consumption and tariff levels, Idia will __ hnTERNATIONAL POWER SECTOR EXPERIENCE: A COMPARISON wmTH TE INIDIw POWER SECTOR 15 Of the six developing countries in Asia, Thai- electricity intensity (see Figure 1). Indonesia, in land appears to have the strongest economy, turn, has focused on extending its power grid, with a high per capita GDP, a high growth rate, and in the recent past, the heavy investment and a low (relative) inflation rate. India's infla- required has hurt the power sector's financial tion rate is more typical of the Asian sample. performance. Both Pakistan and India are ad- dressing chronic electricity shortages and are 3.2 Sector policies focusing on increasing generating capability from their utilities and on inviting private sector Energy policy in the surveyed countries empha- participation. Turkey is going through a period sizes several different approaches to develop- of institutional uncertainty. Norway, in contrast, ment and sector reform. Table 2 presents a is benefiting from competition; real electricity matrix of policy objectives and shows the main prices are somewhat below the prices before priorities for each country. At one end of the restructuring, but utility savings are higher, and spectrum, the ESIs of China and Indonesia are so are the possibilities for profitable exports of closely linked to fuel-use objectives. Thus, these electricity and investments abroad. The fully countries appear to focus on changing the gener- developed power sectors in the United States ation mix to take advantage of indigenous and the U.K. have begun to focus on environ- resources and thereby release fuel for exports. mental issues and on reducing pollution. Chile At the other end of the spectrum, provincial is fine-tuning its system, responding to charges concerns in India, China, and Thailand outweigh of discriminatory behavior; ENDESA, the largest national objectives. The result has been sub- generating company and owner of the transmis- sidized tariffs, rapid growth in rural distribution sion grid, has voluntarily spun off a separate networks, and emphasis on setting sector policy company to hold the transmission assets. at the regional level. In addition, the countries Influencing customer behavior either through in the sample use different approaches to tariffs and demand-side management programs address the trade-off between consumer welfare or through electricity marketing measures is and the financial viability of the utilities. In emphasized by the countries with reformed some countries, the welfare of the population is power sectors. The United States, U.K., Argen- sought at the expense of the commercial viability tina, Chile, Norway, and New Zealand, Thailand, of the utility, whereas in others (developed and the Philippies have developed programs to countries and countries with reformed ESIs), the influence industrial consumption patterns. focus is on improving utility performance with There is an about-even split in pricing policies, the assumption that greater customer satisfaction with half the countries setting prices at the will result. provincial (regional) level and the other half AR of the objectives in Table 2 are being using a national formula. Developing countries pursued to some degree by each country. Each at times use both types of pricing policies to country wishes to make better use of its fuel encourage development and to cross-subsidize resources, but the developed countries and those certain consumer groups. In India, for example, with reformed ESIs are pursuing this end by the tariff rates vary widely from one SEB to using dearly defined economic and commercial another for the same customer class, with the criteria, whereas many of the developing coun- common feature that tariffs are consistently low tries are still largely driven in their energy among all SEBs for agricultural consumers. In policies by strategic and political considerations Thailand, national pricing is evident, but the that may have noneconomic outcomes Plans for tariff system of the Metropolitan Electricity capacity expansion in the developing countries Authority (MEA) is structured so that urban have identified a changing generation mix, customers cross-subsidize rural customers. particularly a reduction in oil- and diesel-fired Most of the Asian countries are moving plants. Coal and hydro are the most common toward cost-reflective tariffs. High tariff resources targetd for new development. In increases in these countries were prevalent in the China, India, and Turkey, nuclear power produc- late 1980s, particularly for low-voltage customers tion is also contemplated. (tariffs are addressed in greater detail later in the In China and India, priorities for development report). In Chile, cost-reflective tariffs have been of food production work to the detriment of in effect since the 1980s, but in Argentina only energy sector financial receipts because both since 1992. Turkey, in particular, has recognized countries provide subsidized energy tariffs for that the best manner to address once and for all agricultural conLsumers, which also foster high the inefficiencies of the pricing mechanism is by 16 INTERNATIONAL POWER SECTOR ExPERIENCE: A COMPARJSON wiTH THE iNDAN POWER SECTOR reformning the sector along market lines and In China, Indonesia, Pakistan, and Turkey, privatizing the electricity utilities. However, vertically integrated, publicly held organizations institutional and political obstacles have have primary responsibility for power supply. prevented it from advancing more rapidly along China is served by nine regional utilities pro- this road. viding generation and administering five sep- Improving the financial health of the power arate grids. Little self-generation takes place in sector is also a common emphasis of national China, but the regional companies operate more energy policy. Indonesia, Pakistan, Turkey, and autonomously than do the utilities in Pakistan Argentina have sought to reduce government and Indonesia. Indonesia is charazterized by a investment and secure additional capital from single publicly held organization, the PLN, debt financing and private equity sources. For which, however, is responsible for only about similar reasons, the U.K., Argentina, Chile, and two-thirds of power generation, with the Thailand have undertaken privatization pro- remainder coming from industrial self-generation grams, and all the other countries in the sample and small village cooperatives providing full have initiated programs for greater involvement electric service. Pakistan is served by two in private generating schemes. publicly held companies, WAPDA and KESCo, with 14 percent of the total power supply 3.3 Institutional strueture of the ESIs resulting from self-generation. Turkey is served by TEK, a publicly owned corporation, which The degree of private ownership and the institu- basically controls generation, the interconnected tional structures of the surveyed countries are electricity transmission network, and diverse (see Figure 2). Four countries have the distribution. greatest share of private ownership: the United The United States has perhaps the oldest States, Chile, the U.K., and Argentina. Most of continuous private sector ESI. It is a flexible the remaining countries are in transition toward system that has achieved low-cost and reliable greater private ownership. The organization of supply of power through an evolutionary pro- the ESIs also varies widely: some are vertically cess that appears to be one of the industry's mtegrated monopolies; others are structured so main sources of strength. The industry is mostly that generation, transmission, and distribution in private hands: three-quarters of the power are provided by separate companies. Five needs are met by privately held, vertically inte- countries have the most unbundled ESIs: Nor- grated utilities, with about one-quarter of power way, the U.K, Argentina, Chile, and New Zea- requirements serviced by public organizations, land. The three countries in the top-right quad- cooperatives, and self-generators. Although the rant of the figure are basically private and United States has approximately 200 investor- unbundled. The general trend is for countries to owned utilities, it also has more than 1,000 rural move toward this quadrant: the American and cooperatives and small, municipal organizations the Chilean systems are thus moving up, providing service. These rural and municipal whereas the Norwegian and the New Zealand groups have traditionally been distribution electricity industries are moving rightward. entities that typically purchased power from vertically integrated private utilities and various federal marketing areas. More recently, hew- Figure 2 ever, they have-individually or in group- undertaken some backward integration into Ownership and Industry StrUcturs generation. too Power BOE In contrast to many other countries, where competition has emerged through sweeping all- at-once changes, the United States has pro- 4 60~L ,r * I ,' gressed toward greater competition in the sector j. -in two stages: at first, competition could take 40 - u *vs place only in new generating requirements for a 2 20 Icufgiven vertically integrated utility; later, competi- tion was extended to bulk supplies outside the 0 2 4W 10 D service areas with nondicim itory access to 20 40 6 0 1 PEk Owlp D PdivM.O wnuwhi the regional transmission systems. __________________________ The U.K. was reformed and privatized in 1990/91. The industry in E&W is basically IRATONAL POWER SECTOR EXPERIENCE: A COMPAISON WTH TE INDIN POWER SECTOR 17 private, with unbundled generation, transmis- emphasis is on market contestability where sion, and distribution services. The nuclear possible. generating plants (about 8 GW of generating Norway carried out a profound reform of the capacity) have remained in the public sector, sector, introducing competition at all levels of however, and the utilities of Scotland are still the industry. Until 1990, the Norwegian policy vertically integrated. The U.K. reformed its was to encourage concentration of the electric power ector as part of an overall structural supply industry into about 20 vertically inte- adjustment and privatization program to reduce grated utilities. However, this policy had not the weight of the public sector in the economy been successful in eradicating a number of and ensure the benefits of competition and inefficiencies in the industry that had developed independent regulation. There are two major because of its monopolistic structure and its private generators, Nation Power (with around susceptibility to political influence. Following a 30 GW of capacity) and PowerGen (about change of government, a new market-based 18 GW). Independent generation is growing, approach was adopted for the ESI. The Nor- however, with the opening of the generating wegian reforms shared with the English reforms market to independent producers. There are 12 the aims of reducing the surplus of high-cost regional distribution companies (RECs), acting as capacity and sustaining long-term efficiency. distributors and sellers of electricity. The RECs Competition has been stimulated in generation own the National Grid Company, which man- and marketing of electricity, with open access to ages the transmission system. There is third- the T&D grids. Statkraft, a state-owned enter- party access to T&D. Electricity is bought and prise (SOE), owns about 30 percent of produc- sold under long-term contracts and in a spot tion capability. Statnett (another SOE) manages market. the national transmission network, and a multi- The power sector utilities in New Zealand plicity of small distribution companies have have been fully corporatized, with the natural generation facilities. In addition, since 1993, monopoly areas (T&D) effectively separated from Statnett has assumed responsibility for the the potentially competitive elements (generation operation of the power pool through a sub- and retailing). Generation is dominated by the sidiary company, Statnett Marked. The power Electricity Corporation of New Zealand (ECNZ), pool in Norway currently functions as a market with 95 percent of generating capacity. There only for marginal energy exchanges; otherwise, are no entry restrictions to the generation mar- most energy is provided under firm contracts. ket. ECNZ, corporatized in 1987, sells to the six Some 54 other owners control medium-voltage major industrial and transport consumers, which networks, of which 40 also operate distribution together account for 25 percent of the market, as networks. In total, 200 local distribution utilities well as to the distributors. Trans Power New are in operation, mostly owned by municipalities Zealand Ltd., an ECNZ subsidiary, operates or counties. About half of the distribution transmission. The government plans in the utilities also own power plants. The private medium-run to turn it into a stand-alone Crown sector is represented by industrial self-produc- corporation, and in the long term, into a tion and some generating utilities, which company owned by a club of generators and together account for about 15 percent of total retailers. Electricity is mostly distributed by production capability in the country. companies formed under the Energy Companies Chile was the first country to enact sweeping Act of 1992. Shares of these companies were reforms to promote competition and to attempt distributed to customers, community trusts, local to sustain it by opening the sector to private authorities, and the community at large. Com- investors. There was a progressive privatization panies operated as departments of local author- of the industry from 1982 onward. The process ities remain under control of the local authorities entailed changing the public's perception of conened. The sector is regulated, not through electrcity as a service in need of special treat- sector specific regulations but rather through the ment to just another commercial activity. The use of anti-competitive practices under the 1986 experience has helped other countries in Latin Commnrce Act. Monopoly abuses are kept in America to promote their own reforms (e.g., check by the threat of regulation. Electricity is Argentina, Colombia, Peru, and Bolivia). The no longer consider a public service in need of Chilean ESI is mostly in private hands and specal treatment but a commodity subject to the includes 11 generating companies, of which the commercial code and commercial practices. The largest, ENDESA, also controls the transmission 18 INERNATIoNAL POWER SECTOR EXPERIENCE: A COMPARISON WrrH THE INDIAN POWER SECTOR system. About 90 percent of power exchanges than $3.5 billion per year, or 1.3 percent of GDP. take place in the interconnected system, but a This does not include additions in transmussion, few isolated systems also are in operation. distribution, or customer service investments. Almost all of the distribution services are Capacity in the developing countries grew private. The Comisi6n Nacional de Energia is in faster than in the developed ones in our sample. charge of regulating the sector, monitored by the The latter are demand driven, whereas growth in Superintendencia de Electricidad y Combustibles. the developing countries, given lower electrifica- Argentina underwent, as part of a far-reaching tion rates and low per capita consumption levels, general reform program in 1991, the restruc- is supply driven. Cost-recovery tariffs are an turing and privatization of public sector com- important instrument for the developing coun- panies. The reform in the power sector aimed to tries to provide efficient and timely supplies. overcome the profound power crisis and the Underpricing in the developing countries has inefficiencies in operation and past investments. raised demand above economic levels, promoting The reform benefited from an understanding of waste of energy, pressure to invest, and short- the experiences of Chile and the U.K Currently, falls in capital funding. several generating companies are operating, and In terms of capacity per capita, the Asian generation is open to all investors. Transmission countries in the sample lag far behind the devel- is managed by TRANSENER, and access is open oped countries and behind Argentina, ChUie, and to the lines. CAMMESA, formed by the main Turkey as well. This indicator highlights the sector players (generators, transmission com- known association between electricity supply pany, distributors, large consumers, and the and economic grovwth. Figure 4 shows instaLled government), is charged with the dispatching of capacity per capita for the seven developing generation. countries in the sample. The Philippines, Thailand, and India reflect unbundled electric service provided by publicly owned organizations. In all cases, a primary generating company provides service to regional Figure 3 distributors. India has vertically integrated Average Capacity Growth regional utilities in each state, together with 1A9"i some national bulk generation and private Ca' Growth licensees undertaking some generation and 0e 4% 8% 2% 16% distribution. Thailand and the Philippines are a,,,s_____ served by three utilities. Thailand's system is moving toward private ownership. [] 0 2000 4,000 4000 8oo0 I ~~~~~~~~~~~~~~~~~~~Ca piyAddcm(MW L 4. Supply performance _<- d O,whE me Figure 4 4.1 Installed capacity and generation Installed Capacity per Capita 1991 Most of the sample countries (except the U.K, Naway - - the Philippines, New Zealand, and Chile) added us _ I significant generating capacity during the 1980s. Now ZaslI d I China ranked first, with an average of 7,782 MW UKr per year, followed by the United States, with Afttin I I 5,643 MW per year, and by lndia, with an addi- CaI I tion averaging 3,528 MW per year (see Table 3). nIk1IW'1 | Ia Figure 3 shows average annual capacity addi- fions rnd capacity growth for the countries in Chinai the sample. Assuming an average cost of 0 1,000 ZOOo 3,000 4,000 5,000 6000 7,10t US$1,000 per kW, the investment in generation kwpe mpo in India in the past 10 years amounts to more INMRAnIOmA POwER SECIOR EXPERIENCE: A COMPARISON WTH IRE INDMN PowER SECrOR 19 An important achievement of India has been the electification of most of the country. As Figure 5 Figure 5 shows, India's 80 percent electrification Elecrificadon Ratas rate is higher than the other Asian countries in MI the sample and comparable to those of Argentina N-ay and Chile. However, the massive electrification Now _ u _ _ was based heavily on subsidies and political = = = considerations, and that explains in part the h precarious financial situation of the sector. i _ _ In most countries, additions to capacity have = P=In= been predominantly thermal (see Figure 6). For _ _ example, India's growth in hydro generation * , , o , capacity amounted to only 2 percent during the o% 40% 60% sos loo% 1980s, and the country is rapidly approaching the limit of possible hydro additions. India is Figure 6 also the only Asian country in the sample with Fgure 6 a commitment to nuclear capacity; nonetheless, GCAat India's generation mix remains predominantly coal-fired. All of the Asian countries experi- enced high inflation during the 1980s as well as electricity shortages, which suggests that higher 1 0E demand growth, stemming from constant 40% nominal tariffs below LRMC, and capital con- m straints are holding back expansion of the ESI. X . Energy in India (as well as in China) is domi- UK, nated by coal-fired output; the other Asian l *1 countries rely principally on oil, diesel, and gas, _ ard several must import fuel to generate power (see Figure 7 and Table 4). India is less vul- Figure 7 nerable and relies almost entirely on indigenous slnaciroatmu fuel, but much of it is low-grade coal, which raises capacity construction costs and environ- menital concerns. Figure 8 shows energy and capacity growth in the sample countries during the 1980s. In the 4M . . . . United States and the U.K, as well as in some of 20% the Asian countries, energy growth was higher than capacity. This indicates that plant load factors were increasing, as would be expected. a : a In Indha, however, capacity growth was not 0m by* much higher than energy growth (8.7 percent vs. 8.4 percent) despite the obvious reed for addi- Figure 8 tional s" pply. This may be caused by the aging C*MdftYaeS GmMfl GM of the system-that is, when the efficiency and 18% M91Gro&R , reliability of aging generaftng plants declines 15% more rapidly than can be compensated by the addition of new baseload capacity. Or, it may be t.7 caused by the addition of hydro plants with low -- plant load factors. However, it may also indicate - that India's new coal-fired plant is performing below baseload output levels (say below 75 per- 3-_ ___; _ l cent plant load factor) or that there is insufficient 0 6% 9 1^ IS If transmission capacity to move the power to c*Dy customers. _ 20 INTERNATIONAL POWER SECTOR EXPERIENCE: A COMPARISON WTrH THE INDIAN POWER SECTOR Figure 9 presents the capacity and electricity Figure 9 generated as of 1991 in 17 SEBs. There is a wide Capacit& Generation variFtion in the scales of the SEBs, some of m9 which have systems that are as large as those of 3tec0 *pFEIJ some countries. The system of Maharashtra SEB, 20,000 ~- ~~~~ ~ ^~~ ~ for example, is larger thdn those of New Zea- _W _land, the Philippines, and Chile. 30.000 .________ . - _______en_n 4.2 Transmission and distribution systems o - 400n ooo vc 1 PFigure 10 shows the ratio between the size of the CapSIY(MW) transmission system and the level of peak demand served for the countries for which information is available. The data indicate the Figure 10 efficiency of the different T&D systems and show how the tiansmission systems may need to PeakDemand and HV Transmlssion Peak Dmand and UV Tnmmission grow to meet demand more effectively. --- _ _ _India's T&D system has a far higher number of T=UK people served per kilometer of transmission line at 132 kV or higner than do the systems of Chile, bnaomeo sTurkey, the U.K., and the United States (see Figure 11). This measure indicates that India's delivery infrastructure is predominantly low voltage, a factor that contributes to high technical __ ___________,,,___; losses and poor quality of service. Most of 0 20 40 00 aono io 00 t4o India's rural distribution network is served by kwdoMuid pa km of linelow-voltage wires rather than by an efficient T&D network. On the other hand, on the basis Figure 11 of kldometer of low-voltage line per user, India People Sered by kIm of Line serves fewer householda than any other country: 1991 Chile serves 69 residential customers per kilo- meter of low voltage, Turkey 34, and the U.K sex0 aoo 27, whereas India serves only 15. This suggests so serious commercial problems, inadequate regis- W0so \W A' - - - - xoters of consumption, and deficient billing of A2,oSo - 1 F [ |--tt 2ol Iresidential customers. Some residential custo- i t I lo J mers are probably misclassified as rural or Oq 0 i wi , , , , ocommercial, as weLl These indicators, especially Ib_____P_____U5 unregistered consumption, suggest the causes of h"' iDi - ] the high levels of total losses. The inefficiencies of India's T&D system are Figure 12 also apparent from the ratio of the size of the MWh gles per km of TnmIson Line network to peak demand and customer sales. The high-voltage systems in the other countries UK move three to four times more electricity (see us~~~ Figure 12) CNN _ _ - * | |Sales in India from 1985 to 1991 grew at c=$ | 8.4 percent per year and were outpaced by the lAl l growth in system losses at 10.2 percent. The PakWe I | | transnission system did not keep pace with _ift i C Idemand requirements, and this led to power imbalances, shortages, and outages. Peak 0 ,ou 2.oM ,0o00 4,000 9.00 6MD COW demand grew at 11.2 percent during the same period, but the generation system increased by only 6.7 percent and the T&D systems by 6.5 percent. IMERNATvoNAL POWER SECTOR EXPERENCE: A COMPARUSON WIrH THE INDMN POWER SECTOR 21 4.3 Station use and system losses - Figure 13 Figure 13 summarizes comparative loss ratios for LFgs Ret1 1980 and 1991. Losses in India were higher than 1980 mmd in the three subsets of countries in the sample. 3$% Natural losses on the T&D system are expected. 30% The losses reported here include both T&D losses as well as nontechnical losses (primarily illegal consumption, unmetered sales, and bitling -f% errors). Technical losses in the United States, 10 China, Norway, and New Zealand are below , i b IL o 10 percent of net generation. As the figure ,, shows, although most other countries reduced w ~ us Na.li their losses over this time frame, India did not. *,so Ern1 As Figure 14 shows, the loss ratios of the SEBs are generally in the 15 to 30 percent range, with most clustering above 20 percent. If losses were Figure 14 reduced to 10 percent, India would have an Loss Ratios In India additional 34,700 GWh, which would increase sales revenue by about 14 percent at the current average customer rates. Station use typically amounts to between 1 percent and 7 percent of net output; coal and nuclear stations tend to be on the high side of ftis range, whereas hydro is at the low end (see Kan&uP Table 5). As a result of this pattern, station use is lower in the Philippines, Pakistan, Norway, and Chile, which have higher percentages of 9% 2 hydro in the generation mix (see Figure 15). In this perspective, the higher value for hIdia is not unexpected because of the high proporfion of Figure 15 coal in generation. Yet it is significantly higher Staton Use han, for example, the U.K. and China, which 1991 also have significant shares of coal in their generation mix. This suggests that' India's plants are relatively less efficient in their use of power. 4.4 Peak demand and reserve margins An optimal generating reserve margin (RM)P k , (installed capacity less peak load over peak N-m-xy load), depends on system conditions: the RM in 6 0% 2% 4% 6% % 10% a hydro system (or a small system) is typically para greater than in a thermal system (or a large system). However, there are acceptable ranges. For example, the RMs generally range between 15 percent and 35 percent in developed coun- tries. Along with an effective T&D system, mission system rather than by insufficient gener- utility planners believe, an optimal RM should ating capacity. Moreover, generation and T&D serve customers with adequate reliability of faults together account for less than 8 hours of supply. RMs outside these limits may indicate total interruption per year in developed coun- investment constraints or overinvestment. In the tries. The security standard for generation is developed countries, electicity shortfalls are typicaLly 1 day in 10 years' loss of load caused almost entirely by faults in the trans- probability.4 4 This is a probabflistic measure that generating capacity will be unable to meet demand less than 1 day m 10 years. 22 INTERNATioNAL POWER SECTOR EXPERiENCE: A COMPARISON Wrm THE INDIAN POWER SECrOR The surveyed countries exhibit a wide disper- sion of RMs (Figure 16). A number of factors Figure 16 could contribute to the exce-sive reserve Reserve Margins margins. First, peak loads may be under- M reported because of lower generating resources available at the time of peak occurrence. This w _ _i inflates the RM values. For example, Argentina, Chile, and New Zealand, with their significant shares of hydro (more than 60 percent of Zoal _ capacity) may have hydro capacity available InI during the rainy season but may incur capacity Ur._ _ shortfals during other times of the year. Plant pawX outages, weather conditions, and (planned or ,4 unplanned) load management may also have an 06 20% 40% 60% so0 100% impact. The high RM in the U.K. may be partly explained by the positive response of new gener- ators to the opening of the ESI to the private Figure 17 sector. In addition, plant capacity ratings may Peak and Energy Demand Growth be overstated, and fuel interruptions and trans- 1985-91 Aimu Gowth Rato mission outages may cause energy shortages even in countries with a high reserve margin. The high RMs of India, the Philippines, .2.. - - ,--.. . Indonesia, China, Turkey, and Argentina, however, suggest a mismatch between supply and demand. In India, the peak demand of ... ...... , ......- 46,500 MW might have been significantly higher if additional generating resources were available. The RM in the United States conforms to the a,, generation and transmission planning targets. In " ^ l2 tF Pakistan and Thailand, reserve margins are significantly below 20 percent, indicating an Figur 18 obvious need for additional capacity. Electricity consumption in efficient electricity 1991 supply systems generally grows faster (or at ___ about the same pace) than peak demand. This improves load factors, enabling (a) operation cost cue savmgs (lower-cost plants run more of the time), PIpPi __ and (b) investment savings (reduction of expan- sion requirements). As Figure 17 shows, elec- tricity consumption in the countries above the diagonal lines (the U.K, New Zealand, Chile, Pak Pakistan, and Indonesia) grew faster than peak __ demand, whereas consumption in the countries °*0% 20% 4'% inside the diagonal lines (the United States, the Philippines, China, Turkey, and Thailand) grew at about the same pace as peak demand (see Table 6). India was the only country below the Figure 18). India's low load factor is explained lines in the figure. Peak demand grew faster by a variety of reasons. Noneconomic tariffs are (11.5 percent) than energy consumption (9.2 per- perhaps the main reason. Bulk and industrial cent), leading to a deterioration of the load sales are not subject to time-of-day tariffs with factor. power, peak, and off-peak energy charges. System load factors are typically in the 60 to India's daily load patterns largely follow the 80 percent range on an annual basis and tend to ability of the system to supply energy rather increase with the lwel of industrial sales. India than changes in load pattems during the course exibits the lowest load factor of the surveyed of the day stemming from varying industrial, countries for which data are available (see commercial, and residential usage. Another ERIATIONAL POWEX SECTOR EXPLRMNC& A COPARISON Wmn THE fDLW POWER SECTOR 23 reason for the low load factor Is the low per- not generally available for the Asian countries. customer usage in the industrial sector and the Current production in China and India is being significant unreported sales. The relatively low met from coal-fired plant. In Indonesia, genera- load factor also may be the result of generation tion expansion will likely come from coal and transmission shortages throughout the year. sources. In India, coal quality is low, and the older plants do not hav.. scrubbing equipment. 4.5 Reliability of supply The United States, U.L, Norway, and New Zealand have programs to reduce the environ- Data on energy shortages in the Asian countries mental impacts of the power sector. In Turkey, are not reported in a consistent and detailed although emissions of SO2 per capita are rela- manner that allows an examination of improve- tively low, in line with energy consumption per ments in the security of supply. Data for India capita, emissions per unit of energy consumed indicate that energy shortages have averaged are high, coming primarily from lignite. Plans about 8 percent of anticipated requirements, are being made to equip thermal power plants whereas demand shortages have been in the with FGD units, but Turkey lacks any air quality 12 to 17 percent range. Electricity interruptions regulation that would make investors consider are common throughout India, as in most devel- air emission levels as well as monitoring of NO, oping Asian countries. Load shedding is and particulate emissions. common in Pakistan, where unmet load reaches up to 25 percent of peak load served. MEAin m Thailand reports a good annual average outage duration of 124 minutes. In Argentina, a severe power crisis in 1988-89 was triggered by a 5. Demand indicators drought in 1988 and was compounded by the unavailability of thermal equipment to compen- sate for the low flow in the hydro generating 5.1 Consumption by customer class system. Serious power cuts and conservation measures (rationing and load shedding) were Each country shows a unique consumption mix necessary throughout the country on a daily that varies according to the level of development basis during the peak season. The Argentine (see Figure 19 and Table 7). In the developed treasury estimated operating losses for the ESI of countries, the consumption mix has remained US$50 million per month, and a much larger relatively static at about on'third residential economic loss for the country in terms of (household), one-third industrial (high-voltage productivity lost. This power crisis prompted users), and the remainder comprising commerce, support for the restructuring of the sector. At agriculture, transport, govenment, street present, the new generating companies have lighting, and other services. In the developing made rehabilitation investments that have countries, the most notable change appears to be resulted in improvements in operational effi- an increase in residential and couimercial usage ciency and reliability. The number, length, and as additional supplies become available and the frequency of the outages that aflicted the 1980s system grows. In India, the industrial propor- and early 1990s have already been reduced, and tion of consumption has dropped, and the outages should be eliminated completely in the _ short term In Chile, the quality of the service is considered better after privatization, with full Figure 19 modernization of the pubLc systems and quicker 8.1111 responses to requests for service. Quality of supply in the United States, the U.K, Norway, it I and New Zealand is considered acceptable. Outages in these systems are caused entirely by fauls in the T&D system and are witin normal parametes. Data on NO, SO2, ash, and other ndicators of 'Fi^_ Np bid I enviroanmenta quality in the power sector are CMO.t.OdW U1AAW*I * Mm C--MnIEOdI- 24 LMhNAinomAL POWER SEIR EXP xnw4c A CoMPARiSOi w mE INDN POWER SECTOR Figure 20 Figure 21 AvugM*Ia DTmd AMm GC_m E potUw SW . ............. .. .............. *._tr ft" . ......................... ........... 1 9 -t t tf.,-1 &W L g\ et" .. ...... I.1 g. Ae- .M.w i agriculture and residentia proportions, have 5.2 Electibty uston#rs grown. 'Te atural shr in India is the ghes of the co1mties in the sample, probably Figure 21 shows average use per customer for beaeof the heavy consumption by agricul- the residential and industta classes and indi- ture. This factor also may account for the lower cates that usage is substantialy lower in the average usage than in the other countries. T'he developing countnes, w.ith India second to last. Iargest share of consumption in China, however, 1'e extaniely low intensity of electric consump- has been industria (>70 percent), with mnceases tion in the residential sectors in China, bidia, h reddential usage occurring only in recent Turkey, and Indonesia mdicates the level of years. development in providing access to electc Pigure 20 shows the average demand mcre- sevice. ments and the growth in dct and for the 198l" The custme mix in Idia, consisting of perod. It is apparent that the United States has 71 percent resadential, is lower than the other the i rgest dmad incrtmt becawe of the contties in the sample (see Table 8). This may beu size of its ESI, the orgest in the world, and be further esidence of the lack of access to the Chile, the smallest ma the sample, has the systht ut may also substate the cl ercial smalest incremnent. The incrments prefigure problems of improper cuskome classification, the signficat effort Chmna and Wmdi will have tadequate bilfig of consumption, and lugh to mare to provide for these othrcuents. The levels of unauthorized consumption. rgtes of demand growth show a dniferent phwture. The developed coetries New Zeal; id, 5g3 Cstomer tarifs Norway, the Unted Staves, and the UKi-crew at conservative, low rates, whereas the develop- hli secfion bihights the results of a compari- ing Asian countndseIndonera, Thaiand, son of customer tariffs for the seected counitrin . Pa restn and Indianrew at bigh rates. We examine tarhffs fa(m an econo.ic and In shdia, ofmidenSth consumption has tnpled fibeural erpectiven that is, the abicty of custo- over the 1980s91 period. The growth in indus- mer taiffs to promote ecotmic efficoency and sial consumption generaicy laes behid the cover producaion costs. The fu e assifaure is growth signi idental use. Whereas the con- exam ted by seeing whether tmption meet the sutmtion growth rates e Inrqa are mtgh, the LRMC of production, the second by checlng ates oan average usage ndifate a substentpil whether tariffs are sufficient to result n finan- lag bT hhd the developed cou ties-e Rw dentil cy viable ufalites. Table 9 presents the mtin usage in the U.K is about seven times hiU. a a-grcs of the taewff sdhedules in the atm c Insva (in Eurate, average age is about surveyed countries. ing kWh/customer-year). on a per customer A previous World Banr studye concluded that or per capita basis, aIdea is far beh sd the o. e tariffs i developng countr fell short of both counti ni the sample, except Chha, which of nhiese objectives, observtti thabiihe rafto of only recentlybeganresidenu al serviea. bulk (wholbyae) rates to low-voltage tariffs statisticson average usag hndiate an ss Dqtt il vw of Ele t ariff Tarffs i Developig Corl Dinf 0e 19kWh E/rgy Sery Paper 32 ar o World Ban 1990 IMfERNATIONAL POWER SECTOR EXPERIENCE: A COMPARSON WITH THE INDIAN POWER SECTOR 25 (primarily household and small commercial) was Norway, the U.K., and the United States, use higher than expected, indicating that cross- time-of-day tariffs for industrial customers. subsidies were present and that low-voltage The cost and revenue situation in India is not tariffs were failing to capture the additional costs homogeneous. Although unit costs in most of of greater line losses, investments in distribution, the SEBs are higher than average sales revenue, and expenditures for customer service. Hiimachal SEB is in a better situation than most, International comparison of tariffs with mar- receiving about 19.29¢/kWh sold, which costs ket/official exchange rates (OER) are misleading, about 19.26¢/kWh to produce. because the tariffs fail to provide an accurate Tariff distortions are particularly evident in picture of the value relative to the purchasing India, Pakistan, and Turkey, each of which has power of the countries' populations. Most cross-subsidies and rates generally below LRMC developing countries with undervalued currency (see Figure 24). Under economic pricing, appear-using OER-to have low average tariffs industrial tariffs are generally lower than and unit costs of production, whereas developed residential tariffs, reflecting the lower costs of countries with OER in line with purchasing supplying industrial consumers. A situation of power appear to have relatively higher numbers. residential tariffs below industrial tariffs In this paper, we use the World Bank's PPPERs. generally indicates cross-subsidization. India The first significant result of using PPPERs is has, on the one hand, the lowest residential that whereas residential tariffs in the developed tariffs, and, on the other, the widest margin countries are higher with OER than developing between residential and industrial tariffs. This countries (India has the lowest tariff of US¢3.27/ combination suggests a massive sibsidization kWh), when using PPPERs, tariffs in developed countries decline substantially in relative terms, _ and those of developing countries increase Figr 22 (India's tariff rises to 10.36¢ikWh). The second significant result is that India goes from being a Unit Cost and Revenue low-cost producer (with OER) to the second- US4 of 1991 pve kWb highest-cost producer (about US016/kWh) after 30 _ t . 25 . . .. ....~~~~~~~~~~~~~~~2 hidonesia. 202 . The tariff comparison highlights that India and 15 Argentina are the only countries where tariff 10 - L - rates fail to cover production costs6 (see Figures s t 7 22 and 23). Average tariff levels in developed 0 countries are between 5¢ and 10¢ per kWh (the I' 5ap CCh UK Argabi N-w Ma1m= TbaDwAd Twkm US New Zcaje U.K. has the highest average rate with about Conwred uth PPP xchantgrres 90/kWh). Tariffs in most developing nations MuaR.emsUk Coo -0-uitW kW* (except Argentina) are above 10¢/kWh, with Thailand, the Philippines, Pakistan, and Indo- nesia above 20o/kWh. Figure 23 It was noted that the Asian developing coun- 1991 Unit Costs & Average Revenue tries in the sample, as well as Argentina, are (U*S PPP Exhae Rate) addressing the disrepancy between customer 30 tariffs and LRMC as part of their overall energy strategy. Most of these countries employ flat 20 usage (per kilowatt hour) charges to low-voltage customers and both demand and energy com- i 0 ponents to large industrial customers. Most include a fuel price adjustment, but s:ane do not o____,____ include this in the residential rates. Most also 0 10 O20 30 have lifeline rates for low-usage customers; for example, Pakistan has an increasing block usage rate. Thailand, Argentina, Chile, New Zealand, 6 It is importmat to note that Axgentina data corresponds to 1991. In 1992, the average electricity rate had increased to 5.7t/kWh (from 4.2¢). 26 Wm.IwloMs POWER SECTOR EXPwUCE: A COMPARSON WTH THE MuD POWER SECTOR of households by industrial customers. Indus- trial tariffs in India, Turkey, and the Philippines Figure 24 highlight teir competitive disadvantage vis-A-vis Residntial & iodutrial Tariffs the other surveyed countries, where tariffs are 199, significantly lower. Tariffs increased at higher rates in Turkey, XlO China, the U.K, and Norway. However, in India, Paldstan, and the Philippines, tariffs declined further. As a result, the financial - t -. situation of most power sector utilities in India has worsened. Of the Asian countries, Thailand O L has been more successful at setting cost-recovery m - P xu tarifs.__ _ _ _ Pigure 25 Sdes and Customen per Employ.. LI ~~~~~~~~~~~~~~~~~~~~~~~~~~~~1991 6. Productivity indicators 6.1 Labor prodctivity Figure 25 and Table 10 present labor produc- j . ...i tivity, showing the number of customers served and sales per employee for the Asian countries, 0 _. Turkey, and Argentina. These are common standards for levels of efficiency and perfor- mance. As might be expected, the countries with the largest populations and systems have the Figure 26 larger number of customers per worker. Even Them Plat Efficency though the values are within a close range, India l99-1991 Av appears to employ twice as many people as ann needed. Sales per employee (MWh/L) is a better P - measure of relative productivity. Sales in the developed countries range from 1,965 MWh/L in N M - the U.K to 5,519 MWh/L in Norway (1991 _ - figures). The MWh/L ratio in the developed l| l countries is biased because of the higher inten- sities of consumption. Reform in E&W enabled .i . . the two private generating companies to reduce 0% 106 20% 3n 409 labor drastically. National Power cut labor from 17,000 to 6,000, and PowerGen went from 10,000 to 4,700. The developing countries with re- services contracted out, or the distribution of formed ESIs also have higher MWh/L ratios, labor between generation, tansmission, distribu- Chile sells 4,972 MWh per employee, and Argen- tion, and customer service. The values also do tina 1,516 MWh. The situation is different for not indicate whether or not India's labor costs in India, however. As can be appreciated in Figure the power sector are out of line with the others. 25, India, with 204 MWh/L, has the lowest That question is explored i the section on MWh/L ratio, about 20 times less than the U.K financal performance. It is clear that India and Pakistan employ a huge work force in their power sectors and that this 6.2 Power plant perfonmance may be a gauge of their inefficiency. Note, however, that these measures do not India's thermal efficiencies are the lowest among indicate skill levels, relative numbers of man- the sampled countries (see Figure 26 and Table agerial and administrative employees, amount of 11). Intemational experience indicates that NTEAnONAL POWER SECTOR EXPERIENCE A COMPARISON WiTH THE INDIAN POWER SECTOR 27 thermal efficiencies typically vary between and Turkey (0.6 percent) spending less (although 30 and 50 percent. India's thermal efficiencies perhaps some of these costs are included in the since 1985 have never been above 27 percent, labor category). O&M costs in hydro systems however. are lower than in thermal ones. Norway and Table 12 presents a comparison of recent Argentina thus spend 6 to 11 percent of their experience in Indian and United States coal-fired total expenditures on O&M, whereas the U.K thermal plants. It shows that in general India's and the United States spend 27 to 45 percent. fuel quality is below United States averages, heat The low O&M may help to explain the low rates and station use are higher, and availability availability factor and the need to compensate and net output are below United States perfor- with a high margin of reserve. The share of mance. In particular, station output is below financial and administrative costs is lower in what would be expected under conditions where India than in the other developing Asian coun- energy shortages occur (plant load factor tries, despite the lœrge amount of new generating < 70 percent). Plant load factor in the United plant. There are substantial depreciation costs in States is constrained by economic dispatch; this China, Indonesia, Pakistan, the Philippines, and is an indication of the difference between United Thailand. States availability and net output. In India, the Figure 28 presents the operating margins in the difference stems both from partial outages at the sampled countries. Several issues are raised by plants and from transmission constraints. these values. First, Idia's sales revenue is below that of the other countries (except that of Argentina) and fails to recover production costs. Second, Pakistan, Thailand, and the Philippines, despite the tariff subsidies to selected customer 7. Financial challenges 7.1 Cost and fiancial performawce Figure 27 India's labor costs are higher than the other CoStt, Asian developing countries in the sample but 1991 lower than Argentina's and Turkey's (see Figure , 27 and Table 13). The data on Argentina portray .... . the situation prevailing in 1991, during the UK mu.. power crisis that prompted the sector's restruc- _ _ = us turing and eventual privatization. However, in hd = Turkey and India, the high labor costs appear to . be.- caused by overemployment. The share of . X iii' labor in total production costs in the developed 0% 2% 40% a% 10% countries varies within a narrow range of 11 to ISdiawu Bra .d&PowP.udmu 20 percent Given the lower labor costs of developing countries, the share of labor costs should be anywhere between 4 and 13 percent; Figure 28 for example, Pakistan has a 3.9 percent share of opetig Mxin labor costs, China 4.4 percent, and Indonesia 12.8 percent. This last value might be considered ___----- on the high side, but it is overshadowed by Im,- Indias 20.1 percent share and Turkey's 40.1 percent b1 S India's fuel costs may also be considered too UK high, especially given the high use of indigenous , . coal and hydro in its generation mix. In the r _,. U.K, the fuel share amounts to 47.1 percent, 0% 10% NS0 *O% 40% A 0% while in India it is 52.3 percent The 5.1 percent share of operation and maintenance (O&M) in ,_= India is lower than most of the countries in the sample, with only the Philippines (4.7 percent) 28 NmERNATIONL POWER SECTOR EXPERIENCE: A COMPARSON wim TdE NDIN POWER SECTOR clsses, have high operating margins that help ments of about $117 billion for the 1993-2000 them to face the investment challenges. In India, period. Under current tariff levels, India can residential and agricultural power tariffs are only provide $6 bilion, multilateral institutions below the marghial cost of production, and the $5 billion, and other bilateral and commercial taiiff levels of industrial consumers are not institutions another $7 billion, leaving a gap of enough to compensate for the shortfalL $99 billion. Given the problems with the information, a word of caution is in order. The counkties surveyed do not report operational and financial Figure 29 costs consistently. Some countries do not Investment per GDP & Sales include depreciation as part of the cost of opera- 1991 tions, for example, whereas others do. The U.K reports cost data in constant currency, but the others report on a current basis. Comparisons 2.. so are also difficult in that countries do not fuUy n, 0 explain how they categorize costs. For example, executive salary costs cannot be distinguished as ID _ either labor or administrative. In addition, labor 20 costs might be included in eithe the fuel category or the repairs and maintenance 0Q. No C r t category. Ina idnia CMe Phil ippines hb_pwaipt pD?P, -hJnwMpcMWh S4w 7.2 Investment challenge rigure 3u Finanlal Performance of sEsM Significant investment has occurred in Argentina, 1991 Palkstan, and India. The available data do not lCOD%, t .2 appear to indicate that India, China, and the Fhilippines have kept pace with demand and . system growth requirements (see investment per 40o0a 1 MWh sales in Figure 29 and Table 16). Coun- 20.0%-" o t- ties with relative overcapacity-Norway, Chile, . o0e% the U.K, and the United States-have needed -o%r only relatively minor investments to keep up .40.0% with demand growth. 0.0% 0 0. 'I.% Although the quality of the financial informa- Ra - .w Of Ri os 3 tion of the SEBs is variable and wanting in some respects, the information generally conveys a Figure 31 difficult financial situation for most SEBs. Rates Excted Investment Sources of return are mostly low or negative, ranging D Power Sector, 1993-2000 from -15 percent to +23 percent (see Figure 30). owne(Sao%) The average level of cash generation of the SEBs (6|00) was only 1.3 percent of their investment require- ments. This compares unfavorably with World Bank targets of between 20 and 60 percent. Collection periods in most SEBs are about three months, ranging from .55 days for Tamil Nadu to 371 days for Meghalaya. Based on recent investment, required system improvements, current demand growth trends, Ga* 48%) and existing tariff levels, India will face a signifi- = I7lIon cant power investment gap during the rest of the decade (see Figure 31). Assumng an expected demand growth of 7.8 percent and an investment cost of US$1,940 per kW of incremental supply capacity, Idia will have investment require- WnATIONAL POWER SECrOa EXPWENcL A COMPAMISON Wrni E INDIN POWeR SEcrOt 29 Dat rcec A/hlpub&hU Tilk Year Asian Deveopmt Bank a lectrdc Utilities Data Book for the Asian and PaciHc Region 1991 & 1993 E Energy Indicators of Developing Member Coumtries of ADD 1989 & 1992 Co-Operative Program on Key Isues Facing the Electricity System of Argentina 1990 Energy Development Ernst & Young Electrity and Gas Dstribution in the (European Community) Member 1991 States International Energy Agency . Energy Polides of IEA Counthies 1991 * Electricity in IRA Countries 1985 * Energy Balances of OECD Countries 1980-89 and 1989-90 1990 & 1992 Water and Power Development Power System Statistics Seventeenth Issue 1992 Authority The Electridty Councl (U.K.) Handbook of Electridty Supply Statistics 1986-89 United Nations . Electric Power in Asia and the Padfic 198748 1991 i nergy Balances & Electridty 1990 1993 * Energy Statistes Yearbook 1988 & 1991 1990 & 1993 U.S Central Intelligence Agency Handbook of Intenational Economic Statistics 1992 US. Energy Information . Electric Power Annual 1986W90 Adrrnistration e Finandal Statistics of Major Investor-Owned Electric Utilities 1991 * Electric Plant Cost and Power Production Expenses 1986.90 Utility Data Base U.S. Steam-Electric Plants: Fve Year Production Costs 1986.90 1992 World Barnk Power Sector Statistics for Developing Gountries, 1987-91 (Draft) 1994 rable I bdwp=d country nfonatln Chiina iA US. bdomsia Ian Thipbs Tarky UJC. ThaiIa Argent*ta Cxle Mwzy Zndad D_hkm~bic daba Land Area (2) 95,1(iM Q00 9,529,202 1,919,443 796,100 300,000 779,000 234497 513,115 2776,000 756,950 306,808 270,53 PopulaU*u (muon 1) . 1M -.252.5 193. l17. 65* 58.6 57.5 MS - 1. 3 Popu1aono gwtw rate 1.4; '24 09 22 11 2.4 2.4 03 1.8 1.3 1.7 4 0.8 (1980.91)>; Populaon denslty 120, 26 26 101 148 219 75 245 111 12 18 14 12 % Rural 73.6 .2S 0 72 72.8 58.2 0 0 78 14.7 0 28 i5 General cmomc daft S GDP (1991 pdries) bn $ 3795 6 5,677.5 115.9 43 453 108.6 1,014.6 81A 172.5 313 105.9 42.4 GDP per capita 329.6 1,853. 22,45 598.7 365.6 5,280.9 17,64Q8 688.8 1,4327 2,338.4 2,815 24,78.1 GDP growth ate 1980.91 8.76 . 2.6 5.51 6.27 1.61 5.1 2.6 7.75 -13 3.79 1.6 3.6 % Inflation (19865-A) 11.13 * 3.76 8.62 7.63 9.84 51.79 5.85 5.06 965.4 19.8 4.3 8.54 1991 Average exdaange rate 5.32 4 1 1,9503 23.8 27.48 4171.8 0.57 25.52 Q92 34937 6.48 1.73 (curencyl$US.) , Elecridty access and Inensity ' % Population access to 66 80 100 24 37 61 NA 100 71 95 91 97.7 95 electricty (1991) Electridty Intensity per capita 550.0 3 11,188.1 167.1 311.6 365.7 966 5,226.2 708.1 1,655.3 1,477.1 25,608.4 9,3173 (1991) Ebtrilty intensity per GNP 1.79 1.0 0Q5 0.29 0U88 0.55 0.55 0.32 0.52 0.29 063 1.05 073 undt (t991) rable 2 polic Objectives New U.S. UtX Z Turky Chm n Indonesia Pastan Ph4e ThilanWC Link to other energy resuces * Exploltindigmousfuel X X X X X X X X X X X X • Prmotecoal/lignIte X X X X X X • Promotehydro X X X X X * Prmote nudear X x opuiFtion welfre * Link to food poduction X X * Reduce enerW shora X X X * Ihproveruraldistr*utionnrtwork X * Reduce polution X X X X X X influence customer behavior * Promoteeffidentelectridtyuse X X X X X X X * Promote conservation & demand X X X X X X management Picing policy • Ratonalizeprlces(attaincommerdal X X X X X X X X X X X prices) * Natlov-lprites X X X X X * Promote regtonal development & X X X X income distributin Fiacial policy * Reduce government Inestment X X X X (additional debt financing) * Attainsatisfctoryreturson X X X X X X X investmet Ptivatization strategy * IntegrateBOOschemes,industrial X X X X X X X X X X X selfgeneration e Sl utilityinto theprivate sector X X X X X X L Table 3 Size of electicity sysms - MW of capacity New US. Ca UiX Wk Norw runy Arntin Indoneitl Thand2 Fkfr,ta1 Zadand Mlimesl C* . . . . , , . . . . . . ,. -. ,, .e. -, , . - -. . Z-ay,. 5 ^ts . . .. \ : ::x~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . . . . . hwtalIed *dty 1991 693,016 151,43 3.~ . t.025 :27.1 1720;7 1556 : 6 .R? > : 174 4, * Capacity 8owth rate 1980-91 0Q9% 7.9% Q6% :78% 2.8% 119% 3.7% 13.7% 8.8% 8.4% 12.2% 44% 5.1% Average capacity additions 5,643 7,782 395 3.s$ 648 ,L099 498 670 458 428 642 217 184 CMW/year 1980-91) Instlmed hydo capacity 1991 92A31 37.884 4,190 19,914 26,89 7,114 6,591 2,095 2240 2,897 4,619 2,148 3,088 Installed nudear capacity 99589 MA 11,353 I 0 0 1,018 0 0 0 0 0 0 1991i IkStalled other theml 600,985 113,590 57,474 4B.(6 250 10,093 7,954 7,161 5,787 4,831 2,449 4,M6 1,881 capacity 1991 Hydro capacity additons 14,534 15,728 1,850 6,6 7,107 4,633 2,990 1,716 970 ,330 46 1,208 957 ' 1980M91 Nudear capacdty addidtons 43,134 0 5,316 S 0 0 648 0 0 0 0 0 0 I980-91, ema capacity addiions 44,991 56,332 (7,70) VZA 14 6,3 1,654 4,985 3,609 2,952 2,5a6 965 411 1980-91 Inst capaty per capita 2,744.6 131.5 1,2.0 97 6,350.4 293.7 476.5 47.8 141.3 65.8 2,135.7 93.9 371.1 I aW/000 pOp) 11990 data. Table 4 Size of electriity systems - GWh of generaton * ~~~~~~~~~~~~~New c US. China ux_ rni;. Nonwqw T1*uy Argmt8a ThagiPid PakWil cInessa NwC (ra* generation GWIt 1991 2,825,028 677494 322,805 286 1009 j6* 50,124 3 >42,491 3 50858 25105 l 99619 Generation growth rate 1.9% 7.7% 1.6% 9,0% 2.6% 9.0% 3.1% 11.7% 9.7% 163% 3.3% 5.2% 4.9% (1960491) * Growth in hydro 7.2% 2.8% 4.1% 2.5% 6.5% 0.8% 11.4% 6.9% 15.5% 1.9% 5.7% 5.4% generation e Growth in thermal 2.2% 7.8% -0.8% 11.6% 10.9% 11.0% 4.6% 9.5% 41% geeration Capacity growh rate 09% 7.9% 0.6% 7.8% 2.8% 11.9% 3.7% 8.8% 8.4% 13.7% 12.2% 4.4% 5.1% 1980-91b 1991 GWh generation by fudel * C.AW 1,551,167 504,030 208,124 180,936 0 20,181 2,450 10,230 65 11,603 736 1,741 5,908 * Oil 108,176 44,666 22,662 0 0 3,921 5,960 9,067 8,137 9,825 6,193 9,767 0 e Diese 3,287 0 50 7 0 21 0 267 5 4,814 64 2,071 522 e Gas 264,172 3,953 0 5,439 0 10,192 21,170 18,057 12,513 %9 0 0 403 o Nudear & geotheml 622,702 0 61,308 6,244 429 80 7,140 0 0 1,125 2,018 5,470 0 SUBTOTAL 2,549,50 552,649 292,144 192,696 429 34,395 36,720 37,621 20,720 28,336 9,011 19,049 6,833 e Hydro 275,519 124,845 6,375 71,53S 110,580 23,148 17,350 4,864 16,925 5,675 22,895 6,074 13,128 TOTAL GENERATION 2,825,023 677,494 298,519 264,231 111,009 57,543 54,070 42,485 37,645 34,011 31,906 25,123 19,961 1991 % generation by fuel type * Coal 54.91% 74.40%e 69.72% 68.48% 0D00% 35.07% 4.53% 24.08% 0.17% 34.12% 2.31% 6.93% 29.60% * Oil 3.83% 6.59% 7.59% Q00% 0.00% 6.81% 11.02% 21,34% 21.62% 28.89% 19.41% 38.88% M0D0% * Diesel Q12% 0.00% .02% 0.03% 0.0% 0.04% 0.00% 0.63% 0.01% 14.15% 0.20% 8.24% 2.62% * Gas 935% 0.58% 0.00% 21064 O.00% 17.71% 39.15% 42.50% 3324% 2.85% 0.00% Q00% 2.02% * Nudear & geothermal 22.04% 0.00% 20.54% 2.36% 0.39% 0.14% 1321% 0.00% 0.00% 3.31% 6.32% 21.77% 0.00% * Hydro 9.75% 18.43% 2.14% 27.07% 99.61% 4023% 32.09% 11.45% 44.96% 16.69% 71.76% 24.18% 6527% 100.00% 100.00%/e 100.00% 100.00% 100.00% 100.00% l0 .00% 100.00%o 100.00% 100.00% 100.00% 100.00% 100.00%L Table S Generatin balance (2980 & 1990) - GWh New 1 . In1nesia Pakia F*Iphi ThaOwd US. U.K AJnlia Turay ahl Zudlnd Noway Geneation in 1990e ',",' GrOSs generafton 621,320 4 34,011 37,645 25,105 42,491 2,808,151 319,695 47,007 57,543 18,372 30,157 121,848 Less station use 4003 b777 1,674 1.035 1,056 2.261 0 2,6 0 3,311 324 27 1,3S Net generation (Busbar) 581,287 2004 32.337 36,610 24,049 40,230 2,808,151 297A59 47,0(7 54,232 18,0S8 30,130 120,490 Plusnetfnports 0 i06 856 439 4 689 0 11943 0 175 0 0 (15n17) Less T&D losses and theft 40,113: ; 5453 8,114 3,763 4,023 199.498 24,984 SA77 6680 1,944 1,S18 6,874 Net sales to customs 541,174 t88j Z40 27,740 28,935 20,290 36,896 2,608,653 284,418 41,530 47,727 16,104 28,542 97,709 Station use as a % of net 6.9% 8. 5.2% 2.8% 4,4% 5.6% 0.0% 7.5% Q O0% 6.1% 1.8% Q1% 1.1% T&D loom as a % of net 6.9% r.5% 16.9% 222% 15.6% 10.0% 7.1% 8.4% 11.7% 123% 10.8% 53% 5.7% generation Ratkn:s ales to gneration 87.1% i 79.6% 76.0% 80.8% 85A% 92.9% 8538% 883% 82.7% 87.7% 946% 922% plus imnports Generation in 1980 Gross generaton 300,628 7,502 14,872 15,086 14,028 2,286,106 =,225 35,671 23,275 11,751 NA 899 Lts station use 8 042 34 421 784 638 station 17245 0 1,394 145 NA 14M Net generation (Busbar) 282,586 1,613 7,159 14,451 14,302 13,390 226,106 254,880 35,671 21,881 11,606 MA 82,698 Plus net imports 0 1,46 919 291 0 746 0 1,953 23,532 1,341 0 NA (462) tess T&D bsses and theft 23,373 ,517 4,392 1,665 1,406 186M44 212001 Z786 24 1,442 NA 7j2 p Net saks to custoaes 259,213 83704 6,561 10,350 12,637 12,730 2,099,762 23S,832 56,417 20,398 10,164 NA 75,107 Station use as a % of net 6.38% 6.98% 4,79% 2.91% 5.48% 4.76% Q0.0% 6.81% 0.00% 6.37% 125% NA 1.69% generation T&D losses as a % of net 8.27% ;.% 21.19% 30.39% 11.64% 10.50% 8.15% 8.24% 7.81% 12.91% 2.42% NA 8.62% gneraton Ration: sales to grss 86.2% i74.% 77.9% 68.3% 83.8% 862% 91.8% 86.0% 953% 82.9% 86S5% NA 89.8% generaion plus imports d~~~ able 6 eak demands C9804991) - MW New saint idht Irdo PakWa Pkiippss Thland US. UJC Argents Turey Oie Zealond Norwy Peak demand OMW) 1980 38,458 199 1,577 2,614 2,414 2,417 NA 51,301 NA 3,892 1,544 NA NA 1981 39,564 Z4121 1,876 2,897 2,620 259 NA 49,44 NA 4,025 1,58 NA NA 1982 41,919 21,527 2285 3,436 2,913 2,838 NA 50,286 NA 4,475 1,643 4,084 NA 1983 44,958 *23i07 2,413 3,781 3,117 3,2D4 NA 48,602 NA 4,608 1,716 4,270 NA 1984 48,227 2 2,715 4,027 3,049 3,547 NA 48,890 NA 5,380 1,825 4,533 NA U 1985 52,5 348 2,965 4,588 3,037 3,878 NA 53,083 NA S,689 1,850 4,93 NA 1986 57,517 $0 3,403 4,805 3,203 4,181 476,983 52,148 NA 6,391 1,905 4,716 NA 1987 63,620 #1,4 3,889 5,270 3,432 4,734 496,173 55,2W 7,843 7,366 2,009 4,779 NA 1988 69,727 *208 4,496 5,996 3,684 5,444 529,460 53,555 7,749 7,564 2,147 4,76 NA 1989 74,795 . M 02 5,165 6,500 3,909 6,233 523,082 53,414 7,436 8,450 2,270 5,121 NA 1990 79A483 A 5,898 6,83 3,974 7,094 546,000 54,068 NA 9,007 2,273 5,129 NA 1991 87,267 :A NA NA NA NA 551,106 5%,472 NA 9,854 2,375 5,124 NA Avnge peak gcwth rate 8.8% 1% 14.7% 8.2% 5.5% 12.8% 2.9% 0.4% -2.6% 9.6% 4.3% 0.8% (1985.1991) Aveage peak growth rate 6.4% 6$iR% 135% 11.9% 4.7% 9.9% NA 07% (19801985) Average enery owth rate 8.6% 09% 17.4% 11.8% 6.1% 13.4% 2.3% 3.1% 5.4% 10.0% 6G0% 24% 1.3% (1985.1991) Average energ owth rate 6.5% 8.7% 15.1% 77% 4.6% 9.9% 1.6% -0.4% 3.1% 7.8% 3.7% 5.3% 4.2% (198045) 5'-year growth rate 3-year growth rate 'able 7 :onsumption by custower class (1980,1985 & 1991) - GWh New Chia India Indomesa Pakistan Phlippines Thaiand US. U.K Aretin Turki Chie Zeland NoW Net sales 19l 532,901 205,151 27,740 28,935 20290 36,896 2762,003 290,841 48,593 49,23 17,550 27,819 105,512 % Consztmption by sector • Residental 7.9% 15.5% 32.5% 32.0% 31A% 21.1% 34.6% 33.7% 30.5% 22.09o 0.0% 369% 35.0% Co 5.7% 62% 8.4% 6.7% 21.6% 26.8% 27.7% 25.5% 8.5% 62% 00% 19.8% 182% Industrial 778% 46.9% 51.1% 35.4% 42.9% 48.2% 343% 37.6% 48.2% 57.9% 0O.O 403% 44.4% * Transot 1.7% 2.3% 0.0% (3.0% 0.0% 0.0% 0.0% 1.8% 00Q% Q0% .0% 0.6% 0M7% * Agriculture 6.9% 24;% 0.0% 18.9% Q0.0% 03% 0.0% 1.4% 0o.0 Q0.o 0.0% 2.5% 06% * Others 0.0% 4.6% 8.1% 7.1% 4.1% 3.5% 3.4% -Q0% 12.8% 139% .0% 0Q0% 1.2% Total 1991 100.0% t100.% 100.0% 100.0% 100.0% 100. 100.0% 100.0%%o 100.0% 100.0% 0.0% 100.1% 100.0% Net sales 1985 354,936 125,992 12,206 15,981 14,770 19,M 2,323,974 244,935 36,860 29,709 12,003 23,994 93,019 % Consunpion by sector * Residential 0.0% 14.0% 39.7% 28.9% 27.1% 25.3% 342% 36.9% 29.6% 16.8% 18.1% 37.5% 33.5% * Comuerdal 00% 5.9% 9.1% 7.5% 22.1% 25.5% 26.1% 23.9% 10.8% 5.5% 7.6% 17.6% 16.0% * Industrial 77.5% 54.5% 38.6% 36.0% 43.5% 46.9% 36.0% 35.5% 47.1% 66.0% 462% 41.7% 472% e Transport Q8% 2.% QO.% QO% Q0% 0.0% Q0% 2.0%o Q0% 0.0% 2.1% M7% 0.8% 0 * Agticultire 142% 19M% QOL% 20.4% QO% 0.3% 0o.0o 1.6% QO% 0.0% 0.2% 2.5% 09%o * Others 7.6% 4.0 12.6% 7.2% 7.4% 2.0% 3.8% 0O.o 12.5% 11.7% 25.8% QO% 1.7% Total 1985 100.0% 100.0I 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 10D.0% Net sales 1980 259,213 834704 6,561 10,350 12,637 12,730 2,099,762 249,996 32,884 20,398 10,164 76,031 0 % Consumption by sector * Residential (1.0% 112% 44.4% 192% 20.7% 22.1% 342% 34.4% 30.1% 172% 20.3% 31.1% o Conurerdal 0% 5.7% 14.9% 4.8% 24.4% 272% 26.6% 21.6% 10.7% 5.6% 7.0% 13.4% * IndustrWial 81.2% 384% 26.3% 38.7% 49.3% 50.0% 39.1% 412% 47.0% 63.8% 45.9% 51.7% 0 * 1tansport Q.5% 28% 0.0% QO% 0.0% Q0.0% 0.l% 1.2% QOO% Q0% 2.2% 9% * Agricltute 12.7% Mr 00%o 252% Q0% 0.1 0O.% 1.6% 0.0% QO.o 0.2% Q.9% * Others 5.6% 4.4% 14.5% 122% 5.6% Q6% O% 0.0% 122% 13.4% 24.3% 2.0% Total 1980 100.0% Io0% 100.0% 100.0% 100.0% 100.0% 10D.0% 100.0% 100.0% 100.0% 99.9% 100.0% Net sales (GWh) 1980 259,213 83,70 6,561 10,350 12,637 12,730 2,099,762 249,996 32,884 20,398 10,164 NA 76,031 1981 269,184 9637 7,846 11256 13,586 13,934 2,144,801 239,067 33,643 22,030 10,489 NA 88,531 1982 283,874 9Z202 9,103 13,529 14,535 15,138 2,190,805 238,335 34,420 23,586 10,312 20,104 90,220 1983 302729 146 10,008 14,173 15,484 16,342 2,237,797 233,156 35,215 24,465 10,682 21,371 109,943 1984 326,305 116A66 11,039 15,716 15,305 17,970 2285,7% 241,082 36,028 27,635 11,543 23,027 105,729 1985 354,936 125,99Z 12,206 15,981 14,770 19,771 2,323,974 244,935 36,860 29,709 12,003 23,994 93,019 1986 390,062 138,959 14,759 19,039 14,926 20,951 2,368,753 257,159 39,590 32,210 12,603 24,275 86,462 1987 426,929 148,9 17,076 21,705 16,589 24,121 2,457,272 263,226 42,523 36,697 13,428 25,349 94,455 1988 474,380 162,78 20,027 25,131 18,601 27,419 2,578,062 274,505 44,457 39,721 14,341 25,805 106,042 1989 508,449 V4i906 23,435 26,709 19,866 31,348 2,646,809 279,399 46,479 43,120 15,495 26,698 124,899 0 1990 541,174 18A 27,740 28,935 20,290 36,896 2,712,555 284,420 48,593 46,820 16,104 27,309 129,523 1991 532,901 2O3i5 2,762,003 290,841 52,892 49,283 17,550 27,819 105,512 - B~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U 'able 8 3edridy custsmm (90m N - Cab. fU Indonsam Pakita 12owuilpa Thaian US. iLL A,Kgnt in Tsn*ea cule Zealad mm"a Number of cuswam 199o 242,6Z7 5 11,464 7,859 5,386 7,875 1,561 24,754 4,414 15,543 1,679 1,600 NA ° ('000) Residmilal 207,240 468 10,7442 6,209 4,880 7,222 97,05 22,8 N1275 1,52 1,32 NA Go1d 4,125 Zpl: 527 1X2 38 542 tZ8 1,M N 182 122 148 MAg Indutal 7,280 1,9 34 181 22 16 525 217 NA 485 18 28 mA Ag8ture 17.715 8 0 149 0 16 0 263 NA 0 10 98 MA Otws 6,309 160 8 IQ 2 79 859 5 NA 520 18 5 NA 1 of number of cu _um 100.0% 10.0 IO0.0% 100.0% IOD.0% 100.0% IO.O% 10.0% 1IO.0% 10.0% 100.0% 10.0% NA Realdendal 85.4 % 93.7% 79.0% 90.6% 91.7% 87.8% 90A% NA 81.8% 90A0% 82.6% NA I Commerda 1.7% 1141% t6% 15t7% 7.1% 6.9% 10.9% 7.6% MA 11.7% 7.2% 9.2% NA Indust"ial 30% 0Q3% 2.3% 04% 0.2% Q5% Q.9% NA 3.1% 1.1% 1.7% NA Agriculture 73% 1 QO% 1.9% Q0% 0.2% 0.0% 1.1% NA QO% Q6% 6.1% NA OthS 26% 1 Z 1.4% 01% 1.9% 1.0% 0.8% 0QO% NA 3.3% 1.1% 0.3% NA Avemge ua per _ rmwe 1990 Resuldental 197 6 838 1,492 1,306 1,078 9,517 4193 NA 714 1,875 7,420 NA Cornmerdal 1,653 1j58 4,413 1,466 11,461 18,255 62,161 37,551 NA 1,413 1096 36,861 NA Industa 54,711 4441 411,841 56,667 404,09 1,132,138 1,800,994 509,859 NA 60,276 435,622 405,427 NA Agrculte 3,562 0 36,5 0 6,687 0 14,Q59 NA 0 6,442 6,17 NA Otbeis S,103 Z(,4 14,000 260,669 8,129 16,619 107,087 1,O00,796 NA 11,446 219,915 38,233 nA I Ppultion 1991 (0 1,131,487 SAM1193,560 117,490 65,759 56,814 252,502 57,515 32,664 58,581 13,390 3,9 4,274 Avge size of household 3.67 1 6 432 7.00 8.22 5.59 2.60 2.57 NA .O0 &06 2.37 NA % EIeriftlau rat 1990 66 0% 24.0% 37.0% 61.0% 71.0% 999%1 999%1 95.0% NA 91.0% 95.0% 97.7% [A _umed. rable 9 rariff structure chaacteristics New Ckina Wk Indonesia Pakistan Phiippines Thmand US. UIC Argetina Tury Chile Zaland Nbrwgy Rates established Naidonal Reg l Natonal National National Nadonal Regional Regional Regnal National Reional Regiond Regional Flat rates for low-veltage Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes users Demand & ene Yg yye Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes compaents izk the rates rme of day rates Yes Yes Yes Yes Yes Yes Yes Life rate yes Yes Yes Yes Yes Yes Yes Yes Fuel adpstment los Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Relatonship to LRMC below beow below below above above above above below below above above above Price subsidies ag tre a _ur agiltre Average btriff inaease 11.8% 19% 6.0% 2.4% -01% -1.9% 2.7% 1.6% NA 66% -0.3% 4.1% Q7% 1988-91 Residental tariff inerease NA 4l% 10.3% NA 21.7% 0.3% 2.5% 7.5% 7.5% 243% -I0O% .02.o 4.6% 1988-91 Indusial iff increase 4.9% 8 % 8% NA -6.5% -05% 1.7% -3.7% -02% 32% 4.3% -3.9% -2.8% n9B8 91) , 8~~~~~~~~~~~~~~~~~~~~~~~ ,,,,, , ,. :.~~~~~~~~~~~~~~~~~~~~ _ ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. Table 10 Labor satism & _uodd bivity ana bi {ndonea Pksan Phiippins haid US. UIL Atgetina Turky Che eW N Number of Employees 1983 652,8 85; 44, 132,000 31,080 59,946 NA 163,748 NA 52,365 0 15,780 17,764 1984 679,739 65* A04 49,696 132,000 33,581 63,760 NA 159,080 NA 57,270 0 15,783 17,947 1985 724,584 51,290 132,000 32,150 64,807 NA 155280 NA 62287 3,728 15,592 18,281 19866 m,9 O-?Z5W7 51,571 132,003 32,550 65,299 NA 153,127 NA 66,683 3,800 15,750 18,801 1987 841,465 O 51,203 132,000 35,819 67,827 677M824 152,880 34,480 65,814 3,943 16,38 19,406 rI 1988 842,464 to# 51;237 132,000 36,754 68,819 675,701 151,5(7 34,592 68,305 3,939 14,632 19,M50 1989 866,516 91$A628 511353 132,000 39,292 71,192 659,87 151,i50 34,705 70408 4,105 13,513 19,560 1990 890,568 52812 132MM00 42,149 75,45 668,545 151,500 34,818 68,049 3,894 12,922 19,396 R 1991 1,58,00 N NA NA NA NA NA 148,00 3432 64,2 3,0 12,88 19,119 0 Sales per emplyet (MWh) 1983 463.7 M. 222.9 107.4 498.2 272.6 NA 1,423.9 NA 4672 Q00 1543 6,189.1 1984 480.0 AS. 222.1 119.1 455.8 281.8 NA 1,515.5 NA 482.5 Q0 1,459.0 5,8912 1985 489.8 14. 238.0 121.1 459A 305.1 NA 1,577A NA 47.0 3,219.7 1,538.9 5,0883 1986 505.3 1 286.2 144.2 458.6 320.8 NA 1679.4 NA 483.0 3,316.6 1,5413 4,598. 1987 507.4 ;- *. 333.5 164.4 463.1 355.6 3,6252 1,721.8 12333 557.6 3,4055 1,548 4,8673 1988 563.1 390.9 190.4 506.1 398.4 3,815.4 1,811.8 1,2852 5815 3,6403 1,763.6 5,424.1 1989 586.B 452.0 20.3 505.6 4403 4,011.1 NA 1,3393 612.4 3,774.7 1,975.7 6,35A 1990 607.7 2G 5253 2192 481.4 481.7 4,057.4 NA 1,395.6 688.0 4135.6 2113A 6,67758 1991 423.6 l NA NA NA NA NA 1,965.1 1,514.1 761.5 4,971.7 2,210. 5,518.7S Sales per emnpoy.". W) 423.6 24 523 219.2 481.4 4917 4,057.4 1,965.1 1,514.1 761.5 491.7 2,210.0 518.7 Custmes per employ" 242.7 11.5 7.9 5.4 7.9 110.6 24.8 4.4 15.5 1.7 1.6 O0. 1,:, L Table 11 it Power plant pefoance n Inmdia and the US: 19M7M91 Cajncity 04pui Plannd PFo,re AwAi ly Pant load Speaficad Calmfi Heat ate Stio Men per Yat (MW J (GWk) mtd*M % oute % % J idor % usetl%) b (ka8/A) Omlg u) % A Indi- 1987-88 29A39 141,473 9.57 17.83 72.60 54.86 0.705 3,838 2,705 10.29 3.782 1988/89 32,354 148,829 11.58 1544 72.78 52.51 VW70 4142 2,872 9.92 1068 1989-90 36,206 168,66 11.06 15.44 73.40 53.18 W0704 4t28 2,901 9.07 3.267 1990-91 37,610 172713 1124 16.11 7221 52.42 0706 4C091 2,898 7.46 3251 US. (coal plants) 1987 292,595 1,463,781 12.49 9.07 82.61 57.11 0Q438 5,812 NA NA 0Q251 1988 294,685 1,540,653 11.56 8.8 84.03 59.68 Q440 5,804 NA NA1 CQ248 1989 296,614 1,553,661 11.03 9.03 8L17 59.79 Q446 5,790 2,593 NA1 0.241 1990 279,876 1,559,606 11.24 &14 84.44 68.61 Q443 5,870 2,615 NA' 0242 'Statlon use data for this subset of plants is not available. It is tplafy in the range of 5.8%. Table 12 Thenaal plant efficiendes cm= h 0I'mia PJdsta Phlpis Thaiand US. UIX Aigetin Turkq Oil Za,Lad NRway 1985 30.5% 293%. 35A% 472% 32.8% 39.7% 36.7% 372% 255% 32.3% 37.8% 34.9% 29.9% 0 1986 30.0% 29.4% 34.5% 44.0% 31.0% 39.9% 37.1% 37.2% 25.9% 31.8% 37.2% 38.5% 21.1% 1987 33.1% Z3% 305% 45.3% 32.4% 39.6% 372% 37.6% 25.6% 32.6% 38.1% 372% 30.6% 1988 32.1% 292% 31.6% 48.6% 31.1% 393% 37.9% 37.8% 313% 31.6% 383% 36.9% 27.5% 1989 313% 2.1% 50.9% 41.0% 36.8% 40.1% 37.6% 36.7% 302% 34.6% 3h1% 31.7% 482% 1990 31.1% 29.4% 32.5% 42.0% 38.7% 36.4% 39.8% 36.9f% 31.2% 325% 35.7% 43.1% 3S5% 1991 31.7% 2t0% 31.7% 42.7% 3S.0% 35.4% 40.0% 37.5% 32.0% 34L1% 543% 382% 30.7%9 - 8~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ rable 13 ruture of pouctiom osts New Cbaw Ihlk. Idmoisi Psta Philies Thalad US. U.K. Mnmthi Turky Chike ZeAlad Non Slaries & wages as a % of toa costs 1986 4.4% 20% 13.4% 35% 4.5% 8.4% 10.7% 16.6% NA 112% NA NA 11.6% 1987 5.5% 21.0% 12.4% 3.8% 4.8% 8% % 10.7% 17.6% NA 162% NA NA 12.1% 1988 4.0% 21.5% 12.4% 3.4% 52% 83% 11.0% 16.8% NA 15.1% NA NA 11.8% 1989 4.8% 2AA4% 13.6% 3.5% 5.7% 8.6% 1O9% 18.6% NA 24.1% NA NA 12.7% 1990 4.4% 2;O1% 12.8% 3.9% 4.2% 8.7% 10.8% 19.9% NA 40.1% NA NA 13.0% 1991 3.9% 20.1% 12.8% 3.9% 4.2% 8&707e 10.8% 19.7% 313% 472% NA NA 12.3% I Fuel & puhased power as a % of total costs 1986 75.8% 3.% 742% 60.8% 76.1% 643% 362% 42.0% NA 54.7% NA NA 58.7% 1987 74.7% 51% 73.4% 59.1% 71.6% 612% 36.8% 40.6% NA 40.9% NA NA 55.9% 1988 70.0% SZ1% 72.9% 60.8% 63.5% 662% 37.0% 45.5% NA 30.1% NA NA 56.5% 1989 79.1% S2 69.8% 61.7% 61.0% 64.6% 373% 47.8% NA 355% NA NA 553% 1990 673% 52A 71.4% 622% 67.5% 68.0% 372% 47.1% NA 37.6% NA NA 549% 1991 67.7% 52.3% 71.4% 622% 67.5% 68.0% 36.9% 44.7% 56.1% 39.9% NA NA 57.5% Repairs & m_uatenance as a % of total COsts 1986 9.7% 5.6% 7.8% 34.2% 3.2% 17.2% 465% 36.0% NA 05% NA NA 5.8% 1987 11.6% 5,29 9.6% 35.6% 3.6% 18.2% 45.6% 36f2% NA 0.5% NA NA 5.9% 1988 10.6% 3.4% 9.6% 34.5% 4.2% 17.1% 44.9% 32.2% NA 0Q4% NA NA 6.1% 1989 9.4% 5.0% 10.7% 33.4% 6.2% 17.5% 44.8% 28.0% NA 0.4% NA NA 6.3% 1990 16.6% 5.11% 10.7% 32.5% 4.7% 14.9% 44.8% 27.2% NA 0.6% NA NA 6.2% 1991 17.9% 5.1% AM.7% 32.5% 4.7% 14.9% 44.8% 30.1% 11.1% 0Q9% NA NA 5.8% AdnIstaftbe, deptediadon, inte*s, pnfit, & other costs a a % of total csts 1986 10.1% 23% 4.5% 1.5% 16.2% 10.1% 6.6% 5.4% NA 33.6% NA NA 23.9% 1987 8.2% 222% 4.6% 1.5% 20.0% 11.8% 6.9%7o 5.6% NA 425% NA NA 26.1% 1988 15.4% 21.0% 5.1% 1.4% 27.1% 8.4% 7.1% 5.5% NA 54.4% NA NA 25.6% 1989 6.7% 21A% 5.9% 1.4% 27.1% 9.4% 7.0% 5.7% NA 40.0% NA NA 25.7% 1990 11.7% 22.4% 5.1% 1.4% 23.5% 8.4% 73% 5.8% NA 21.7% NA NA 25.9% 1991 10.5% 22.4% 5.1% 1.4% 23.5% 8.4% 7.4% 5.5% 1.5% 12.1% NA NA 24.4% L Table 14 A! ae revenue and unit osas per kWh of sales (US* of 1991) Newp ee una )wdiz Idoosa Pakistan Philippies Thaiand US. UK. Argentina Turkey ie Zealand Norwayr Avrerage mevemue 1986 11.07 1261 31.45 26.16 30.08 2721 7.15 10.58 14.02 24.02 24.46 6.06 1987 10.51 12L40 28.46 23.14 28.62 26.13 6.75 10.08 15.69 17.27 19.18 5.51 1988 9.17 1L".9 26.14 24.86 26.56 24.93 643 9.84 12.71 18.79 5.43 5.07 1989 9.36 11.78 30.48 2628 23.30 23.64 627 9.76 13.11 18.80 5.33 4.11 1990 10.95 12.1S 28.14 26.67 24.72 22.47 6.05 9.32 12.28 19.97 5.23 3.90 1991 132 12.80 28.14 26.67 24.72 22.47 6.04 9.43 5.56 12.11 16.40 5.07 5.06 Unit Costs 1986 6.02 1L42 22.07 14.55 16.77 1625 6.59 10.32 16.87 4.33 4.89 1987 6.08 1&7 21.60 1328 15.46 14.25 6.12 9.72 14.79 4.64 4.48 1988 5.74 14.54 19.63 13.88 12.25 13.76 5.80 9.79 12.58 12.89 5.16 4.11 1989 6.16 1538 17.72 13.69 11.42 12.80 5.67 8.71 14.73 12.80 4.29 3.19 1990 8.49 14.86 19.50 1328 14.23 11.92 5.48 7.76 10.71 14.00 4.20 2.97 1991 9.64 1574 19.50 1328 14.23 11.92 5.44 7.55 6.04 10.89 9.61 4.36 3.81 Deflated with the CPI (1991=100) and with the 1991 PPPER. Table 15 O Indian power sector Amual pk Instad Custom T&D Higk-otage W-oltage Total Year demad apy sales loss netwrk (>132 kV) netowk (<32 kY7 T&D 1980 19,089 30,213 83,704 21,325 88.533 2,263,076 2,351,609 1981 20.121 32,345 91,637 23,389 93,912 2,428,549 2,522,461 1982 21,527 35,363 97,202 25,644 101,187 2,591,899 2,693,086 1983 23,077 39,353 104,363 27,689 106,733 2,758,579 2,865,312 0 1984 24,020 42,618 116,466 31,214 114,245 2,887,850 3,002,095 1985 26,248 46,803 125,992 34,194 125,204 3,086,752 3,211,956 1986 30,490 49,287 138,959 37,784 131,834 3,239,382 3,371,216 1987 31,314 54,176 148,592 42,231 137,727 3,434,733 3,572,460 1988 33,728 59,060 162,878 46,032 143,489 3,648,618 3,792,107 1989 41,902 63,011 174,906 53,260 15O,419 3,891,603 4,042,022 1990 46,509 66,257 188,240 57,320 157,694 4,249,8W 4407,501 1991 50,431 69,025 205,151 61,173 Anual growth 6.6% 9.1% 8.5% 9.9%ye 7.2% 6.4% 6.4%9 1980.1985 Amnuul growth 113% 6.7% 8.5% 10.2% 4.7% 6.6% 6.5% 1985-1991 Table 16 Invesimet and fnanidd pedomanm _11 Ck . :fjuiI Indsia Pakista Phiipphs Thaiad US. U.X A,atin Tw*xy Chi New Zeala, Nmy j 1'991 Cap( t) 5,936 7W 906 676 189 7.103 14.674 6,281 3,919 1,171 186 6,216 870 Aveae capital lnvestment 4906 4,644 1,163 699 254 5,2O 14,674 4,788 3,919 1,622 454 554 1,269 1986.19911 e [reGhment/GDP ( 1991) 1.56 IA 0.86 1.57 Q43 827 0.27 0.62 2.18 1.0B 0Q9 14.66 082 o hwalzent/capadty 392 57.1 97.9 96.4 30.5 8849 213 85.9 2549 68.1 49.8 879.6 32.1 ($/MW 1991) * Ihrestmiet/net sake 11.1 20A1 32.7 25.8 9.3 192.5 5.4 21.6 80.7 23.8 14.1 223.4 82 Operating magIn 212% t2% 32.7% 51.7% 445% 502% 1716% 199% 4.9% 11.5% 42.0% NA 34.0% (rev - oJels)/rev Rgte of retun 4.0% G% 6.3% 10.1% 6.6% 6.6% 1.7% I.6% -13.4% 3.0% 0.0% Q 1% 0.0% 4DefJad with the WPI (1991=100). Note US$ estimates based an 1991 ofidal e,chage rates. Table 17 Memorandum t freign excage rates and pEce indices C_a Ito& Id nmea Paksta Pilpn Thaiad U.S. U.. Argtina Twr' hWsi/e New Zadnd Nwy Consumer price indices 1980 44.1 3$ 403 457 22.8 615 605 50.1 (0L 1.4 129 353 464 1981 453 4S: 452 15.1 25.8 693 66.7 56.0 Q0 1.9 15.5 408 52.7 1982 462 45$ 49.5 54.1 28A 72.9 70.9 60Q8 O00 2.5 17.0 47A 5868 1983 47.1 5l8 553 57.6 312 75.7 73.1 63.6 0.0 3.3 21.6 509 63.6 0 1984 48A $SS 612 61.1 47.0 763 76.3 66.8 .0 4.9 25.9 54.0 67.6 1985 54.1 ;7 64.1 64.5 57.8 782 79.0 70.8 O00 7.1 33.9 62.4 71.4 1986 579 O 67.8 66.8 583 79.6 80.5 732 (0L 9.5 40.5 70.6 76.6 1987 63.0 694 74.1 69.9 60.5 81.6 83.5 763 0.0 133 48.5 81.7 832 1988 76.0 7M 80.0 76.1 65.8 84.8 86 80.0 M00 23.0 55.7 86.9 888 1989 884A 87 852 82.1 73.8 893 91.0 86.3 1.5 37.6 652 91.9 92.9 1990 89.5 8 91.5 89.5 84.3 94.6 95.9 945 36.8 602 82.0 97.5 96.7 1991 100.0 t0 100.0 100.0 100.0 100.0 100.0 100.0 I1I00 100.0 100.0 100.0 10.0 L Table 17 (continued) Memorandum iterm foreign e!cange rates and price indices New Oju fax Inonsi PakWm A97ns. utxw US. U. rgetn TAR ON Zead Noayw Wholssle price indices 1980 52.8 4* 38.0 41.5 2DA 69.4 77.1 542 0.0 1B 128 42.0 55.6 1981 538 4i 422 472 23.4 76.0 84.1 59.4 M0 2.5 14.0 492 61.8 1982 53.7 510 453 50.4 25.9 76.6 85.8 64.0 M0 32 15.1 56.5 65.8 1983 54.3 351 53A 54.1 3Q0 782 86.9 67.5 Q0 4.2 21.7 59.6 69.7 1984 57.1 to 593 59.1 502 75.8 89.0 71A O0 6.2 27.1 63.9 74.0 1985 62.5 61. 622 60.8 59.4 75.8 88.6 75.1 0.0 9.0 38.8 73.7 77.8 1986 65.0 651 63.6 63.8 58.4 75.5 8S.0 78.4 O00 11.6 46.5 77.9 79.9 1987 693 (6# 75.9 69.1 63.8 80.0 883 81A 0.0 153 55.4 84.1 84.7 1988 79.1 7t5 79.6 75.9 72.3 86S. 91.1 85.0 m1 25.8 58.5 88.5 892 1989 85.6 801a 86.4 822 80.0 90.5 96.4 89.4 2. 42.3 67.4 94.8 94.0 1990 89.5 8811 95.1 893 88.1 93.6 99.8 94.7 415 64.4 822 992 97.5 1991 100.0 100.A 100.0 100.0 100.0 100.0 100.0 100.0 10.0 100.0 100.0 100.0 100.0 Power paity exchange rates 1980 Q846 3376 268.28 3360 2.971 8.109 1.000 Q432 ao00 48.403 23.079 0.920 7.473 ° 1981 Q906 430 273.553 3.320 3.164 8.459 1.000 038 0.000 65532 2489 1.025 8.618 1982 Q.885 440 305.977 3.419 3.319 8.462 1.000 0.602 0.00 79.040 35.512 1.113 9.260 1983 0817 4.-71 378.151 4256 3.902 8.145 1.000 Q611 M000 94.537 40210 1.139 9.508 1984 Q838 4.50 377.090 4.t32 5.334 7.907 1.000 0.612 QQ00 134.053 39.183 1.192 9.737 0 1985 0925 4.732 364300 4.186 5.613 8333 1.000 0.578 0000 174.713 53.096 1.252 9.613 1986 Q903 4.6q. 379.969 4.240 6.038 7.525 .000 0.506 0.000 213.495 57583 1.196 8.224 1987 0.866 4.80 423.487 4.124 6.086 7.123 1.000 0489 Q.000 274.9(03 63227 1.179 7.982 1988 0.839 S.254 452264 3.994 6.187 7385 1.000 0Q511 OQOOI 457.511 73306 1.282 8.471 1989 0.863 5.76 398.693 4.329 6-554 7.785 1.000 0.590 a25 697.054 84362 1.533 9.422 1990 1.052 S1 415.529 4.700 7.412 7.868 1.000 0.568 0.330 924.011 99.580 1.580 .908 1991 1.062 7.13 439328 4.613 8.421 7.938 1.00O 0S83 Q7Q0 1,565230 115.53 1.561 8328 0 Market exhange rates 1980 1.498 7.863 626.990 9.900 7.511 20.476 1.000 Q430 0OO 76.040 39.000 1.026 4.939 1981 1.705 8Si.6 631.760 9.900 7.900 21.820 1.000 0493 o.0o 211.220 39.000 1.149 5.740 1982 1.893 9.45! 661.420 11.847 8.540 23.000 1.000 0571 0.000 162.550 50.909 1.330 6.454 1983 1.976 1.0M9 909.260 13.117 11.113 23.000 1.000 0.659 Q.OO 225.460 78.842 1.495 7.296 1984 2.320 11.36 1,Q25.940 14.046 16.699 23.639 1.000 Q748 QaQo 366.8 98.6 1.729 8.162 1985 2.937 12.360 1,110580 15.928 18.607 27.159 1.000 0.771 QQ00 521.980 ;61.081 2.06 8597 1986 3.453 12.611 1,28600 16.648 20386 26299 1.000 0.682 0OO 674500 193.020 1.900 7.397 1987 3.722 126.2 1,643.800 17399 20568 25.723 1.000 0.610 0.000 857.200 219540 1.689 6.738 1988 3.722 13.917 ,685 .70 18.003 21.095 25294 1.000 0561 0.001 1,422300 245.050 1524 6.517 1989 3.765 16.226 1,770.100 20.541 21.737 25.702 1.000 Q.610 Q042 2,121.700 267.160 1.671 6.905 1990 4.783 17S0 1,84280 21.707 24311 25.585 1.000 QSS60 488 2,608.600 305.060 1.675 6.260 1991 5323 2 1,950300 23.801 Z7.479 25.517 1.000 565 0.924 4,171200 349370 1.727 6.483 Performance of the power sector in India by Tata Energy Research Institute providing quality power in the required quan- tities to the different consumer categories. Both peak and energy shortages of varying degrees 1. Introduction are prevalent in various parts of the country. The SEBs, who are responsible for generating and supplying power in the most efficient and The Power Sector in hidia, with a total installed economic manner in their states, are today eapacity of nearly 70,000 MW, is one of the caught in a vicious circle of shortage of resources largest in size in the world. The sector has and poor operational and financial performance. undergone a substantial change during the past Resource constraints not only lead to delays in four decades, both in terms of its size, as well as capacity additions and thereby increased cost of in terms of the regulatory structure. The power generation, but also affect the perfor- installed power generating capacity and gross mance of existing capacities. Rising costs of generation increased at 9 percent and power supply and unrationalized tariffs, 10.2 percent (compounded) respectively during primarily due to social and political consider- the period 1950/51 to 1992/93. This growth has ations of the state governments, have resulted in been achieved largely through investments made huge levels of accumulated losses in the Boards. by the government in the successive Plans. The The existing inefficiencies and problems in the Plan allocation for the Power Sector has varied Power Sector are a function of a large number of between 17 percent and 18 percent of the total variables, ranging from those which are directly Plan outlay, and in absolute terms, the outlay under control of the Boards, to those which are has been doubling every ten years. In the Eighth related to the existing institutional and manage- Plan (1992-97), 24 percent of the total outlay has ment framework Lack of transparency and been allocated for the Power Sector. political interference is perhaps the root cause Though the progress of the Power Sector of the deteriorating performance of the Power during the past four decades has been sub- Sector. This paper attempts to review the stantial in absolute tems, the industry has pfomanceof the Power Sector in India, at the been unable to fulfil the primary obligation of PWERORMACE OF TM POWER SECOR IN DLIA 45 46 PERFORMANCE OF THE POER SECTOR IN INDM national and state levels. The perfomance of the (196065) and declined to 28 percent In Boards is also conpared with the other public 1991-92 (Figure 1). Hydroelectric generation and private utilities operating In the country. facilities are dominant In the Southern and The objective is to highlight some of the major the Northeastern regions (Annex 1). issues and constraints within which the system e Only 14 percent of the total hydroelecric is operating today, with a view to initiate discus- potential (84,000 MW at 60 percent load sions to identify workable solutions for the same. factor) has been developed so far, and 7.1 percent is under various stages of development. Maximum unexploited potential lies in the Northern and North- eastern region. 2. Growth of the power . The share of gas-based Installed capacity at sector only 2.7 percent, is concentrated In the Northeastern and Western regions. It is estimated that over 4 bcm of natural gas 2.1 Installed capadty being flared In the Bombay High basin annually can generate about 12,000 MWh of The generating capacity in India comprises a nix electricity. of hydro, coal-based thermal, oil-fired thermal, * Nuclear capacity of 1,500 MW installed In gas and nuclear plants. Total instaled capacity the Northern, Western, and Southern has increased at a growth rate of 9 percent per regions, accounting for only 23 percent of annum during the period 1950/51 to 1992/93, the installed capacity. and as of March 1993, stands at 69,796 MW. a Rising share of central generating com- Among the five regions, the growth rate in panies in the total installed capacity, from Installed capacity has been highest in the North- 73 percent in 1980/81 to 22 percent In em region and lowest in the Eastern region. The 1989/90 (Figure 2). The increasing trend in growth in Installed capacity Is characterized by: the share of investment by the public sector generating comnpanies in setting up new Declining hydrothema capacity mix since generation capacities is evident from the early seventies. The share of hydro Figure 3. Further it is important to note power projects in the total instalted capacity that the central generating companies have increased from 32.6 percent in 1950 to realized better plan-wise achievements in 45.6 percent by the end of the Third Plan installed capacity compared to the SEBs. Figure 1 Trends in installed capacity so * 50 70 '_ 40~~~~~~~~~~~~~~~~~~~~~~~~4 30 20o20 * o ~~~~~~~~~~~~~~~~~~~~~~~~~o 10 *0 190 40/61 O/N 70/m /7 60/61 8586 90/91 9192 92/"X NsHyd- _ Xbmn PMMummnNm SWOO--fHY&O PWORUMNCE OF THE POWER SECOtR IN INDIA 47 Figure 2 Ownership of litstalled capacity us 1980/81 1989/90 ED: Electricity department Figure 3 Investments In the power sector 11X0 ~~~~~~~~~~~~~~~~~~~~~~39.17*. 0 0 WPIV VPlan VIPlan Vi Plan VI PPlan Cetter StaWs & Share of cent a About 4 percent of the total installed capa- * A shift in the location of the power stations city is owned by the private companies. from load center to pit head locations, in Their share, however, is expected to view of the problems of transportation of increase in the future with the operdng up large quantities of coal from pit head to of the power sector for private sector stations located at the load center. The participation in power generation and share of pit-head capacity in the total dishibution. installed themal generation capacity has Increase in the unit size of coal-fired progressively increased from 10 percent at thermal power plants affording economies the end of the Sixth Plan to 25 percent at of scale. While in 1960, the largest size in the end of the Seventh Plan (1985-90). use was a set of 90 MW, today 210 MW and 500 MW sets have become common. 48 PERFORMANCE OF THE PoWER ScroR nv INDM In the Eighth and Ninth Five-Year Plans, rapidly, from 5.1 TWh in 1950 to 301 TWh in 70,000 MW of new capacity is envisaged to be 1992/93, registering a compounded growth rate commissioned. While coal-based generation will of 10.2 percent per annum (Figure 4). During continue to be the mainstay of the Indian power the eighties, the hydro generation Increased at sector, it is important to improve the peaking only 4.4 percent as against 11.6 percent for availability through Increased share of hydro and thermal generation. This may be attributed to a gas capacities. Large hydro projects have faced decline In the share of hydro capadty in the total several problems on the environmental front and capacity mix as well as a gradual reduction in these concerns need to be rationally viewed and the average utilization of the hydro projects some major sites should be carefully selected for (from 45.15 percent in 1970/71 to 34.78 percent early development. Further, the possibilities of in 1988/89). Owing to poor hydro development developing hydro resources with collaboration and prevailing peak deficits, coal-fired thermal and cooperation of neighboring countries, such power units are often used for meeting peak as Nepal and Bhutan, need to be explored. The loads. Since the start-up time for a coal-fired use of gas for power generation has to be care- thermal power unit is four to five hours, these fully evaluated considering its availability and its units have to continue generating at part load alternative uses based on the value added poten- conditions during the night hours (when the tial in other sectors of the economy like fer- demand is low); this reduces their overall tilizers, petrochemicals, transportation, etc. efficiency. Nuclear generation has accounted for Seven new units, of 235 MW each, of nuclear 2.5-2.7 percent of the total generation since the capacity are under construction, and the Depart- seventies. The capacity utilization of nuclear ment of Atomic Energy (DAE) plans to add power stations has also declined from 5,000 MW of nuclear capacity by the turn of the 65.7 percent in 1970/71 to 49.8 percent in century. This targeted capacity however, may 1988/89. Region-wise and source-wise gross not be achievable in light of the various technical generation in utilities is given in Annex 2. The and financial constraints. Also long-term waste share of gross generation by the central management and the eventual decommissioning generating companies, has increased from of plants will be the two key concerns in the 7.7 percent in 1980/81 to 25 percent in 1989/90. development of nuclear power. 2.3 Transmission and distribution 22 Generation The basic transmission and distribution (T&D) In line with additions to installed capacity, gross configuration today is a 400 kV network as the generation in public utilities also increased main and bulk transmission system in each Figure 4 Trends in power generation 250 200 . Hydro lS Thermal 0 1960/6 70/71 85/81 8S/86 86/8? P/88 88/ 89 /9 90/wh 9/m PWORAEAHCE OF THE POWER SECOR fN INDIA 49 Figure S Growth of T&D network 2000 12 10 Iw 2 o uo 19SO/51 1960/61 1970/71 1980/81 1985/86 1989/90 Year 400 230/200 132/110 78/66/44 _33/22 S15/ll- LSMS region; 220 KV, 132 KV and 110 KV network as curtailed because not all the required 400 KV the main and support transmission systems in lines had been commissioned to evacuate the each state; 66 KV, 33 KV and 22 KV network as power generated. subtransmission systems; 11 KV network as While the interstate power exchanges are quite primary distribution systems; and 400 V (three- common, interregional exchanges are constrained phase) and 230 V network as local distribution due to lack of adequate transmission facilities. ystems. The total T&D network expanded by The major emphasis hitherto has been to use AC about 6.4 percent per annum during the 1980s technology. HVDC technology is being intro- (Figure 5). One of the striking features of the duced for back-to-back interconnection between expanding T&cD network is the rising share of the Northern and Western regional systems and 11 KV distribution lines. The ratio of LT.HT also for the bulk transfer of power in the lines increased from 4.16 in 1965/66 to 7.86 in Northern region. Until now one HVDC line has 1980/81 and further to 10.79 in 1989/90. been established between Singrauli and Dadri in In the past, the investments in the T&D system the Northern region, for bulk transfer of power have generally been less than the desired levels. to the Delhi area from the Singrauli area in Investment In generation has always gained central India where there is a concentration of priority over investment in T&D, indicating pit-head super thermal power stations. With the priority on qtl.ntity rather than quality of rising share of central sector in total installed electricity supply. Investment in generation in capacity', there is a need to strengthen the most of the utilities has varied between facilities for interregional exchanges to utilize 60 percent and 62 percent of the total Plan available power effectively to reduce the short- allocation, as against the recommendation of ages. In addition to transmission facilities, there 50 percent by the Rajayadhaksha Committee is an urgent need to look Into issues relating to (1980). Another aspect that reeds attention, is interstate and interregional tariffs. that at present, transmission and generation High T&D losses is one of she important issues planning is not done simultaneously and in a of concern for the Indian utilities. T&D losses In coordinated manner. As a result, for example, the Indian utilities increased from 17.5 percent the generation levels of certain power stations in 1970/71 to 23 percent in 1992/93 (Figure 6). (for example, Singrauli and Rihand Thermal Losses are particularly high in the Northeastern Power Station in the Northern region) had to be states, averaging 32 percent in 1989-90 as against X All the central sector coal-based power stations are of unit capactles of 210 MW or 500 MW and have ultimate station muwef4am nf v fm MWI- 50 PERFORMANCE OF THE POWER SECQR IN INDM Figure 6 Trends in T&D losses 196016 65/66 70/7 75/76 80/81 85186 66/87 87/88 88/89 89/90 90/91 20- ~ ~ ~ ~ ' Yen all-India figure of 22 percent.2 Apart from the distribution transformers is required to reduce technical losses, the incidence of nontechnical technical losses. Reduction in T&D losses is a losses is quite high in several utilities on account priority area in the Eighth Five-Year Plan of pilferage and unmetered supply.3 The System improvement schemes are also high reasons for high T&D losses (technical) include: on the priority list of the Power Finance Corporation for granting loans. • Weak and inadequate subtransmission and Curtailment of nontechnical losses requires a distribution system due to low priority judicious mix of legislative support, increased given to these works as compared to the customer awareness, improved billing and generation projects collection procedures and reliable and high • Large-scale rural electrification program quality meters. undertaken in the country, resulting in long lines and low power factor without 2.4 Rural electrification strengthenin, the back up transmission and subtransmission system Rural electrification (RE) as a plan program was * Too many transformation stages, resulting introjuced in the First Plan with the objective to in higher component of transformer losses provide electricity as a social amenity to rural * Inadequate reactive compensation in the areas. Both the central and the state govern- system ments give high priority to RE programs. The * Improper load distribution, resulting in primary objective is to ensure increased agri- o-erloading of system. culture output by providing power for irrigation pumpsets. A secondary objective is to provide Reduction in technical losses require trans- electricity for domestic, commercial and small mitting at higher voltages and appropriate industrial consumers and the street lighting in HT:LT ratio. In the lower voltage networks, in the villages, thereby improving employment addition to the augmentation of the network, opportunities and the quality of life in the rural installation of capacitors, reconductoring, elimi- areas. The RE program was strengthened by the nating both underloading and overloading of formation of Rural Electrification Corporation 2 A substantial portion of the electrldty sold is not metered and thus the T&D loss figure should be taken as estimated value. 3 A study conducted by TERI for the Delhi Electric Supply Undertaking (DESU), estimated that the total T&D losses In the DESU network comprise about 13 percent technical losses and 9 percent commerdal losses. PEFOR.M&CE OF 171 POWER SECTOR AN IND) _ Figure 7 Sectoral electricity consumption 100% 1950/51 1960/61 1965/66 1970/71 1975/76 1980/81 1985/86 1990/91 1991/92 U lAduat M Agrlwltute U Domedti M COMMeircia1 U RAiwYS 03 Othem (REC) in 1969 which now provides over 1991/92. The patter of consumption has under- 90 percent of the funds for rural electrification as gone a significant structural change during the concessional loans to the SEBs. As a result of past four decades, with the increase in the share these efforts, today 84 percent of the Indian of agriculture and domestic sector in total elec- villages have been electrified and nearly 10 lakhs tricity consumption. The RE program launched pumipset energized (Annex 3). The achievement by the government in the mid-sixties resulted in of RE has been maximum in the Southern region. a large-scale energization of pumpsets. This Though the progress of RE program looks compounded by subsidized electricity tariffs has quite impressive in terms of quantum of villages lead to a rapid increase in electricity con- electrified, the fact remains that so far only about sumption in the agriculture sector. Conse- 27 percent of rural households have been elec- quently, the share of agriculture secor in total trifled, as electrification of a village (as per electricity consumption has increased from current definition) implies that only one or more 7 percent in 1965/66 to 28.2 percent in 1991/92 households in the village have this facility. (Figure 7). In some states like Punjab, Haryana, Further, the low tariff charged for the- sale of Uttar Pradesh and Andhra Pradesh nearly electricity to the agrculture sector has not only 35-40 percent of the total electricity consumption resulted in heavy financial losses to SEBs but has is for Irrigation purposes. led to the wasteful use of electricity and also of The electricity consumption by the domestic underground water. The flat rate tariff structure sector increased at a compounded growth rate of offers no incentive for energy conservation. The about 10 percent per annum during the last four RE program has also resulted in an increase in years resulting in almost doubling of its share in T&D losses in the power system due to the total electricity consumption. Increased urban- extension of the LT supply network in a sura ization and increased use of domestic electric optimal m anner. appliances are perhaps the reasons for such a trend. 2.5 Trends in electricity consumption The industrial sector, though still accounting for the highest share in total electricity con- Though the per capita consumption of electricity sumption, registered a decline in its share in in India is quite low, 253 KWh in 1990/91, the total utility electricity consumption from demand for electricity has been increasing at a 70.6 percent in 1965/66 to 42 percent in 1991/92. fast rate outstripping its availability. Electricity A large number of industries are increasingly consumption has grown at an annual compound relying on captive power because of increasing rate of 10 percent during the period 1950 to 52 PER:otmWAcE Or rm PowER SECTOR iN INDI4 Figure 8 Electricity shortages 1991/92 17.7 t990/91 1989/90 _ 11 C 1988/89 1 . _~~~~~~~~~~. 1987/88 11.7 1986/87 A 12.7 1985/86 . ~~~~~~~~~~~~~1. 0 5 10 to 20 Pecent Erey M Peak shortages of the utility power and also poor 2.6 Demand supply gap quality of supply. Number of industries having captive power plants (capacity 500 KV or Power supply position in India has moved from 100 KW or more) increased from 828 units in one of surplus in the fifties and sixties to one of 1950 to 3,648 units in 1985/86. In 1989/90, a deficit since the mid-seventies. Both peak and survey of 1,304 industries showed that captive energy shortages of varying degree are prevalent power generation accounted for nearly in the various states. In 1991/92, the all-India 42 percent of their total electricity consumption. peak and energy deficit was 17.7 percent and O The commercial sector, comprising shops, 8.5 percent, respectively (Figure 8). Except in the offices, institutions, hotels, etc., continues to Northern region, the demand-supply gap has account for 5-6 percent of the total electricity deteriorated in all the other regions. sales. Today electricity is also finding greater The situation is most critical in the Eastern and use in the transport sector, largely in the Southern regions (Table 1). Discussions reveal railways. Electriciiy consumption in railways that energy shortages could be reduced partially though accounting for only 2.3 percent of the !f there existed adeq.uate economic and technical total electricity consumption has increased from provisions for interstate and interregional power 372 MWh in 1970/71 to 5,338 MWh in 1989/90, exchanges. an annual growth rate of 15 percent. Table I Regtonwge ttends in energy shortages (%) Region 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Northern 14.0 10.7 9.5 113 5.9 5.8 5.4 Western 0.7 1.4 4.2 4.9 2.6 2.6 3.6 Southern -0.2 9.3 11.0 16.9 13.8 13.3 10.9 Eastern 17.3 13.8 17.7 12.2 11.6 15.0 18S Northeasten -2A 3.6 6.2 4.8 3.2 3.0 4.6 Al-India 6.7 7.9 9.4 10.9 7.7 7.9 7.9 PERFORMANa OF THE POWER SECTOR IN INDIA 53 Figure 9 Slippages in installed capacity 25- O Taget 20- 11Addevment | I m 1968/69 IV V 1979/80 VI vn 199M/91 Five-Yea pIu Fdum nh4watsIp qtt Perhaps the key reason of such shortages is the management and implementation result in inufflciency of financial resources. As against slippage in capacity additions, thus widening the the estimated requirement of Rs. 128,000 crores demand supply gap (Figure 9). Further, low for the Power Sector development in the Eighth plant load factor, poor availability of power Plan, the Plan allocation was only Rs. 79,589 plants, high T&D losses on the supply side, and crores. Inadequate resources and poor project low end-use efficiencies also aggravate shortages. 54 PERFORMANCE Of THE POWER SECrOR IN INDIA Annex 1 Installed capacity In utilities by region as on Mach 31 of each year (%) 1971 1977 1980 1984 1987 1989 1990 Northern region (MW) 3,152.8 5,63428 8,22402 11,179.78 13A62A4 17,470.97 19,138.17 Hydrn 6137 47.90 47.99 42.68 38.79 34.14 31A5 Steam thermal 34.83 45.91 48.36 52.85 5632 59.06 58.55 Diesel and wind 3.40 1.89 0.83 0.54 0.36 0.12 0.11 Gas 0.40 0.40 0.15 0.00 1.34 2.82 6.36 Nucdear 0.00 3.90 2.68 3.94 3.27 3.86 353 Western region (MW) 4,02333 5,607.05 7,808.52 11,975.00 14,68063 17,1831 19,21159 Hydro 28.12 29.75 22.93 15.12 14.19 12.51 12.00 Steam thermal 59.09 61.71 70.96 78.90 77.98 81.03 81.92 Diesel and wind 1.02 0.08 0.04 0.02 0.02 0.02 0.11 Gas 1.34 0.96 0.69 2.46 4.95 4.07 3.78 Nuclear 10.44 7.49 5.38 3.51 2.86 2.36 2.19 Southern region (MW) 4,0371 ,634.22 7,20731 9,397. 12s4.s 14,567.19 15,866.06 Hydro 70.40 66.72 63.73 63.13 59.99 54.49 51.02 Steam themal 29.04 32.88 35.97 33.60 36.21 42.24 45.9 Diesel and w-nd 0.07 0.05 0.02 0.02 0.03 0.05 0.12 Gas 0.50 035 028 0.21 0.00 0.00 0.00 Nucear 0.00 0.00 0.00 2.50 3.76 3.23 2.96 Eastem region (MW) 3,305.47 4,327.52 4,866.74 6,076.8 7,741.42 8,161.21 8,380811 Hydro 12.39 18.95 18.63 16.13 13.96 15.23 17.46 Steam thermal 86.56 80.16 16.81 81.44 84.15 81.82 79.67 Diesel and wind 1.06 0.89 0.86 0.78 0.61 0.61 0.60 Gas 0.00 0.00 2.05 1.65 1.29 2.33 227 Nuclear 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Northeastern region (MW) 192.39 265.52 341.24 709.39 892.82 1,022.00 1,039.71 Hydro 34.99 29.67 43.13 43.81 35.62 41.23 40.73 Steam thermal 0.00 24.48 18.32 26.08 36.63 34.93 3222 Diesel and wind 22.65 15.16 14.67 9.32 8.43 6.96 6.95 Gas 42.36 30.69 23.88 20.79 19.32 16.88 20.10 Nuclear 0.00 0.00 0.00 ('.00 0.00 0.00 Q00 All Inlla (bMW) 14,708.95 21,468.9 28,447.83 S9,338.6 49,265.86 59,039.68 63,63634 PEFRMCE OF THE POWER SsCR IN INDIA 55 Annex 2 Reglonwise annual gross generation in utlities (GWh) 1970/7l 1976P7 1979180 1982183 1985186 1986187 198/88 1988189 Nothern teion ll1,63.00 23,856.00 29,227.00 37,07700 46,1400 53,147AM 59,994.00 75,560.0 Hydro 55.77 48.05 52.95 49.99 42.66 41A4 34.78 33.10 Steam 43.93 4731 43.15 4852 54.55 55.79 62.15 60.83 Diesd 0.30 0.04 0.02 0.01 0.00 0.00 0.00 0.00 Gas 0.00 0.01 0.01 0.00 0.00 0.28 0.75 3.78 Nuclear 0.00 4.59 3.87 1.49 2,80 2.49 232 229 Westen region 16,912.00 25,981.00 32,077.00 40,188.00 57,376.0 62,733.00 68,471.0 81,490.00 Hydro 32.39 29.45 24.77 16.30 10.36 9.81 7.40 8A3 Steam 52.89 61.85 69.55 77.19 84.26 82.89 86.51 86.56 Diesel 0.09 0.00 0.00 0.00 0.00 0.00 9.00 0.00 Gas 0.34 0.40 0.24 2.85 1.97 4.11 3.74 3.12 Nuclear 14.29 8.30 5.4 3.66 3.42 3.19 2.34 1.9 Southen regon 1S,710. 21,714.00 27,032.00 33,82.00 43,496.00 46,875.00 7,457.00 59,917.00 Hydro 74.34 60.22 71.60 60.11 49.11 44.96 36.57 40.96 steam 25.65 39.77 28.40 39. 46.91 51.40 59.13 56.77 Diesel 0.00 0.00 .00 0.01 0.00 0.02 0.02 0.02 Gas 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Nuce 0.00 0.00 0.00 0.00 3.98 3.62 4.29 2.25 Easten region 10,959.00 15,977.00 15,393.00 17,922.0 21,67.00 22,982.00 23,95300 25,64.00 Hydro 12.01 15.37 15.16 14.30 13.98 15.97 13.33 16.02 Steam 87.70 8455 83.99 84.41 85.78 83.76 86.43 83.42 Diesd 0.29 0.07 0.18 0.11 0.00 0.10 0.13 0.14 Gas 0.00 0.00 0.66 1.18 0.23 0.17 0.12 0.42 Nuclear 0.00 0.00 0.00 0.00 0.00 O.O 0.00 0.00 Notheasten 385.00 803.00 69800 1,39S.00 1,897.00 1,980.00 2,213.00 2,807.00 region Hydro 54.24 46.52 43.77 56.40 Steam 14.31 23.21 23.57 25.72 Diesel 1.25 1.42 135 1.43 Gas 30.20 2835 31.31 16.45 AU India 55,829.00 88,333.00 104627.00 130,26400 170,010.00 187,717.00 202,094.00 245,438.00 Includes 156 GWh from windmills 56 PERFwoRMCE OF THE POWR SECTOR IN INDIA Annex 3 Progess of rural electrification Village$ deatrfled (~~*) % '~~~~~ ~~ __ ~Pumpsets CO) % of tow no. of v&" wpd 1950.51 3 05 21 1960-61 22 3.8 199 1968-69 74 12.8 1,089 1973-74 157 27.2 2,426 1977-78 217 37.6 3,300 1978-79 233 40.4 3,599 1979480 250 434 3,966 1984-85 370 64.3 5,709 1989-90 470 813 8308 1990-91 482 83.7 8,972 Annex 4 Performance of thermal power stations in various capacity groups Commissioned up to 31-3-91 Reiwed during 1990-91 PLF (%) Caity No. Capadty (MW) No. Capacity (MW 1988-89 1989-90 1990-91 500 13 6,500 11 5,500 74.97 70.03 61.02 200/210 101 21,090 90 18,80 60.65 61.71 60.24 140/150 9 1,270 9 1,270 42.74 49.24 40.94 115/120 20 2,80 20 2,380 38.73 41.62 41.87 105/110 39 4,245 37 4,025 47.20 45.92 37.98 90/100 11 1,042 11 1,042 52.23 53.38 57.61 70/80 9 680 8 610 32.96 35.66 27.34 62.5/67.5 22 1,375 22 1,375 51.22 54.23 51.78 60 25 1,85 25 1A85 47.86 45.78 44.57 40/55 29 1,275 28 1,225 49.36 51.12 51.29 20/32 33 840 23 606 41.84 36.18 36.66 Total 311 42,182 284 38,298 54.93 56.22 53.89 PERFORMNCE OF THE POWER StCTOR IN INVI 57 Annex 5 Quality of coal received at thermal power stations Percenage receipt of al in vaious graes Avg. AoJliffc value % of (E+F+G) Year 0=11AN) 8 C D B F G gade 1985-86 4,217 1.7 1.6 19.8 26.9 41.2 8.8 76.9 1986-87 4,075 1.5 13 17.7 20.1 48.6 10.8 795 198788 3,800 13 1.1 20.2 27.0 41.4 9.0 77.4 1988-89 4,179 1.13 0.04 15.1 28.5 49.7 5.5 83.7 1989-90 4,176 1.00 1.10 13.2 35.5 41.3 7.9 84.7 1990-91 4,198 1.03 0.04 12.6 27.8 51.9 6.6 86.3 Annex 6 Specific coal consumption In thermal power stations Number of thenl pwer station i Sp. l cosumption 1986-87 1987-88 1988-89 1989-90 1990-91 0O andless I 1 - - - 0.51 - 0.55 - 2 2 1 0.56 - 0.60 6 6 5 7 7 0.60- 0.65 9 7 5 8 6 0.66 - 0.70 7 7 10 8 9 0.71 - 0.75 8 7 7 7 9 0.76-0.80 4 11 9 8 9 More than 0.80 17 16 16 20 21 SB P£RFORMANCE OF THE POWER SECTOR IN INMA Annex 7 Statement showing bmprovemnent in PLF of thenmal units where substantial R&M works have been canied out as on 1.4.991 PLI bejore renowi on PLF afer substntfial e tion. Based on rated ap. (or) derated Rawed Deate -P. Bmed n at Bsed on dentet op wheee appicable (April- Name of TPS No. ca"cly if any (MW) e s (%) March 91)(%) Badarpur 1 100 95 45.7 48.1 78.1 3 100 95 572 602 66.5 4 210 - 44.2 - 73.5 5 210 37.0 - 66.8 Indraprastba 2 62.5 47.9 - 57.9 (DESU) 3 62.5 53.5 57.7 5 60 50.3 - 73.1 Fartdabad 1 60 55 28.8 31A 78.7 3 60 55 21.1 23.0 47.3 Bhatnda 1 110 - 48.0 60.8 3 110 45.7 58.2 4 110 - 52.6 52.6 59.9 Pankd 4 110 105 43.4 455 53.1 Obra 2 50 40 45.7 57.1 71.6 6 100 94 37.9 40.3 56.0 7 100 94 3.2 41.7 52.9 9 200 - 333 - 72.0 10 200 31.4 - 66.7 11 200 - 28.4 58.9 12 200 - 402 - 74.8 13 200 - 35.1 - 73.8 Harduaganj 6 60 - 38.1 - 43.6 (B & Q Korba-ll 1 50 40 61.0 76.3 78.8 3 50 40 62.6 78.3 805 4 50 40 525 65.6 71.6 Korba-tll 1 120 41.4 47.7 2 120 56.4 - 60.5 Satpura 1 62.5 - 515 - 59.0 Gandhinagar 2 120 482 - 62.8 Ukat 2 120 - 38.7 65.5 Koradi 4 120 115 38.9 40.6 56.4 Kothagudem 1 60 - 40.0 - 58A 4 60 - 54.9 - 62.6 5 110 115 27.6 28.9 44.4 6 110 115 23.2 24.3 55.0 7 110 - 17.3 - 50.4 8 110 34.2 - 47.0 Ramagudam 1 62.5 - 70.A 73.2 Ennore 1 60 - 51.0 - 68.1 2 60 - 48.1 - 63.2 4 110 25.2 - 50.3 5 110 26.4 55.0 Tuftook¢ 1 210 - 46.0 - 66.5 2 210 47.0 65.1 3 210 40.4 - 82.7 P£RFORMANCE OF TME POWER SECTOR IN INDU 59 Annex 7 (Continued) Statement showing '¢iprovement in PLF of thermal units where substantial R&M works have been carried out as in 1.4.1991 PLF bfre reotin PLF after substntal romation. Based on rakd cap. (or) dermted Raed Dated cap Based on rated Bsed on derated cap. whe r applible fApril- Name of TPS No. capacity if any (MW) cap ( cap. M Man* 91) (%J NeyvelH 3 50 - 71.1 80.6 6 50 78.3 83.8 8 100 68,2 84.7 9 100 95 66.3 69.8 792 Talher 1 62.5 60 33.7 35.1 65.6 Patratu 1 50 40 32.8 41.0 51.4 2 50 40 25.2 31.5 62.8 6 50 90 443 49.2 51.0 Santaldih 4 120 34.1 - 56.2 DPL 3 70 - 22-2 Annex 8 Kate of retrn of SEBs SEBs 1988.89 1989-90 1990-91 Andhra Pradesh 1.31 0.18 4.71 Bihar -1680 -20.52 -1435 Guja t 0.95 -11.72 -23.72 Haryana -5.59 -5.64 -7.92 Himachel Pradesh 55.10 -3.40 2.92 Kanataka -9.28 -14.06 3.0 Kerala -4.51 -3.12 .1339 Madhya Pradesh 3.94 291 -4.63 Maharashtra 1.41 0.48 2.56 Orlssa -4.93 3A1 3.57 Punjab -3.57 -2.48 -2.82 Raasthian -4.81 -9.95 -5.89 Tamil Nadu 3.00 3.00 3.40 Uttar Pradesh -0.02 1.43 2.92 West Bengal .8.95 -1027 .19.82 Assam -26.89 -42.67 .43.18 Meghdaya 2.80 1.91 -5.56 60 PEWORMANCE OF THE POWFR SECTOR I INDM Annex 9 Growth rate of electricity tarlffs during the period 19W85 to 1989/90 All SEB/UT Porn.* Cmmn. A8yi.' Small 1n4' Mediun Indy' Lae Indy' consumers Andhra Pradesh 523 6.55 0.00 10.07 11.78 11.56 6.14 Assam 1.61 7.54 10.76 6.75 10.52 13.11 11.93 Blhar 0.00 2.84 0.00 6.58 6.68 7.44 5.36 Gujarat 2.10 11.44 -12.03 9.62 6.93 11.90 3.05 Harayana 5.57 7.55 5.42 22.91 17.40 19.47 5.43 Himachel Pradesh 0.30 3.97 0.00 1127 16.94 16.83 2.96 J&K -1.24 8.45 0.00 18.41 15.17 17.66 9.53 Karnataka 7.95 11.23 8AS 17.32 15.70 18.16 6.32 Kerala 0.00 9.46 0.00 16.86 21.04 11.06 8.88 Madhya Pradesh 1.05 3.79 0.00 10.71 8.52 13.28 4.70 Maharashtra 3.25 10.24 -7.79 12.23 13.93 10.68 7.58 Orissa 2.34 12.45 14.15 10.64 9.84 13.43 6.81 Punjab 3.02 6.96 -0.04 11.61 14.24 14.15 3.76 Rajasthan 5.46 11.35 8.45 15.72 13.89 13.63 6.45 Tamil Nadu 0.60 7.90 -7.79 10.46 13.58 13.96 4.19 Uttar Pradesh 4.92 3.36 0.00 16.44 14.94 12.82 6.51 West Bengal 0.72 8.07 0.00 2.77 0.00 12.45 5.91 Goa 5.39 6.83 8.16 7.57 8.92 12.44 n.a. Mizoram 8.75 7.96 9.46 27.12 27.68 24.20 n.a. Nagaland 9.34 6.21 0.00 0.95 10.03 10.03 n.a. Sikkim 5.14 9.86 9.86 9.86 6.43 8.33 n. DESU 0.00 12.72 -5.29 15.47 15.47 13.47 n.s. Domestic - 30 kWh/month Commercial - 200 kWh/month Agriculture - 5hp, 10% load factor, i.e. 272 kWh/month Small Indy - Slhp, 10% load factor, Le. 272 kWh/month Medium Ind - 50 kW, 30% load factor, i.e 10,950 kWh/month Large Indy - 1,000 kW, 50% load factor, Le. 265,000 kWh/month PERFOMNCE OF tHE POWER SECFOR IN INDIA 61 Annex 10 Financial working of state electricity boards 1991-92 Intest due to RWInIe Operatng Gross operatingi Board recdpts expenditure surplus deicit (3-4) Depredtion InstitutiOns State ovt. Andhra Pradesh 1,652.23 1,169.00 483.23 108.35 183.03 132,70 Assam 141.62 215.25 -73.62 29.73 65.68 123.47 Blhar 595.74 782.35 -186.61 63.89 115.06 Gujarat 1,525.62 1,714.68 -189.06 130.75 165.31 9626 Harayana 634.41 720.78 -8637 45.00 71.20 83.25 Himachel Pradesh 127.00 99.85 27.15 8.81 35.67 42.44 J&K 45.07 184.86 -139.79 13.72 28.22 35.37 Kamnataka 892.66 838.56 54.1 3456 71.58 34.37 K.P.C 383.81 196.55 187.26 26.86 52.34 71.23 Kerala 321.05 270.12 50.93 24.82 51.77 43.40 Madhya Pradesh 1,514.87 1,169.% 344.91 131.34 302.39 172.83 Maharashtra 3,379.37 2,683.64 698.73 217.54 407.39 238.34 Meghalaya 22.28 19.64 2.64 2.80 20.13 7.28 Orissa 368.70 236.36 132.34 39.92 73.90 25.22 Punjab 879.99 980.57 *100.58 91.20 92.98 276.91 Rajasthan 1,060.47 941.03 119.44 80.24 96.68 61.22 Tamil Nadu 1,731.41 1,750.02 -18.61 110.53 203.70 100.07 Uttar Pradesh 1,699.10 1,763.68 -64.58 167.24 245.86 395.82 West Bengal 757.93 727.95 29.98 33.00 122.34 61.09 Total 17,733.34 16,464.85 1,268.49 1,360.30 2,405.16 2,001.30 62 PwOMUNCE Of TM POWER SECtOR W IND I Annex 11 Revenue outstandings as percentage of total revenue For Ohe Yw ende 31st March SEBs 1985 1990 1991 1992 Andrha Pradesh 19.70 33.40 27.63 27.87 Bihar 70.64 87.32 98.13 94.52 Gujarat 13.49 26.07 25.57 23.99 Haryana 25.28 3834 66.87 73.74 Himachel Pradesh 28.57 3331 51.9 56.82 Karnataka 33.21 58.34 50.32 46.12 Kerala 30.97 30.92 35.7 37.04 Madhya Pradesh 25.11 45.02 NA. N.A. Maharashtra 20.73 28.77 30.85 28.83 Orssa 36.73 38.65 44.92 NA. Punjab 13.62 18.42 1725 18.05 Rajasthan 29.30 17.77 16.73 15.02 Tamfl Nadu 9.86 13.06 11.64 13.00 Uttar Pradesh 33.52 1833 48.71 51.81 West Bengal 20.87 2".93 35.75 NA. Assam 24.63 NA. 28.82 38.86 Meghalaya 93.24 N.A. NA. NA. PERFORMAWC OF TnE POWR SeCwOR I INDIA 63 Annex 12 Indicators for manpower utilization (1991-92) Empoyees per million klhh Bord el dedrkily sales Emplyes per MW Emplayee per '000 coums Andhra Pradesh 3.96 14.15 9.84 Gtarat 2.14 8.96 6.95 Haryana 5.95 25.55 16.69 Himachle Pradesh 12.10 44.5 12.72 Kanataka 3.51 14.83 6.95 Madhya Pradesh 6.65 30.66 17.31 Maharashtra 3.63 14.16 12.02 Otissa 538 18.63 29.25 Putnb 5.87 22.95 1952 RaJasthan 5.75 20.23 16.49 Tamil Nadu 5.16 20.40 10.46 Uttar Pradesh* 5.09 19.86 23.06 Data for 1990.91 Data on employees for Assam, Bihr, Kerala, and West Bengal is not available. The power sector in India: a macroeconomic perspective by Administrative Staff College of India the development of power with the result that this sector has shown remarkable growth during the period after independence. The fragmented 1. Executive summary power systems in urban cities have gradually been knit into state level power systems that enter state tiers or any other regional tier. The The power sector in India has played a very vital national power system, operated through a role in the socio-economic development of the national grid, has emerged with an installed country. Though large sections of the popula- capacity of 77,000 MW in 1992-93. The length ton are still without access to power, the fast of transmission and distribution lines is over growth of industries and urbanization could not 4 million circuit km. have been possible without power. Even in The power sector accounts for about one fifth agriculture, the present position of India having of total planned expenditure. But the value averted the shortages in domestic production added contributed by the power sector to and dependence on food imports is mostly national income is hardly 2 percent. The power attributable to the rapid improvement of irriga- sector employs nearly 1 million workers. tion facilities. The exploitation of sub-soil wLter Though the power industry is a very important with the use of power has played a major role in sector in terms of investment and employment, this. The total average of irrigated area under its contribution to national income is more by cultivation from the dawn of independence has way of its providing the energy needs of agricul- increased from 22.6 million hectares in 1950-71 to ture and industries. 73.1 million hectares in 1991-92, and, of this, the The power industry system is operated by area under well irrigation may be 23 million eighteen State Electricity Boards (SEBs), which hectares. In India, out of the total number of are again formed into five Regional Boards. wells, more than 9 million wells are energized. These SEBs have the statutory responsibility to Recognizing the importance of power to the meet the supply needs of all consumers in the overall development of the country, the Govern- area of their respective jurisdiction. As the state ment of India (GOI) has taken a keen interest in governments tightly controlled tariff fixation and THE POWER SECTOR iN IND: A MAcRo EcoNOMoc PERSPECTIVE 65 66 THE PowER SErTOR IN IDLDA: A MACROECONOMIC PERSPECrlVE institution agricultural tariff to be far below with the lack of adequate investments to operating cost, all SEBs have become f;nancially modermize, have made the power industry sick. very weak and incapable of raising the funds As of today, most of the SEBs will come under needed to set-up the power projects required to the definition of "sick industries" where their meet the increasing power demand. accumulated losses exceed their net The GOI has tried to augment power supply worth/assets. by setting up power generation companies under SEBs, state governments, and the GOI were the central government that sell power in a prn aware of the need for reforms. There have been determined ratio to the SEBs. National Thermal several efforts. The GOI tried first, to sup- Power Corporation (NTPC), National Hydro plement the finances of the state governments by Power Corporation (NHIPC), and later Nuclear providing them with special advances for imple- Power Corporation (NPC) were the result. But menting power projects. Since this did not meet these, by themselves, could not bridge the their needs, the GOI set up central power gener- supply-demand gap. The quality and reliability ating plants by organizing corporations like of power have deteriorated. Demand has been NTPC, NHPC, and NPC. Then the Power running far ahead of supply in all states in India. Finance Corporation (PFC) was set up to finan- Most of the areas are facing a situation of wide cially assist the SEBs to undertake system fluctuations in supply voltage and frequency, improvement projects. Though PFC was to lend frequent interruptions and low voltage condi- on a commercial basis, the distributional pres- tions. Of the eighteen SEBs, except one state sures have upset the expectations from PFC. (Andhra Pradesh) and marginally two more Several reports were also commissioned by the (Madhya Pradesh and Maharashtra), all other GOI to look into the workings of the power SEBs are in the red. Due to the resource crunch, sector. Suggestions have been made to improve the foreseeable situation is an increasing gap technical performance on the demand and sup- between demand and supply. The accumulated ply sides, and also on financial aspects. Most of losses of the public sector power industry is the recommendations could not be implemented. Rs. 21,891 crores as of March 1992. In fact, on several parameters, the situation None of the Boards project an image of com- worsened. merciality. Most of the projects are implemented The main problem of the SEBs arose on with long delays. The operation and main- account of the state governments' competing tenance costs are rising out of control, the finan- with each other to reduce the tariff on agri- cial management in terms of tariff fixation over culture and thereby sapping the financial receivables are poor, and the establishment resources. When the Eighth Plan demand indi- expenditure has been rising. The unsatisfactory cated an additional capacity requirement of over performance of SEBs has created problems for 30,000 MW on an investment of Rs. 126,000 central sector organizations like NTPC, NHPC, crores, the GOI, in a hurry, decided to review Bharat Heavy Electricals Limited (BHr'), the basic policy of the power sector and allow because of their inability to meet their commer- private sector participation in power generation. cial obligations to these organizations. But, this was a reluctant privatization; as of now, It is not only in financial terms, but also in the private power generators can only sell power terms of operational efficiency as seen from to public utilities. Against this background, we different parameters, that the power industry need to examine whether getting this additional exhibits inefficiency; but more disconcerting capacity installed by inviting the private sector is the fact that these inefficiencies have been to participate in power generation is the only increasing over time. Capacity utilization, option. measured in terms of plant load factor, would It is clear that, with the delays in public sector increase slowly over the years, but has never projects and the unexpected delays in settling reached the target of 58 percent, set in the contracts for private power generation, it would Rajadhaksya Committee. Transmission and not be possible to achieve a target of 30,538 MW distribution (T&D) losses have slowly deterio- by 1997. But the supply system could be used rated from around 15 percent in the 1950s to more effectively to significantly reduce the nearly 23 percent currently. Labor productivity, power supply-demand gap. In the forecasts, the measured in terms of the number of employees required capacity to meet demand of 0.58 MW per million capacity sold or per thousand con- is assumed to be only 1 MW. This can be sumers sold, is decreasing, but is still very low improved by better maintenance of power plants. compared to other countries. These, combined If the load curves are flattened by proper THE POWER RECTOR I IND M: A MACROECONOMIC PERSPEcTIVE 67 demand management, it would be possible to companies. In order to distance the state reduce the anticipated peak demand for the governments fromct the SEBs, the general public, same energy requirement. A 5 percent improve- the stake-holders in the power industry, should ment in the ratio of peak demand/energy would be allowed to contribute to the equity and be reduce peak demand by 3,500 MW in the ter- allowed an appropriate share in the strategic minal year of the Eighth Plan. The peak capabil- decision making of the new power companies. ity of the supply systems has been assumed to The introduction of private power generation be low because of past experience. Peaking companies should be used to create and nurture capability of the thermal systems is assumed at competition in the power supply system. This is 58 percent due to forced outages of 23 percent. possible by deregulating the power supply If it is reduced by 10 percent, the requirement of system to large consumers who take their supply the total system will come down by 8,100 MW in at high voltage. Though difficult, this is possible 1996-97. and will have to be programmed and pursued. Despite differences or exact approximations in The package of reforms to make the power anticipated demand, the issue of additional industry commercial and competitive is dis- generation remains preeminent. The point of cussed in a companion paper ('Commercialization inquiry is whether the SEBs are in a financial of the Indian Power Sector" by the Administrative position to do so, or if it is necessary to invite Staff College of India). private parties, and whether the invitations of the private agencies above will reform the power industry. A holistic examination of the issues in the power sector suggests that the policy change to invite private agencies to set up power gener- 2. An overview of the ation is inadequate to remedy the problem. power sector Unless the SEBs are structurally changed and made to work on commercial lines, they will not be able to pay for the power supplied by private 2.1 Trends in installed capacity agencies and, from then on, private agencies would not come forward. As long as SEBs are The total installed power generating capacity in funded exclusively by or through state govern- public utilities during the plan periods has ments, they cannot be commercially run. State increased from 1,712 MW in 1950 to 69,796 MW govenmments could not encourage the SEBs to be in 1992-93, a forty-fold increase in 42 years, commercial. When power was extended to rural increasing at a compound growth rate of 9.2 per- areas, the important clients were the farmers cent per annum. The growth of hydroelectric who use power for pumping water. The state power capacity was 8.8 percent per year dur- governments had the dilemma that water sup- ing 1950-51 to 1992-93. The growth rate was plied to farmers from surface irrigation sources, 11.85 percent in the 1950s and 13.8 percent in the built, owned and operated by the state govern- 1960s. These growth rates gradually reduced to ments, is at very low rates which do not even 6.65 percent in the 1970s and 4.2 percent in the cover the costs of maintenance of the state- 1980s (Table 1). owned irrigation sources, let alone pay for the From the table it can be seen whereas the amortization of investment. State governments, installed capacity growth of thermal power therefore, are and will be forced by farmers' ranged betveen 8 percent and 9 percent per lobbies to make power tariffs to farmers cheap, annum except in the 1970s where the growth so that the cost of water to them could be on par rate was about 12 percent per year. Over the with water supply from surface irrigation period, the annual installed capacity has grown sources. When the costs of power generation at the rate of 9.3 percent per annum. In the went up over the years, state governments inter- recent past; i.e., during the Eighth Five Year Plan vened to prevent the adoption of long-term (FYP) (1985-86 to 1989-90) about 21,401 MW of marginal costing by the SEBs and to provide additional power-generating capacity was added power at highly subsidized rates to farmers that against a target of 22,245 MW, achieving 96 was even far below the average cost of power percent of the target. Since then, only 6,160 MW generation. of additional power generating capacity was Immediate reforms to affect str:icture and added until Marcn i5,3. On the whole, a total institutional changes are required. The first of 41,348 MW of additional generating capacity reform is to convert the SEBs into public limited was created since 1980-81. 68 THE POWER SECTOR iN INDiA: A MACROECONOMIC PERSPECnVE Table 1 Growth of installed power generating capacity (figures In percentages) During Hydro Thermal Nuclear Total 1950-51 to 1959-60 11.85 8.20 - 9.50 1960-61 to 1969-70 13.80 11.90 - 13.10 1970-71 to 1979-80 6.65 8.50 4.80 6.85 1980-81 to 1992-93 4.20 8.90 8.60 7.25 1950-51 to 1992-93 8.80 9.30 6.65 9.20 Source: Central Electricity Authority, GOI. The growth in hydropower generation was less per annum in the 1950s and 1960s, and it slowed compared to thermal power generation through- down in the 1970s and 1980s (Table 2). out the period under consideration. The share of The overall power generation by public util- hydro generation in the total generating capacity ities increased at the rate of 9 percent per annum of the country has declined from 34 percent at in the 1980s. During 1991-92, power generation the end of the Sixth FYP to 29 percent at the end increased by 8.5 percent over 1990-91. Although, of the Seventh FYP. This is likely to dedine in generating capacity of 41,348 MW was added the next decade. The hydropower projects with during 1980-81 to 1992-93, the growth in genera- storage facilities provide peak demnand to power tion was not satisfactory due to the under- system. The NTPC and NHPC contribute to utilization of power plants and drought play an important role in supplementing the conditions. efforts of SEBs. The central share in generation Plant load factor (PLF) is an important indi- capacity has increased from 16 percent at the end cator of the utilization of thermal and hydro- of the Sixth FYP to 26.1 percent at the end of power plants. As part of every FYP, the demand 1991-92. The major contribution to this came for peak load and energy is forecasted. From from NTPC. these, the required additional installed capacity In the nuclear front, the country has adequate is calculated using the PLF achieved in the quantities of uranium to meet the life-tme previous period, adjusted for possible improve- requirements of the first stage nuclear power ments in the forecast for thermal plants. The development program of 10,000 MW. In addi- hydro plant energy and peak load supply is tion, there are large deposits of raw materials forecasted from their design characteristics. The used in nuclear power generation, that are overall PLF of thermal power plants showed a estimated to generate 900,000 billion units of marked improvement over the years. The PLF electricity. which was 47.9 percent during 1983-84 has increased to 56.5 percent in 1989-90. It fell to 2.2 Trends in power generation 53.8 percent in 1990-91 and again increased to 57 percent in 1992-93, as shown in Table 3. The Power generation in hydro and thermal power thermal power plants in the central and private stations increased at the rate of 12.0-13.4 percent sectors, though small in capacity, registered a Table 2 Growth of electric power generation In India (figumes in percentages) During Hydro Thrl Nuclear Tota Non-u tSiie 19SO 51 to 1959-60 12.06 13.35 - 12.70 - 1960-61 to 1969-70 12.75 13.10 - 12.95 4.05 1970-71 to 1979-80 6.80 8.00 2.00 7.25 4.80 1980-81 to 1992-93 3.45 11.42 12.82 8.67 11.00 195D-51 to 1992-93 8.22 11.22 7.30* 10.20 7.20" * Growth rate refers to the period during 1969-70 to 1992-93. Growth rate refers to the period during 1969061 to 1992-93. Grow (~th raterefeArs to therh prio uin 90-1tT19-3 IhE POWER SECTOR IN NDiA: A MAcRorcomomIc ftRSPEatV£ 69 Table S Plant load factor (figures in percentages) Central State e kly Private edtor bados ser O0eri 198384 54.8 44.1 64.1 47.9 198485 55.4 44.9 63.0 50.1 195-6 61.9 46.8 575 524 1986.87 64.9 48.6 61.1 532 1987.88 63.3 53.0 67.6 565 1988-89 626 49.6 63.2 55.0 1989-90 62.2 54.6 69.5 565 1990-91 58.1 50.0 58.4 53.8 1991-92 64.7 51.1 56.7 55.3 1992-93 59.5 48.3 60.1 57.0 Son= Cuent Energy Scie m India, Cenf jfor Monitoring htin Emomy, May 1993. higher PLP compared to State Electricity Boards 35 percent. It was estimated that a one percnt- during the past decade. age point improvement i the PL would be equal to an additional nstalled capacity of 500 The utilization of SEB power plants was not MW. If the SEBs improve their PLF, the very satisfactory. The PLF of 15 SEBs averaged additional hstalled capacity required for Eighth 51.1 percent in 1991-92 and 48.3 percent dur- and Ninth FYPs could be trimmed substantially. ing the first nine months of 1992-93. These were 7 percent below the Rajadhyaksha Committee 23 Power consumption t dnis recommendation of 58 percent PLF. The perfor- mance of hdividual SEBs showed very wide The power utilization from 1960-61 to 1991.92 is variations in the PLF. The majority of states had given in Table 4. Total energy sold has gone up a PLP less than 50 percent. States like RaJasthan, by 15 times from 13,841 million kWh in 1960-61 Tamil Nadu and Andhra Pradesh had a PLF to 207,645 million kWh in 1991-92, increasing at more than 60 percent over a period of time on the compound rate of 9.1 percent per annum. the one hand, and states like Haryana, Orissa, From the table it can be seen that the share of Ilihar and Assam had a P less than 45 percent energy consumed in industry has gradually on the other. In a few states like Orissa, Bihar and Assam, the average PLF was as low as Table 4 Power utadtion 1960-61 to 1991-92 ToalW Slmr of seld RlWays/ indusy Ag8eutn Domestic Comnial t?umy OHeM 1960-61 13,841 694 6.0 10.7 6.1 33 4.5 1965-66 26,735 70.6 7.1 8.8 62 4.0 33 1970-71 43,724 67.6 102 8.8 5.9 32 4.3 1970-76 60,246 62.4 14.5 9.7 5.8 3. 4.6 1980-51 82,36 58.4 17.6 112 5.7 27 4.4 1985-86 122,999 545 19.1 14.0 5.9 25 4.0 1986-87 135,952 51.7 21.7 142 5.7 2.4 4.3 198748 146,2M5 475 242 15.2 6.1 2.5 4.5 1988X89 160,196 47.1 24.3 15.5 62 2.3 4.6 1989-90 174,818 46.0 25.1 16.9 5.4 2.3 4.3 1990.91 190,357 44.9 2.a 16.5 6.1 2.2 4.3 1991-92 207,645 42.0 282 17.3 5.8 2.4 4.5 SOurU Cwrn EnrY Sacne in In&, Cente fr Monlt Iin EwmnTy, May 1993. 70 ShE POWER SECTOR fN MDm A MACROECONOMIC PERSPECTE come down to 42 percent in 1991-92 from The Planning Commission and Central Electic- 69.4 percent in 19661. The share of agriculture ity Authority estimates show that the gap be- has increased to 28.2 percent from 6 percent tween the requirements and supply of power during the same period. This steep increase of will come down by the end of the Eighth Plan consumption in agriculture is due to the encour- Period. But past experience makes us hesitant to agement given to this sector by supplying elec- readily accept this viewpoint. Later in Part 3, we tric power to farmers, to lift water for irrigation, project alternative scenarios of power demand. on a priority basis. The low or almost non-existent electricity 2.4 Transmission and disibution losses charges for agriculture encourased energizing of pump-sets rapidly. The stee increase in oil T&D losses in the power system continued to prices persuaded farmers to opt for electric remain ligh over a period of time. The SEBs pumpsets rather than diesel units. The share of and NTPC (until 1992) are responsible for T&D domestic consumption has also increased during of electric power. The all-ndia T&D losses this period due to the increase in the number of increased from 17.6 percent in 1970-71 to 20.6 households and the income increase in the upper percent of generation by 1980-81. By 1991-92, decile of the population. The rural electrifiation these losses increased to 22.9 percent. program of the GOI has led to increases in con- Energy losses have increased from 22,790 mil- sumption in the domestic and agicultural fronts. lion units in 1980-81 to 65,657 million units hi The consumption share of commercial and 1991-92, growing steadily at the rate of traction has marginally come down over a 10.1 percent per year. There are no scientific period of time. studies that estimate transmission losses and The rate of growth of power consumption distrbution losses separately. But it is reported averaged 9.1 percent per annum during 1960-61 that transmission losses are in the range of to 1991-92, whereas generation was 9.6 percent. 5-7 percent and the remaining are distribution During the 1980s, the rate of growth in con- losses. These losses remained significantly sumption was 8.9 percent Demand for power, higher than the international average of with the expansion of industry and agriculture, 10 percent. However, in the absece of satis- is expected to outstrip the supply of electricity, factory metering arrangements in the case of This has resulted in continued shortages of agricultural consumers, the level of losses indi- power in different parts of the country, forcing cated by the states could, at best, be an estimate the power supply authorities to impose restric- of the energy not accounted for in the system tions both on supply and demand. The supply The high T&D losses could be largely attributed of energy was 8.5 percent short of demand at the to the low investments made on T&D facilities in all-lndia level, and peak shortage was about different states, and the extensive lower-voltage 19 percent in 1992-93 (see Table 5). distribution network in rural and urban areas. Table S Demand and supply of electrical power in India (bon units) Demand Spply Doct % 1980-81 120.1 104.9 -12.6 1981-82 1292 1153 -10.8 1982-3 136.8 124.2 -9.2 1983-84 1453 129.7 -10.7 198485 155.4 145.0 -6.7 1985.86 170.7 1573 -7.9 1986-87 192.4 174.3 -9.4 1987-88 211.0 188.0 -10.9 198889 221.2 205.9 -7.7 1989-90 247.8 228.2 -7.9 199D-91 267.6 246.6 -7.9 1991-92 289.0 266.4 -7.8 1992-93 278.0 254.6 -8.4 Sourc: C4rt EneV Scene in ndia, Cenftre for Monitoting Ini Eonomy, May 1993. ThE POWER SEcToR IN INDi& A MACROECONOMC PERSPECTIVE 71 Table 6 T_amIsson and distribution losses (as percent of elechticty generated) Avmrge 1985-86 to S*e 1980-81 1985.86 198687 1987-88 19888 1989-90 1990-91 1991-92 1991-92 Haryana 22.6 19.8 20.6 25.4 26.6 29.2 27.6 22.9 24.6 Uttar Pradesh 15.6 20.5 20.0 26.8 27.4 26.1 26.1 26.0 24.7 Rajasthan 26.6 26.5 23.9 21.0 25.3 24.4 24.9 21.0 23.9 Orlssa 19.2 23.0 22.0 233 275 24.0 23.0 23.0 23.7 Kerala 14.9 24.6 27.5 21.3 25.2 22.5 21.0 22.0 23.4 Gujarat 19.8 25.5 24.0 23.5 19.6 22.1 22.1 21.0 22.5 West Bengal 13.7 23.1 23.2 21.2 232 22.7 21.9 20.0 22.2 Bihar 22.1 22.5 22.1 21.7 24.0 215 21.0 21.5 22.0 Assam 19.3 20.0 21.0 20.2 25.0 21.6 21.0 20.5 21.3 Andhra Pradesh 22.6 19.2 18.5 20.2 19.4 20.2 19.6 20.0 19.6 Kamstaka 24.6 22.5 22.2 21.0 21.3 20.5 19.6 19.3 20.9 Madeya Pradesh .3 189 20.8 205 22.1 19.5 18.8 18.3 19.8 Punjab 19.6 18.8 17.0 18.4 18.3 18.1 19.0 19.0 18.4 Tamil Nadu 19.1 187 18.7 186 17.7 18.5 18.4 18.4 18.4 Maharashtra 16.2 14.5 14.5 14.3 15.8 17.6 15.5 15.0 15.3 Jammu & Kashmir 48.1 35.9 33.5 41.8 41.5 49.5 46.2 50.0 42.6 Alln WIa 20.6 21.7 21.5 22.1 22.3 22.9 22.9 22.9 22.3 These factors have also contributed to the poor are quite substantial since there are no recurring quality of electricity supply in many parts of the costs involved m maldng power available to the Country. system. It was estimated that a 1 percent reduc- From Table 6 it can be seen that the T&D tion in T&D losses on a national basis would losses estimated at 26.0 percent in Uttar Pradesh additionally supply 1,800 million kWh to the during 1991-92 was highest among major states, system. This would increase an additional followed by Orissa (23.0 percent) and Haryana revenue of Rs. 1,280 million at 1987-88 tariff (22.9 percent). The losses in Haan dropped levels. This leads to avoid an investment of from 29.2 percent in 1989-90 while losses in Uttar 530 MW at an estimated cost of Rs. 7,950 million. Pradesh increased from 15.6 percent in 1980-81 This is another important aspect which the SEBs to 26.0 percent in 1991-92. Six states namely should concentrate to increase the system's Hryana, Uttar Pradesh, Rajsthan, Orissa, overall performance.' Kerala, and Gujarat accounted for higher losses compared to the national average of 22.3 percent. 2.5 Investments and rtutns Jammu and Kashmir lost 50 percent of the power generated because of the problems prevailing in Investment in the power sector alone, on aver- that state. The losses were least in Maharashtra, age, constitutes about 17.7 percent of the total which was estimated at 15 percent of generati investment of FYPs. Investment has gone up From the table, it can also be observed that from Rs. 67,670 million during the Third FYP to there has been a progressive increase in T&D Rs. 342,730 million during the Seventh Plan in losses in some SEBs. In some SEBs, the losses 1984-85 prices. It is expected to be Rs. 459,990 have gone up by more than 2 percent between million, during the Eighth FYP (795,890 million successive years. Some states have registered in 1991-92 prices), which is nearly a seven-fold more than 27.5 percent in T&D losses. Reduc- increase over the Third Plan. With this huge tion in T&D losses will improve the overall investment, substantial generation capacity has system perormance with less cost and in a faster already been added in the country. The returns time frame. The retums on these investments on these investments are not at all satisfactory, Government of India, MhIsy of Ener, Rlnt of the Wkdn QG=p for snst te fo strnt te finacM Of May 1989, New Delh 72 ThE POWER SECTOR IN tNDIA: A MACROECONOMIC PERSPECTIVE Table 7 Yearly profit and losses of SEBs after taidng into account re-subsidy as provided in the account (Rs. crom) 1975 1980 1985 1986 1987 1988 1989 1990 Andhra Pradesh -0.3 6.0 49.7 144 40.8 37.9 39.8 57.9 Bihar -12.5 -17.0 -9.7 -121.1 4.2 -110.5 -48.4 -8.3 Gujarat -4.8 -8.7 36.1 -1.7 13.4 34.9 -171.5 239.9 Haryana -9.3 -11.0 -74.0 -61.5 -70.2 -163.6 -25.1 -20.1 Hirmachal Pradesh -2.8 -5.8 -22.4 -8.3 -11.3 -16.6 -14.9 -13.4 Karnataka -0.9 8.5 10.8 20.7 -60.0 -86.1 37.1 38.0 Kerala -7.5 11.4 9.7 4.8 7.6 6.8 -37.1 -23.7 Madhya Pradesh 2.3 6.5 -18.2 21.1 126.8 64.4 80.0 82.6 Maharashtra 13.7 -27.5 -33.2 -26.3 64.5 73.1 54.2 37.6 Orissa -6.2 -12.3 -12.5 -10.2 2.5 -31.6 -3.0 27.1 Punjab -18.8 9.7 -6.6 -6.4 -19.8 -1.3 -38.9 -538.3 Rajasthan -3.3 16.1 -73.5 -47.8 -13.7 -77.7 -29.5 -117.3 Tamil Nadu 8.1 8.9 8.7 27.9 96.8 33.1 136.7 32.6 Uttar Pradesh -54.2 -70.5 -42.0 -152.3 109.7 129.7 -231.8 204.4 West Bengal -2.7 -1.8 -35.2 -72.0 -18.3 6.6 -25.4 -8.8 Assam 12.3 -11.7 -43.4 -92.6 -51.3 -17.2 -119.9 -87.1 Meghalaya -12.2 -1.6 -1.9 -2.4 -0.5 2A 1.5 10.8 Losses -135.0 -167.9 -372.5 -602.6 -245.1 -504.5 -745.5 -126.3 Surplus 37.3 61.7 115.0 88.9 466.3 388.9 349.3 276.8 Net -97.7 -106.2 -257.5 -513.7 221.2 -115.6 -396.2 -984.5 Souce: Report of the Working Group for suggesting steps for strengthening the Finances of the State Electricity Boards, GOI, Central Electicity Authorlty, New Delhi. Table 8 Undt cost of thenial generation of SEBs (PslkWIbi Year Generation cost Coal cost Oil cost O&M cost Establishment cost 1988-89 37.9 33.5 3.8 4.9 165 1989-90 43.4 39.7 3.5 5.2 17.2 1990-91 46.2 41.2 4.2 5.5 18.7 1991-92 57.2 45.6 4.8 5.7 19.1 1992-93 53.7 51.1 5.1 5.8 19.2 since most of the SEBs have been incurring huge sustained in supplying power at uneconomic losses for some time.2 The SEBs that are tariffs, and cost over-runs in completing the generating surpluses include Andhra Pradesh, projects. In addition, the cost of inputs has also Madhya Pradesh, Maharashtra, and Tamil Nadu gone up sharply. The average unit cost of (Table 7). It was only in 1987 that the SEBs, put thermal generation of SEBs is given in Table 8 together, generated a surplus, of Rs. 2,212 mil- above. lion. Investment in electric supply will remain a In addition to these rising costs, the tariffs pre- problem when SEBs are unable to generate a scribed for agriculture and domestic supply have surplus and have balance sheets which vii not also contributed to the losses of SEBs. The tariff enthuse commercial lenders to assist them. rates for agriculture ranged between 2.1 paise The reasons for the huge losses of SEBs are per kWh in Tamil Nadu to 31.24 paise per kWh many. They include low generating levels of in Rajasthan in 1992-93. In a few states, the rates power plants, high T&D losses, pilferage, non- charged for agriculture are decreasing. On payment of rural electrification subsidies to average, the rate of sale of electricity for all compensate the Boards for the loss of revenue categories of consumption was 49 paise per unit 2 Goverment of India, Report of the Group on Power, EIthth Plan Power Prourm September 1991, New Dehl. THE POWER SECTORz IN hNDIM: A MACROECONOWC PERSPECTIVE 73 Table 9 Estimated losses on account of agricultural and domestic consumption in 1992I93 Estimated loss on Avg. cost of eletricity State (PsI*Wh) Agricultural (Rs. cromes) Domestic (Rs. crores) Andhra Pradesh 102.2 641.3 61.9 Assam 211.4 4.5 28.9 Bihar 168.7 278.9 37.7 Gujarat 128.7 734.2 109.6 Haryana 129.5 339.9 57.7 Himachal Pradesh 3.3 22.1 janunu & Kashmir 176.6 24.1 Kamataka 97.1 432.4 22.4 Kerala 75.4 10.2 10.3 Madhya Pradesh 132A 324.2 391.1 Maharashtra 122.5 788.2 140.4 Orissa 89.7 22.7 31.0 Punjab 114.3 669.9 52.5 Rajasthan 128.0 314.3 72.1 Tanil Nadu 134.1 483.4 203.4 Uttar Pradesh 126.2 754.8 249.2 West Bengal 152.4 63.8 71.6 Total 5,8894 1,565.2 Table 10 Taets and achievements in fte power sector (MW additions to installed capacity) Percentage aciemment Plan Target Achievement (percent) Second Plan 3,500 2,250 64.0 Third Plan 7,040 4,520 64.0 Annual Plans 5,430 4,120 76.0 (66-67 to 6869) Fourth Plan 9,264 4,579 49.4 Fifth Plan 16,548 10,017 60.5 Sixth Plan 28,448 14,226 50.0 Seventh Plan 22,245 21,401 9.0 Eighth Plan 30,538 - Source: Plannmg Commssion, Various Five Year Plan Doants. in Jammu and Kashmi which was the lowest reducing the T&D losses will improve the perfor- and 124.84 paise per unit in Maharashtra which mance of the SEBs to a substantial extent, with was the highest in the year 1992-93. Due to the least cost. low tariffs for agriculthural and domestic con- The targets and achievements of the power sumption, the losses incurred by SEBs are very sector, in terms of installed capacity, during the substantial as can be seen from Table 9. plan periods is given in Table 10 above. All these factors adversely affected the efficient The achievement in installed capacity was functioning of SEBs. As a result, they were higher in the early Plan Periods (Second, Third, unable to meet their commercial obligations to and Annual Plans) which ranged between organizations like NTPC, NHPC, Coal India 64 percent and 76 percent During the Fourth Limited (CIL), and BHEL, etc. The non payment and Sixth Plans, the installed capacity achieved of dues by the Boards has created problems for was 50 percent of the target. Only in the various central sector organizations in their day- Seventh Plan was the achievement very high, at to-day operations. Two major factors; i.e., increasing the PLF of thermal power plants and 74 THE POWER SECTOR IN WNDmA: A MACROECONOMIC PERSPECTIVE Table 11 Potential for reducing peak demand and installed capacity requirements Business as usual With effciency improvement Savings Installed Installed Installed Energy demand Peak demand capacfty Peak demand capacify Peak demand cpacity (Bn units) (MW) (MW) (MW) (MW) (MW) (MW) 1992-1993 308.16 54,634 74,976 49,853 70,426 4,781 358 1993-1994 333.41 59,122 80,628 53,934 75,774 5,188 340 1994-1995 359.61 63,760 87,246 58,164 81,993 5,596 399 1995-1996 386.97 68,541 94,431 62,574 88,746 5,967 433 1996-1997 416.27 73,656 105,670 67,296 99,308 6,360 677 1997-1998 447.64 79,122 112,981 72,347 103,470 6,775 616 1998-1999 481.17 84,960 121,465 77,746 111,237 7,214 715 1999-2000 517.00 91,160 130,136 83,515 119,178 7,675 73K 2000-2001 536.17 97,746 139,966 86,364 128,180 11,382 828 2001-2002 594.52 104,641 152,402 95,989 139,569 8,652 1,047 96 percent of the target. Except in the Seventh 3.1 Demand for power FYP, the performance in installed capacity was less than what was targeted in the Plans. Exercises for estimating demand for power are During the planning period, it was recognized always interesting and tend to vary depending that T&D losses were fairly high, PLF was much on the methodology adopted. Choice of data below the anticipated rates, the pricing of elec- and estimation problems also contribute to tricity was not proper, problems in T&D of these differences. The net result is that macro- electridty existed, and the quality of power projections, even within official estimates, tend supply was not satisfactory. Power projects to lend an element of uncertainty. In the current were taking a much longer time to complete, scenario, when the economy is going from a leading to cost and time over-runs. On average, relatively planned and controlled economy to an the cost over-run was 68.6 percent and time open economy, power projections do remain as over-run was 4-128 months of original schedules. approximations. Nonetheless, macro-relation- These factors led to the unsatisfactory per- ships depend on projections regarding the formance of electricity boards, both on the demand for power. We present here two esti- financial side, and the generation anrd distribu- mates of the demand for power. They are: tion side. * The official demand projections based on the Fourteenth Electric Power Survey of India,3 and o Elasticity of electricity consumption to gross 3. Power sectr: macro domestic product (GDP). relationship The estimates of official demand projections, whidi is considered as '"Business as Usual," The relationship between the power sector and (BAU) is modified to take into account projec- the rest of the economy are more clearly high- tions based on the Western Region pattern as the lighted when we examine crucial macro-relation- "efficient case." ships between the two. In this section, we have focused on six relationships as a basis for esti- 32 Official projections mating the costs to the economy. Energy demand, peak demand, and installed capacity, that have been estimated by the working group on power, is given in Table 11 as 3 Central lectricity Authority, Government of India, Fourteenth Electrc Power Survev of India March 1991, New Delhi. THE POWER SECTOR IN INDIA: A MACROECONOMIC PERSPECTIVE 75 "Business as Usual" scenario. The Western Region of the country is the most efficient in Y = 538.58 + 36.11 VAE, ? = 0.988 meeting the energy and peak demands compared (25.66) to other regions of the country. This has been Y = 636.74 + 7.39 CE, r2 = 0.966 taken as the efficient scenario. Based on these (10.63) two scenarios, it is possible to reduce the peak Y = 638.84 + 5.04 GE, r2 = 0.991 demand substantially as given in column 6 of the Where:(29.35) Table, and still meet the energy requirements Y is Gross Domestic Product In billions of during the Eighth and Ninth FYP periods. It is rupees in 1980-81 prices. estimated that 6,143 MW of investment on capac- VAE is Gross value added due to electricity in ity could be reduced if adopting the performance rupees crores at 1980-81 prices of Western Region is apped to the whole CE is consumption of electricity in billion units country. 3.3 GDP growth and electcity demand Elasticity indicates the demand for power. It is 3.4 Investment in the power sector defined as the rate of change in consumption for a unit change in income (indicates change in Of the total public actor outlay, the energy demand for change in income). The con- sector constituted about 29 percent in the Sixth sumption elasticity for power over the period FYP and 28.6 percent in the Seventh Plan. from 1960-61 to 1989-90 was 2.23. This elasticity Investment in the power sector alone, on was gradually decreasing during the 1970s atnd average, constitutes about 17.7 percent of total 1980s. The consumption elasticity in the 1980s public sector investment during the FYPs. The was 1.83. Similar trends can be observed for the increased outlays irt planned investment are industrial and commercial sectors as well, as discerned from the Fifth FYP onwards, when shown in Table 12 below. the central generating power states were commissioned. Table 12 During the 1980s, investment in the electricity iasticity of consumption sector increased at the rate of 6.5 percent per year in real prices, as against investment in Totl industry and public sector of 6.0 percent and 6.8 percent for cosumption commeri the economy as a whole. Investment went up Period dastici4y demand from Rs. 6,767 crores during the Third FYP to Rs. 1960-61 to 69-70 2.49 2.42 34,273 crores during the Seventh FYP at 1984-85 1970-71 to 79-80 2.11 1.51 prices (Table 13). It is expected that investment 1980 81 to 89 90 1.62 1.18 will reach Rs. 45,999 crores during the Eighth 1960-61 to 89-90 2.23 FYP, which is nearly a seven-fold increase over the Third Plan. The share of power sector investment to public sector investment during the Sixth and Seventh FYPs was, on average, Based on these estimates, with the 5.6 percent growth in GDP during the Seventh FYP, the growth of electricity consumption works out to 9 percent. in the Eighth FYP, growth of the Table la power sector is expected to be 9 percent. The Plan outlay for power sector (current prices) Planning Commission and Central Electricity Authority have estimated that the gap between Outlay Percent of the requirements and supply of power will come P11 (Ra. crores) total down by the end of the Eighth Plan Third Plan 1,252.3 14.6 The relationships between GDP growth and Anmual Plans 1,212.5 1a.3 the value added due to electricity, electicity Fourth Plan 2,931.7 18.6 consumption, and the electricity generated are Fifth Plan 7,399.5 18. expressed in the following equatims given Sb Plan 18,87.0 18.2 equationw Eth Plan 34M5, 19.0 beOW. Eighth Plan 45,999.0 18.3 76 THE POWER SECTOR w INmIA: A MACROECONOMfC PERSPECTIVE 23.7 percent, while its share to total investment Boards have invested about Rs. 20,967 crores, of in the country was 10.4 percent during the same which state goverunent loans were in the order period. The share of power investment to of Rs. 11,851.5 crores or 56.5 percent, market public sector investment has come down from borrowings were 14.1 percent, and borrowings 23.6 percent in 1980-81 to 19.9 percent in 1984-85. from institutional sources were 39.9 percent as Thereafter, this share has gone up significantly. given in Table 15. Interestingly, most of the 1he share of power investmnent to total invest- SEBs could not raise internal resources because ment has increased marginally by 1 percent of their poor performance in operations. The during the 1980s. The investment in electricity, share of state government loans and borrowings the public sector, and the economy is presented from institutional sources to total borrowings are in Table 14. increasing, whereas market borrowings mar- ginally decreased during this period. Intemal 3.5 Pattem of financing resources of the SEBs were positive during the first two years of the Seventh FYP, thereafter Investment in SEBs consists of state government showing a negative share, which increased from loans, borrowings from institutional sources, -8.6 percent during 1988-89 to -19.5 percent market borrowings and intemal resources. during 1990-91. On the whole, the SEBs were During the Seventh FYP period, Electricity unable to raise their own resources through intemal improvements. Table 14 Investment in electricity, the public sector and the economy Gross capitalformnulation in Share of elect. investment in Power sector Pub!ic sector Country Public sector Country 2980-81 prices (Rs. crores) in % 1980-81 2,780 11,767 28,453 23.6 9.8 1981482 3,358 15,178 35,888 22.1 9.3 1982-83 3,568 16,635 39,982 21.4 8.9 1983-84 3,453 15,502 32,240 22.3 10.7 1984-85 3,500 17,588 33,249 19.9 10.5 1985-86 3,984 18,216 39,451 21.9 10.1 1986-87 5,009 19,584 39,925 25.6 12.5 1987-88 5,010 17,958 42,089 27.9 11.9 1988-89 4,972 19,346 47,440 25.7 10.5 1989-90 5,329 20,895 49,194 25.5 10.8 1990-91 5,216 21,091 54,895 24.7 9.5 Average 23.7 10.4 Source: National Accounts Statistics. Table 15 Pattem of fiancing investment in state electricity boards (as percentages) Duting (Rs. crores) Seventh Plan 1986-1991 1986-87 1987-88 1988-89 1989-90 1990-91 Market 2,947.1 4,687.0 borrowing (14.1) (14.7) (12.9) (12.3) (16.9) (8.4) Institutional 8,374.3 2,435.3 sources (39.9) (29.4) (27.6) (34.6) (35.3) (43.4) Intemal -2,206 *1,092.4 resources (-10.5) (0.5) (2.4) (-8.6) (-25.4) (-19.5) State govt. 11,851.5 3,801.5 loans (56.5) (55-5) (57.1) (61.7) (73,3) (67.7) Total 20,966.9 5,613.1 (100.0) (100.0) (100.0) (1000) (100 0) (100.0) Source: AmuaI Report on the worktng of state elecncity boards and electridct departments, August 1992, Planning Commission, New Delhi. TuE POWER SECTOR IN INVI: A MACROECONOMIC PERSPECTJVE 77 Table 16 Cost per kWh delivered prdse/kWh sold at 1991-92 prices Average cost of Average realization Average realization Year supply including agriculture Gap excluding agriculture Gap 1980.84 90.57 69.82 20.75 76.22 14.35 1984-85 113.21 85.93 27.28 99.45 13.76 1985-86 116.59 93.3P 23.21 110.12 6.47 1986-87 124.07 102.44 21.63 124.50 -0.51 1987-88 132.26 103.51 28.75 131.34 0.92 1988-89 132.63 102.39 30.24 130.83 1.80 1989-90 131.80 119.72 32.08 129.03 2.77 1990.91 132.36 89.38 42.98 118.14 14.22 1991-92 119.20 96.90 22.30 122.30 -3.10 Average 125.26 96.71 28.55 120.72 4.54 3.6 Cost of power There are no scientific studies available to determine the extent of T&D losses, due to The average cost of energy supplied to con- technical and non-technical losses. Transmission sumers, per kWh, is presented in Table 16. The losses are in the range of 5-7 percent, while the supply cost of energy was calculated at 1991-92 bulk is taken by distribution losses which prices and, accordingly, adjustments were made include non-technical losses. for the period up to 1980-81. Average cost has T&D losses valued at average cost in 1991-92 gradually increased during the 1980s, whereas it prices and long run marginal cost were esti- has come down during 1991-92. The average mated for the Eighth and Ninth Plan periods cost of energy delivered over a ten period was under BAU and efficient scenarios as given in Rs. 1.25 paise per kWh. The average realization, Table 17. The long run marginal cost for energy, incuding agricultural consumption, was Rs. 0.97, worked out by us, is Rs. 1.61, which is Rs. 0.36 28.5 paise less than the cost. Whereas the more than the average cost. These losses are average realization, excluding agricultural con- very substantial to the economy, which can be sumption, was Rs. 1.21 paise per unit, 4.5 paise reduced through minor investments in the T&D below the cost. network. During the Eighth and Ninth Plans, steps are to be initiated to reduce the T&D losses 3.7 Technical parameters of power sector through modernization and renovation of the existing network, besides new investments. T&D losses in the power system in India con- These measures are expected to reduce T&D tinued to remain high during the Sixth and losses by 3 percent during the Eighth Plan, and Seventh Plan periods. These losses increased, a further 4 percent during the Ninth Plan. If both in percentage terms and in absolute terms these losses are reduced to these levels, sub- during the 1980s. In percentage terms, it was stantial gains will accrue to the electricity boards. about 22.9 percent during 1991-92, against the normal expected T&D loss of 12 percent. These 3.8 Productivity ratios losses can be attributed to both technical losses and commercial losses: The productivity indicators of employees of the Electricity Boards and Electricity Departments in e Technical losses are due to extension of the the country are given in Table 18. The total low tension distribution network to cover numnber of employees has gone up from 791,600 wider areas of low load densities with long in 1980-81 to 968,500 in 1990-91. The number of lines, and low quality transformers and employees per million kWh sold has drastically other equipment. cocne down to 5.3 in 1990-91 from 106.6 in o The commercial losses (also known as non- 1980-81, which showed a reduction of 5.3 percent technical losses) include theft, pilferage, per year. The employees per 1,000 consumers umnetered supplies, defective meters, etc. has come down to 16.8 from 29 during the same 78 ThE PowER SECToR IN INDIA: A M4cROEcoNomic PERsPEcTNE Table 17 TransmiSsion aUd dlstrlbution losses foeCas of energy losses At Rs.1.61 BAU scenario At Rs.1.61 efint Scenario Under BAU scenario Under dpcent scenario (Rs. cr¢ aes) (Rs. crores) 1992-1993 8342 8052 10744 10370 1993-1994 8966 8338 11548 10739 1994-1995 9697 8685 12489 11187 1995-1996 10490 9059 13511 11668 1996-1997 11727 9770 15104 12583 1997-1998 12162 8680 15664 12479 1998-1999 13059 9946 16820 12810 1999-2000 14017 10210 18053 13150 2000-2001 15025 10370 19352 13356 2001-2002 16084 11205 20716 14432 Computed based on the Data. Source: 1) Cument energy cne in India, May 1993, CMIE 2) Annual Report of working of SEBs, Electric Dearment, Plar.:ting Comnission, August 1991. Table 18 Productivity indiCatus of emiployees No. of employees Employe per Employees per Power gen Year 'OOOs GWh sold 1000 cosumers per employee LAM unts 1980-81 791.6 10.6 29.0 1.40 1984-85 857.3 8.6 22.3 1.83 198-86 885.3 7.8 20.9 1.92 1986-87 897.2 7.4 20.1 2.09 1987-88 920.4 7.0 19.1 2.11 19889 957.4 6A 18.3 2.31 1989-90 966.7 6.1 17.4 2.53 1990-91 968.5 5.3 16.8 2.73 Source: Antwl Rports of Working of SEBs, &Elerity Depts. period, whereas the power generated per well as new projects, and the costs associated employee has almost doubled during this period. with the runming of the system have to be It shows that the productivity of labor in the assessed on the basis of past performancv of the electricity boards has increased significantly. power sector. With a view to assess the future supply position, the Central Electricity Authority (CEA), based on their analysis and study of the past performance of power projects, has evolved some norms. These norms were adopted in 4. Assessment of economic developmg the Eighth PYP. These norms are cost given in Table 19. There is no outage in hydropower plants and auxiliary consumption is only 1 percent in them. The main objective of any long-term capacity ' lopting these norms, the extent of loss due to expansion requires an assessment of the most outages, both forced and partial valued at long likly demand growth and also the various run narginal cost (LRMC), were calculated for benefits that will accrue from existing as well as the years 1992-93 through 2001-2002. These are newly plamed capacities. The lIkely benefits, in presented in column 1 of Table 20. terms of available energy, from the existing as THE POWER SECTOR oI INDIA: A MACROECONOMIC PERSPECr1VE 79 Table 19 The unmet demand for power has been Peaking capacity of power projects ( worked otit by the Planning Commission for all India, region-wise and state-wise for Eighth and Thermal Gas turbine Ninth FYPs. This has been taken as the BAU Item units units scenario. In the western region, the performance 1. Planned maintenance 10 15 of the system is efficient compared to the south- 2. Forced outage rate 14 10 em and nortlern regions. This has been taken 3. Partial outage rate 9 10 as the efficient scenario, which is applied for all 4. Auxiliary consumption 10 1 India, and this norm is applied to compute the 5. Spinning resee 5- power availability. Since demand does not Peaking capability 58 59 change, the difference between the availability and the requirement is computed to determine the unmet demand valued at LRMC and pre- sented in Table 21. Under the BAU scenario, the total va!ue of loss due to unmet demand during It is possible to reduce the partial outage in the the 1992-2002 period is estimated to be Rs. 110.13 power system. If these are reduced, the gains billion. Whereas under the efficient scenario, it that would be generated in the system are given is estimated that the gains will be in the order of in column 2 of the Table. Rs. 212.07 billion during this period. Under the Table 20 Cost of forced and partial outages Cost due to outages at LMRC Possible gains if outages can be Net cost Year (Rs. billion) reduced by 9% valued at LhIRC (Rs. billion) 1992-1993 112.1 72.1 40.0 1993-1994 122.4 78.7 43.7 1994-1995 132.9 85.4 47.5 1995-1996 144.5 96.0 48.5 1996-1997 150.2 101.1 56.22 1997-1998 173.3 111.3 62.0 1998-1999 185.5 119.2 66.3 1999-2000 199.1 127.9 71.2 2000-2001 ?12.5 136.6 75.9 2001-2002 231.8 149.1 82.7 Table 21 Unmet demand for electrieity (billion Rupees) Unmet dematd valued at avemge prices Value of loss due to unmet demad at LRMC 1.61 Year Business as usual scenario Effcent scnario Business as usual sario Effidient sawrio 1992-1993 18.24 -1.52 29.36 -2.48 1993-1994 16.64 -9.45 26.79 -15.21 1994-1995 15.89 -25.11 25.58 40.42 1995-1996 -6.50 -5.89 -10.45 -9.48 1996-1997 9.76 +4.90 15.71 7.89 1997-1998 0.44 -7.04 0.71 -11.29 1998-1999 1.42 -20.79 2.28 -33.46 1999-2000 2.41 -6.64 3.87 -10.69 2000-2001 5.15 -21.40 8.28 -34.45 2001-2002 4.97 -38.81 8.00 -62.48 Total 110.13 212.07 Note: The negative sign denotes surplus availability. 80 THE POWER SECTOR 114 hNDA A MACROECONOMIC PERSPECIWE Table 22 Generating ineffideticy losses (298546 to 1991-92) Loss due to auxiliary consumption T&D kmsses in excess of 12% of Excess cost due to oil Year (Rs. billion) generation (Rs. billion) (Rs. million) 1985-86 21.29 20.61 1825 1986-87 24.03 22.27 1803 1987-88 27.66 25.48 1793 1988-89 29.38 28.46 1575 1989-90 33.30 33.40 535 1990-91 34.78 36.00 1118 1991-92 38.91 39.06 2711 BAU scenario, the losses are estimated to come establishment/administration, it is increasing down during the Ninth Plan compared to the from 16.5 paise/kWh sold in 1988-89 to 19.22 Eighth Plan, whereas in the efficient scenario 'te paise in 1991-92. With the 20 percent reduction gains increase during this period. Generation of manpower in the power system, substantial inefficiencies continued to persist in the power gains can be generated to the SEBs. system in India. These are in the form of low The addition to capacity during the Eighth and plant load factors, excess of T&D losses com- Ninth FYPs, the sector will need substantial pared to international standards, high auxiliary additional manpower. To make an assessment consumption, and high fuel oil costs. The auxil- for the requirement of manpower in the Eighth iary consumption in hydropower stations is very and Ninth Plans, one has to work out additional low. Hence the loss due to auxiliary con- requirements for additional facilities of genera- sumption is computed for thermal stations. In tion, besides natural depletion of the anticipated computing T&D losses, a threshold level of available personnel due to death, retirements, 12 percent is taken, since much of this loss is changes in profession, etc. CEA has envisaged unavoidable in the system. Since T&D losses are a 10 percent reduction in the requirement of in excess of this 12 percent, the loss accrued due manpower per MW with respect to operation to this is estimated. Similarly, the lowest value and maintenance, and a 5 percent reduction in of oil cost to generate one Uit of electricity is construction projects. taken as the minimum that is necessary to gen- erate one unit of energy. Taking these norms, the losses due to- auxiliary consumption, T&D losses, and Io ^fs due to oil consumption are presented in Table 22 for the period 1984-85 to 1991-92. 5. Justification for reforms The power system, with generating capacity of 66,087 MW at the end of 1990-91, along with the T&D system spread throughout the country, was The power sector in India has an impressive employing more than 12 lakh people. The entire growth in installed capacity and has an extensive manpower in the power sector could be grouped T&D network. Power generation and con- into two categories-technical and non-technical. sumption has also increased significantly over a Manpower can also be broadly categorized as period of time. The importance of the power skilled/unskilled. On average, total manpower sector has been recognized in the early stages of in SEBs under the state sector comprises of planning particularly from the Fifth Plan 71 percent technical staff and the rest non-tech- onwards. The planned outlays were higher in nical. There appears a trend in the decrease of the power sector, compared to other sectors of technical manpower. the economy. The CEA has estimated that about 20 percent With the available installed capacity, its utiliza- of manpower is in excess of the requirement. tion is rather low, though it showed marginal The cost of establishment in the electricity boards improvements in recet years. The reasons for has been increasing, though their productivity these are high levels of outages and higher ratios are increasing. In terms of the cost of auwdLary consumption. Energy generated in the THE POWER SECToR IN INDI A MACROECONOMC PERSPECTVE 81 system is lost excessively before it reaches the The FYPs have recognized these problems, and consumers. This is because of the inefficient emphasized the need to overcome these prob- T&D network The costs of supply of power are lems. They assured that the anticipated higher due to the higher levels of consumption demands are to be met adequately and in a of coal, high operations and maintenance costs, reliable cost effective manner to increase the high establishment costs and excessive employ- performance of the SEBs in the country. The ment. These factors have led to the high cost of Planning Commission also advised the states power, below the expected realization of cost. from time to time to inprove performance of the These further led to inadequate mobilization of SEBs, and has taken some measures to imple- internal resources, with excessive borrowing ment them. But these measures could not yield from the market and the state government, thus the expected improvements in the operation of increasing the debt burden of the SEBs. These SEBs. As a result, it becomes necessary to factors affected the efficient functioning of elec- overhaul the functioning of SEBs, through appro- tricitv boards. As a result, it has become diffi- priate legislation, as self-sustaining economic ctdt for the SEBs to meet their commercial obli- enterprises. gations to other organizations. The need for reforms is pressing, given the It was recognized that the PLF of thermal need for increasing economic development. In plants was much below the recommended levels this paper we traced the macro-relationship and the T&D l,sses were fairly high. The between power and economic growth from the pricing of electri:ity was inadequate to generate viewpoint of some cntical parameters. From surpluses, and the quality of power supply was these, the extent of unmet demand and the not satisfactory. Time over-runs and cost over- requisite supply availability was projected for runs were very common in new power projects. the Eighth and Ninth Plans. The LRMC of addi- These factors have led to the unsatisfactory tional generation was calculated to enable quan- performance of electricity boards, both on the tification of the cost to the economy if reforms financial side and the generation and distribution are not effected. These costs provide significant side. justification to reform the power sector. 82 THE POWa SBIOR IN INDIA: A MAcRoECONOMIC PERSPECTVE References 1. Report of the Group on Power-Eighth Plan Power Program-1992-93. Vol. I & II, September, 1991. 2. Annual Report on the Working of State Electricity Boards and Electricity Departments, Planning Commission, GOI, August, 1992. 3. Annual Report on the Working of State Electricity Boards and Electricity Departments, Planning Commission, New Delhi, June, 1987. 4. Fourteenth Electric Power Survey of India. Central Electricity Authority, Ministry of Energy, GOI, New Delhi, March, 1991. 5. Current Energy Scene in India, Center for Monitoring Indian Economy, Bombay, May, 1993. 6. Conference of Power Ministers of States, Department of Power, GOI, New Delhi, April 4, 1992. 7. Public Electricity Supply. All India statistics, Ministry of Energy, Department of Power, Central Electricity Athority, GOI, New Delhi, 1989-90. 8. Seventh Five Year Plan, Mid Term Appraisal, Planning Commission, GOI, New Delhi. 9. Second Five Year Plan, 1956"61, Planning Commission, GOI, New Delhi. 10. Third Five Year Plan, 1961-66, Plarnig Commission, GO!, New Delhi. 11. Fourth Five Year Plan, 1969-74, Planning Commission, GOI, New Delhi. 12. Pifth Five Year Plan, 1974-79, Planning Commission, GOI, New Delhi 13. Sixth Five Year Plan, 1980-85, Planning Commission, GO!, New Delhi. 14. Seventh Five Year Plan, 1985-90, Planning Commission, GOI, New Delhi. 15. Eighth Five Year Plan, 1992-97, Planning Commission, GOI, New Delhi. 16. Report of the Woridng Group for suggesting steps for strengthening the finances of state Electricity Boards, Central Electricity Authority, GOI, New Delhi, May, 1989. 17. Report of the Sub-Group on Energy Pricin& SE-s Finances and Related Issues, Central EleCtricity Authority, GOI, New Delhi, April, 1989. 18. AnnuaL Report on the Working of State Elecuricity Boards and Electricity Departments, Planming Commission, GOI, New Delhi. Power sector reform in Argentina by Marta Zaghmni, General Director of Financing Aid and Cooperation Secretariat of Energy Good morning, ladies and gentlemen First of Our country is the eighth largest country in all, I want to speak a little about my country so the world by land area-2.7 million square that you can have a better understanding of the kilometers-and the second largest, after Brazil, causes and the goals of the reforms that our in Latin America. The population is approx- government has oeen carrtying out since 1989, imately 33 million. especally in the power sector. Related to government organization, Argentina has been an independent republic since 1816. The country consists of 23 provinces and the federal capital is Buenos Aires. Argentina's Federal Constitution is modeled after that of the United States and has been in 1. General information effect since 1859. Since the end of the last nmlitary government in 1983, Argentina has experienced ten years of uninterrupted Presently, in spite of a weak economic democratic rule. perfonnance during the last ten years caused by state intervention in the economy and high levels of inflation, Argentina Is still among the wealthiest countries in Latin America in terms of per capita income. Through a program of substanial economic 2. Economic reform reform and liberalization over the last three years, Argenfna has become one of the fastest growing countries in the region, with Gross After President Menem took office in July 1989, Domestic Product (GDP) growing by approxi- his administration implemented a series of mately 6 percent during 1991 and 6.5 percent for reforms, including The Economic Emergency 1992. Law and the Law of the Reform of the State, POWER $ECrot REFORM IN ARCENTINA 83 84 POWER SECrOR REFOPtM iN ARGENrlNA designed to achieve a major restrulcturing of the performance resulting in frequent electricity country's economy. cuts and low tension The main features of the initiative includea: * Huge investments in generating projects, such as Piedra del Aguila, Yacyreta, and * Fiscal reform through privatization of state- Atucha II, were completely stopped and the owned enterprises, tax reform, and reduced contractors presented claimns against the government expenditure government o Reform to ensure monetary stability and e Low tariffs (good for industrial competi- lower levels of inflation tiveness) that reached a similar level to that o Liberalization of foreign trade of other countries such as Uruguay and * Deregulation of commercial and financial Chile, with similar costs in 1991, as a result markets. of the price stability achieved with the Convertibility Law. Despite this, these com- The overall structural adjustment program was panies ran an annual deficit of appro..i- given greater impetus with the appointment of mately U.S. $300 million Domingo Cavallo as Minister of Economy in o The T-easury was unable to make transfers February 1991. He announced a far-reaching to the sector due to the hyperinflation crisis economic reform program, designed to achieve in 1989. long-term economic growth and low levels of inflation. 3.2 Strategy One of the cornerstones of the plan was the passing of the Convertibility Law, which made The strategy that was put in place by the Argentina's currency fully convertible with the government to solve the problem consisted of: United States dollar. The Convertibility Law also prohibits monetary revaluations, indexation o Privatizing the companies in the energy of prices, cost adjustments, and other sector mechanisms for the adjustment of debt, taxes, * Elaborating a set of laws and regulations for and prices of goods and services. the industry The government has implemented a general e Keeping the sector operating. reform program for public sector companies, which included the adjustment of tariffs for It was decided to transfet the companies to the goods and services provided by public sector as private sector without restructuring them, well as restructuring and privatization of public leaving that task to the private owners. For this sector companies. reason, majority interesis were transferred to the The government has included in its privati- new owners to enable them to quickly and zation plan electricity, telecommunications, ports, efficiently take control of these companies. airports, water, gas, steel, petrochemicals, and The most important steps in the privatization railways. The management of the privatization plan were: pro-ess is under the responsibility of the Ministry of Economy and Publics Works and * Division of the state-owned enterprises Utilities as well as the Ministry of Defense. into a sufficiently large number of new companies o Valuation of the companies according to the 3. Energy sector reform: Discounted Cash Flow (DCF) approach .1 * Establishment of contracts between "Why did the producers and distributors before the sale to government do it?" develop a long-term market, among others. The decisions taken with respect to these companies include: 3.1 Introduction - The legal incorporation of companies as capital societies In 1989, the energy sector was characterized by: - The sale of the majority interest-in all cases in excess of 50 percent o Thermal generation equipment that was - The simultaneous transfer of assets and generating at only 40 percent of its capacity, liabilities of companies in operation at and distribution systems with very bad the time of the sale POWER SECTOR REFORM fi AtGNA 85 - The remaining shares in the hands of the * Assigns the task of supervision and of government will be sold in the stock setting policies and regulations to the public market to create a stronger capital sector while leaving management decisions market in the country to the discretion of the private sector - Employee Stock Ownership Programs * Establishes the basic principles of concession (ESOP) are planned. for transmnission and distribution activities - "Open access" for the networks of both transmission and distribution 4. Energy sector reform: - For transmission activities, there is an XI "How did the govern- explicit prohibition against buying and LHow da d the goveas- selling, only a toll is permitted; the dis- _ ment achieve its goals?" tributing companies have the obligation to supply electric energy within the concession area. 4.1 Regulation * Sets tariffs based on real production economnic costs and determines profitability The regulation and privatization processes have levels according to activities with similar been based on two laws drafted during 1990 and risk levels 1991. e Establishes the Ente Nacional Regulador de The first law, State Reform Law NO 23.696, la Electricidad, a national electrical regu- provides a framework for the transformation of latory entity that is separate from any the entire public sector. Figure 1 outlines the political authority. This agency is to act as principal aspects of the law. This law allows the a "host" to public hearings and as a government to split up public companies, change mediator between palies that have con- their charters, create new corporations from the flicting interests. existing companies, transfer liabilities to the As a complement to these laws, the Secretariat Argentine Treasury, and sell stock of the of Energy has devised a regulatory scheine for companies. the sector based on its division in areas with The other law is the Electrical Regulatory different characteristics (Table 1). Framework Law N' 24.065. This law: The regulatory principles with respect to distribution are: v Restructures the energy sector, dividing it into generation, transmission, and distribu- * Market concession vs. obligation to lend tion activities-leaving generation to the service market characteristics while defining trans- a Rates predetermined by power granted on mission and distribution as public services the basis of marginal costs Figure 1 Principal aspects of Law No. 23.696 Reform of the State Rule Law No. 23.696 Intervention of Reorganization of Privatization L public enterpr s | public sector contrac l l 1. Divldon of public enterprises 2. Constitutim of new commerdal sodeties 3. Transfer of liabilities 4. Selng of the ongoinf, enterprise shares 86 POWER SECTOR REFORM IN ARGFNA Table I Price system and chracteristics of productive stages Stage Generation Trasm&ssion Distr0utin Characteristic Competitive Market Intermediate Monopolistic Investment Projects Discreet Continuous Prices Free Marginal cost Marginal cost Failure cost Failure cost Fixed costs Reglation Contract obligations Preestablished oblgations Penalty based on required Rate of revenue service quality • Punishment system with repayment to users tions and financial requirement, the qualifica- on the basis of failure costs tions of the operator, and the pres -s ition of e Short periods of negotiation. guarantees. The second envelope contained the bidding offer. Figure 2 outlines how the market works. The market has two prices. One is the agreed price for contracts between generators and large Table 2 consumers or distributors. The other is the spot Bidding process price. This price will be set by offering and _ demanding electricity in a free market. Time tabe S ule (days) 4.2 Auctions Beging of the seling of the condition's 0 tender The privatization process began once the Optional date for submission 30 regulatory framework was established. Table 2 First envelope opening 50 illustrates a basic structure of the bidding Analysis and prequalification 57 process. The process essentially consisted of the Tems for the mnv peacment 60 interested parties submission of wvo envelopes. Traenfer c optract 75 The first envelope had to state the composition Awarding 90 of the group, with the corresponding participa- Figure 2 Operation of the option market c=w cw*gt _ ~~~~~Pd 1w~~~~~~~~~~ww Pnaw CLi /Cu a ~~~~oteg A6W cnotaLa t>=~~~~~~~ ) %r.tLwr POWER SECrOR REFORM IN ARGEWNIA 87 ____ 43 Results Table 3 shows a sample of the shareholders and their interests in each of the new companies 5. The future which wEfe created. Selecons financial rtetyts for the companies are shown in Figures 3 and 4. 5.1 Future scenrios Tables 4 and 5 show the energy sold at thie F level of production for the entire system for the Poetosfrteepc nrydmn years 1989 to 1993 and the corresponding growth are shown in Figure S. A relatively high wholesale prices. The growth in demand has g rate of energy demand of 5 percent is been accompaned by a recuperation of genra- expected until the year 2000, when the growth tion equipment. At the same time, the price of will continue at a nore moderate rate of the system has decresed with the increase in the 2 pecent. Figue 6 shows how the thermal availability and efficiency of termal generation stations will be incorporated into the network. equipment. Table 3 SEGBA SA. 5ale Nam eof u group Pt. CqU Co[mp Dae % COimes % Cent Puerto SA 4/01/92 60 Ceta Puero SA. (1,009 MW) Chilgener SA 82.5 Chlecta Qinta SA 125 Cetal Costanera SA. 5/29/92 60 Central Costmea S.A. (1,260 MW) Endesa de Chile 50.0 Eaeis SA 15.0 Dist. Cilectra Metro. S.A. 5.0 Inversora Patagodca 12.5 later Rio Holding EL 12.5 Costanera Power Corp. 5.0 Central Pedro de Mendoza SA 9/22/92 90 Central Pedro de Mendoza SA. (94 MW Acindar SA. 75.0 Massu" SJA 25.0 Cental Ddck Sud SA 8/31/92 90 Central Dock Sud SA. (21 MW) Pofledo SBA. 100.0 EDENOR S&A. 8/31/92 50 Elecidad Argentina SA. Astra CGpsa 40.0 Electcite de France 20.0 Endesa de Espafia 10.0 Empm Nac. Hdroelectrica del 20.0 Ribagozana SBA. Sodete d'Amenagemeny Urbane et Rural 10.0 EDESUR BA 8/31/92 51 Distrlec Inversota S.A CIa. Naviera Perez Companc SA 40.5 Grupo PSI Energy Inc. 10.0 Dlstlddora Chilectra Mehtpolitans 20.0 Enerds SA. 19.5 Endesa de Chile 10.0 EDELAP SA. 12/18/92 51 CIa de Inv. Elercidad S.A. Houton Arg. S.A. 49.0 Tedd1nt &A. 51.0 88 POWER SECfOR REFORM IN ARCEGTINA Figure 3 Work plan for electric loss reduction - EDENOR SA. 2as- Figure 4 Evolution of unavailability - Central Costanera Ja92t maw M,9 Ju9 SW9 NoV'2 ' M M-% Ju1 S Table 4 With oil and gas basins located throughout Table~ ~ ~ ~ ~ ~~~~~F-gr 4 Production of energ- Argentina and the network of gas pipelines and ____________________________ electrcal paower lines, numerous different ,Yer Energ Anmyt % comWbinations and alternatives can be developed G%% Diffe Incremse using thermal stations that can be installed in the 1989 43,200 - weli head or close to the demand, cancentrated 1990 24,800 (400) (1) principally in the Buenos Aires area. These 1991 46,100 3,300 8 plarts can also work as "peak shavers". 1992 SO5,O 3,920 9 The gas system, organized similarly to the 1993 (est) 52,000 1,980 4 electric system, is divided by sectors: distribution and transportation. Future development will be based on free market forces. PowER SECwOR tEFORM IN ARGENINA 89 Table 5 5.2 e remaining task Spot prices Only four large issues remain to be solved in the USS/MWh Us$IM W public sector to complete the organization of the system. They are the following. ____ 39.63 First, the government sells the remaining Aug 46.49 shares that it owns in the privatized companies. Sep 42.02 Table 6 illustrates the list of companies, the Oct 3727 percentage of shares still held by the govern- Nov 32.03 ment, and the value of those shares based on the Dec 40.35 price initially offered for the maiority. This 1992 48.61 process will most likely begin towards the end of Jan 38.46 the year with the sale of the remaining shares of Feb 43.65 Central Puerto S.A. and Central Costanera S.A. Mar 57.76 Second, Table 7 shows regional distribution Apr 42.21 companies in the hands of the provinces of May 46.17 Buenos Aires, C6rdoba, and Santa Fe. Although Jun 76.33 the national government does not have direct Aug 57.90 interest in these companies, transfer steps will Sep 48.15 soon take place in the provinces of Santa Fe and Oct 44.39 Buenos Aires, and most likely in the Provinces of Nov 36.47 Corrientes and Misiones, among others. It is our Dec 32.05 belief that the whole country will follow this 1993 38.60 policy for which reason w p can expect a gradual Jan 39.60 but sustained transfer of the distribution Feb 40.98 companies to the private sector in the next two Mar 43.00 years. Apr 43.47 Third, Figure 7 shows the timetable for the May 38.53 remaining companies, the installed capacity, and Jun 35.61 the tentative date for the initiation of the bidding Jul 33.4( idn Aug 34.15 process. Figure 5 'Total consumption of electricity (GWh) 70000 t970 198o 199o 200 2010 90 POWER SECTOR REFORM IN ARGENA Figure 6 Interconnected electricity grid - future additions ('000 GWh) so 75 70 _ CombIned Cycle 65- *Atucha L 605 = = = ill-ilil lll ll UPichi Picun Leifu 55 __ 50 U Yacyreta 45 0 PiedradelAguila 40 Exitn 35 30 1992 1993 1994 1995 1996 1997 1998 1999 2000 Table 6 Remaining sham Finally, the remaining issue to be solved in the Shfes Aezount energy sector in A.gerntina is related to natural Company % USs milln gas. The well head price which is still fixed by Centra Puerto-A.30461 the governent is due to be lifted in June 1994. Central Puerto SA. 30 46.1 Due to the fact that there is still no market Central Costanera S A. 30 45.1 CAMUI - TermkaGuemes.A. 30 31 structure in existence, the government is TRANSENER S.A. 25 90.0 studying the best way to free the price to EDENOR S.A. 39 340.8 establish competition among the producers, and EDESUR SA. 39 390.9 prevent physical limitations and bottlenecks EDELAP SA. 39 106.3 which result in practices that affect price and do Total 1,062.1 not arise froi' supply and demand. Table 7 Electric power sector disrbution makrets Sdes to fial user (GWh) Jurisdition EnterpHse Dnmestic Industrial Others Total Capital Federal y EDENOR S.A 2,330 2,827 1,348 6,505 Gran Buenos Aires EDESUR SA 2,100 2,905 1,605 6,610 Buenos Aires ESEBA 600 2,500 600 3,700 Cordoba EPEC 650 800 450 1,900 Mendoza EMSE 400 1,000 500 1,900 Rio Negro ERSE 150 800 130 1,100 San juan SESJ 130 110 110 350 Tucuman E1DISA 270 300 180 750 'These markets comprise 55 percent of total public sector electrldty ses. POWER SECTOR REFORM IN ARGENTlNA 91 Figure 7 Power plants to be transferred to the privAte sector Powet?Iatt (') KHTu.uman tNov.) I ^O Grndie (Nov.) t)PubIIcbIdd date Cabra Corral Nov idding In prtm. 81 Nlhuil (Nov.) Potaletuf tEnd Oct)_ P,dgiae >. d*I Asudz M) Fd.-I'-II(~ -- - 0 1000 2100D 3CnJ 4000 9mW 6,W) Met Gono=tY* (CWh) Power sector reform in China by Ye Rongsi, Vice President China Electricity Council Ladies and Gentlemen: there are four interprovincial networks, each with installed capacity more than 20 GW, and It is my pleasure to be here it, Jaipur, the Pink three other grids, each with instilled capacity of City, to attend what I am sure will be a very more than 10 GW. Trunk frames of 500 KV and beneficial seminar. I would like to take this 330 KV have been formed initially in each main opportunity to present an outline of power network. sector reform in China based on what I know. Although China's power industty has made considerable progress, it still does not keep pace with the demands of our nation's rapidly devel- oping national economy and quickly improving living standards. The power shortage has lasted 1. Present situation of the for more than 20 years. According to estimates, _i power industry the national power shortage in 1988 reached 80 TWh. In the most recent five years, the newly added installed capacity was relatively great and Since the foundation of the People's Republic of amounted to 60 GW. In 1990 and 1991, the China, through more than 40 years of develop- growth of GNP tended to slow down, and the ment and construction, China's power industry contradiction between supply and demand was has achieved great success. Now it is entering a alleviated in the nation as a whole. Since last new stage in developing large power units, large year, the state has decided to further speed up power networks, extra-high voltage, and reform, open to the outside world, and take this advanced automation. By the end of 1992, the favorable opportunity to quicken the develop national installed generating capacity had ment of the economy. In 1992, the growth rate reached 165 GW, with annual electricity genera- of GNP was 12.8 percent and industrial output tion amounting to 747 TWh. China now has 25 value rose 20 percent, but electric power grew large power plants, each with installed capacity only 103 percent. Most power networks once over l GW (4 hydropower and 21 thermal). Also again faced a tense situatior. between supply and POWER SECrOR REFORM IN CHINA 93 94 POWER SECOR REFORM JN CHIN4 demand, and many provinces and municipalities functions in one. Ihe Ministry of Electric Power had to maintain the supply and demand balance (MOEP) or the Ministry of Water Resources and by load curtailment. Electric Power (MWREP), the Regional (inter- After the Fourteenth Communist Party Con- provincial) Electric Power Administration gress, the State Council readjusted the national (REPA), the Provincial (Municipal or Autono- economic development plan, which was mous Regional) Electric Power Bureau (PEPB), approved by the Eighth NPC, held in March the Cities' Power Supply Bureaus (CPSB) and the 1993. According to the readjusted plan, the Counties' Electric Power Bureaus (CEPB) had annual average growth rate of GNP was to both governmental and power enterprise increase from the previously set 6 percent to functions. between 8 and 9 percent, and the target of The central government owned and had direct quadrupling GNP over that of 1980 is to be managerial control over the entire power sector. realized in 1998, or two years in advance. The government directly controlled and man- Meeting the demands posed by an annual aver- aged the power sector's production, marketing, age national eco.nomic growth rate of 8 to 9 per- sale, procurement, wages, and financing. All cent will place a heavy burden on the power production and operational activities were industry. Based on the original plan of an carried out in accordance with the plan annual average GNP growth rate of 6 percent, approved by the government. Newly built the state previously made a plan that national generating capacity, electricity generation, equip- electricity generation would reach 810 TWh by ment retrofitting, electricity sales, and equipment 1995, at an annual average growth rate of and materials procurement, had to conform to 5.6 percent. Now, after the readjustment of GNP the plan. Personnel, labor, and payroll man- forecasts, national electricity generation will have agement were also under government control. to reach 920 TWH by 1995, at an annual average Senior personnel were appointed by the govern- rate of 82 percent. ment. The total number of workers in an enter- prise was fixed by the government. The grade levels and total salaries and wages were set by the government, and any person that was trans- 2. Background of the ferred had to bring along his salaiy index. In power sector prior to short, the power utilities had no autonomy. li reform The management of generation, transmission z reform and distribution activities of inter-provincial networks or independent provincial networks Before the early 1980s, under the centrally was vertically integrated. REPA and some planned economic system, the power sector independent PETBs are legal entities. PEPBs incorporated the administration and enterprise Figure 1 Relationship between power enterprises and the state P urtde reoomy ew T"=7 p e O" 90M P(dt __tDypwe _WI powr o cmS .tWdbumt .aeapyo POWER SECTOR REFORM IN CHNA 95 under the REPAs had no status as a legal entity power enterprises and to shackle the develop- and no independent accounting systam. ment of China's power production. These The state adopted a finandal management shortcorings then led to acute power shortages system of "total reimbursement to and appropri- during the Sixth and Seventh Five Year Plan ation from governirent" and "detached control periods (1981-90). The power crisis showed that over revenue and expenditure" for power enter- reform was imperative and led to the restruc- prises. The earnings of power enterprises were turing of the power sector during the past 10 thus entirely turned over to the state, and their years. funds, in turn, were allocated from the State Treasury. The capital construction fund of the power industry came from a single source (i.e., ] appropriations from the State Treasury). Power 3. Main reforms enterprises were entirely under the adminis- implemented and trative command of the government and had no oI . p.t autonomy in financial decisionmaking and ongong implementaton dispatching. With no competition an" no risk, the sector lacked vitality and self-development Over the past 10 years, power sector reform has capablity. This kind of financial management made breakthrough progress in some important system formulated a one-way enclosed loop areas. economic relationship between the state and power enterprises (see Figure 1). 3.1 Reform of power investment The power sector was responsible for plant construction and operation, except for some In the early 1980s, power investment shifted small thermal and hydropower plants that were from govenur at appropriations to loans and built and operated by other sectors. There was payable uses of funds. According to the docu- no private sector involvement in financing and ment "Tentative Stipulations on Encouraging operating newer plants. Fund-raising for Power Construction and Imple. The single tariff system of electricity pricing menting Multi-rate Tariff" issued by the State was set by the central government in 1955 and Council in 1985, the monopoly of the central lasted for 30 years. National average electricity government on power investment has been price levels are shown in Table 1. changed to multi-channel fund raising, which Serious shortages of power resulted from the mobilizes local pvernments and power con- lack of construction funds. For example, from suming enterprises to participate in power 1981-85, the average growth rates of installed investments. In power construction, competitive capacity and generation were only 5A percent market systems were introduced, pushing for- and 6.4 percent, respectively; 5.6 percent and ward the contracted system of responsibility for 4.6 percent, respectively, behind the growth of the owners, and tendering contract and construc- the national economy. tion supervision systems. To sum up, the pre-reform situation under the Private investment was permitted, and foreign system of the highly centralized, planned econ- investment was encouraged. Since 1984, the omy, China had a combined and government- state has been encouraged to use foreign funds demanded operational system, a financial man- massively to develop the power industry. By agement system of total reimbursenent to and 1992, US. $8.9 billion of foreign funds was appropriation from government, and sharp invested, of which a small part was in the form policy restraints on state investment, tax reve- of direct investment. Some Chinese foreign nue, credit, tariffs, etc., and so on. The effect of joint ventures, such as Huaneng Intemational this was to suffocate the vitality of China's Power Development Corporation and the Xinli Table 1 Avemg el*Mdly ptces, 195345 Pawktd 1953-58 195945 196-70 1971-75 1976-80 198145 Yuan RMB/kWh 64.16 74.33 66A48 65.96 66.94 70.85 96 PoWR SECTOR REFORM riI CNINA (Sunburst) Power Company, were set up o:A the 3.4 Reform of profit shari.ng state level. Some Chinese-foreign cooperative power plants were also set up such as the In thc early 1980s, power companies imple- Shajlao B Power Plant it (Wuangdong Province. mented the "'Enterprises Fund," "Retaincd Profits," and the first and second stages of 3.2 Reform of the mono-tariff system of 'Profit Submission Transformed into Tax' electricity to a multi-tariff system systems in succession. Since 1988, power enter- prises were contracted with the responsibility The tariff for electricity generated from power system, in which enterprises were allowed to plants owned by the local govenmments, institu- retain their operating surplus if they "turned tions other than the central government and over she prescribed profits, after completing central power sector, Huaneng, Xunli, and other technical innovation tasks, electricity sales, and joint venture companies is priced and verified materials consumption, linked with the total based on the real cost, plus taxes and a reason- amount of payroll." This reform has strength- able profit. ened enterprise managament and the sense of In line with the escalation of coal prices and economic efficiency and has raised enthusiasm in transportation charges that increase operating system operations. costs, tariffs are raised correspondingly. For simplifying the rate schedule, different 35 Reform of the internal management systtm tariffs have been combined and levelized into a within enterprises single rate schedule in some provinces. But the tariffs for electricity generated by the state- According to the "Enterprise Law," all enter- owned power plants and the plants already in prises should implement the director (manager) operation before the reform remrain unchanged. responsibility system. To put this law into effect, reforms in labor, payroll, and personnel systems 3.3 Progression of power enterprise rform in the power enterprises were launched in 1992, through which the -)rganizational setups and Based on the principle of "separation of adminis- personnel management within the enterprise are tration !rom enterprises, real entities on provin- being significantly reformed. This reform is now cial bases, united networks and unified dis- spreading. patching, and joint financing for power construc- tion" that was put forward by the state in 1987, 3.6 Reform in the accounting system and the "Scheme of Institutional Reform on PoM: Industry Management" raised by the The state issued the "General Rules on Enter- Ministry of Energy and approved by the State prise Finance and Enterprise Accounting Crite- Council in 1988, the East, Central, North, and rion," which were put into effect on July 1,1993, Northwest China Pc . t Jnited Companies and to conform with international practices. the Northeast Power General Company, as well as several provincial power companies, were set 3.7 Stock systems up in succession. These companies are economic and legal entities with independent accounts, Stock systems have been employed in some organized from enterprises of diverse ownership. state-owned enterprises since 1992. A few power In managing the power network, they have been enterprises were approved to issue intracompany utilizing economic, technical, and legal measures stocks. Some issued marketable stocks to the instead of administrative mandates. On these public. Thus, the general public and the bases, the North, East, Northeast, Central, and employees of the power industry are beinning Northwest Power Groups in China were estab- to own a small portion of power enterprise lished in January 1993. Twenty-one of the thirty assets. provincial power companies joined the power groups that practice individual planning, and 3.8 Transfornation of the government funtion independently contracted projects from the state with more autonomy in operations. In addition, In the government, reform meant that functions some 1,500 county-level distribution companies, were changed, offices were simplified, and two-thirds of the total, became bulk purchasers authority was distributed to lower departments. and independent legal entities with their owr Good progress was made in retuming autnomy accounting systems. to the power enterprises. The newly established POWER SECTOR REORRM IN CHINA 97 Minstry of Electric Power is detemined to * The rational econonic tariff system has not transform its functions from direct administra- been utilized. tion to providing "planning, coordinating, and * Power enterprises have less internal funds supevising"' services. for expansion and alleviating the power Through the above-mentioned reforms, new shortage. The scarcity of capital, lack of investments have emerged in China's power fuel supply, and delays in transmission industry. In 1993, total investment in the power network construction also obstructs the industry reached 53 billion Yuan, an increase of development of power industry. 32.5 percent from 1992. Of this new capital, * There is a lack of a comprehensive legal approximately 70 percent came from multi- system to suit the requirements of a socialist channel funds. In 1981-85, the commissioned market system. average annual generating capacity was only a * There is a lack of an efficient and effective little more than 300 MW. In the recent five macro-control. years, newly installed generating capacities * Regarding power planning, power reached 1,260 MW annualhy. Reform has investment, electricity laws and regulations, steadily improved the manage.nent and the tariff and policies from multi-sectors, the profits of China's enterprises. A lot of high- process is complicated, decision-making is quality, efficient, and economic capital construc- slow, and small local generation plants are tions were undertaken in the power industry. In often not coordinated with the overall recent years, coal consumption decreased more demand. than 3 g/kWh. Equivalent availability factors of large generation sets increased annually. 5. Objectives of power 4. Main issues currently 5 sector reform faced .1 Principles of setting reform objectives Great success has been achieved in the develop- These are as follows: ment and reform of China's power industry. But there is still much work to be done to deepen * Contribute to the general goal of national reforn and accelerate development. The main reform to establish a socialist market issues currently faced are as follows: economy system. * Build from the existing conditions of the e The government still intervenes too meticu- power sector in China. lously in th.. enterprises. The enterprises do e Use the experience of other countries for not have complete autonomy in their deci- reference. sionmaking. Power enterprises are not o Ensure the conformity between reform separate from the government, and continue objectives and development goals. to undertake a lot of the administrative functions. For example, the government 5.2 Main points of reforn goals allocates power to customers. This insepa- rableness hampers the power enterprise In my view, the main reform goals can be from becoming a real legal entity with the divided into several categories: general, shifting capability to run, develop, discipline itself, government function from overall operation to and be accountable for its profits and losses. perfrming only the necessary central functions, * The power group corporations and provin- corporatizations of the utilities and more cial power companies have not yet been thorough going commercializations of main corporatized. operations, and development of a oDmprehensive o There is no competition among enterprises. legal and regulatory framework in the sector. Thus, there are less incentives to cut down operating cost, improve efficiency and promote profitability. 98 Powu scroR REFORM IN CHINA GENERAL DESCRU'tION: "Corporation Law" issued by the state. Most of them will be reorganized first into Separate government administration from limited-liability companies. Some suitable enterprise management: "Two rights ones may be altered to limited-share corn- (ownership and operational right) should be panies. Distinguish ownership and share- separated." holding rights on the basis of re-evaluating * Corporatizatlon of the enterprises' properties. Separate ownership and opera- organization. tonal rights. Put in" practice a system of * Commercialization of the companies' having a general manager under the leader- operation, ship of a board of directors. Implement a * Legalization of power regulation. new accounting system that can meet inter- national standards. SHIFr OF GOVERNMENTAL FUNCTION TOWARD * Following the construction of the Three NONINTERFERENCE IN ENTERPRISES' DAILY Gorges Hydropower Station, and the imple- MANAGEMENT: mentation of a united power grid in the whole country, it will be possible to * The main duties of governmental adminis- organize a national power grid company trative departments include: law and policy and to set up an intergrid power market. formulation; overall planning; investment * Make the provincial power company a legal quantity control; major projects approval; entity, and let regional generation, transmis- supervision of the state property value sion, and distribution control be managed guarantee and value addition; and appoint- by a sole entity. Another option is to let ment of state-owned shares representatives. regional generation and transmission be * Power control functions (such as tariff controlled by a single entity, but have a review, franchise license, etc.) should be relatively independent county power com- relatively centralized. The 'Tower Regula- pany manage power distribution. It is also tory Commission" should be set up to possible to manage an interprovincial grid review and authorize legal and regulatory as a whole or to have one or more power fi. nctions (although this arrangement will be companies within a province. rather difficult, it is an option that should * An interprovincial power group company be considered). The national power regula- will control the grid trunk frame and some tory authority may be transferred away important peak-regulating power stations. from the power administrative departments Its transactions with the provincial power gradually. In the meantime, the govern- companies are through property control ment may also (a) transfer the obligations of shares or shareholding. formulating policies and rules to the per- * Public ownership will comprise the majority tinent governmental departments (may be a of shareholding rights of the companies. comprehensive economic department); and Under such a premise, a part of small (b) transfer grid control duties to a national power plants may be leased to or operated power dispatching agency or national/ by private companies, with properties still regional power group companies. owned by the state. Some of them may be * Power companies shall have no administra- put up for auction. One may transfer a tive functions and shall not use two name- small part of state-owned property (e.g., plates for one entity. The provincial power 10 percent) to the general public or as regulatory commission can be set up as a employees' shares. provincial power bureau with independent organization and operational rights. COMMERCIALIZATION OF COMPANY OPERATION: o The electricity council shall further imple- ment their pacts in trade management and This process should have the following features: serwces. o Companuies should have full autonomy CORPORATIZATION OF ENTERPRISE ORGANIZATION: rights in power generation, operation, procurement, electricity sales, employee * Reorganize interprovincial power group management, and organization companies, provincial power companies, arrangements. and other power entities according to the POWER SWC=OR REFORM IN CHINA 99 o Companies shall have the capacity to gen- o While practicing economic tariff and erate self-developing funds of their own, assuring internal funds for capital expan- and functions to collect funds from the sion, stop imposing two cents per kWh for market, get loans from banks, and issue power construction funds that are not com- shares and bonds upon approval by the rrercialized and are not based on standard state. methods. Transition measures should be * Companies should diversify business arranged. wherever necessary. Maintenar. .e work and e According to pubic utility requirements, other productive and accommodation ser- decrease circulation tax to 5 percent and vices may be separated from the company income tax to less than 3 percent. as an independent entity with its own * Power companies shall be operated accounts. according to the "Law of Enterprise" and v Nonopcrative properties such as hospitals "Transition Management Ruies for State- and buildings should be separated from Owned Enterprises" issued in 1992. When power companies. The nonoperative seg- the "Corporation Law," becomes effective, ments should operate as independent reorganize the company and operate accord- contractors. ing to the new law. * Internal accounting units should be mini- * Establish a legal system to control power mized and set as independent contractors. companies. This system should Jay down * Economic tariff options should be planned, the "Electricity Law," supplemented by calculated, and applied according to reason- rules and regulations for tariff control, able tariff principles set up by the state. To electricity supply and service control, power set power consumption allowances accord- development project permits, business area ing to China's social goals, a responsibility franchise, electric facilities protection, power contracted system must be established. grid control and regulation, and rules that encourage private and foreign investors to LEGALZATION OF POWER CONTROL, build power stations. If a central and local CONSUMMATION OF LEGAL POLICY FRAEWORK: power regulatory comnmission is set up, organization and regulatory rules for it will To develop a legal and policy framework, the be needed. following points are critical: China's power sector reform is complicated * Set up tariffs according to the principle of and has a long way to go. We will gradually cost+tax+reasonable profit, and assure self- reach the goals as long as we persevere within reliance. Tariffs will be approved by the the socialist market economy orientation. government or power regulatory authorities. The U.K. experience by Roger Witcomb, Director of Corporate Planning National Power PLC Good afternoon, ladies and gentlemen. I work into no less than four companies. The trans- for National Power, the largest private generator mission system was hived off as an independent in the U.K, and I should like to give you a common carrier. The power stations divided practitioner's view of our new electricity market. between three companies. The nuclear stations went into Nuclear Electric, which is still in public ownership because it was thought unsalable, while the thermal stations were divided between two companies, National Power and PowerGen. In addition, a com- 1. The U.K. arrangements pletely new market was created for electricity, called the pool, which 'l come back to later. The restructuring of the electricity supply industry in the U.K was a most complex piece m of economic engineering. The former structure (Figure 1) consisted of a 2. Reasons for single, publicly owned corporation, the Centrl resLucturng Electricity Generating Board (CEGB), which owned the power stations and the high-voltage tranission system, and 12 regional organi- Why did the Thatcher administration decide to zations, also publicly owned, which owned the restructure the industry so comprehensively? low-voltage distribution system, bought power The first thing to rmember is that electricity in bulk ftom the CEGB and sold it on to final was part of a much larger program of privatiza- cuStDMe. tion. The official reason for this program was a Under the new arrangements (Figure 2), the belief that it was not the business of the govern- "'2 distibution companies were sold off as ment to run industrial concerns. It was felt that 12 independent companies. The major surgety without the stimulus of the profit motive or was saved for the old CEGB, which was split competition, the nationalized industries had TIE ULX EXPERDEN 101 102 THE U.K. ExPBPEMCE Figure 1 The industry before March 31, 1990 cfol ectos| Scotla | France Genera ad Transmission Inldepenldent| G1) 12Regioal Boards PThskibuC n and Supply) Figure 2 The industyr after vesting on March 31, 1990 Companies Power IG Scotland BOUC I rn PowerGen Transmission Company Edeendez, CGzid w 12 Pubiccicit Law)C3 < National Power, PowerGen, Nucear Electric, and National Grid = Successor Companies to CEGB become inefficient and b,ureaucratic. Poor Moreover, attempts to control nationalized investment decisions were being taken, and there industries were thwarted by a management that was also a eelinm& although this was not often was better informed than their political masters marcated, at least by those in goverment, that and had a different set of objectives. All these the government could not be trusted to treat features were present in the U.K electricity these essentially commer ialundertaldngs as just industry. The costs of investment were exces- that, commercial undetak , and would sive. It is geerally believed that under the always be tempted to use them as istruments of CEGB, power stations cost between 50 and govemment policy. 100 percent more than in other developed TmJ U.K. EXPERJENCE 103 countries and that thev took twice as long to concentrated in the hands of three companies. I build. also have to admit that the original intention of The industry wes over-manned. This was the government was to set up rather more generally believed to be true, but I don't think generators, but they were frustrated by a series anyone realized how bad things were. Por of events that I don't need to go into here. example, when National Power was created in However, in the longer term, the real indicator 1990, we had over 17,000 employees. Now. three of competition is the freedom of entry into a years later, we have little more than 7,000 staff. market, and here our generation market is The electricity sector was undoubtedly also beyond reproach. used as an instrument of goverunent policy. The heart of the competitive market is the For example, the CEGB was allowed to buy only pool. The rules of this market are simple. First, British coal at well above market price. It was, anyone can become a generator. All you need to to a large extent, obliged to buy its plant from do is to get a license, which is freely available, British manufacturers. This contributed to its build your power station, and set it up to the high investment cost, and by feather-bedding technical standards required by the system. British plant manufacturers, it more or less Then you have to join the pool, which, in destroyed their chances of ever being competi- structure, is basically a cooperative of producers tive in international markets. It allowed British and retailers. Rail to extract monopoly rent from the gener- The third rule is that all generators bid their ating sector to make its own results look more plant into the pool at 10 o'clock every morning. respectable. The CEGB also invented implaus- The National Grid Company, which operates the ible schemes to justify selling power to industrial system on behalf of the pool, collects all the bids, users at very low prices. For all these hidden estimates demand in each half hour of the fol- subsidies, domestic consumers and small bu.:- lowing day, schedules plants to meet that fore- nesses pickced up the bill (the opposite to most cast at minimum cost and fixes the price in each developing countries). half hour at the bid price of what economists call By the time it was electricity's turn to be the marginal, but what is in plain language the privatized, there was another item on the polit- most expensive, generation set running at that ial agenda. In the first, two privatizations of time. telecommunications and gas, the industry had, in Taken together, these arrangements produce a each case, been sold as a single company. A lot market structure which is as competitive as any of people thought that privatization had merey disciple of Mton Friedman could wish. Al turned a public monopoly into a private monop- generators compete on level terms every minute oly, with no obvious improvement in economic of every day, and there are absolutely no barriers efficder y or in social welfare. So when elec- to entry. tricity was privatized, there was a real attempt to introduce competition in those sectors of the market where that was possible. Transmission and distnbution are obviously natural monopo- lies. This left generation and retailing, which we also call supply, which sometimes confuses 4. Competition in retailing economists. The other potentially competitive market is retailing. The structure of the pool should make competition in retailing easy to achieve. In prin- 3. Competition in ciple, just as anyone can sell electicity into the generation pool anyone can buy from the pool. Many large usew already operate in the pool and there is no reason why, in the fture, there should not be Of course, the obvious first requirement for competing retailers of electricity, so that, just as competition is that there should be a reasonable with telecommunications in New Zealand or the number of competitors, and here you might United States, even domestic consumers will think that the UJC govenmment missed an have a choice of supplier. At present, this opportunity because immediately after privatiza- freedom of choice is available ordy to consumers tion the vast bulk of generating capacity was with a load of more than 1 MW. However, the 104 THE U.X. Expmrmav restriction is essex tUlly a political one; that limit 7 falls to 100 kW next year and disappears entirely in 1998. 6e Lessons for ofIher Li would-be restructurers You will ha, : gathered by now that I'm some- 5. The performance of the thing of an enthusiast for ti. z new world, but new market even I would have to admit that there are still some, how shall I put it, some open questimns. But I'll pick those up when I try to answer the That then is a very brief description of why the question which is the big one for this conference restructuring took place, and how it took place. and that is ...Is the U.K. system exportable? And There remain two questions. We have stood in if it's not exportable in its full glory. what bits of the new world for three years now. Does it it are? The centerpiece of the U.K. arrangements work? And of course that key questions for this is the pool. Only, I think, with the pool or with workshop is: would it work anywhere else? something very like it can you achieve, first, the So, does it work in the U.K? I think the delegation of investment decisions to the narket- answer is yes, with some qualifications. The first place and, second, the possibility of real competi- thing to say is that it has worked technically. tion in retailing. I have to say I find the first of The lights have stayed on, the plant has been these more important than the second. In the dispatched, in merit (nore or less), and the right U.K., the jury is still out on the question of payments have flowed, at the right times, from whether the market will do a better job of invest- retailers to generators. You may think that that ment planning than a central planner would is not much to be proud of, but you should not have. The record of the old CEGB was not, as I underestimate the technical difficulties in making have said, very good in this regard. The last such a complex market work, and there were twenty years or so have seen serious overinvest- plenty of people who said that it wouldn't. ment, caused mostly by over-optimistic forecasts, Second, there has been the dramatic effect on but also by a wish to keep British plant manufac- operating efficiency, which I mentioned earlier. turers in employment. There were reasonable The effects have, not surprisingly, been most concerns that the new arrangements would lead marked in the generating sector, where my to under investment and capacity shortage. In company, National Power, and the other two big fact, for a variety of reasons which I won't go generators have all seen major gains. into, there has been a huge build in gas-fired, Thirdly, for many consumers, prices have combined-ycle gas turbines, and the over- fallen, although the picture is not uniforn and it capacity is as bad as ever. This means that the has been obscured by various taxes and sub- market arrangements for rewarding capacity are sidies both before and after privatization; and essentially untried because the market payment the fourth major benefit has been the trans- stays resolutely, and rightly, at zero. I have to parency that it has brought to the marketplace as say I'm not convinced that those arrangements I mentioned earlier. For example, there has been will work very well but I am driven to the a major public debate in the U.K. recently on the conclusion that if you want the market to set the future of the British coal industry. Whatever level of investment, then the system we have got you may think about the outcome, it cannot be is the worst system there is, apart from all the denied that the debate focused directly on the others. issue of an uncompetitive domestic coal industry I also have to stay that I think that a com- in a way which would not have been likely petitive pool will work only if the technical under the old arrangements, when subsidies conditions are right. In particular, you need a were hidden as contracts between two public good transmission system. Our commercial sector industries, and the poor old electricity arrangemnents are based on the assumption that consumer paid the bill. our transmission system is perfect. In other words, it assumes that an extra kW of demand anywhere on the system can be met by an extra kW of generation, anywhere on the system. Even for the UIK system, which is by common consent overengineered, that is something of a THE U.X EXPFENC 1o0 heroic assumptOn, and much of the dissatis- On these difficult questions I shall say nothing, faction with the pool stems from the rather crude on the grounds that they have not yet been methods used to reconcile the pur,ty of the addreased in the U.K., so we don't have any concept with a rather more untidy reality. If the experience for you, and also because there are transmission system is even less perfect, for people here who are far better qualified than I to example, if it is little more than a set of intercon- tell you what ought to be done. nectors between semi-independent systems, then a single pool is likely to fall. Of course, one can still realize many of the benefits of competition in generation with less radical measures, but my own view is that the U.K. system has an Impres- sive logic to it and it works, at least in the U.K. 7. Conclusion I am conscious that I have concentrated almost entirely on generation, and to a lesser extent retailing. That is because transmission and I am a simple generator, and from where I sit, distribution are straightforward natural monopo- the new world looks all right. There are still lies which are not suitable for a market solution. rough edges to be smoothed off, but it's an There are, of course, some large questions about awful lot better than what we had before. Of how such network monopolies should be regul- course, the market prospects in the UK. are ated and in particular, how they can be given poor, and we in National Power are actively incentives both to operate efficiently and, what looking to invest in dynanmic economies like is possibly even more important, to price and India, but that is another story. invest efficiently. Levels of competition in the U.S. power sector by Bernard Tenenbaum,' Consultant Industry and Energy Department The World Bank business" in the distribution function2 are, in most circumstances, a "natural monopoly."3 This ra;ses the critical and usually controversial 1. Levels of competition question of where competition should be intro- duced, and where service should continue to be provided on a monopoly basis. One of the most critical issues facing the priva- In most countries today, the distribution tizing government is how far it wants competi- function, where the electricity systems interact tion to permeate the previously monopolistic with the end-use customer, is provided on a structure of the industry. Today, there is broad monopoly franchise basis.4 This typically means (though not universal) acceptance that the gener- that the distribution company is granted a ation function is potentially competitive. How- franchise service territory with a more or less ever, there is equally broad acceptance that the exclusive monopoly right and accompanying transmission function and at least the "wires obligation5 to provide end-use customers with An earlier versicn of this paper appeared In Benard Teenbaun, Reiner Lock, James V. Barker., 'Electridty Privatizatl: Structural, Compeive and Regulatory Options," &jgzgy.frljev Decemnber, 1992. The views expressed in this paper are those of the author and do not necessarily represent the views of the World Bank or the co-authors of the earlier paper. 2 Transmission is typically distinguished from the "wires business" of distribution on the somewhat arbitrary basis of the voltage level of the transmission of the power. We will refer to the wires and related facilities In both funcions as "transmission facilities". So me have argued that competitive joint ventures (a type of joint ownership) in transmission could obtain the benefits of competition in transmission service without losing the efflciencies of a single integrated operation. See Susan Braman, Theorv and Application of Cognetitive Toint Ventures Ph.D. dissertation, Georgetown University, Washington, D.C., August 1992. 3 A monopoly is a natural monopoly when producion by a single entity is the cheapest way of producing any level of output and production by a single firm is the natural outcome of the markefs operation, absent any government intervention. See Richard Schmalnsee, The Control of Mono tolies Lxdngton Books, D.C. Heath Company, 1979, p. Z 4 On many systems, this is integrated within a single company strucure to provide generation and transmission service on this basis also. 5 In the U.S., this is often referred to as "the obligation to serve," and in the European Community (C) as "seuity of supply." -EVELS OF COMPEnON IN Tm U.S. POWER SECTOR 107 108 LEVUS OF COMPETITION IN THE U.S. POWER SECTOR the service they need. The end-use customers enhance long-term investment efficiency. It is receive a bundled "wires" and power sales this fundamental notion that was driving both service. Generally, the exclusive right to serve is the European Commission's Directive that would maintained by the utilities' monopoly control have required "third-party access" (TPA) and over transmission facilities (at least the distribu- legislation recently passed by the U.S. Congress tion "wires" and, where integ.rated companies that mandates unbundled "transmission service." exist, the entire transmission system). Most Both initiatives are designed to enhance competi- customers do not, under this system, have access tion in the inter-utility bulk power markets. to other power suppliers because they do not The issi'e of mandatory wholesale access has have rights to use tle utilities' transmintbon proved highly controversial in both the EC and facilities. Nor in most cases do they have the U.S. contexts. Those who support it argue that economic ability or legal right to build their own it is the fundamental prerequisite to a fully facilities to do so. Hence, the key to significant competitive generation market. Those who competition on most systems comes down to oppose it, usually transmission-owning utilities, who has "access," or the right to use, t.e utilities' have argued that the only efficient way to run an transmission system on reasonable terms and electric power system is as an integrated monop- conditions. Most privatizing govemments will oly. They contend that open access and corapeti- have two fundamental options: tion threaten both the technical reliability of utility systems and their own long-term eco- 1.1 Wholesalelnonfranchise access nomic efficiency and assurance of supply. While the first view has been adop..ed in the U.S. in the This would limit competition to the "nonfran- Energy Policy Act of 1992 that was signed into dhise" level, typically the wholesale level, by law on October 24, 1992, the debate still goes on allowing only generators and distribution util- in Europe. ities access to the transmission grid in order to give the latter increased options as to power supply.6 As the high-voltage transmission grid 1.2 "Retail" or "franchise" access to end-use has grown in the US., some level of competition customers in these markets has developed even without major government intervention to guarantee The yet more controversial and difficult issue is access for these entities to transmission service. whether the competing generators should also This competition has been facilitated by a signifi- have transmission access to end-use (retail) cant level of voluntary access or "wheeling" customers; or, to put it in a way that highlights granted by utilities, especially as to each other's company concerns, whether end-use customers surplus capacity, and to the development of an should have the ability through transmission "independent" power sector under federal access to reach other suppLiers and hence, to regulatory guarantees that guarantee some escape the hithertofore exclusive supply market, albeit often localized, for their power. monopoly. However, a legal or regulatory requirement Added to accentuated concerns about system that utilities must grant access on reasonable reliability and long-term efficiency is the funda- terms to generators to reach distribution utilities mental economic concem of distribution sup- is widely viewed as essential to a fully competi- pliers-that a right of end-use (retail) customers tve bulk power market in generation.! The to leave their systems at will could lead to justification for imposing such a requirement is serious "stranded investment" problems that that a competitive generation market will narrow could raise prices for remaining customers and inter-system operating ceit differentials and even threaten the financial viability of the 6 Many developing countries such as China, Honduras, and Guatemala have opted for an even more limited form of wholesale competition. In these countries, independent power producers (IPPs) compete for the right to make a long-term power sale to an exsting vertically integrated utility with a de facto or legal monopoly in a particular geographic area. This is sometimes referred to as the "central procauement" model It represents a sanitized, compartmentalized form of competition. It is competition to supply an Input rather than competitior. to take away customers. The access may be granted to the generator, or to the distibution utility, or, to render the right most usable, to both. The U.S. seems to be moving towards a buyer and seller access regime. LEVBL OF COMPETMON IN TE U.S. POWER SECTOR 109 distribution monopoly.' The stranded invest- to other customers that are connected to the grid. ment concem is particularly acute for vertically Customers that withdraw from a franchise must integrated systems that have built capital-inten- be required to procure sufficient generating si.e, long-gestation facilities to meet the expected capacity to ensure their security of supply. If "load" or demand of franchise customers on a such a requirement is not imposed, the new long-term basis. It is also potentially present in "non-franchise" customers will receive reliability the case of a distribution company heavily benefits because the franchise customers will pay dependent on long-term take-or-pay power for generating capacity that protects everyone contracts with IPPs. These concerns appear to be that is connected to the grid. In other words, a accompanied in the U.S. context by a deep- regime that permits customers to purchase seated and not unreasonable frar of utilities that energy without any capacity responmibility is retail access will undermine the current monop- unfair to those customers that purchase the oly franchise system. capacity that provides emergency protection for In reality, the stranded investment problem everyone connected to the grid.' This is an may properly be characterized as a "transition" example of a free rider problem. issue9 inherent i the movement from an exclu- In the recently concluded U.S. debate over sive franchise distribution monopoly system to enhancing competition in the electricity sector, one that permits competition at the end-use the view that ultimately prevailed was that end- level.1" It can be managed by imposing notice or use access or retail wheeling should not be direct compensation requirements on end-use (or endorsed as national policy. In the EC, the wholesale distribution) customers leaving the proposed Commission Directive on TPA would franchise system, and on those, having left, have required Member States to grant access on wishing to return to the system for assured all interconnected transmission systems to large service."1 These .equirements would be related end-users (those approximately 25 MW and to the utility plauning horizons for additional above) and to distribution utilities who capacity investments and would be designed to individually or "in association" comprise at least protect the utility from "stranded investmnent" 3 percent of the Member State's overall con- losses and to protect remaining customers from sumption3 In Britain, where the complete retuning customers' threatening adequacy of vertical deintegration of the industry has service. reduced political opposition and economic An additional problem which must be con- concerns, the right of access is currently available fronted, even if the stranded investment problem to 1 MW or larger. As noted above, that size is solved, is the obligation of wheeling customers limit will be eliminated in 1998; hence, every 8 In India, the economic incentives for State Electricity Boards (SEBs) to allow retail wheeling are not cear cut. Since most SEBs are currently short of capacity, it would be to their advantage to lose load to another supplier. However, this effect has to be balanced against the fact that industrial customers often subsidize other customers. In another paper prepared for this conference, it was observed that the SEBs generally oppose giving high-tension customers access to the grid because these customers pay their bills and their departure "would make the SEBs dependent on small custor-rs from whom the collection is difficult". Administrative Staff College of India, Commercialization of Power Sector In India. 9 In a major report by former Commissioner Stalon and the Federal Energy Regulatory Commission (PERC) Staff to the Commissic.t in 1989, it was argued that, during a "transition period," the FERC needed to be "sympathetic" to the "stranded investment cs of utilities that supply the power needs of distribution "requirements utilities (ie., those that rely on the supplier for aU or most of their generation needs). These customers leaving a utility system can cause stranded investment problems similar to end-use customers' leaving. See FERC, The Transmission Task Force's Report to the Commision. Electicity Transmission. Realities, Theory and Policy Alte atives," October 1989, p. 175. ' This principle was applied by the FERC in a decdsion conceming wholes service to "requirement" cu.. mers (typiay supply-dependent distribution utilities). FERC indicated that it would allow "legitimate and verifiable stranded investment costs on a case-by-case basis" in cases where open access was not contemplated when the power supply contract was signed. Enerev Services Inc. 58 FERC '161,234 at 61,770 (1992). PERC decisions are reported in a fashion simiar to court decisions by Commerce Clearing House, Inc, a company that reports the decisions of speiaHzed U.S. regulatory agencies. ERC decisions are reported by volume number ere "58 PERC means the 58th volume of FERC reports). Each ase is assigned a number designated by a paragraph sign (here 161,234), followed where pertinent by a page number (here 61,770), and fllowed by the year of the decision. Al furither citations of M1RC decisions herein follow this standard citation system. 11 In the US., this is sometimes called the "prodigal son" problemL 12 This is an example of a "network exterality". Loop flow is another example of a network exterality. The difference between the contracted power scheduled over an interconnection and the actual physical flow is known as paralle or loop flow in the U.S. u Arcle 7(2), TProposa for a Council Directive nerdning common rules for the internal market in electricity," Commission of the European Communities, DirectorateGeneral re Energy, Brussels, January 17,1992. 110 LEvELS OF COMPETmlomN IN THE U.S. POWER SECTOR homeowner in England will, theoretically, be CUSTOMER SELF-SELECIION: This model would able to shop around for electricity.' If the permit a customer to select whether it prefers to "stranded investment," emergency "free rider', be served on a monopoly franchise, assured and political problems can be managed, one supply basis or to "shop" on the competitive bulk could envision at least three models for accom- power markets for its own supply. Such a modating end-use or retail access in a "steady system could permit customers to move from state" situation: one to the other regime with reasonable notice. The advantage is that, with proper notice, this SmE Lrs: This model would permit access system reduces the likelihood of stranded invest- for only end-users (or distribution-only utilities) ment because it encourages more careful delinea- of a certain minimum size, as in the proposed tion of the rights and responsibilities of the EC Directive. The primary motivation for such distribution company and the different categories a limit is twofold: of customer. A variant of this approach was adopted in 1986 by the California Public Utilities X A practical, somewhat paternalistic, recog- Commission (CPUC) for intrastate natural gas nition that only end-users with the financial transportation service. The key element in the incentive to devote adequate resources and program is a distinction between "core" and capabilities to effectively procure power in "non-core" servie.18 The CPUC initially decided a competitive, bulk market, should attempt which customers go into each category based on this quite technical and complex task; and previously determined priorities related to . A concem that large numbers of end-users volume of consumption and access to substitute or distribution-only utilities seelkng access, fuels. This type of program could be applied to perhaps without the necessary expertise to electricity and modified to allow for self-selec- procure power effectively, could jeopardize tion by customers.1'9 the technical reliability and longterm efficiency of the supplying systems.'5 Niw LoADs: This model would permit access only for new customers or for incremental loads, .e., new demand, but would not permit cus- _ 2. A phased strategy tomers access to switch suppliers for existing loads.16 One problem is that a simple "new customer" rquirm t could lead to "gaming" of As the protracted and often quite emotional the system, e.g., by an existing corporate debates over transmission access in the US. and customers going out of corporate existenc9 and the EC demonstrate, the issue of introducing any re-emerging as a "new" corporate customer.1 significant level of competition through access is tSee Parliamentary Select Committee report, Sn note 28. The Commitee questioned whet unlimited end-use access will yield th same benefits as Improved metering (combined, presumable, with time-of-use tarffs). While size limits are iherently aiby, they should, at least, be reated to reasonable judgements as to these two factorsm Moreover, any access proposal keyed to size inevitably rases a "boundar problem. Customers below the minmm size wiD have the incentve to group together to get over the size requirement. The electricity regulator in Britain has already had to address this problm. In the U.S., a form of acoess for new end-use customers Is allowed in the state of Georgia. The four major utilities in the state compete for new industral and commerial loads above 900 kW if the customer locates its facility outside of a city l}mit. However, once the customer chooses its supplier, it must remain with this supplier in papetuity. Therefore, the competition is a one-time competition. See CGeora Territorial mectricSevice Act," (GA. 1l1973, p. 200, par. 1). This competition is made possible by the fact that each of the fotr utilities has a partial ownership interest in the entire high-voltage grid. Ownerhip provides tramision rights anywhere on the high-voltage system. * The Georgia law tries to preve such gaming by tying the sevice to specified phyl fadlitiez 1 See CPUC, Dedsion 91-1105, November 6, 1991; and Michael P. Russo and David J. Teece, 'Natural Gas Dibtriuon in Califa" in Rihard J. Gilbert, ed., Utni Choices University of Calfomia Press, Berkeley, CalIfomia, 1991. 9 It appears that Poruga has opted for thib approa. ndurl csom will be given the choice of patcipating in the "binding" or "nonbidn market. If they choose to be served in the binding market, the regional distribution company wil haves legal obligation to supply them with power on a regulated basis. If they choose to buy in the unregulated nonMbr-ding market, they cannot return to the binding market without fst giving two years notice to the regional distrbution supplier. LEVELS OF COMPETTFION IN THE U.S. POWER SECTOR 111 controversial. However, there is a growing they may plan generation for load that sub- consensus that, if implemented properly, a sequently leaves its system prematurely and transmission access regime that introduces leaves remaining customers (or the utility's competition in generation at the wholesale or shareholders) with the larger cost burden of non-franchise level could capture many of the excessive reserves to bear. Moreover, while potential benefits of competition without customers physically embedded in a utility's threatening system reliability, security of supply, system may theoretically buy power from or the financial health of the industry. another system through retail wheeling, in However, the yet more controversial step of reality the power may corile from the original also introducing some competition at the level of supplier, forcing it into a "supplier of last resort" end-use sales, directly challenging the monopoly role that mav be difficult to avoid (e.g., by status of the local supply franchise, elevates such cutting off supply) or to be compensated for concerns to a new level. Hence, it requires a (e.g., by penalty provisions). Hence, if end-use careful analysis ef both the short- and long-term or retail access is not implemented verv carefully impacts. The central long-term issue is what and with full regard to its implications, it could such competition would do to the supply plan- lead to planning inefficiencies that, in an ning function of the distribution franchise utility, industry this capital-intensive and captive to especially if it retains an "obligatioit to serve" long planning timeframes, could be very costly. end-use customers. In many cases, this function In light of the enormity of the challenge of will be operating in an industry which requires even introducing effective competition of the either capital-intensive long-gestation generation generation level, the prudent course for most investments of the utility itself, or long-term privatizing governments may be to limit compe- contractual commitments to other generators. tition, at least in the early years of privatization, Such an environment, certainly without ade- to the generation level, i.e., non-franchise access, quate regulatory safeguards and notice require- and not to enter thte arena of end-use level ments, could lead utilities to plan too little competition. This should make management of generation in order to minimize economic risk, the economic and technical challenges and risks, but with the effect of exacerbating risks to relia- and of political opposition to the privatization, bility or to security of supply. Altematively, immeasurably easier. Power sector regulation in India, U.K., and U.S. by Coopers & Lybrand with the collaboration of Tata Energy Research Institute F] H 2. Legal and regulatory l. Introduction environment in India Reguation is one of the key factors that must be This section first describes the legal framework addressed in the pursuit of power sector reform. that governs the Indian power sector and the Regulatory reform needs to march hand in hand main institutions and companies that operate with any sector restructuring and/or introduc- within the power sector. It then summarizes the tion of private sector participation. As part of regulatory structure. the background for the October 1993 Conference on Power Sector Reforms in India, this paper 2.1 Legalaframework and instiutions therefore presents: Electricity is a "concurrent" subject under the * A summary of the exsting legal and Idian Constitution. This means that both the regulatory environment in which the Indian central and state governments have powers to power sector operates enact legislation affecting the power sector. In * A comparison between the regulatory general, the central government has taken the arrangements in India, the U.K, and the lead in defining the main legislation, the 1948 U.S. Electricity (Supply) Act (E(S) Act), and in pro- viding the policy framework through the Ministry of Power (MOP). Meanwhile, state governments have focused on specific issues relating to the generation and supply of elec- tncity h their state. States may, and have, amended sections of the E(S) Act as it applies in their own state. In addition, two or more states POWu SBcTOR RuIA77noN m hrJA, U.K, AND US. 113 114 POWER SECTIOR REGULATION rN INDIA, LIK, AND U.S. can require the central legislature to pursue new national resources cutting across state bound- laws on their behalf that apply just to the states aries. Under the 1976 amendment, a generating concemed. If the state and central government company must be formed by central or state legislations were to be in conflict, the central govenmments (or jointly by a combination of government legislation would prevail; however, these). Such a company must be registered this situation has not arisen, and political consid- under the Companies Act, 1956, and must have, erations are such that it is unlikely to do so. among its objects, the establishment, operation, Power sector legislation is embodied in the and maintenance of generating stations. Gener- 1910 Indian Electricity Act (IE Act) and the E(S) ating companies are to sell power to SEBs and Act, together with amendments and regulation electricity departments as per their allocated issued under these Acts. shares. The following central generating com- The IE Act provided for the issue of licenses to panies exist: National Thermal Power supply electricity and set up procedures to Corporation, National Hydroelectric Power regulate the licensees. Parts of the IE Act were Corporation, North Eastem Electric Power overtaken by the E(S) Act. However, licensees Corporation, Neyveli Lignite Corporation, and continue to operate under the provisions of the Nuclear Power Corporation. IE Act. There are currently 57 distribution Some of the state govenmments have also licensees, of which 5 also engage in power established power corporations responsible for generation, although these companies account for power generation. However, in most of the only a small proportion of total electricity states, these corporations construct and supply. commission power plants, which are generally The main purpose of the E(S) Act was to create handed over to the respective SEBs upon the State Electricity Boards (SEBs). These are completion. statutory organizations responsible for the In 1991, the relevant parts of the E(S) Act were development of the power sector in their respec- amended to allow a generating company to be tive states. The Industrial Policy Resolution of formed in the private sector as well. 1956 reserved generation and distribution of Regional Electricity Boards (REBs) were estab- electricity almost exclusively to the state sector in lished in 1963 as associations of the constituent the form of the SEBs. In the union territories SEBs and other power utilities in the respective and in a few states in northeastern India, regions. The REBs are under the adminustrative however, power development is the respon- control of the CEA. The REBs are charged with sibility of the electricity departments or mun- the responsibility of coordinating the generating icipal corporations. schedules of the power utilities, monitoring The constitution and composition of SEBs, system operations, and helping to arrange inter- their powers, operations, staffing, and their state exchanges of power. However, it was only financial accounting and audit procedures are in 1991 that the statutory powers for effective comprehensively covered in the E(S) Act. The control were provided to the REBs. According Act also gives powers to the central and state to the amendment of the E(S) Act, in August governments in matters such as approval of 1991, every licensee and generating company investments and borrowings and gives wide shall follow all directions of the REBs, induding powers for state governments to issue directives. compliance with the instructions of the Regional A further purpose of the E(S) Act was to create Load Dispatch Center to ensure integrated the Central Electricity Authority (CEA), which. is regional grid operations. administratively responsible to the MOP. The Powergrid Corporation of India Ltd. was Originally a part-time body, the CEA became a established in 1989 with a view to formation of full-time organization in 1974. The CEA a national grid and integrating the grids in the develops power sector policy and has wide five main regions of India. Powergrid has the powers which are discussed further below, for legal form of a 'Generating Company' under the example to approve investment projects. provisions of the E(S) Act, although it does not In 1976, the E(S) Act was amended to provide have a direct involvement in generation per se. for the establishment of central and state gen- Two power sector financial institutions exist, erating companies to augment power availability the Rural Electrification Corporation and the and to achieve a more e'icient utilization of Power Finance Corporation. Both are under the administrative control of the MOP. PowE SECTOR REGULATION IN INDIA, U.X AN US. 115 2.2 Regulatory structure other matter arising out of the SEB's functions for which it is "necessary or expedient" for the Economic regulation of the Indian power sector government to issue regulations. is carried out by: The CEA is the other main regulatory body. Its regulatory powers include: • Central government * State governments * Authorization of all power projects above * CEA 25 crore rupees (the power being exercised • The SEBs themselves. at several different points through the life- cycle of projects from original inclusion in Of course, there are a number of other the Five Year Plan, through to project regulatory bodies that control aspects of the execution); and power sector, such as the Ministry of * The resolution of disputes in certain cases Environment and Forests and the Reserve Bank (e.g., between state government and SEB, of India; however, these areas of regulation are between SEB and REB/Regional Local not covered in this paper. Neither do we cover Dispatch Center over dispatch instructions). the substantial policy development role of the MOP, which is not strictly a regulatory role. In addition, CEA has wide powers to issue The central and state governments have several regulations under Section 4C of the Act. Central types of powers which they can use to exercise government can also make rules, via CEA, under regulatory control over the SEBs. Sections 4A and 4B, although these have to be Section 78A of the E(S) Act gives the state approved by parliament. government the power to issue directives to the The SEBs themselves exercise regulatory SEBs on matters of policy. If there is a dispute powers over the licensees which cover matters over whether a directive relates to a policy such as dosure of generation stations and prices, matter for this purpose, then the matter can, in and conditions of supply to other customers. As theory, be referred to CEA for their decision or noted above, these powers are themselves subject it can be challenged in the courts. In practice, to any regulation issued by the state government where directions have been challenged, the in this respect. courts have decided in favor of state govern- ments (e.g., over directions on the level of prices 2.3 Cod-tparison of Regulation in the UX., U.S., to agricultural customers). This gives the state and India governments wide-ranging and unrestncted general regulatory power. Moreover, state gov- The purpose of this section is to present a high- ernments can exercise more informal powers, level comparison of the regulatory and legal e.g., through its powers to appoint board mem- environments of the U.K., the U.S., and India. bers of the SEBs, that means that it often need The choice of the U.K. and the U.S. as compara- not resort to the issue of directives. tors reflects the fact that these two countries Section 79 of the E(S) Act also empowers the represent the dominant, although not the only, state governments to issue regulations on a examples of transparent regulatory regimes specific list of topics, some of which relate to which have been in place for some years. their quasi-ownership role, such as financial The main features of the comparison are set reporting and the holding of Board meetings. out in the following series of tables: The list of regulatory powers covers the right to determine the: Table 1 Industry structure Table 2 Legal framework o Principles by which the SEBs themselves Table 3 Regulatory institutions and processes regulate prices for bulk electricity (grid Table 4 nstruments of economic and technical tariffs) and other aspects of their relation- regulation ship with licensees; and Table 5 Power sector planning (generation) * Principles governing the supply of elec- Table 6 Power station authorization tricity by the SEB to customers. Table 7 Price regulation Table 8 Technical and quality of supply As for many regulation all over the world, regulation there is also a "catch-all" clause which alJnws Table 9 Consumer protection the state government to issue regulation on any 116 POWER SECTOR REGULA7T0N N INDA, U.X, AND US. Table 1 Industry structure U.K (E&W) e Regional distribution companies, national grid company, competing generation companies * Competition in wholesale generation (competitive power pool) and in supply to larger customers (above 100 kW from April 1994) U.K e Vertically integrated regional utilities, with some independent generation contracted on long-term (Sotland) basis * No formal wholesale generation competition, but with competition in supply to larger customers U.S. * Vertically integrated regional utilities in each state, together with independent power producers (IPPs) selling bulk generation to some of these utilities; also, many small cooperatives/municipali- ties undertaking distribution and supply o Increasing competition for construction and operation of new power stations to supply utilities; competition in spot and short-term wholesale generationi (inside and outside power pools) 4nd little competition in retail supply (utilities have monopoly franchises over customers) India * Vertically integrated regional utilities in each state, together with some national bulk generation; private licensees undertaking some generation and distribution * No comnpetition in generation or supply Three different power sector regimes exist in The power sectors in the U.K. and the U.S. are the U.K: in England and Wales (E&W), in both dominated by private sector companies Scotland, and in Northem Ireland. Although which are driven by commercial motives. Con- many of the regulatory features are the same, sequently, explicit independent regulation of there are some differences in detail which result these companies is required in both countries. from the different industry structures. Where This contrasts with India, where the SEBs are not relevant, the Tables comment separately on E&W required to act as commercial entities. and Scotland; the Northern Ireland arrangements Table 2 summarizes the legal environments in are less relevant because of the small size of the the three countries. There is a distinct contrast: system and so are not covered in the Tables. the U.K system is based around a Lcensing In the U.S., the industry structures and regime; in the U.S., the evolution of case law in regulatory arrangements differ in detail although the courts plays a substantial role in defining the not in substance, between the 52 states. The legal environment; in India, the emphasis is on Tables represent the most common supervision of public sector entities by the arrangements. government administration and is, in some We summarize below the main points of aspects, similar to the old U.K system before comparison that emerge from the description privatization. presented in the tables. There is a clear similarity in the federal/state Industry structure (Table 1) is an important division that exists in both India and the U.S. input to a comparison of regulatory arrange- However, the central (federal) government in ments. In particular, the regulatory arrange- India has played a much stronger role i ments will reflect the nature of ownership and exercising a central policy framework, largely the extent of disaggiegation and competition because of the emphasis on national planning. within the electricity sector. Turning to the regulatory institutions and The industry structure in India resembles that processes (fable 3), there are a number of of the U.S. (and, to a lesser extent, Scotland); the differences between the U.K. and the U.S. (e.g., comparison will strengthen if the development of sector-specific regulator in the U.K. v. utility- independent power projects in India takes off so wide Public Utilties Commission (PUC) in the as to give an industry structure in which private U.S., regulatory discretion in the U.K. v. quasi- generators play an important role in supplying judicial approach in the U.S.). However, the vertically integrated regional monopolies. The U.K and U.S. systems share a number of com- major contrast with the U.K. relates to the mon features when contrasted with India. In prominence given to the role of competition in particular, the regulatory institutions in the U.K supply end the role of competition in the E&W and the U.S. are independent of government power pool (and power sector companies) and operate with POWER SECOR WULATION n DIA, UK AND US. 117 Table 2 legal fremework U}C * 1989 Electricity Act - Sets up Iesing framework for generation, transmission, public electricity supply (including both distribution and supply), and competitive supply - Establishes regulatory body [Office of Electricity Regulation (OFFER)] together with its duties and powers e Actions of regulator are subject to judicial review on questions of law or process * General competition law plays a potentially important role U.S. * 1920s PUHCA Act provides very broad legal framework for feseral regulation of the utilities sector. Individual state laws created regulation structure in each state * Other relevant legislation includes Administrative Procedures Act at federal level which controls the regulatory grocess and 1992 Energy Policy Act which removes remaining legal barriers for IPPs * Federal legislation can be enacted which affects state utilities (e.g., 1979 PURPA which requires utilities to buy from independent generators at avoided cost and 1991 Clean Air Act which sets up tradeable permits for S02 emissions) * State and federal regulators can be challenged in relevant courts * The bulk of the detailed regulatory rules are defined by precedent either in the form of case law or in the form of previous regulatory judgements which have been upheld in the courts Inia * Concurrent sector with powers for both central and state governments to legislate * 1948 E(S) Act establishing SEBs = statutory bodies and setting out powers of SEBs, CEA, and govemment o Decisions and actions of SEBs and state govemments canm in principle, be challenged in the courts Table 3 Reulaty Insltitutions and processes UEK * OFFER covers sector-specific economic regulation and competition issues * OFFER is independent of goverunent; decisions are made by a Director General who has consider- able degree of discretion in reaching these decisions subject to the duties and powers imposed by the 1989 Act * It is becoming common practice for OFFER to issue consultation documents inviting comments from interested parties in advance of important decisions * Department of Trade and Industry retained some powers to issue orders in restricted cases (eg., l_________ emergencies, renewable energy obligations) USb * PUCs are responsible for regulation at the state level (e.g., pricing, quality of supply); they usually cover all privately owned utilities, not just electricity; municipalities and cooperatives are usually free of direct regulatory oversight * PUCs are run by a group of Commissioners who may be elected or appointed by state government * PUCs hold quasi-judicial hearngs at which interested parties present their cases in open sessions * Federal Energy RWgulatory Commission (FERC) deals with issues which are not exclusive to each individual state (e.g., transmission and interstate sales of bulk power) * Department of Energy maintains limited policy role India * Main regulation powers are split between CEA (e.g., power station development) and state govem- ments (e.g., electricity pricng) * Proposals exist to establish Power Tariff Boards, but little progress to date, and no statutory powers are cmently envisaged a reasoably transparent, rules-based approach; The contrast in regulatory processes is natu- in contrast, the regulating bodies in India are not rally reflected in the differences between the use independent of government or the power sector of regulatory instruments (Table 4). The U.K companies and important aspects of the and the U.S. rely on a rules-based approach regulation process are opaque (e.g., price embodied in a variety of instruments such as seting).1 licenses, regulatory determinations/judgments MBlecriy Counidls were set up to have an independent (but consultative) role, in practce, they have tot played their role effvely. 118 POWER SECTOR REGULATION iN INDIA, U.K, AND U.S. Table 4 Instruments of economic and technical regulation U.K * Conditions attached to the licenses issues under Electricity Act (together with amendments agreed by regulator and licensee, etc.) * Orders made by Secretary of State for Trade and Industry, in restricted areas under Electricity Act * Determinations made by Director General of OFFER in resolution of disputes E Codes of practice approved by OFFER on technical matters or areas of customer protection U.S. e Notices of judgements made by PUCs * Court rulings on matters sent to courts on appeal India * Directions issued by state governments under Section 78(A) of the 1948 Act * Notifications Issued by regulating bodies (CEA, SEB) under authority of relevant parts of 1948 Act * Note that, to a significant extent, regulation can be exercised through control and approval powers in an informed way Table 5 Power sector planing (generation) U.EC (E&W) * No central planning. new investment is driven by commerdal incentives under which generators build new stations either speculatively or contracted under long-term sales agreements to distribution companies or large customers U.K * Vertically integrated companies are subject to a requirement to meet a generation security standard, (Scotand) but it is their decision whether they build new stations themselves or buy bulk generation from third parties U.S. * Obligation on regional utilties to meet security of supply standards * Planning of new power station is effectively subject to PUC approval, often in the context of 'Least Cost Planning' in which the economics of capacity additions are compared with demand reduction measures India * New power stations are sanctioned within the context of Five Year Plans which cover all public sector investment Site selection committees and CEA investigate possible power station sites. Schemes are put forward by SEBs for indusion in the plan. CEA reviews and approves individual schemes as well as the overall investment portfolio, as part of the planning process and court decisions. In India, most of the regu- generation investment (Table 6). In all countries latory processes involve more informal directions there are important hurdles that need to be from govenmment to the power companies. passed on environment impact, local planning There are marked differences in the role of requirements, and consultation, etc. (although we planning in the development of generation do not cover these non-economic aspects of (Table 5). At one end of the spectrum there is regulation in the table). Once these important no central coordination of planning in E&W hurdles are cleared, authorization/licensing where investment in generation reflects commer- tends to be something of a formality in the U.K. cial decisions. At the other end of the spectrum, and the U.S. In India, there are several addi- there are elaborate arrangements for planning tional authorization steps; this reflects the much and control of new generation in India. This greater role of central planning as discussed contrast reflects the different objectives: in E&W above. the objective is to promote competition in an In a superficial sense, there is explicit price environment where there is no meanngful regulation in all the countries Crable 7). In obligation to supply in respect of generation; in practice, of course, the rate of return criteria for India, the objective is to mobilize resources to try price setting in the E(S) Act is almost universally and keep pace with the needs of rapid expan- overridden by political and social considerations. sion. Scotland and the U.S. represent examples Moreover, the process for seeldng authorization between the two ends of the spectrum. for tariff changes in India is not explicit or The diffeence in role of central planning is transparent. reflected in the authorization process for POWER SECTOR REGULATION IN INDU, U.K AND US. 119 Table 6 Power station authordzation U.K License required from Secretary of State for Trade and Industry (usually a formality) * Sanctioned by board of company as for any other major commercila decision U.S. o License required from PUC or other state agency * License issuance does not necessaily guarantee later recovery of associated costs in retail or wholesale prices. Ihdia * Project must be approved by CEA and Planning Commission for inclusion in Five Year Plan o Technical details must be approved by CEA (and modified according to CaA directions) * Fuel linkage dearance required from Ministries of Coal, and Petroleum and Natural Gas o Final clearance required by Planning Commission (state projects) and by Central Cabinet, via Public Investment Board (for central generating project) Table 7 Prce egton UK. (E&W) * Price regulation set out in licenses issued to relevant companies * Transmission and distribution prices controDed by formulae that allows average prices to rise at the rate of inflation less some percentage X * Value of X is reset by agreement between the regulation and company every four to five years; if agreement cannot be reached then the matter is refered to the Monopolies and Mergers Commision for a form of adjudication aGeneration purchase prices are passed through to franchise customers as generation is procured in a competitive market * Prices to non-franchise customers are unregulated * License conditions restrict cross-subsidies or discrimination between customers UX. a As for E&W except that the generation component of prices to franchise customers is set by a o(Sotland) formula which represents bulk generation market value (pass through of generation costs Is not permitted because of vertical integration) U.S. * Price regulation is implemented by PUC under legal requirement that prices should be 'fair and reasonable'; the definition of 'fair and reasonable' has evolved over time through precedent * Prices are almost exclusively set by rate of return criteria which permits a reasonable return on assets * Recent changes are introducing some 'incentive regulation' (analogous to U.K) and alow pass through of generation purchase that are incuned from independent generators under competitive tender * Detailed tariff approval by PUC addresses relative prices to different consumer group (mainly on average cost principles) * Price regulation of wholesale power sales by FBRC (by mix of cost and market-based approaches) India * 1978 amendment to the E(S) Act requires Sills to earn (at least) a 3 percent return on historic cost asset base * SEBs are empowered to set prices so as to meet this requirement, but this power is subject to state government approval in practice social and political considerations dominate and the 3 percent return requirement is not met (except for few utilities) * Pricing to different consumer groups is also effectively controDled by state governments; there are no restrictions on cross-subsidization which is extensive 120 POWER SECTOR REGULATION IN INDIA, U.K, AN) U.S. Technical regulation (Table 8) is very similar in o In India, the regulatory institutions and format between the three countries which reflects high-level rules are defined in legislation, the engineering aspects of the electricity indus- the emphasis of regulation is on control of try. In contrast, there is no explicit customer supply side investment (particularly protection (Table 9) in India. generation) rather than prices, quality of In conclusion, when looking at the comparison supply, or consumer protection. jr he attached tables, one can pick out a number of common themes between the U.K. and the The differences in emphasis reflect a variety of U.S. which are in contrast to the regulatory factors which include: the chronic supply situa- environment in India. These could be sum- tion in India which requires rapid expansion of marized as follows: generating capacity; the contrast in the status of the electricity industry between privately owned, e In the U.K. and the U.S., there is an empha- commercial driven companies in the U.K. and sis on explicit, independent regulation and the U.S. and the traditional role of public sector transport, even though this is achieved in statutory bodies which are, in part, a tool of somewhat differing ways; the emphasis of social and political policy in India. regulation is on control of price, quality of supply, and consumer protection more than regulation of supply and investment Table 8 Te:hnical and quality of supply regulation U.K. * Security of supply criteria set out in standards attached to the licenses * Technical standards on voltage and frequency set out in Gnd and Distribution Codes approved by regulator under conditions of the licenses * OQuality of supply standards set and monitored by OFFER under provision of the Electricity Act oTechnical matters controlled under Regulations issued under Electricity Act (e.g., installations inspection carried out by inspectors appointed by the Secretary of State; meter installation inspections administered by OFFER) U.S. * Standard set and monitored by PUCs India e Technical regulation, such as voltage and frequency, are set out in Schedule 5 of the Indian Electrcity Rules, 1956 and subject to state government approval e No formal regulation of quality or security of supply * Technical matters are regulated by the Ccntral Electrical Inspectorate (set up under 1910 IE Act) under the CEA, and by the state electrical inspectors set up under the 1956 Indian Electricity Rules Table 9 Consumer protection U.K e Various codes of practice approved by OFFER (e.g., on disconnection for non-payment of bills) * Rights of appeal to OFFER on disputes involving customers and licensees * Consumer Consultation Committees, which are fornally a part of OFFER, monitor performance of regional electricity companies * Ad hoc consumer consultation/surveys to inform policy development of licensees/OFFER U.S. o Consumer advocate departments located inside or outside state PUC India * District consumer forum set up in some states under judge(?) to resolve minor consumer complaints; otherwise no formal consumer protection other than through resorting to the courts * State Electrcity Consultative Councils * Local Advisory Committees may be constituted by state government on matters which it may determine (which could include consumer protection issues) Regulation and management of the power sector in India by Tata Energy Research Institute permitting the entry of the private sector in power generation and distribution is a move towards an open market structure. The twin 1. Executive summary objectives of bringing in the private sector in power generation and distribution relate to additional resources required for power sector The power sector in India, since independence, development, as well as to bring about improved has evolved as a public monopoly. Electricity is efficiencies through increased competition. a concurrent subject in the Indian Constitution, This paper focuses on the growth, operation, whereby decisionmaking and implementation and management of the power sector in the involves both the central/federal and the state/ present framework of institutional setup and provincial governments. Traditionally, the policy regulations. It also attempts to highlight some of guidelines and the statutory and organizational the important issues critical for the efficient framework for power development is provided functioning of this sector and discusses some of by the central government, and the state govern- the measures necessary to improve the perfor- ments are primarily responsible for power mance of the power sector. generation and supply to the ultimate con- sumers. The power sector is governed by the 1.1 Institutional framework Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948 [E(S) Act]. The institutional structure of the power sector in The power sector has undergone a sea of India comprises: change over the last four decades, both in terms of the number and structure of the institutions * State Electricity Boards (SEBs) and Elec- and in terms of the structure of consumption. tricity Departments (EDs), statutorily The organizational structure of the power supply responsible for the efficient and economic industry has followed an evolutionary process to development of the power sector in their achieve the basic objectives of overall energy and respective states/union territories. power development policies. The recent change REGULMTION AND MANAGEMENT OF TME POWER SECrOR IN INDA 121 122 RECULATON AND MANAGEMENT Of THE POWER SECTOR IN INDM * Central generating companies which gener- from a surplus region to a deficit one. The ate and supply power in bulk to the SEBs. Powergrid Corporation of India Ltd. (PGCIL), e State power corporations which are mostly established In 1989, alms at forming a national involved in construction and commissioning power grid with the objective of facilitating of the power plants. The plants are transfer of power within and across regions with generally handed over to the Boards on reliability, security, and economy, on commercial completion. principles. In the first phase, the PGCIL has o Five private generation and distribution taken over construction, operation, and main- companies tenance of power transmission systems of four Distribution licensees supplying power in a central generating companies. specified area. 1.2 Planning The Ministry of Power (MOP) has the overall responsibility for power development in the Power systems planning and optimization country. The MOP is responsible for formu- studies carried out by the CEA form the basis of lating policies and plans for power development, the power program. Formulation of the indi- processing power projects for Investment deci- vidual projects is carried out by the SEBs. All sions, training and human resource develop- the projects with costs exceeding Rs. 25 crores ment, research and development, and formu- are statutorily required to obtain techno- lating any legislation pertaining to power gener- economic clearance from the CEA. In addition ation and supply. The MOP provides the to this, all the power projects are required to required linkages between other ministries and obtain several other clearances from various departments in the central government, state ministries and departments of the central and governments, and the Planning Commission state governments. The final clearance on the (PC). The MOP, in performing all its functions, project is given by the PC for state sector proj- is guided by the Central Electricity Authority ects and the central cabinet in case of central (CEA), a statutory body set up under the provi- sector projects. All the central sector projects sions of the E(S) Act. require cabinet approval following the approval There is often a perceived misconception on of the Public Investment Board (PIB). the clarity of roles between the MOP and the One of the problems often faced in the entire CEA. The CEA may in fact be considered as the process of project formulation is the bureaucratic technical wing of the MOP. While the CEA delays in obtaining various clearances. Substan- recommends the technical component of a plan tial delays are reported in obtaining environ- and its financial implications, it is the MOP that mental clearances. It is important that the CEA has the final authority to make a decision. and the other ministries/departments involved Power planning and development has been in the process of providing clearances must based on a regional approach (the country is streamline their procedures and develop a time- divided into five regions, each comprising three bound program for granting clearances. This or more states) to maximize utilization of however requires adequate preliminary investi- unevenly distributed energy resources. The gation of the project and also requires that the Regional Electricity Boards (REBs) in each region Boards and generating companies prepare are responsible for coordinating the generating correct and complete detailed project reports sc'edules of the power utilities, monitoring (DPRs). It must be pointed out that while there system operations, and helping to arrange inter- are a lot of discussions relating to the delays in state exchange of power. However, the multi- procuring clearances etc., the subject of project plicity of generation organizations in the region, reports reaching the CEA or the PC with inade- with each pursuing its own corporate objective, quate information, thus also contributing to the at times conflicting with each other, lead to delays, goes unmentioned. suboptimal solution in scheduling and regulating The second major weakness of the present generation and at times to wasteful spilling of system of power planning is lack of coordinated reservoirs. It is expected that the provision of planning of generation and transmission. Gener- statutory authority to REBs in 1991, will result in ation projects have invariably gained priority greater grid discipline. over transmission projects. Inadequate invest- The need for integration of regional grids to ments in the transmission systemn is the main form a national grid is becoming increasingly cause for the increase in the transmission and important in order to facilitate transfer of power distribution (&D) losses and poor quality of REGULATION AND MANAGEMENT OF THE POWER SECrOR IN INDI 123 supply in the Boards. There is a tendency to and electricity duty due to the state governments overload existing transmission capacities and by the Boards. Also, due to the poor liquidity earmark the available resources for generation positien of the Boards, the capital resources are projects. It is important that the generation and divertedi for working capital expenditure. All transmission planning Is done simultaneously this results In substantial delays in completion of and not sequentially, and there should be no bias the projects and consequent cost overruns. in allocation of resources between generation The capital structure of the SEBs is primarily and transmission projects. debt-based. This poses heavy interest burden on In the formulation of distribution plans, there the Boards and thus increases the cost of power are no efforts at systematic planning, not to generation and supply. There are significant mention the issue of optimization. Lines are delays in adjusting tariffs to reflect the increase generally extended in a haphazard manner and in cost of generation and supply, resulting in often with the objective to cover as many vil- huge financial losses for the Boards. Most of the lages or areas as possible, without any regard to SEBs have negative internal resource generation. the capacity of the system to sustain the load. The present capitil structure of the Boards is not The ad hoc expansion of the distribution systems sustainable and ine financial viability of the has resulted in high losses, low reliability, and Boards is crucial for its growth and develop- frequent interruptions. ment. In order to partly offset high interest There exists substantial potential to improve costs, some of the state governments have con- the performance of the distribution systems verted a part of their loans into equity. The full through efficient operation and management of impact of this measure is yet to be perceived. At the existing systems and through a more scien- least 20 percent of the capital expenditure should tific system planning for the future load growth. be financed by the Board's internal resource The planning for the power sector in the past generation. This requires rationalized tariffs, has been based on the traditional approach of cost control, and complete financial discipline in meeting demand through new capacity addi- the operations of the Boards. tions. The increasing shortage of resources and the need to limit environmental impacts of 1.4 Tariffs power generation, distribution, and utilization calls for a thorough evaluation of all available The average revenue realized being less than the options to meet the demand. This includes average cost of generation and supply is perhaps meeting the demand for electricity through the single most important reason for the deteri- demand-side management (DSM) options. orating financial health of the SEBs. Tariffs are Increasing energy efficiency and conservation guided more by social and political considera- has proved to be more cost effective in many tions of the state governments rather than eco- developed and developing countries, as nomic and efficiency obiectives. All the Boards compared to supply options. The planning for recognize the excessive political interference by the power sector, in the future, must therefore the state governments in setting tariffs as against integrate both supply and demand side options their advisory role laid down in the E(S) Act. to develop a least cost plan. Tariffs for the agriculture Fector are the most influenced with the extent of subsidies (dif- 1.3 Finances ference between average cost of supply and average revenue) being as high as 80-100 percent Financial planning of the power sector is in various states. govemed by the Annual Plans and the bud- There is an urgent need to bring in trans- getary mechanism. Once a project is included in parency in the tariff revision exercises. Tariffs in the Plan, there is a virtual guarantee to cover the the short run should be based on normative costs irrespective of any time or cost overruns efficient cost approach and move towards mar- that it may undergo. However, there is con- ginal costs in the long run. All the electricity siderable uncertainty regarding the amount of sales must be metered and flat rate tariffs must funds that would actually be made available to be abolished. While it is justified to provide the power projects during the different years of electricity at affordable (even subsidized) rates to the Plan. The declining financial health of the the weaker sections of the society, cross- state governments adversely affects the avail- subsidization should be limited to within con- ability of funds for the projects. Often the actual sumer categories. Establishment of the National disbursement of funds is adjusted for the interest Power Tariff Board at the center with five 124 REGULATION AND MANAGEMENT OF THE POWER SECTOR IN INDIA Regional Tariff Boards conceived by the central Rapid increase in the size of the Boards, sev- government, is a right move in the direction to eral external factors (such as deteriorating qual- bring in autonomy as well as accountability in ity of coal received at the power stations), and the operations of the Boards. excessive interference by the state governments are, to an extent, responsible for the present state 1.5 Management and operation of the SEBs of affairs in the Boards. The Boards are caught in several day-to-day operational problems such The role of the state governments as the owner as power interruptions, coal receipt, maintenance of the SEBs has resulted in their excessive inter- or key equipment, billing and collectior. prob- ference in the day-to-day operations and man- lems, etc. They have been rather myopic, agement of the Boards. As per the E(S) Act, the addressing these problems on a short-term basis board members are appointed by the state rather than finding long-term solutions. What is govemment. The Boards are required to consti- required is i professional approach with a view tute State Electricity C_nsultative Councils to: (SECCs) to advise the SEBs on questions of poli- cies and to review the progress and planning of * Prioritizing key ptoblem areas the SEBs. These councils are expected to meet a Finding long-term solutions once in three months. However, it is reported * Drawing up a resource plan linked to that SECCs have not, in the past, been effective targets in overseeing the operations and management of o Identifying sources of support the Boards, as envisaged in the Act. * Time-bound implementation and As long as the Boards are totally owned by the monitoring government, the board members will continue to be appointed by the govemments. Even if the It is important to ensure that the incentives are Boards are converted into corporations, but still linked to an overall performance score instead of wholly owned by the govenmment, there will be being based on only PLF or losses as at present. no change in the situation regarding the appoint- This could be done by identifying key perfor- ment of the Board members. mance parameters, giving each performance There exists substantial scope for improvement criteria a weightage, and arriving at a net perfor- in the operations of the Boards. Some of the mance score for the operational unit. important areas are: The concept of signing Memoranda of Under- standing (MOUs) in the central public sector • Improving generation efficiencies of the undertakings should be extended to the SEBs as existing facilities such as increasing plant well. The MOUs distinctly identify the responsi- load factor (PLF) and plant availability, bilities and tasks of the governing ministry and reducing specific fuel consumption, the undertaking. Hence, it is expected that the reducing auxiliary consumption, etc. MOUs will result in little or no interference in * Reducing T&D losses through optimal T&D the functioning of these undertakings. planning, adequate investments, and effec- There are continuing discu.;sions relating to tive measures to curb theft of power. commercialization of the Boards. The sugges- o Rational utilization of the excess staff with tions include: the objective to improve the manpower utilization efficiencies. This requires * Converting the Boards into corporations enhancing the skills of the personnel in case e Separation of generation, transmission, and of redeployment. distribution functions e Introducing innovative options to ensure e Privatization of distribution accurate metering, timely billing, and o Rural electrification (RE) to be separated regular collections. from the Boards operations and converted * Reducing revenue outstandings through into cooperatives greater control and autonomy to take o Prices for electricity generation to be fixed actions against the defaulters. by market forces rather than regulation * Improving the reliability and quality of * Statutory regulatory body for overseeing the power supply. T&D operations. REGULATION AND MANAGEMENT OF THE POWER SECTOR IN INDIA 125 The power sector in India has only recently moved towards privatization in power genera- tion and dietribution. While several proposals have been received by the private investors in 2. Institutional framework the area of power generation, no proposal has come forth in the area of distribution. The private investors have been pressing for certain Electricity is a concurrent subject in Article 246 guarantees regarding fuel supply, sale of power, of the Indian Constitution, relating to "subject payment for power sold, etc.; thus wanting to matter of laws made by Parliament and by the operate in a protected environment as against a Legislatures of the State." Accordingly, the purely market-oiiented environment. decision making and implementation involves In light of the fact that most of the private both the central/federal and the state/provincial proposals are in the process of getting the neces- govemments. Traditionally, the central govern- sary clearances and finalizing power purchase ment is responsible for providing the policy agreements, it is unlikely that any significant guidelines and the statutory and organizational contribution will come in from the private sector framework for power development, and the state even in the Ninth Plan. govemments are primarily responsible for power Electricity has become a basic necessity for generation and supply to the ultimate con- moderr living. The state govemrnments have sumersm The organizational structure of the often Implemented their social policies through power supply industry has followed an evolutio- the SEBs (low prices for agriculture, flat rate for nary process to achieve the basic objectives of very low consumption domestic consumers, etc.). overall energy and power development policies. These policies have had an adverse effect on the Prior to independence, the supply of electricity financial viability of the Boards. On subjects in India was a predominantly commercial ven- such as disconnection, larger issues beyond the ture undertaken by privately owned utilities purview of the Boards have constrained their located in and around urban areas. The Indian performing on a purely commercial basis. Thus, Electricity Act 1910 (IE Act) provided for the it is important for the state and central govern- issue of licenses, regulated the industry, and ments, Boards, and other associated organiza- protected consumers' interests. At the time of tions to come up with a workable mechanism to independence, in view of the importance of enable the Boards to function on commercial power in economic development, the need to terms. In view of the growing size of the power nationalize and restructure the entire power sector, there is an urgent need to bring in trans- industry was felt. Consequently, a separate parency in its operations. There is an even more comprehensive legislation outside the purview of urgent need to identify workable mechanisms to the IE Act was conceived to provide for the insulate the Boards from interference by the state state-owned organizational structure. government in carrying out their functions. One of the ways this could be achieved is through 2.1 State-owned organizational structure of the setting up of a high-powered independent power industry regulatory body looking into the functioning of the power sector. The ultimate objective to be The SEBs, created as a result of the Section 5 of achieved in this process is an efficient power the E(S) Act, are statutory organizations respon- sector delivering reliable and quality power in sible for the efficient and economic development adequate quantities to the consumers at the of the power sector in their respective states. lowest cost. This must be simultaneously accom- The Industrial Policy Resolution of 1956 reserved panied by ensuring a reasonable return to the generation and distribution of electricity almost producers and distnbutors of electricity. exclusively to the state and this led to the gradual nationalization of the power supply industry. In the union territories and some states in northeastem India, power development is the rponsibility of the EDs or the municipal cor- porations. The constitution and composition of SEBs, their powers, operations, staffing, and their financial accounts and audit procedures are comprehensively covered in the E(S) Act. The 126 RtEGULATON AND MMANACEMAENT Of 7E POWER SEtOR IN INDIA under the Companies Act, 1956 and must have E(S) Act, Section 18 among its objects the establishment, operation, The state electicity boards shall be dwged wlth ... and maintenance of generating stations. Gener- "to supply electricity.,. in the most efficient and ating compan'.s are to sell power to SEBs and economical manner with particular refernce to EDs as per their allocated shares. those areas which are not for the time being sup- plied or adequately suppled with electricity."______________ E(S) Act, Secion 78(A) provisions have been modified, from time to '"i the dbdge of its funcdons, the Board shall be time, to meet the necessary requirements arising guided by such directions on questions of policy as out of the rapid growth of the power sector. may be given to It by the stae government." At present, there are 18 SEBs, 13 state/union "If any dispute aises between the Board and the territory EDs, and 1 municipal corporation in the state government, as to whether a question L- or is 25 states and 7 union territories in India. In not a question of policy, it shall be referred to the several states, licensees already engaged in Authority, whose dedsion shall be final." generation and distribution of power were E(S) Act Sect 79 allowed to continue their operations so long as "MSe Bod may, by notfictio in the Official their licenses were valid. There are 57 distribu- Gazette, make regulations...on isme ... admilnstm- tion licensees operating in the country today, tion of funds, maintenance of accounts, grd and 5 of these are also engaged in power tarif... The regulation for the administration of generation. funds, matters relating to Section 20 and spending Section 78(A) of the E(S) Act provides for the fmds non covithd uaproa of state gnment state governments to give directions, if neces- Regulations relating to grid tar and aange- saty, on matters of policy to guide the func- ments of licnsees would be made with the perm- tioning of the Boards. While the section clearly sin of CEA." mentions that guidance is to be given on the subject of policy, the issue of what constitutes policy has been left open for interpretation. The following are some corporations presently There have been a couple of cases where, for functioning as central generating companies: instance, the court has held that it is within the law for the state government to direct the Board * National Thermal Power Corporation to charge a flat rate for agricultural pumping * National Hydroelectric Power Corporation and it does fall within the purview of what * North Eastern Electric Power Co-poration constitutes policy. In practice, it is also observed * Neyveli Lignite Corporation that the directions from the state government are * Nuclear Power Corporation (NIPC) not only limited to matters of policy but also in operations. Some of the state governments have also established power corporrtions responsible for 2.2 Generating companies power generation. However, in most of the states, these corporations construct and commis- In 1976, the E(S) Act was amended to provide sion power plants, which, on completion, may be for the establshment of central and state gener- handed over to the respective SEBs. Such cor- ating companies, with the objective to supple- porations include: ment the efforts of the SEBs to augmnent power availability and with a view to achieve more * Orissa Power Generation Corporation efficient utilization of national resources cutting e Uttar Pradesh Rajya Vidyut Utpadan Nigam across state boundaries. Ltd. "Generating company" is defined as a com- o Karnataka Power Corporation pany formed (a) either by the central govern- * West Bengal Power Development ment or any state government, or (b) jointly by Corporation. the central government and one or more state government or by two or more state govern- ments. Such a company must be registered The NPC maintains and operates nuclear power plants and supplies power in bulk to the SElls, and is under the Jurisdiction of the Department of Atomic Energy. RECULA47oN AND MAAGEM&r OF THE POWE SwCOR In INDU 127 To accelerate hydroelectric development, the Electical Inspectorate (these are statutory institu- central government has also established special tions under the IE Act). joint corporations with some of the state govern- The central sector power corporations, the ments, such as Naptha Jhakri in Himachal central research organization-Central Power Pradesh, Tehri in Uttar Pradesh, etc. Research Institute, the central manpower training As per the recent amendment of the E(S) Act organization-PowerEngineersTrainingSociety, in 1991, a generating company can now be and two financial organizations-Rural Electrifi- formed either in the public sector, in the private cation Corporation (REC) and Power Finance sector, or in the joint sector. Corporation (PFC) are all under the administra- tive control of the MOP. 2.3 Ministry of Power and Central Electricity There is a perceived misconception on the Authority clarity of roles between the MOP and the CEA. The CEA is considered as the technical Wing of The MOP has the overall responsibility for the MOP. All the generation and transmission power development in the country. The MOP is projects need a statutory techno-economic clear- responsible for formulating policy and plans for ance by the CEA. In formulating policies, the power development, processing power projects MOP seeks the advice of the CEA on issues for investment decisions, training and human relating to policy, operations, training, etc., for resource development, research and develop- the power sector. The MOP implements these ment, and formulating any legislation pertaining policies through the various power sector organi- to power generation and supply. The MOP is zations in association with the CEA. Thus, while responsible for the administration of the IE Act the CEA recommends the technical component of and the E(S) Act and for introducing amend- a plan and its financial implications, it is the ments as necessary, conforming to the govern- MOP that has the final authority to make a ment's policy objectives. The MOP provides the decision. required linkages between other ministries/ departnents in the central governments, state 2.4 Regional integration governments, and the PC. The MOP Is guided by the CEA, a statutory Uneven distribution of the coal and hydroelectric body set up under the provisions of the E(S) Act. resources across the states and the limitations of The CEA was set up as a part-time body in 1951 the states as spatial units for planning power under the Central Water and Power Commission development, promoted the regional approach and was converted Into a full-time body only in for power development. Thus, in 1963, the 1974. The responsibilities of the CEA include: country was divided into five regions comprising three or more states in each region. REBs, as * To develop a sound, adequate, and uniform associations of the constituent SEBs and other national power policy power utilities in the respedve regions, were • Formulate short-term and perspective plans created through central government resolutions for power development and are under the administrative control of the e Coordinate the activities of the planning CEA. agencies in relation to the control and utiliz- The REBs are charged with the responsibility ation of power resources of coordinating the generating sc-hedules of the o Act as arbitrators in matters arising between power utilities, monitoring system operations, the SEBs and the consumers and helping to arrange the interstate exchange of o Promote the integration of the state's power power. However, the multiplicity of generation systems and provide technical assistance to organizations in the region, with each pursuing the power utilities its own corporate objective, at times conflicting o Promote and assist in the timely completion with each other, leads to suboptimal solution in of schemes sanctioned and to monitor their scheduling and regulating generation and at implementation. times, to wasteful spilling of reservoirs. It was only in 1991 that the statutory powers for effec- The CEA has four field organizations for tive control were provided to the REBs. carrying out periodical assessnent of future load According to the amendment of the E(S) Act in demands. The CEA also provides the secretariat August 1991, every licensee and generating for CEB and the organization for the Central company shall follow all the directions of the 128 REGULATION AND MANAGEMENT OF THE POWER SCtOR IN INDI4 REBs and shall conduct their operations in available in the surplus regions to the defidt accordance with the instructions of the Regional ones. In 1991/92,8.80 Bus of energy was backed Load Dispatch Center (RLDC) to ensure inte- down due to non-availablity of required Inter- grated regional grid operations. regional linkages. - ----- 2.6 Power sector financial institutionm E(S) Act, Section S5 "Every licensee shal comply with such reasonable There are two financial institutions, the REC and direcdons as the Board may from time to time, give the PFC, specially set up to provide financial him for the purpose of acheving the maximum of assistance for the development of the power economy and efficiency in the operation of his sector. Both these institutions are under the undertakng or any part thef" administrative control of the MOP. "Every licensee or generatng company shall follow The PFC, set up in 1986 by the central govern- all the directions of the REBs ... to ensure integrated ment, assists high priority power projects by gdt operations." insulating them from the budgetary constraints of the central and the state governments. The PFC provides long-term finance to the SEBs and In the event of any dispute arising in the state power generating corporations for system directions given by the REBs, the matter is improvement schemes, renovation and modem- referred to the CEA, whose decision is regarded ization projects, and for accelerated completion as final. However, in the larger interest of inte- of priority generation projects. Funds provided grated grid operations, the licensee or the gener- by the PFC are in addition to the annual plans ating company is bound by the directions of the approved by the PC. During 1990/91, the PFC REBs, until the decision is given by the CEA. approved loans for a total of Rs. 1,359 crores, of which 44 percent was for thermal power projects 2.5 National grd and 28 percent for T&D systems. The balance went towards renovation and modernization of PGCIL was established in 1989, with a view to thermal power projects, uprating of hydro proj- formation of a national grid and Integrating the ects, system improvement, etc. PFC, while grids in the five regions. The main objective is providing the loans, lays a great stress on to facilitate transfer of power within and across improving the performance of the Boards regions with reliability, security, and economy, through the formulation of "Operational and on commercial principles. PGCIL is to under- Financial Action Plans" (OFAPs). As at the end take the following responsibilities in a phased of June 1991, OFAPs were formulated for six manner: Boards. It is reported that the Boards have benefitted by implementing the measures out- * Phase I: to take over completed, opera- lined in the OFAPs. tional, and ongoing EHV and HVDC trans- The REC was set up in 1969 for promoting RE mission projects under the central sector by financing RE schemes and RE cooperatives. generating companies RE programs undertaken by the REC cover * Phase II: to take over the operations of the electrification of villages, energization of pump- RLDCs with the objective to improve coor- sets, provision of power for small and agro- dination of the regional grids based industries, lighting of rural households, o Phase III: to pool power from central gen- and street lighting. The REC also provides erating companies and sell it to different assistance to the SEBs for taking up system beneficiary states in the region ensuring that improvement projects for strengthening the sub- all the states get their due shares. Surplus transmission systems and improved reliability of power from SEBs and the otGier utilities is power supply. The REC has played a key role also proposed to be pooled. in assisting the Boards in spreading the reach of electricity to the rural and remote areas in the Adequate interregional ties and appropriate states. commercial arrangements, if in place, can reduce The institutional structure of the power sector the energy shortages by making the power is shown in Annex 1. REGULA7ION AND MANAGENT OF THE POWR SECTOR iA INDIA 129 2.7 Privatization of the power sector initiated for want of resources. The private investors have been pressing for certain guaran- in September 1990, the Ministry of Energy tees regarding fuel supply, sale of power, pay- announced a policy decision of allowing private ment for power sold, etc.; thus wanting to oper- sector participation in power generation and ate in a protected environment as against a distribution with the basic objective to bring in purely market-oriented environment. additionality of resources for investment in the power sector. Further, private sector partici- pation is expected to bring in increased efficency Some of the highlights of the govemment policy in the operations of the power sector. are A policy package comprising financial, com- a Debt equity ratio of 4:1 mercial, and legal aspects has been put together e Insreae in prescribed rate of return from the by the Government of India to provide incen- exIsting 3 percent above the Reserve Bank of India (RBI) to 5 percent above the RBI rate tives to the private entrepreneurs to invest in the * Period of initial validity of license increased power sector. The Investment Promotion Cell in to 30 years from existing 20 years and subse- the MOP has been set up to directly interface quent extension for 20 years on each occasion with prospective private enterprise entrants to * Capitalization of interest during construction the electricity seclor and help them in obtaining at the actual cost instead of at present 1 per- cent above the RBI rate clearances. A high-powered Board has been * Exemption of private licensees from obtaining formed under the Chairmanship of the Cabinet dearances under the MRTP Act Secretary to the Government of India, to monitor U up to 100 percent foregn equity participation the clearance of the projects. pernitted for projects set up by foreign pri- Several MOUs have been signed by the SEBs *With the approval of the governsent, import with the private investors. Presently, in most of of equipment for power projects will also be the cases, the private investors are engaged in permitted in cases where foreign supplier(s) obtaining the necessary clearances, discussions or agency(ies) extend concessional credit. with the SEBs on power purchase agreements, etc. Actual project construction work is yet to start. It is therefore highly unlikely that there would be any benefits from the private sector in the Eighth Five Year Plan (FYP). Even though the policy of privatization includes power distri- bution, no proposals have been offered by the Boards to the private sector. The major concerns of the private investors 3. Power planning relate to: * Delays in obtaining the necessary clearances 3.1 Long-tertn planning o Guarantees for off-take of all power generated The central planning process in India involves * Guarantees for payments for power formulation of FYPs. The PC is primarily purchase responsible for the central planning function and * Assurances for quality and quantity for fuel is assisted by all the economic ministries/depart- supply. ments and organizations of the central and state governments and UT administrations. The draft The concept of single window clearance, to plans have to be placed before the National facilitate fast clearance of the projects for the Development Council which comprises the Prime power investors, is reported to have not met its Minister as the Chairman, Members of the PC, objectives. It is important for the government to Cabinet Ministers, Chief Ministers of the states, simplify and streamline the clearance procedures and heads of the administration in the UTs. to minimize the time spent in obtaining the The formulation of the power program is clearances and work out a definite time frame based on the long-term planning studies carried for project clearance. In the first instance, the out by the CEA in association with the SEBs and SEBs should offer those projects to the private the generating companies. The CEA prepares a investors which have already obtained most of National Power Plan based on the results of the the clearances required but the work is not power system planning and optimization studies. 130 REGULAnom AND MANAGEMENr OF THE POWER SECTOR IN IDIA Among the power generation and transmission ects. All central sector projects require cabinet schemes identified in the optimization studies, approval following the approval of the PIB. the approvals for inclusion in the plans are done by the PC. The PC forms a Working Group for each PYP to draw strategies to identify the E(S) Act, Section 28 priority areas and detailed programs to be -The Board or the generating company may pre- included in the central, state, and UT Plans. pare one or more schemes ... and where the scheme is of the nature referred to in Section 29(1), the scheme shall not be sanctioned by the Board or 3.2 Project fonmulation the generating company except with the previous concurrence of the Authority." Formulation of individual projects is carried out by SEBs and other generating companies. Sur- Every scheme sanctioned under this Section shall veys and investigations for locations of the local newsh-aperd in cial Ga btte and in such prospective sites are carried out by the SEBs and necessary. the operating companies. Site selection commit- tees are also set up by the govermnent from time E(S) Act Section 29 to time to identify sites, keeping in view the "Before finalization of any scheme ... and the various requirements for power development, submission thereof to the Authority ... the Board or the Generating Company...shall cause such For instance, so far, two site selection committees scheme .. with estimates of capital expenditure, have been set up (1982/83 and 1989/90), to salient features, benefits that may accrue...in the identify sites for super thermal power stations. Official Gazette and in such local newspapers.. Similarly hydroelectric potential s'udies, carried along with a notice of the date, not being less fthn two months after the date of such out by the CEA, identify some of the attractive pubhcation before wich hienes and other sites for hydroelectric development. For all the power projects where the costs exceed Rs. 25 crores, a statutory techno-economic clearance is required from the CEA before the One of the problems often faced in the entire project can be implemented. The CEA, in its process of project formulation is the long delays regulatory role, is required to ensure the opti- in obtaining various clearances. As is evident mality of the project from both short- and long- from a sample of projects in Figure 1, the time term perspectives. In addition, the CEA is also taken for generation projects to get the final required to ensure the economic viability of the sanction varied between 17 to 53 months, from projects. In case of hydro projects, the CEA is the date of submission of the DPR While the further required to ensure that the proposed SEBs hold the CEA and the various ministries/ project does not prejudice the other potential departments involved in the process of pro- uses of water such as irrigation, flood control, viding clearances, responsible for delays, the navigation, etc. All multipurpose river water latter have identifed poor project formulation, schemes are first appraised by the Central Water inadequate preliminary investigation, and incom- Commission. plete information in DPRs as the main causes for Apart from the techno-economic clearance the delays in providing dearances. Obtaining from the CEA, the SEBs are statutorily required environmental dearance is today a major issue in to obtain several other clearances from various the entire planning process. Large hydro proj- ministries and departments of the central and ects have of late attracted the attention of the state governments. Environment and forest environmental groups who have (rightly or clearances are to be obtained from the Ministry wrongly) taken the issue of environmental of Environment and Forests, pollution clearance damage of large hydro projects beyond propor- from state/central pollution control boards, etc. tions. This is perhaps one of the important Some of the non-statutory clearances include reasons for declining hydro-thermal capacity mix availability of land and water, fuel linkage, in the country. ransportation of fuel, and finances. Details of It is important that the CEA and the other various clearances required for power projects ministries/departments involved in the process are given in Annex 2. of providing clearances must streamline their The final clearance on the project is given by procedures and develop a time bound program the PC for state sector projects and the central for granting dearances. This, however, requires cabinet in the case of central government proj- adequate preliminary investigation of the project REGULATION AND MANAGEMENr OF THE POWER SECFOR IN INDIA 131 Figuare 1 Time taken for obtaining various clearances S3 S0 ~30 2 8 2 20 1 10 0 I 1 T3 T4 TS T6 17 TS T9 110 Tl1 PmDjec * SubmiasonofDPR CGovrwnmft U Tedm _omc let#er of award CIeamce by P saawion T1- sample therml proje HI . sample hydro projecL and correctly completeu DPRs on the part of the Resource constraints and growing concems to Boards and generating companies. limit environmental damage owing to production Generation and transmission planning is and utilization that necessitates the utilities to presently not carried out in an integrated adopt DSM options. DSM, which encompasses manner. Project lmplementation delays result in both end-use efficiency improvement and elec- a mismatch in project commissioning schedules trcity conservation, has proved to be more cost between the generation projects and the effective in many developed and developing associated transmission lines. There is a countries, as compared to supply options. In the tendency to overload available transmission future, planning for the power sector should be capacities and earmark the available resources based on 'Integrated Resource Planning' (IRP) for new generation resources. This is the major approach. IRP looks at the demand and supply cause of the present imbalance between genera- side options in an integrated manner to work out ;ion and transmission projects. a least cost plan. Distribution planning is carried out by the SEBs. Discussions with the officials of the Boards reveal that expansion of the distribution systems is carried out in an ad hoc manner. Often, the SEBs do not have access to the soft- 4. Finances for power ware that will enable them to carry out a scien- sector development tific analysis of the options available. The high priority given to RE has resulted in a haphazard growth of rural distribution sys- 4.1 Integration of finances in the FYPs tems. The ad hoc expansion of the distribution systems has resulted in high losses, low reliabil- Financial planning of the power sector organi- ity, and frequent interruptions. There exists zations is governed by the Annual Plans and the substantial potential to improve the performance budgetary nechanism. The physical plans of the of the distribution systems through efficient SEBs are translated into financial plans in consul- operation and management of the existing sys- tation with the state and central finance minis- tems and through a more scientific system tries, the PC, and the planning organizations at planning for the future load growth. the state level. Over the years, due to the Power sector development in the past has been Importance of power development for economic based on the traditional approach of meeting development and its capital intensive nature, the demand through new capacity additions. share of outlay for the power sector in the total 132 REGULATION AND MANAGEMFMF OF TME POWER SECOR DY INNDIA plan outlay has increased from 13 percent in the capital receipts from the state government and First FYP to 18 percent in the Eighth Plan also diversion of resources from the Boards' (Figure 2). capital expenditure to revenue operations. It is Once a project is included in the Plan, there is reported that, on an average, the actual disburse- a virtual guarantee to cover the costs irrespective ment of funds in any year by the state govern- of any time or cost overruns that It may suffer. ment is only 80 percent of the targeted plan However, there is considerable uncertainty allocation. This results in a reduction in capital regarding the amount of funds that would available for projects and hence, the consequent actually be made available to the power projects delays in project commissioning schedules and, during the different years of the Plan. Thus, the as mentioned above, cost overruns. During the year-wise allocation of funds made at the begin- Seventh FYP (1985-86 to 1989-90), as against the ning of the Plan period is quite tentative and plan allocation of Rs. 22,784 crores for the state gets modified in every Annual Plan. This non- utilities, the actual expenditure was only availability of assured funds affects the ability of Rs. 20,757 crores. Details of time and cost over- the project authorities to effectively plan and runs for a sample of hydro and thermal projects control expenditure. In order to circumvent thls are given in Figures 3 and 4 (refer to Annexes 3 problem, the SEBs try to include many new and 4 for details). Apart from the paucity of schemes in each plan period by perhaps under- funds and inadequate cash flow, some of the estimating their investment costs. The idea is other reasons for cost and time overruns include: that once the project is included in the plan, it would get resources, whatever the escalations in e Inadequate project planning and costs and delays in commnissioning. This results management in spreading rather thinly the limited resources * Delays in land acquisition and taking up available over many projects. Hence, further infrastructural and enabling works delays and cost escalations occur. * Tardiness in placing orders for generating There are a large number of transactions equipment and in award of contracts for between the state government and the Board on civil works/erection of equipment various heads of accounts. Some of them are e Delayed deliveries and non-sequential interest due to the state government, electricity supplies duty, revenue subsidy due to the Board, capital a Contract failures, court cases, labor receipts, etc. There is often an adjustment across problems, law and order problems, etc. the capital and revenue accounts (as permitted under the E(S) Act, in consultation with the state government), leading to a reduction in the Figure 2 Investments in the power sector loo -22 .0 t18.6 18.8 19 18.3 16.7~~~~~~~1 2D- . _ . 712 40O 7 20 I u m w v VI vn vm GCadn En T&D Rural dlciilaffon PR&MMh a i pu RgULATION AND MANAGEmENT OF TE POWER SECtOR IN INDIA 133 42 Capital stmcture of the SEBs by the PC and the state governments, and are fully guaranteed by the state govemments. The SEBs are govemed by the provisions of the External aid for the projects is routed through E(S) Act for their financial operations. Tradi- the central govemrment to state governments as tional sources of capital financing for SEBs a part of the plan resources. The SEBs have been comprise state government loans, loans from recently permitted to get funds directly from the financial institutions such as Life Insurance multilateral funding institutions. However, this Corporation, Industrial Development Bank of has to be within the overall borrowing capability India, General Insurance Company, REC, etc., of the Government of India. open market borrowing, internally generated The E(S) Act of 1948 did not provide any resources, and external borrowing via central specific provision for capital structure for the assistance. State government loans are linked SEBs. A Committee set up by the PC in 1962, through the state annual plans and budgets. The recommended an equity-based capital structure borrowing from FIs and markets are governed on a debt-equity ratio of 1:1. The Venkatraman Pigure 3 Time and cost overruns in commissioning of thermal projects 200 so * 60~~~~~~~~~~~~~~~~10 40 20 0 0 -Sampl pa~c Figure 4 Time and cost overuns in commissioning of hydro projects ao30080 700 ISO~pb T - onm0 0Cieu6 200 Am 100 0~~~~~~~~~~~~~~~~~~~~~~ SamPUle 134 REGULAT1oN AMD MANAGEME?T OF THE POWR SECtOR iN INDIA Committee in 1964, made another attempt to surplus, consumers' contribution towards cost of look into the issue of capital structure, and did capital assets, and grants and subventions from not favor the equity-based capital. Sthe main the state government towards cost of capital argument being that the interest on loan being a assets. Further, the share of state government charge is allowed before computation of taxable loans, which are the main source of finance for income while dividend on equity is an appropri- the SEBs, has been declining in several states due ation of profit and is subject to payment of taxes. to the deteriorating resource position of the The Committee recommended that the loans by respective state governments. Consequently, the state government under Section 64 should be Boards have resorted to borrowing from the perpetual. Despite the fact that no such provi- market and the financial institutions, the share of sion is made in the Act, most of the state govern- which has increased from 29 percent in 1985-86 ments have acted upon this recommendation. to 43 percent in 1990-91, resulting in a substan- It was only in 1978, that the central govern- tial increase in interest burden (refer to Figure 5). ment made a specific provision of equity for the Negative internal resource generation of the SEBs by incorporating Section 12-A and 66-A in Boards is the fundamental problem for the the E(S) Act. According to Section 12-A "the power sector development. In 1992-93, the esti- state govemment can declare SEBs as a corporate mated net internal resources generated by all the body with such capital not exceeding Rs. 10 SEBs was Rs. -2,251 crores. The rate of return crores but which can be increased with the and depreciation rates have a direct bearing on approval of the State Legislature to the extent the the extent of internal resource generation. As govemment may deem fit, but not exceeding the per the E(S) Act, the SEBs are expected to, after aggregate of outstanding loans of the Board." meeting all their expense obligations and after Section 66-A provides for the conversion of the taking into account subventions from the state existing amounts of loans into equity. government, earn a surplus equal to 3 percent of The existiitg capital structure of the SEBs the value of the net fixed assets as at the begin- continues to be primarily debt-based. So far, ning of the financial year. The state govem- only in 4 out of 18 SEBs, state government loans ments can fix a higher rate of return as against have been converted into equity - Haryana State the 3 percent specified. However, it must be Electricity Board Rs. 390 crores, Punjab State mentioned that, as of date, no state government Electricity Board Rs. 600 crores, Rajasthan State has specified a higher percentage of surplus. In Electricity Board Rs. 600 crores and Assam State 1992-93 the rate of return was -13.5 percent for Electricity Board Rs. 800 crores. In all the other all the SEBs and the total losses were Rs. 5,130 utilities, the only equity available is reserves, crores. The reasons for negative rate of return are. * Tariffs not related to cost of supply Sources of finance for power projects for SEBs a Low operational efficiencies, low PLF, high 1. Bowing T&D losses, etc., resulting in higher per unit cost of generation and supply Domestic e Heavy interest burden due to the present Government loans capital structure of the SEBs, resulting high Loans from financal Institutions costs Market borrowing . Large revenue outstandings affecting the External liquidity of the Boards Loan from bilateral and multi-lateral * Partal and delayed payment of revenue financial institutions subsidies from the state government. 2. Internal resowue generation Retained earn-gn As per the E(S) Act, the Boards charge depred- Consumers contriouaon ation on a straight line basis on 90 percent of the Capital gant and subsidies value of the asset. The Act also provides for the Depredation CEA to revise the rate for depreciation. In the 3. Own funds past, the average depreciation rate was of the Equity order of 3.3 per.ent. Depreciation rates have Reserve fuds been raised upward orny recently in March 1992 _ _49= a.d, if fully provided for at these revised rates, would mean an assured source of fumds for the REGtUATION AND MANAGEMErT OF THE POWER SECIOR IN INDM 135 Capital structure of SEBS 100 20 7.3 0 . -A195 640 24 1985/86 1986/lD 1987/8S 1988/89 1990/91 Year Boards. However, increase in depreciation rates setting tariffs for different consumer categories, would have to bl followed by an increase in SEBs have to take into consideration the policies tariffs, in the absence of which the Boards will and the social objectives of their state govem- continue to incur losses. This surely emphasizes ments. Often, the tariffs are guided more by the need for tariff rationalization by the Boards. social and political considerations rather than Inten resources should finance at least financial or efficiency objectives. The Boards 20 percent of the total capital expenditure in any have reported excessive interference of the state year. This requires rationalized tariffs, cost government in setting tariffs as against their control, and complete financial discipline in the advisory role. operations of the Boards. Tariff revisions by the SEBs are generally caied out on an ad hoc basis. The sole crite- rion is the absorbing capacity of the consumers without agitation. The additional costs to be recovered are calculated first. Based on this, the extent to which rates for high-tension (HT) con- S. Tarfs suers can be raised is decided. The balance cost to be recovered is then adjusted to the The E(S) Act vests the responsibility of setting tariffs for different consumer categories with the SEBs. The tariffs are to be based on the con- E(S) Act Section 49(1) siderations contained in Section 49 and 59 of the ".-the Board may supply electridty to any person E(S) Act. Under the E(S) Act, the Board is to not being a licensee upon such terms and condi- cmy on itsopemtions as far aspracticaltions as the Board thinks fit and for purposos of carry on its operations, as far as practical sucli supply *rame uniform tarlffs. without incurning losses and the Board could, from tie to time, adjust tariffs to earn a E(S) Act Secton 49(2) 3 percent rate of return on net fixed assets as at 'Ining iffs the board shall have regard to...the the begnning of the financial year. Also, in coordinated development of the supply and distri- accordance with the Section 78-A, ~ bution of electricity within the State in the most accordane, with he Secdn 78-A, t stateeffidient and mechanical manner, with particular government can give guidance to the SEB in reference to such development in areas not for the settng tariffs. time being served or adequately served by the Pricing of electicity by the SEBs is generaly based on the average cost approach. While 136 REGULATION AND MANAGEMET OF THE POWER SECTOR IN INDIA extent possible from the low-tension (LT) indus- * The State Electricity Duty, as a proportion trial, commercial, and domestic consumers. The of average per unit revenue from sale of tariff for agricultural consumers is reported to power, varied between 2 percent and have a strong linkage to political considerations. 16 percent in 1990-91 (Annexure 6). The existing tariff structures are characterized e SEBs have a fuel adjustment charge in their by: tariffs. This is mostly passed on selectively to some consumer categories, primarily HT * The fact that the Boards are not able to consumers and LT industry categories. completely recover the subsidies given to some consumer categories through higher The widening gap between the average rates for other categories (cross- revenue and average cost of supply has resulted subsidization) and hence the Boards incur in mounting losses for the Boards. As of losses in their operations. In 1991-92, only March 31, 1992, the total commercial loss of the two Boards were able to recover their aver- Boards was Rs. 5,130 crores. Losses incurred by age cost of generation and supply, and in the Boards on account of supplying electricity at nine Boards the average revenue realized a subsidized rate to agriculture consumers are to was subsidized more than 25 percent of the be subsidized by the state governments. The average cost (Annexure 6). state governments are to subsidize to the extent o The average revenue realized in most of the that ena'oles the Boards to declare a 3 percent SEBs is less than the average cost of supply. surplus or the full subsidy to cover the loss The gap between the average revenue and incurred by the Board in supplying power to average cost of supply has increased from agriculture sector, whichever is lower. It is 3.70 paise/kWh in 1974-75 to 8.67 paise/ reported that the SEBs have received only about kWh in 1980-81 and further to 24.70 paise in 50-60 percent of the subsidies claimed by them 1990-91 (Figure 6). and the total outstandings as of March 1990 are 3 Agricultural consumers are charged a "flat- estimated to be Rs. 6,299 crores. There is often rate" tariff based on the connected load (HP a disagreement between the Board and the state of pumpset). Electricity prices are lowest government on the quantum and method of for the agriculture sector and, over the calculating the subsidy. Nonpayment or partial years, the gap br.cween the cost of genera- payment after substantial delays seriously affects tion and supply and the average realization the financial performance of the Boards. from the agriculture sector has increased Revising tariffs is perhaps one area where the from 4 paise/kWh to 100 palse/kWh during state govenmments wish to have maximum the period 1974/75 to 1990/91 (Figure 6). Influence. The general argument against tariff Figure 6 Average cost of supply and average revenue realized 120 100 40 20 74/7S 76/77 78/79 80/81 82/83 84/85 86/U7 88189 90/91 YAer *> Averagecot -U- Averaereeue- agr -g- Avegreenue, all REGULATION AND MANAGEMF OF TH POWER SECOR IN INDM 137 Increases is that the Boards pass on their ineffi- o Subsidies where necessary, there should be ciencies to the consumers. The tariffs must a mechanism to ensure that they reach the therefore be based on a normative efficient cost target population approach. This calls for an open approach to e Innovative tariff options such as time-of-day tariff raking where the consumers are informed tariffs to be effectively used for load on the various increases in costs outside the management. control of the Boards. Also, the consumers must be informed of the efforts being made by the One of the key suggestions made at the Power Board to increase efficiency. Minister's Conference in 1991, in the direction of Considering the capital intensive nature of the rationalizing electricity tariffs and reducing the power sector and the fact that the power sector control of state governments in fixing tariffs, was in India is at the increasing part of the cost to set up independent expert bodies to analyze curve, there is a strong case for adopting the costs incurred by the Boards and to recommend long run marginal cost (LRMC) approach for tariffs. This was to be done through the estab- setting tariffs. As the situation stands, LRMC lishment of the National Power Tariff Board at tariffs will be substantially higher than the the center with five Regional Power Tariff present level of tariffs for most LT consumers. Boards. The constitution of these Boards has For the HT consumers, LRMC tariffs are likely to been delayed since the corpus fund which was be either equal or lower than the present level of to come from the Boards has not been forth- tariffs. A comparison of LRMC tariffs and the coming. Some of the SEBs have now agreed to average revenue realized for different consumer make a contribution to the corpus and it is categories for one of the utilities Is given in expected that others will soon follow. Presently, Figure 7. these Boards do not have statutory status and Some guidelines that the Boards could adopt hence, it will be difficult to enforce their in setting tariffs are: decisions. With the opening of power generation to the • Cross subsidization to be within consumer private sector, it is expected that generation groups rather than across consumer groups prices could be set in a competitive framework, e All electricity sales to be based on metered provided there were a sufficient number of supply private generators. In the case of T&D, prices X Tariffs should encourage efficient use of would need to be regulated through an approp- electricity riate framework. However, as mentioned above, Eigure 7 Comparison of LRMC based tariffs and average revenue realized 166 c~~~~~~~~~~~~~d ~ ~ ~ ~ ~ 1 LWadbuetry13 _1~~~~~~~~~~~~~~~~~3 4almweS 163 DomaUc l i XA _lI 0 20 40 60 0o 0oo 120 140 160 1I0 pWl1efkWh 191 pdale U Eiwmlcptce 1 Av. ev. eale For Maharashtra State Electricity Board 138 REGULTION AND MANAGEMENT OS THE POWER SECrOR IN INDIA considering the progress in the proposals of the private sector, this is not likely to happen in the E(S) Act, Section 5 next 5- to 7-year time frame. On the issue of ..."Mhe Board shall consist of not les than three and privatizing distribution, while the policy frame- not more than seven members appointed by the work exists, no proposal has come forth from the state government." private sector. What has been received is E(S) Act Section 8 perhaps an expression of interest from some The Chairman and other members of the Board private parties, and that too for urban distribu- shall hold office for such period, and shall be tion. Except for the four private utilities, the eligible for reappointment under such conditions as private sector has no experience in the manage- may be prescribed. ment and operation of the distribution systems. E(S) Act, Section 10(5) There are indications of Indian firms planning to If the Board fails to carry out its functions, or tie up with US., Canadian, and European utili- refuses or fails to foow the directions issued by the ties to bring in their experience. It is too early to state governments, under this Act, the state govern- come to any conclusion on this subject. ment may remove the Chairman and the Members of the Board and appoint a Chairman and Members in their places. 6. Operational and management issues in * Every power station is headed by either a LJ the Boards Chief Engineer or General Manager who is completely responsible for the technical and financial performance of the power stations 6.1 Organizational structure of the Board under their charge. Similarly, T&D circles or zones are again headed by a Chief Section 18 of the E(S) Act charges the SEBs to Engineer and they are responsible for the supply electricity in the most efficient and eco- operations in their circles or zones. nomical manner with particular reference to o The chief engineers in turn have a number those areas where there is a need for supplying of superintending, executive engineers, electricity. Section 15 of the Act also gives assistant and junior engineers, and other powers to the Boards to appoint staff required staff to absist them in carrying out their for their operations. Section 79 of the Act gives responsibilities. powers to the Boards to formulate regulations a The designations for finance officials is for their different spheres of operation. different from the operations staff. They The organizational structure of the Boards is may include Chief Accounts Officer, or generally along the following lines: Deputy CAO, etc. * The administration is generally under the e The Board consists of a full-time Chairman Secretary of the Board, who has a team of and three or four full-time Members each joint and deputy secretaries to assist him in having full and complete responsibility for his duties. their own areas. The areas allocated are * The Boards have a vigilance cell for generally (a) finance, (b) generation, (c) checking both internal malpractice as well transmission and/or distribution, and as for looking into matters relating to theft (d) projects. The allocation for the members of electricity, which is either under the varies across the Boards. The 3oard has a Secretary or the Chairman of the Board. full-time Secretary, whose appointment is to be made with the approval of the state The organization chart for one SEB is given in government. Annexure 7. It must be noted that, as per the E(S) Act, the board members are (a) appointed by the 6.2 Electricity councils and advisory state government and (b) a specific term for committees the chairman and members of the Board is not defined. The SECC is constituted under Section 16, of the o The Boards may have separate cadres for E(S) Act, with the objective to advise the SEB on generation, transmission, distribution, and questions of policy and to review the progress financial operations. REGULATION AND MANAGEMENT OF TME POWER SECTOR IN INDIA 139 and planning of the SEBs. The Council com- these indicators across the Boards (refer to prises the Chairman of the SEB as the ex-officio Annexure 8). It is reported that more SEBs are chairman of the council and the nembers becorning aware of this problem of increased include all full-time members of the SEB, repre- burden of manpower and thus, there has been sentatives of generating companies in the state, no major recruitment drive in most of the Boards and at least eight members representing the for the last two to three years. The Boards need interest of local self-government, electricity to rationally utilize excess staff with the objective supply industry, commerce, industry, transport, to improve manpower utilization efficiencies. agriculture, electricity staff, and consumers of This requires enhancing the skills of personnel in electricity. The council is expected to meet every case of redeployment. three months. However, these meetings, as revealed from the discussions with officials in 6.4 Peiformanceevaluationandhumanresource various SEBs, are more of formalities rather than development a forum to effectively oversee the operations and management of the Boards. Discussions with the Chief Engineers in various Under Section 16(6), the Board is statutorily Boards reveal that there is ample scope for required to place their annual financial statement performance improvement in generation, T&D, and supplementary statements if any, before the and also the fact that there is enough authority SECC, and take into consideration any comments and powers vested in the Chief Engineers In made on such statements by the Council before order to enable them to function effectively. submitting the same to the state government. While the Boards do have rules and regulations Section 17 of the E(S) Act also necessitates that to ensure that the employees perform efficiently, the state government may from time to time it is often the lengthy and difficult procedures constitute Local Advisory Committees (LACs). that make it difficult to initiate any proceedings The Board may consult the LAC concerning any against employees who do not perform satisfac- business coming before it and shall also place torily. There is the opportunity to record the such business as the state government may, by performance of the employee during the annual special order, specify. performance evaluation (known as CRs or Con- Chapter 11 of the IE Rules, 1956, provides for fidential Reports). Any adverse comments have the appointment of state electrical inspectors and to be intimated to the employee within a given their duties and authority. time frame and an opportunity is given to record his views. Also, there is the provision of giving 6.3 Staff recruitment the next higher officer the opportunity to review the case and make a decision on the adverse Staff recruitment for the Boards is generally comments made. There is a process of a series through a common admissions test, which was, of warnings, letters, charge sheets, etc. to be until recently, held every year, for recruitment at given to the nonperforming employee, before the level of the Assistant Engineer (AB) for any action can be initiated. There have been engineering staff. There was no criteria for the occasions where Boards have taken action sdJection of staff for finance and financial opera- against nonperforming employees. However, tions. The clerical staff were promoted and such cases are few and it is generally in cases of given some training, while the heads of depart- criminal negligence or corruption or bribery, that ments were usually on deputation from one of the action is taken against the employee. the other services or even from other organi- Regarding linking performance to promotions, zations such as banks, railways, etc. It is only the official policy is based on seniority-cum- recently that the Boards have defined require- merit. But considering the large number of ments for their financial cadres and attempts are eligible candidates for middle and senior man- being made to train them to effectively perform agement (such as Assistant Engineer (AE)) to their responsibilities. Executive Engineer (EE), or EE to Superintending Most of the SEBs are today faced with the Engineer (SE)), seniority gets a higher considera- problem of overstaffing. Manpower utilization tion. In the case of the appointment of the in Indian utilities is quite inefficient; ratio of chairman, again the issue of seniority gets employees/MW, sales per employee, and num- importance, although there are several instances ber of consumers per employee are high where junior members have superseded their compared to other developed and developing seniors. In the Boards, where the chairman is a countries. Also, there is a wide variation in 140 REcuLATIoN AND MANACEMENT OF THE POWER SEcOR IN INDIA nontechnical person, drawn from one of the to be reduced. One of the major problems is that central services, this Issue is not relevant. the figure of the T&D losses is notional since a The issue of promotions and human resource large block of consumption is estimated based on development in the SEBs has also been a matter sample surveys carried out by the Boards. There of concern. Engineers who join at the AE level, is an immediate need to put into effect an energy get their promotions after perhaps ten years or accounting system at the circle or zone level to more, and there are EEs who have served for enable the Boards to estimate T&D losses accu- 25 years or more and there is little hope for them rately. The T&D staff did not have any form of to possibly move more than the level of a SE, incentive which was available to the generation perhaps at the end of their career. There is staff. Recently, the Government of India has put substantial disenchantment among the SEB staff in place an award scheme for reducing T&D in this regard. Apart from job rotations, which losses and this financial award has generally to an extent means transfers, the issue of human been shared equally by all the T&D staff. In resource development in SEBs is yet to receive several cases, the Boards have complimented this the attention that it deserves, particularly con- award by putting in an additional amount sidering the impact that these measures can have equivalent to the award from its own budget. on improving the performance of the Board's It is necessary to explore some options through operations. which non-generation staff also have financial incentives linked to their performance. This 6.5 Incentives for efffcient operations could be done by identifying key performance parameters, giving each performance criteria a There is ample scope for improving the perfor- weightage, and arriving at a net performance mance of power stations, transmission, and score for the circle or a district as the case may distribution operations in the Boards. On the be. The monetary incentive could be linked to generation front, PLF, coal consumption, the performance in each of the circles. The secondary oil consumption, auxiliary consump- incentive could be limited perhaps to those tion, outages, etc., are some of the parameters in circles which perform above average on the total which station performance is measured. T&D weighted score. losses, breakdowns, supply interruptions, etc., are some of the important parameters for 6.6 Fuel supply measuring the performance of the T&D systems. The generation staff have financial incentives Power stations have linkages with coal mines linked to the level of generation. Also, the from where they are supposed to get their coal. central government has an award scheme for The linkage specifies the quantity of coal, coal maximum generation by a power station as well quality, and ash content. The Boards and the as for auxiliaries and for secondary oil consump- coal companies carry out joint sampling and tion. There are both advantages and disadvan- weighting to determine the coal quantities and tages to the scheme for linking incentives to coal quality. When the coal quality deteriorates, generation. The advantage is that the staff is there is little choice for the Boards but to change exhorted to generate more, for this would their source of supply. The linkage does not increase their own financial returns. The dis- provide for any penalties for deviating from the advantage is that there is not enough attention quality of coal that the coal companies are paid to maintenance and efficiency. The empha- expected to supply. It is only recently that sis is on units generated and not on generating TNEB has decided to import coal and one would efficiently. The question of cost criteria is have to wait and see the impact of this decision perhaps not of major relevance, since funds on the coal companies and the other Boards. availability is in any case restricted. Also, this The power stations should be allowed to enter has, on several occasions, resulted in generating into medium- or long-term contracts for the stations not following instructions from the purchase of fuel with suppliers and the prices RLDCs to back down generation during low should be decided mutually. Ihis is expected to load periods.2 bring in timely and quality supply of fuel to the The T&D losses in the Boards are high (all- India losses for 1991-92 are 23 percent) and need 2 With the REBs being given statutory authority, this situation Is ikdely to be under control. '. -< _,, I REGULATION AND MANAGEMENT OF ThE POWER SECrOR IN INDIA 141 generating stations. This issue becomes impor- were 33.4 percent of the total revenue receipts or tant in view of the entry of private companies in about four months of revenue. In 4 out of 13 power generation. SEBs, these were more than 50 percent and in Bihar State Electricity Board revenue out- 6.7 Metering, billing, and collection (MBC) standings were significantly high at 94.5 percent (refer to Annexure 9). A large proportion of One of the key factors in the efficient financial these outstandings are due from the central/state performance of the Board is proper metering, government undertakings/departments, over timely and correct billing, and the prompt collec- which the SEBs can exercise no control. At the tion of dues. state level, these are also mostly water supply, Accuracy and reliability of the meters are sewerage Boards, street lighting, etc., which, if crucial to the billing system. Slow or defective disconnected, have serious repercussions. meters result in underestimation of electricity Though the SEBs have the power to disconnect sales and thereby revenue loss to the Board. any consumer defaulting in the payment of the Also, electricity not measured is often regarded amount due from him within a specified time as electricity lost and thus does not give a correct limit, this is rarely done by the Boards. In case estimation of T&D losses in the system. The of HT Industrial consumers, it is the larger con- Indian Electricity Rules of 1956, Section 46, siderations such as law and order, employment, provides for periodical inspection and testing of etc., which generally constrain the Boards from consumers' installation at intervals not exceeding disconnecting the consumers. For domestic and five years. However, inspection and testing of agriculture consumers, it is the social considera- HT consumers is carried out at more frequent tions that perhaps prevail. All these considera- intervals in order to ensure that there is no loss tions constrain the Boards to operate on a purely of revenue due to faulty metering. All Boards commercial basis. Greater autonomy needs to be have meter testing laboratories for testing and given to SEBs to take action against consumers calibrating meters. The Boards are further with large outstandings, i.cluding the facility to required to ensure that the meters conform to disconnect power supply. There are several Indian standards (BIS), or where no specifica- court cases relating to tariffs and billing that tions exist, the accuracy levels maintained should have blocked substantial amounts due to the be 3 percent above or below absolute accuracy Board. It is important to work out a mechanism levels (Indian Electricity Rules of 1956, by which at least a part of these funds can be Section 57). For LT consumers, meter reading is released for the Board's operations. The SEBs undertaken by the meter reading section of the also need to set up special tribunals to expedite distribution circle of the Board. For HT con- the settlement of disputes. sumers, depending on the voltage of supply and Boards need to consider some innovative contract demand, the appropriate authority for option for MBC activities with a view to reduce confirming the meter reading is either an Assis- the cost of metering and billing and to enable the tant, Executive, or Superintending Engineer as timely collection of outstandings. This is one the case may be. area where the Boards could subcontract some or Billing in its wider definition includes meter all of the MBC activities to the private sector. reading, bill preparation, bill distribution, and However, it is most crucial that there are revenue collection. Each distribution circle or adequate safeguards to ensure that the existing zone is responsible of this entire range of activi- system leakages do not prevail in the new setup. ties in their area. There is no uniform system of MBC, across the Boards and across consumer 6.8 Theft of energy categories in terms of the frequency of billing, bill preparation (manual, computerized), distri- The SEBs have special cells for carrying out bution of bills, etc. There is substantial scope for inspections to identify cases where electricity is reducing the cost of various operations in MBC used illegally, without acquiring the permission in the Boards. There is a need to look into some to do so. These cells carry out surprise checks innovative options for improving the efficiency on consumers' premises and in rural areas to of MBC activities. check the HP of pumpsets. The SEBs are to a Revenue arrears as a proportion of revenue great extent also dependent on support fi,m the receipts of the SEBS have increased over the local police, the district magistrate, etc., in years. As of March 1992, revenue outstandings carrying out these duties. Cases are registered 142 REGULATION AND MANAGEMENT OF THE POWR SECOR IN INDIA when thefts are detected, but it is reported that day-to-day operations, and limit the guidance of there still exist procedural problems In proces- the state government to policy matters as si.ig these cases. Suggestions such as having envisaged in the E(S) Act. mobile courts, or even special electricity courts As discussed in this paper, there exists sub- have been made to resolve some of these issues, stantial scope for Improvements in the operations but these steps still have to get under way. of the Boards. Some of the important areas are: 6.9 Quality of supply ° Improve the performance of generating stations The quality of supply is regulated by the Fifth o Reduce T&D losses Schedule of the lIE Rules, 1956. The range for o Effective measures to curb theft of power low and medium voltages is ±6 percent, for high o Rational utilization of the excess manpower voltage +6 percent and -9 percent, and for extra o Introduce innovative options to ensure high voltage +10 percent and -12.5 percent. The accurate metering, timely billing, and frequency variations allowed are +3 percent. It regular collections is observed that during the daytime and more * Reduce revenue outstandings during the evening hours, the frequency drops e Improve the reliability and quality of power and the Boards resort to load shedding. The supply. frequency is generally higher than the limits during the night hours, and this indicates that Financial viability of the Boards' operations are stations are not willing to back down. With of utmost importance. In this connection, it is statutory powers being given to the REBs, this necessary to ensure that tariffs reflect efficient situation is expected to improve in the future, for costs and also that tariffs keep up with increases over frequency periods. However, during the in costs outside the purview of the Boards. periods of under frequency, the Boards would There is excessive political interference in tariff continue to resort to load shedding either setting (as against the advisory role of the state manually or through under frequency relays. governments as envisaged in the E(S) Act), and There is thus a need to evaluate other options for the need for an autonomous body to set tariffs load management, such as DSM, or perhaps has never been more strongly felt. This is also through innovative tariff options. expected to bring in the necessary transparency in the operations of the Boards. There are continuing discussions relating to commercialization of the Boards. The sugges- tions include: 7. Issues and options a Converting the Boards into corporations o Separation of generation, transmission, and distribution functions The installed capacity in the power sector in a Privatization of distribution India will continue to double at present rates for a RE to be separated from the Boards opera- the next two to three decades. There is substan- tions and converted into cooperatives tial scope for Improving efficiencies In genera- a Prices for electricity generation to be fixed tion, transmisblon, and distribution, as well as in by market forces rather than regulation project implementation. The present legal frame- o Statutory regulatory body for overseeing the work provides enough powers to the SEBs to transmission and distribution operations. draw up regulations, to manage its funds, and to carry out their operations in an efficient and Any change should not be considered just for economical manner. Discussions with power the sake of making a change. The case in point sector professionals reveal that it is entirely is to convert the SEBs into corporations. This within the Boards' purview to draw plans for change will bring about no significant benefit improved performance and implement them. unless this is accompanied by real autonomy for There is perhaps a need for building adequate these corporations. enforcement nmchanisms which will ensure that The private sector is expected to play an the SEBs function efficiently. There is also a increasing role In the Indian power sector. A very strong need to insulate the Boards from beginning has been made with power generation interferences by the state govermment in their and distribution. While several propocils have IrmHatroN AND MANAGEMEJ'T OF TME POWER SECTOR IN CIA 143 been received in the area of power generation, These policies have had an adverse effect on the there has been no interest shown by the private financial viability of the Boards. On subjects sector in coming into the area )f distribution. It such as disconnection, larger issues beyond the would certainly be worthwhile to learn from the purview of the Boards have constrained their experiences of some of the other developed and performing on a purely commercial basis. What developing countries who have gone in for is required is to come up with implernentable privatization in the power sector. solutions to some of the pressing issues that Electricity has become a basic necessity for constrain the Boards from functioning commer- modern living. The state governments have cdally. Any change in the legal and regulatory often implemented their social policies through framework should be undertaken keeping this in the SEBs (low prices for agriculture, flat rate for view. very low consumption domestic consumers, etc.). References 1. Annual report on the working of state electricity boards and electricity departments, Planning commission, Govermment of India, May 1989. 2. Annual report on the working of state electricity boards and electricity departments, Planning com-ission, Government of India, August 1992. 3. Report of the Committee of Power, Department of Power, Goverunent of India, 1980. 4. Background notes, Conference on Power, MJnistry of Power, January 1993. 5. Planning and Management of hydro power resources in India, Central Board of Irrigation and Power, July 1992. 6. Law relating to electricity, Sixth edition, Justice J C Mathur. 7. Profile of power utilities in India, Council of Power Utilities, April 1993. 8. Inda's electricity sector - widening scope for private participation, Ministry of Power, Government of India, April 1992. 144 REGUUT20N AND MANAGEMENT OF THE POWER SECR oJ N MmD Annex 1 Institutional structure of the power sector In India | Gvenentof India | tt/TGovernments uiottry National of Power Development (MOP) Councdl Departhnent PlannlngM_irstry of Atomic Consinof Power Energy (MOP) Nuclear Stt tt/TState Private Power Eetiiy Eetit Power Liceresm Co5pOration Bad Derlnt Corporations Natona Nort Pow11;er | Damodar | W= Power;71 RUM2a | Central7 Ihemal ||Hydroelectric ||Eastern|m Grid ||Power B eas ||Fhance |M Eectiifi- | BLecty| Power Power Corp. Power Corp. of Corp. Mgt.t Corp. cation Authorty corp. corp. India Board COTP.~~~~~~Boads RCuLAON AND MANAGEMENr OF TE PoW£R SECrOR IN INvIA 145 Annex 2 List of the main cleaances required for investment project processing StUory danas Clearing authority Cost esimates section 29(1) CEA Teduoweconomic cleaance CEA Publiation/Section 29(2) State government Water availability CWC/State government SED dearance SEB/State govemnment Polution dearance CPCB Forest cleaanae MOE&P/State government Environment & forest clearance MOE&F/State government Civil aviaton crance for chimney height National Airport Authority company registration Registrar of Companies Retabilitation & rettlement of displaced faimlies by land MOE&P/State government acquistion Hydel proects Ministry of Water Resources Equipment procemnt DGTD, CCI&E Non.shtoy dences Clearing authority Land availability State govenment Fuel linkage Department of Coal, Department of Petroleum & Natural Gas nanidng CEA/DOP/Department of Economic Affairs/Financial Institutions Tnortatbn of fuel Departments of Coal/Petroleum & Natural Gas/Min of Railway, Shipping & Surfaoe Transport Annex 3 Time and cost over run of Vm plan major and medium HIE. projects Esthand wst (Rs. a "s) mnim Sdede lwt C cm" 1 Xcty addAitn ()ij Ltst Cost o .. A.cU,,. runoua Nmw of an pvj (MM Aung - t (MW i ( (%) ___~~~~~~~~~~~~~~~~~~~~ _ - _ _ __ __ _ 1. Salal (NHP 3xllS 343 35.15 582.00 955 1974-75 Comd. 13 ___________ ~(1970) (1990) _ _ _ __ _ _ __(87-88) 2 Kopl( EHPO) 2x25+2x40 103 36.77 24382 330 1982-83 GonumL 5 (1974) (1990) 87488) 100 MW 3. Panchat Hin (DVC lx40 43 1603 S2. 293 1982-83 Rovtted 7 (197m (1991) _90)_ i. Anandpur SuIb (Pb) 4x325 134 sOJ3 21365 163 N-A COrned. (NA.) (1990) .0 (85 2. Mukadan (Pb) 3x15+3x15+3xl9.5 152 115.58 41921 263 198243 U 1-3 14 2 (NA.) (1989 Covnud 83844 1984-85 U 4-12 (117) Cmmd89 3. Andhra (H.P.) 3x5.33 16.93 9.74 49.02 403 1980-81 Commd. 7 __________________ 1__________ (1976) (1989) _(8748) 4. Sarjay H) 3x40 120 55.84 17236 209 198586 Rotated 3 (1978) (19B9) (89) _ 5. W.Y.C (Haryana) 5%8 43 45.72 11721 156 1984-85 Comund. 2-5 . .________________ _ ._________ (1980) (1992) _90__ (8690) 6. Maid Bajaj Sagar (Rap 2x25+2x45 143 59.38 12030 102 198243 2x25 Coammd. 3-7 (1977) (1992) 2x985-86) 2x45 G.rnrd. a ______ ~~~~~~~~~(1988-90) 7. UBDC St U (Pb) 3xlS 15 20.84 99.92 379 198"89 1988-89 0 (1982) (991) _ Annex 3 (Continued) Time and cost over run of Vm plan major and medium HIL projects _ fistbnatd cost (lb. in cm) Comsiin sddl Instad capity Capciy addition Cost over rn ___T omw Now of th pmet (MM durilg plan (MW %) run m lya 3. Mhira Tail Race (Mah) 2x40 80 8.40 70.86 744 198243 Commnd 5 (1970) (1989) _ (8748) 4. Bhandardaa Mah) lxlO+1x34 10 17.59 6520 271 1983-84 Commnd. 2 (1977) (1992) t 6 5. Penchk Mah./MP) 2x80 160 28.28 189.57 57 1978-79 Gmmnd. 8 (1972) (1992) (86-87) 6. Bargi (M.P.) 2x45 90 30A9 78.85 56 1987-88 198748 0-1 (1977) (1992) 7. lChadakcwaela (Mah.) 2x8 16 142 21 919 7. Khadakwasla OdaW W 16 ~~~~~14.29 21.33 49 1988-89 RftatedI (1983) (199 (89-9 8. Kadana PSS (Gu) 4U60 60 24.58 242.26 886 1978-79 1989-90 11 (SL I 2x60 (1972) (1992) (SL [ ony) 1. Nagnom _sw P55 (St in 3xlO0 100 33.73 73.00 34 1983-85 Gornmnd. I (AP) (1981) (1992) (84-86) 2. Sdsallam St. I (A.P.) 3xllO 330 39.33 36.00 42 1984-86 Coumnd. 1 (1981) (1984) 5-87) 3. Pociambad (AP) 3x9 27 13.49 2251 67 1987-88 1987-8 0 (1984) (1989) 4. Nagarpmasagar RBC Extn. lx30 30 1525 17.50 15 198788 Rotated 2 (AP) (1983) (1992) (8_ 90) - - -~~~~~~~~1 Annex 3 (Continued) G Time and cost over run of VIII plan major and medium -E. projects . . _ ~~~~~~~~~~~~Estheated awst. (Rs. in crt) Cmmisionming sd*edsde Installed cay CapuCty add ition . . Cost oor nm _ r Nam of the poje (MM duing pan (MW M t() in yaw 8 Idukki St.11 (Kar) 3x130 390 31.68 70.00 121 1984-85 Comnmd. 1-2 (1973) (1989) (87) 9. Servalar (T.N.) _20 20 935 46.56 458 1978-79 Crnmmd. 7 (1974) (1989) (-86) 10. Kadampnai (T.N.) 4xlO0 400 35.12 18133 416 1978-79 Commnd/Rot-ated 9-10 (1973) (1991) (87-89) 11. Lower Mattt¢ (T.N.) 3x15 120 83.60 171.79 105 1981-82 Com d/Rot-ated 6-7 _ _ _ _ _ __(1973) (1991) (874-9) 12. Kundan (T.N.) lx20 20 5.03 14.00 173 1987-90 Rotated 0 (1980) (1992) (19874;9) 1. Rangali (Oria) 2x30 100 35.32 139.27 296 1982-83 CG madn . 3 ._______________ . . ns_______ (1973) (1968 (8586) _ 2. Upper Kolab SL I (Orissa) 3x30 240 51.39 204.01 297 1980.81 Cnmd. 7-9 @ (1973) (1991) (87-90) 3. Rangali Extn. (Orissa) 3x50 100 40.55 71.00 75 1988489 Comnmd. I (19) (1991) _____ _ 90) RRGULA7ON AND MANAGEMENT OF THE POWER SECTOR IN INDU 149 Annex 4 Time and cost overrun of hydroelectrlic projects during Sixth Plan (Italled capacity above 3 MW) Estimated cost cost Times Instkdacd (Rs. in MMora) over Commissioning schd. omer run Name of project (MW i ltest | ) Orig. Latest 1. Basil Extensdon (HP) IxIS 445 4.74 6.5 1978-79 1980-81 2 2. Garhwal Rishiesh 4x36 40.90 9.70 143.7 1977-78 1980-81 3 Chflls (UP) 3. Shanan Extension (Pb) Ix50 1326 27.25 105.5 1978-79 1981.82 3 4. Bai SIl (HP) 3x60 20.49 147.55 620.1 1974-75 19881 6 (Central) 5.Pong Dam Extetsion 2x60 21.91 29.79 36.0 1981-83 198243 1 (Pb) 6. Dear Extension (HP) 2x165 28.28 40.87 44.5 1981-83 1982-84 1 7. Mukerian (Pb) 3x15+3x15+ 115.58 419.21 263.0 1982-85 1983-89 1-4 6x19.5 I I 8. Yamuna St. 11 (UP) 4x30 17.96 65.16 263.0 1972-73 1983484 11 9. Bhnwa (HP) 2x3 4.32 12.74 195.0 1980-81 1984-85 4 10. ManarBhal St I (UP) 3x30 17.78 83.90 371.8 198243 1984-85 2 1. Koyna Dam PH (Mah.) 2x20 2.17 15.76 626.3 1979-81 198081 7 1 2. Pathan (Mah.) | x12 5.96 15.24 155.7 1981-82 1984-85 3 1. NaraJunasagar PSS-1i 3x100 55.75 75.00 34.0 1983-85 1984-86 1 (AP) _ _ _ _ 2. Kalinadi St. I (Ktk.) 6x135+2x50 126.63 359.00 184.0 1977-82 1979-86 24 3. Srlsailam St. L (AP) 4x110 45.75 523.90 1045.0 1981-82 1982-85 1-3 4. Nagarjunasagar RBC 2x30 18.19 28.94 59.1 1982-83 1982-84 1 (AP) - _IIIIt 5. Donkarayl (AP) Sx25 7.92 13.00 64.1 1981-82 1983-84 2 1. Jaldhaa St. 1 (WB) 2x4 3.16 18.96 500.0 1978-79 j 1983-84 j 5 2. Suberorekha (Bihar) 2x65 15.27 34.07 123.1 1970-71 | 1980-81 10 1. cundt Exteon (Ix5 ixs 1.91 5.90 193.2 1982-83 1983-84 1 CMn) , ._____ 2. Kopil (Assam) 2x25+2x50 56.17 243.82 330.0 1982-83 198385 1-2 (for (Central) 2x25 . Loktak (Mard) 3x3 10.90 129.98 1092.5 1975-77 1983-8 7-8 (Central) 150 RECUAoN AND MANAMENr OF WE POWER SEcrOR IN INDL4 Annex 5 Ratio of average cost to average revenue (1991192) State Domestic Commercal| ArS Low Tension -High Tensio Avecrge rate AP 1.22 059 4337 0.76 0.56 1.00 Assam 5.04 2.61 6.05 5.10 3.21 3.25 Bihar 2.26 1.67 16.94 1.07 1.23 1.74 GEB 1.78 1.78 7.91 1.05 0.95 1.55 HSEB 1.64 0.79 4.93 0.86 0.99 1.37 HP 2.59 1.14 4.51 1.41 0.00 1.54- KEB 0.97 0.39 20.13 0.55 0.67 0.97 KSEB 1.42 0.88 3.14 1.15 1.19 123 MPEB 4.12 1.01 7.74 1.04 0.84 1.25 MSEB 1.70 0.78 7.92 1.07 0.74 1.09 Meghalaya 2.84 1.69 5.66 2.16 2.16 2.27 OSEB 1.41 0.74 2A1 1.22 0.96 1.04 PSEB 125 0.75 11.65 1.11 0.91 1.77 RSEB 1.92 1.05 3.75 1.00 0.81 1.21 TN 1.96 0.80 0.00 0.84 0.89 1.27 UP 1.69 1.06 4.38 0.90 0.00 1.55 WB 2A2 1.44 6.18 1.72 1.28 1.31 rGECuLAIoN AND MANAGEMENT OF ThE POWER SECTOR nv INDI4 151 Annex 6 State electricdty duty (SED) as proporton of average revenue (palse/kWh sold) 1989-90 1990-91 S. INo. EodAerge rate SED (%) AeMrage rate SED (%) 1. Andhra Pradesh 66.65 2<33 3.50 74.80 2.25 3.01 2. Assam 87.87 1.77 2.01 94.84 2.04 2.15 3. Bihat 86.80 1.90 2.19 92.21 1.90 2.06 4. Guarat 81.10 9.68 11.93 81.45 9.71 11.92 5. Haryana 58.68 5.06 8.62 82.40 6.19 7.51 6. Himachal 64.56 2.54 3.93 79.13 220 2.78 Pradesh 7. Jamimu and 40.23 4.90 12.18 38.00 4.30 11.32 Kashmnir 8. Kamnataka 65.80 5.35 8.13 79.70 5.47 6.86 10. Kerala 55.00 7.58 13.78 53.04 735 13.86 11. Madhya 83.72 13.43 16.04 83.15 13.43 16.15 Pradesh 12. Maharashtra 83.22 4.37 525 103.06 4.35 422 13. Meghalaya 50.30 0.65 129 59.21 0.85 1.43 14. Orissa 65.78 11.16 16.97 72.38 11.34 15.67 15. Punjab 46.90 4.22 9.00 54.87 4.53 8.26 16. Rajasthan "6.67 4.85 6.33 89.27 4.86 5.44 17. TamIl Nadu 73.34 85.13 18. Uttar Pradesh 71.47 2.37 3.32 73.09 2.34 320 19. West Benga 103.43 1.85 1.79 103.51 1.84 1.78 All Boards' Average 74.62 4.84 6.49 77.84 4.26 5.47 Source Annud Report on the Working of State Ekctricity Boa and Eklety Departmnts, Planning Commissum, Government of India, August 1992. 152 REcUiwAiom AND MANAGEMET oF 71E POwER SEwrOR N INDIA Annex 7 SEB - Organizational chart CHAIRMAN Other Member Member Member Member Members Thermal Transmission Distrbution Finance & Secretary & Hydro Accounting Design Design Areas Accounting Planning Engineering Management Operations & Material Electricity Internal Maintenance Management Supply - Audit Training Monitoring Authority Power Station control & Rural Control of |Enquiry Resident Monitoring Electrification - Audit & Committee Management Account Commercdal Tubewall Cost Security Electrification - Control r | , | | , -| Fund Hydro Generation F Transmission Desig & Construction Design Re|rgnization Pson Operation & Civil Works & Maintenance Construction Monitoring Administration Sports Plants Management Areas Management System Control & Dispatchig RECULATION AND MANAGEMENT OF THE POWER SECTOR NV INDIA 153 Annex 8 Indicators for manpower utilization (1991-92) Employees ptr milin kWh of Employees Employees per B&rd electriIty sales per MW '000 consumers Andhra Pradesh 3.96 14.15 9.84 Gujarat 2.14 8.96 6.95 Haryana 5.95 25.55 16.69 Himachal Pradesh 12.10 44.85 12.72 Kamataka 3.51 14.83 6.95 Madhya Pradesh 6.65 30.66 17.31 Maharashtra 3.63 14.16 12.02 Orissa 538 18.63 29.25 Punjab 5.87 22.95 19.52 Rajasthan 5.75 20.23 16.49 Tamil Nadu 5.16 20.40 10.46 Uttar Pradesh' 5.09 19.86 23.06 * Data for 1990.91 Data on employees for Assam, Bihar, Kerala, and West Bengal Is not available. Annex 9 Revenue outstanding as percentage of total revenue S. No. Xame of the SEB 1985 1986 1987 1988 1989 1990 1991 1992 1. Andhra Pradesh 19.70 21.29 2337 26.85 29.23 33.40 27.63 27.87 | 2. Bihar 70.64 7037 43.80 64.69 77.37 87.32 98.13 94.52 3. Cujarat 13.49 18.51 26.06 23.37 25.72 26.07 25.57 23.99 4. Haryana 25.28 51.88 49.28 42.79 34.60 38.34 66.87 73.74 5. Himachal Pradesh 28.57 28.61 64.81 55.59 27.07 53.31 51.90 56.82 6. Karnataka 33.21 46.46 52.57 58.18 64.86 58.34 50.32 46.12 | 7. | Kerala 1 30.97 24.91 23.88 23.88 22.66 31.92 35.70 37.04 8. Madhya Pradesh 25.11 27.98 29.07 29.07 39.33 45.02 N.A. N.A. 9. Maharashtra 20.73 21.79 23.14 29.13 28.90 28.77 30.85 26.83 10. Orissa 36.73 35.18 35.55 36.39 32.68 38.65 44.92 N.A. 11. Punjab 13.62 16.15 18.77 19.11 21.36 18.42 17.25 18.00 12. Rajasthan 29.30 26.07 2158 23.99 9.49 17.77 16.73 15.02 13. Tamil Nadu 9.86 14.04 12.02 13.82 12.81 13.06 11.64 13.06 14. Uttar Pradesh 33.52 35.95 31.01 38.25 39.69 48.33 48.71 51.81 IS. West Bengal 20.87 24.20 25.48 25.63 29.04 27.93 35.75 N.A. 16. Assam 24.63 NA. N.A. N.A. N.A. NA. 28.82 38.86 17. Meghalaya 93.24 N.A. NA. NA. NA. N.A. N.A. N.A. Total 24.54 27.63 24.71 31.12 32.96 34.90 34.29 33.44 _s_= =z _ ss8r. s ;_~ROOM Commercialization of the power sector in India by Administrative Staff College of India H Preface 1. Executive summary This paper is presented in four parts. A study of the Indian power sector shows that while it has registered a fast expansion in quan- • Part 1: sets out the summary of the paper tity terms, it has steadily deteriorated in all other giving briefly the sector level measures parameters. The main shortcomings of the required for making the State Electricity power sector have been recognized a long time Boards (SEBs) function on commercial lines back and several measures were taken from time and to give a sense of commercialism to the to time to remedy these. In actual terms, these entire power sector in India. measures could not be implemented and power e Part 2: sets out the rationa'e for the reforms sector performance, as a whole, has deteriorated suggested in Part 1 and how they could be both in terms of technical efficiency and financial implemented. performance. Throughout the eighties, the gap o Part 3: gives the micro-level measures to be between what the power industry should achieve taken by the SEBs to remedy the short- and what it could achieve widened. In the comings of the financial operations. decade of the nineties, the technological * Part 4: gives transitional measures to be advances in several industries are likely to initiated immediately. accelerate power demand in terms of quantity and quality. The central and state governments and the SEBs have realized that, by themselves, it would be impossible to meet the anticipated demand even quantitatively, let alone meeting it qualitatively. COMMERCIAUZATION OF ThE POWER SECTOR IN INDI 155 156 COMMERaALIZATION OF tHE POWER SECTOR IN INDIA The Government of India (GOI) has, therefore, in India suggests that there are serious structural proposed to permit the private sector to set up barriers which impede the implementation of the generating stations and sell the power to the financial reforms for commercialization. The SEBs. A number of concessions have been given solution to the power sector's problems, there- to private-sector investors to attract them to fore, rests in effecting major structural, institu- invest in the power sector. The target for tional, and regulatory reorganization as a private-sector power generation in the Eighth prelude to implemnenting other financial reform Five Year Plan (FYP) was set at 8,000-10,000 MW. measures. A large number of independent power devel- The core of the structural, institutional, and opers from within the country and outside have regulatory reform is aimed at strengthening the initiated discussions with the different SEBs. (financial and executive) autonomy of the SEBs, Though the public agencies involved have while at the same time enhancing competitive published only scanty details, the latest infor- conditions in the power sector. This would mation is that the private sector has so far signed involve: Memoranda of Understanding for over 28,000 MW of power. Even if all those projects * A proper demarcation of the relative role of materialize, they will not remedy the basic the central and state governments in power problem which the electricity sector faces. The sector management, based on the man- purchase of power from the private sector is not agerial and financial autonomy of power very different from the SEBes' purchasing power utilities from the central power generating stations. The o Empowerment of the SEBs to adopt dif- SEBs are finding it difficult to pay for the power ferent options of generation, transmission, purchased because of the low tariffs which are and distribution to meet the needs of elec- inadequate to cover the operational cost and the tricity of all consumers costs of purchased power. The same situation o Corporatization of the SEBs and sale of will continue even when private independent equity to all stake holders, especially to generators sell power to the SEBs. power consumers The crux of the problem lies in the SEBs a Deregulation of the power market for improving their flnancial performance by larger, high-tension (HT) consumers of becoming commercially viable units capable of electricity fulfilling their mission. a Organization of Regional Power Pools The SEBs can fulfill their mission of supplying o Restructuring the regulatory mechanism the power needs of the consumers in their area towards a transparent and autonomous with electricity of appropriate quality at reason- regulatory process. able (competitive) prices, only if they function as commercial entities. Commerciality of the SEBs We shall in this part (Part 1) only highlight the would imply: essential features of the reforms listed above :eaving the detailed discussion to Part 2. e Ability to meet the power needs of the customers in the area efficiently 1.1 Demarcation of the role of state and central * Ability to make decisions without any governments in the power sector external interference, along commercial principles The Indian power industry is governed by two • Ability to meet promptly all financial obli- Acts. One which was enforced before indepen- gations to the suppliers of inputs and power dence, the Indian Electricity Act, 1910, and the (like central and independent generators) other post-independence, the Electricity (Supply) * Ability to fully meet debt servicing and debt Act (E(S) Act), 1948. It is clear from these Acts redemption obligations that the responsibility for the power supply is o Ability to generate at least the statutory vested with the SEBs. The role of coordinating minimum surplus by their operations the efforts of the different states by prescribing * Ability to raise commercial finance and the the general rules and common stendards is given freedom to contract from power supply for to a technical body, the Central Electricity independent generators. Authority (CEA). Under the Indian Electricity Act, 1910, state governments can license anyone A careful, in-d,pth examination of the failure to generate electricity in any specified area and of the earlier attempts to reform the power sector can acquire any small electricity company to COMMERAIAUZATION OF THE POWER SECTOR IN INDIA 157 combine into a state grid. Under the E(S) Act, SEBs; (2) redefining center-state relations; and (3) GOI (central government) had the authotity to advisory role of the CEA. constitute the CEA. The CEA Is a totally tech- nical agency subject to directions from the cen- 1.2 Empowerment of electricity Boards tral government, empowered to take measures to develop a uniform national power policy and The role, responsibility, and power of the SEBs secure the optimal utilization of resources. are well defined in the E(S) Act. The SEBs have However, over the years, the central govern- the monopoly right to generate and distribute ment gradually assumed greater direct respon- power in the respective geographical area. sibility for the planning and development of Before the NEP, when specific targets for the power for the country as a whole. This became growth for all sectors were set out in the FYPs, necessary because of the financial inability of the electricity demand was also derived from the SEBs to develop power to the adequate extent FYPs. Setting of targets essentially ihvolved required. In turn, the SEBs leaned towards state identifying and locating large, energy-intensive governments for financial supports, adding to industries among the different states. The SEBs' the increasing dependence of state govermnent responsibility was only to fulfill these predeter- budgets on central devolution. The large capital- mined targets. With the liberalization program Intensive power projects in the eighties made of the NEP, most industrial targets have become this almost unavoidable for the SEBs. Even by indicative. The SEBs no longer have clear prior the middle of seventies the central government indication of the industries that would material- had felt that the SEBs cannot be relied upon to ize in their state. As a result, the SEBs will have generate adequate power for the developmental to decide the targets themselves based on the needs of the country. This was the period when assessment of market opportunities and their large generating power companies like National specific strengths. Thermal Power Corporation (NTPC) and In Section 1.4, which follows, the feasibility National Hydro Power Corporation were set up and need for deregulation of the HT consumer by the central government. market Is discussed. Normally in the SEBs, the The centralization process has proceeded so far low-tension (LT) load for power is about 40 to that private power companies invited under the 50 percent of the total demand, and this demand recent reforms to set up power generation and grows gradually on predictable lines. The SEBs supply power to the SEBs, expect central should assume the responsibility to meet the LT sovereign guarantee. demand in their area. HT demand would be The New Economic Policy (NEP), however, met to the extent that the SEBs are in a position envisages a different scenario wherein market to increase their installed capacity. Demarcation orientation may not be complimentary to the of HT consumers can, in the fiture, be refined to centralized scenario. Power corporate entities allow for deregulation of distribution and gener- would have to be autonomous and guided by ation, with distinct generation/distribution market forces. The entire planning process has companies for HT consumers. This would now been modified to indicative planning. reverse the trend of increasing dependence of the Therefore, the immediate reform should be for SEBs on state funds and in turn on central funds. the state governments and central government to The centralization process, gradually modifies to revert to their roles assigned under the two Acts, decentralized processes. governing the power industry and allow the The GOI is no longer in a position to provide SEBs to play their respective role. Simultan- for the huge funds required for power develop- eously, the CEA reverts to its technical character ment in the country as a whole. It has, there- as the highest coordinating body to guide the fore, amended the E(S) Act to permit private SEBs on technical matters with only directions of power generators to supplement the SEBs' broad policy issue from the central government. generation. Under the legal provision, the The state government, which is elected to repre- agreement between a private power generator sent the best interest of its constituency, should and the SEBs would be a purely commercial become the protector of the rights of all classes agreement subject only to certain technical of consumers. It should use the powers of parameters to be prescribed by the CEA. How- granting licenses for power generation whenever ever, in practice, the GOI continues to assume a it is in the best interest of the consumers. Thus, large role for itself by trying to negotiate the envisaged scheme can be conceived of insti- between the private parties and the SEBs tutional reforms at three levels: (1) autonomy of induding settling the terms of the Power 158 COMMERCaALZATION OF TJE POWER SECTOR IN INDIA Purchase Agreement (PPA). Experience of the ating units like APSEB, conversion into a com- few agreements signed show that, due to the pany form overstates their profitability, whereas increase in capital costs and the higher return in the case of loss-making companies, the losses and higher depreciation rate given to private get exaggerated. The company form is not to be power generators, the costs at which the SEBs resorted to as ai accounting gimmick but as a are likely to get their power from the indepen- means of distancing the SEBs from the state dent power producers is very high compared to governments, raising finance from different their own power generators. So far, no steps sources, and bemoming more accountable to the have been taken to ensure that the tariffs levied stakeholder. by the SEBs should be raised adequately to cover Corporatization also raises the issue of restruc- the cost. The results of such helf-measures are turing the capital of the SEBs to make it attrac- likely to be disastrous to the SEBs. The commer- tive to investors. This may call for the write-off ciality of the SEBs lies in the present context in of large amounts of loans which are shown as their ability to negotiate with the private parties due from the SEBs to state governments. These on purely commercial lines. This should include loans are not likely to be collected by the state a process of bidding by which the SEBs can governments at any point of time and as such, it select the private unit offering the lowest price. would be appropriate to write them off. With a Further, the SEBs must also have the power to properly dressed up financial statement, the decide for themselves the areas of generation electricity boards should be in a position to seek and distribution which could be privatized and funds from the market. shared with other entities. This may require As a public limited company, the various modifications to the E(S) Act. stakeholders in the electricity boards should be In sum, the SEBs need not pursue targets of encouraged to take shares. This would ensure power supply set for them by other agencies. the requisite accountability of the new company. They would have responsibility to supply the Preferably, all the consumers should be needs of LT consumers only. Their responsi- encouraged to invest in the equity of these bility to supply the needs of HT consumers will companies. In proportion to the investment, gradually get reduced. The SEBs would have different classes of shareholders could be repre- the power to supply HT consumers to the extent sented on the Board. The Board alone, without of the capacity of their supply system. The SEBs any external interference, should have the power could invite the private sector to generate power to choose their chief executive and other and sell it to them. They would have full functionaries. powers to negotiate and settle the contract in the interest of the consumers and the SEBs. The 1.4 Deregulating the market for large, high- tariff for noncompetitive supply to LT consumers tesion consumers would be subjected to regulation (Section 1.6 below), which would ensure that the SEBs get a In the present setup, all consumers have to get total revenue which covers all their costs and their supply of power from the electricity boards. provides them with a return on the basis of Any reform of the power sector should sow the investment as laid down in the E(S) Act. seeds of competition at the consumer end. This can be done only by selecting a group of con- 1.3 Electricity boards as corporations sumers whose supply deregulation will not upset the arrangements in respect of others. If the SEBs have to take up an entrepreneurial While the total number of consumers is several stance as indicated above, corporatization of the million, the number of consumers who take SEBs iE inevitable. A corporate form will enable power supply from 132 KV transmission lines the SEB to raise money from the capital market are only about 1,000. But they account for or from financial institutions, while reenforcing 10 percent of total power consumption. If these the move towards autonomy. As a first step, the consumers are separated and made part of an SEBs can be converted into public limited com- emerging supply system, it would not affect the panies registered under the Companies Act. The electricity Boards' other operations. These large interesting exercise is with regard to the possible consumer groups could also bid for power and relevant debtequity ratios. By and large, purchases from the local SEB, central power the prevailing financial structure of the SEBs companies, or independent power developers, suggest a debt-equity ratio of 1:1. At this ratio, who might have excess capacities after meeting it can be seen that, in the case of surplus gener- their obligations to electricity Boards, or private COMMERaCAlJZATION OF THE POWER SECTOR IN INDIA 159 generation which could be set up to meet the on more thinner time slices of a half-hour each power demand of some large industrial for the daily offer and acceptance is operated consumers. very satisfactorily through the Pool Price System Once the deregulated power supply system In the U.KI now. gets stabilized, the schemne would be extended to other large consumers who take power from 1.6 Regulation in the power sector 132 KV. This scheme would set in the com- petitive process through purchase and sale of Under the new reforms, the envisaged regulation power among a small number of consumers In the power sector assumes importance. But, from a small number of sellers of power. the form and extent of regulation vary depending upon the reforms introduced. Utili- 1.5 Organization of the regional power pools ties, despite technological developments, display market imperfections that hinder competitive The best option of servicing the needs of large forces. These failures come about due to the power consumers is to have a national supply existence of significant scale economies, inade- system operated through the cooperative efforts quately defined property rights, informational of the National Power Grid Corporation and the asymmetries, environmental considerations, and SEBs, until such time as commerciality of the excessive transactions costs. Traditionally, SEBs enables prices to coordinate grid activities. government intervention through a regulatory This will take time. Meanwhile, there could be agency has been the general modus operandi. an arrangement to meter the transient surplus Regulation has also been the process of intro- with some producers with demands not met by ducing noncommercial distributional considera- long-term arrangements on a day-to-day basis tions of governments. The sovereign role of the and on a seasonal basis. The power generating state tended to get mixed-up with the regulatory agencies, viz., SEB, central generating companies, role. But in the current context of market and private power generating corporations, reforms, traditional forms of regulation may only could be involved. The temporary demand contribute to existing state failures. It is neces- would come from SEBs which could not be met sary, therefore, to seek self-regulatory or inter- from their own system and from large con- nalized regulatory mechanisms that do not sumers, whose long-term contracts cannot sup- perpetuate existing state failures. ply needs of that particular day or season. The At the outset, a few basic guidelines may help regional pool is intended to match this surplus in developing the new regulatory framework. with the demands on a temporary day-to-day Firstly, the main purposes of regulation are to basis and on a season-to-season basis. It is resolve conflicting interests, ensure competitive possible for each of these power generating behavior, and protect consumers interest. In a companies to indicate their anticipated surplus segment where monopoly elements persist, availability during certain seasons annually and competitive elements need to be stimulated the surplus on daily basis. Similarly, the power through benchmark pricing schemes; for needs also will be indicated to the same agency. example, the supply of power at regulated prices National Power Grid Corporation will be given to LT consumers and other HT consumers below the responsibility to match the surplus avail- the deregulated category. Secondly, regulatory ability and temporary demand. The Regional mechanisms should be transparent. Finally, Electricity Boards (REBs) could indicate the efforts towards arm's-length regulation should general guidelines as to how it should be oper- be attempted by vesting a nvmitoring role to the ated within the region. In other words, to begin regulatory agency through which it can always with, the REBs may determine the rates at which protect the general interest, even if it requires the surplus power would be sold to these action to prevent interferences from external demanding agencies. But the Regional Pool sources. In the transition period, the above System should quickdy progress to a stage where guidelines may be modified. the supply company indicates the cost at which Regulation is required in the following four they would like to sell power and the areas. They are: demanding consumers could opt to the particu- lar source at a particular price. 1. Regulation at entry point to stimulate com- When the proposal was discussed wfth some petitive conditions and also maintain a officials of the SEBs, they considered this to be a balance among different generating units complicated and unworkable system; a system 160 COMMERCIALJZATION Of THE POWR SECTOR IN INDM 2. Regulation at the operational level to ensure ment program of the right size. When state the smooth and safe functioning of the grid governments could not allocate adequate funds at both the national and state level until to the power sector, the Planning Commission tariffs evolve towards merit order started giving special central assistance to imple- operations ment power projects and the power ministry at 3. Regulation through an agency for the opti- the center started closely monitoring the imple- mal utilization of natural resources, mentation. Table I below shows the increasing especially In the context of skewed distribu- dependence of the SEBs on states' funds and less tion of fuel resources within the country on internal resources. If market borrowing and 4. Regulation to ensure equitable distribution Institutional loans which are on the basis of state of power as between big and small con- guarantee are included, the proportion given is sumers, between consumers whose supply much higher. It is interesting to note here that is not deregulated, and the consumers in the state funds have decreased in 1990, suggestive of deregulated competitive market. decreasing budgetary support, but institutional loans have increased. The first and most comprehensive document _li 2. Proposa1s for the on energy issues was the report of the Fuel r ,. . Policy Committee (FPC) accepted by the govern- commercialization of the ment in 1975. The emphasis of the Report (FPC) power sector was on the coordinated development of coal, oil, and electricity. At that time, production of coal and oil were monopolies of the GOI. Power In this part, the proposals for commercialization alone was decentralized and under the jurisdic- of the power sector are examined in detail and tion of the different states. In the face of the the ways of implementing the proposals are recommendations of the FPC, the GOI felt It identified. necessary to assume a larger responsibility for power production and also to effectively coor- 2.1 Demarcation of the state and the central dinate towards optimal utilization of all forms of government's roles energy sources. When the central power gener- ating companies were set up in 1975, it was In the fifties and sixties, the GOI was concerned decided that power generated in each location with the issue of broad guidelines to the SEBs on would be divided among the states in that power development. It was found that, over the location in a predetermined ratio. Though there years, the SEBs were slowly losing their ability is nothing in the rules governing the central to fulfill the responsibility cast on them under generating companies to supply power in a the E(S) Act. From the Third FYP, when large pre-fixed ratio to the states of the region, the industrial investments were made in the central central government preferred to give directions sector, the central government felt that It had to on these ratios. take a more direct responsibility to forecast the Such modes of operation are bound to change demand for power in the different states and under the NEP wherein implications of the "roll "help" the states to implement a power develop- back of the state" has changed the relationship Table I Pattem of financing (%) 80-85 85-86 86-87 87-88 88-89 89-90 90-91 State government 55.5 57.1 61.7 733 77.0 68.0 Market 95.1 Borrowing 14.7 12.9 123 16.9 13.0 8.0 Institutional 29.4 27.6 34.6 35.3 41.0 43.0 Loans Internal resources 3.9 0.5 2.4 -8.6 -25.4 .31.0 .19.0 M-. .. MP4.z.. ;;tv4:iZiF : y Era Z w s , Source: Govemment of India, Power and Energy Division, Annuad Report on Working of SEB and EDs., May 1989. Notes: The break-ups with re8ard to Pattern of Fhnacing were tabulated only fmm 1985 onwards. Hence in the perd of 1980-85 we only hm aWegate values. COMMERCIAJZATION OF Thi: PCt.R SECTOR IN INDIA 161 between public enterprises and the governments. These requirements depend largely on expected PubUc undertakings are being distanced from the industrial growth and the rate of energization of govenmment and forced to function in competi- agriculture pumpsets combined with the trend tion with private industry. They are also not projection of demand in the household and given any special assistance. This is equally true commercial sectors. Scenario building for indus- of central power generation companies such as trial growth depends on state policy and NTPC. The legitimate purpose of NTPC setting resource availability. Trend projections are not up a project in a state should be to exploit the robust for such projections, persuading the SEBs resources of fuel or water located in a state, to target alternative rates of growth. which the state concerned was not finding it The SEBs can then plan for supply additions necessary or convenient to exploit. It would be under different options open to them: quite justifiable once the project is set up by the GOI, the central generating companies sell the e Enhance or add to installed capacity under power to the SEBs on the basis of their need and their ownership willingness to pay. The earlier pre-fixed ratios * Negotiate with independent power and the role of the central government becomes developers to set up new generation units redundant. * Negotiate with central power generating Similarly, the role of the CEA and the relation companies. to GOI undergo a change. The CEA was orig- inally Intended to be a technical regulatory body The firmed-up plans for setting up projects of with the GOI retaining the powers to give direc- their own, plus firm commnitments of supply tives. Asymmetry of knowledge and information obtained through negotiations with central with the CEA and the GOI, clearly defined the power companies or independent developers, scope of directives from the GOI to the CEA. form the power development plans of the SEBs. They were to be only on broad policy issues. With power, follows industrial investment. Over the years, however, the GOI, In their Industries would seek locations anywhere in the anxiety to play a more active role in the power country where there are bright chances of supply sector as part of the centrally planned manage- of the requisite inputs, including power. The ment of development, pushed the CEA into states which have a good power development different roles such as power demand fore- plan attract the new industries. Under this casting, consultancy, etc. Under the NEP, the system, the SEBs plan for their growth based on forecasting of power demand in such detail, as their own strengths while taking due note of the attempted by the CEA, though the Power Sur- state's development plans. vey, has become unnecessary and to some extent The special funding of central assistance by futile. central governments to state governments for Under these conditions, the CEA can easily implementing power projects may be insufficient revert back to its role originally envisaged in the and perhaps inappropriate. Devolution of E(S) Act. The exercises of working out the resources from the central to state governments possible industrial investment and deriving the would then be left to the discretion of the statz' state-wise power demand year wise was a regarding its allocation among sectors. In effect, justifiable exercise during the period prior to the the reform proposed is for the state and central NEP, when all investments in all sectors were governments to revert to their original role of subject to the approval of the GOI in one form or providing broad policy guidance. The GOI the other. In the current context of economic would set the policy and procedures of foreign liberalization, for almost all industrial invest- investment in the power sector and set the pace ments, no permission from the GOI is required. of development for the power sector by the Industries, therefore, would seek locations where growth impulses in their overall approach to there are bright chances of getting inputs industrial investment. The GOI would approve including power. The gestation for power the formation of generating plants under Sec- generation projects is much longer than most of tions 15A of the E(S) Act. State governments the industrial investments. Power development provide some elements to the target for power should therefore be a step ahead of the industrial development by their social development plans development and would be based on the entre- and energization plans for agricultural pumpsets. preneurial ability of the states. States, therefore, State governments would also grant licenses for would have to anticipate, in broad indicative power generation and distribution under Sec- terms, power requirements for the plan period. tion 3 of Indian Electricity Act. In essence, state 162 COMMERCALUZATION OF THE POWER SECTOR IN INDM governments fulfill the objectives of the E(S) Act tions, the state governments have no other role by becoming the true guardian of the consumers except to do an annual review of the SEBs' work. of electricity. Both governments would distance Interestingly, tariff fixation is entirely within the themselves from the SEBs and future corporate competence of the SEBs and is governed by Sec- groupings set up to generate power and supply tions 49 and 59 of the E(S) Act. But state gov- the electricity needs of all the consumers. ernments invariably have assumed the powers invoking the ownership rights over the SEBs and 22 Empowerment of the SEBs and their introduced in tariff fixation. The major causes corporatization for the poor financial performance of the SEBs is the tariff fixed under the direction of the state The SEBs are notoriously poor In their financial governments. Tariffs in general have remained performance. The causes are technical, man- well below the average cost of generation and agerial, and institutional. So far, several supply. The tariff also provides a high level of attempts have been made to correct these tech- subsidy to agricultural consumers but state nical and managerial shortcomings. They have governments fail to carry the cost. The Table met with little success as reflected in the below sets out some details. increasing accumulated losses of the SEBs. The Besides fixation of tariff, the state govern- Table (Table 2) gives a birds-eye view of com- ments' influence or intervention In the SEB tnercial profit and loss of some SEBs. functioning relates to specifying the villages A careful examination of the causes for the which should be energized each year and the failure of the reforms attempted on the SEBs number of agricultural pump-sets which have to shows that they lie in the SEBs surrendering be energized. Needless to say, these proposals, their powers and responsibilities to the state although socially justifiable and politically governments. The E(S) Act clearly defines the significant, are nonviable. Therefore, implemen- roles of the SEBs and the extent to which their tation of these projects add operationally and work can be monitored or supervised by the financially to the losses of the SEBs. In such state governments. cases, the state governments can spread the Basically, state governments have two func- burden through capital contribution to the tions. First, the state governments have a very project. The obfuscation of the role of the state important role in appointing the members of the governments as owner and as a provider of SEBs and nominating one of the members as the social goods to the weaker section is largely Chairman. Second, if the state governments do responsible to the SEBs running into operational not fix any limit, the return above cost should be deficits. 3 percent as prescribed in the Act. The surplus The SEBs cover the deficits by loans from state rate of return over cost could accrue as revenue governnents. This gives scope for the state while fixing the tariff. Under these two func- govermnents interfering in other matters also. In Table 2 Commercial profltJlosses (-) at current rates (excluding subsidies) during Seventh Plan (1985-90) period fot a few states (Rs. crores) State 1985-86 1989-90 1985-90 Andhra Pradesh -9.65 -54.36 .101.66 Bihar .191.73 -283.10 -1,211.85 Gujarat -123.08 -383.57 -952.46 Kamataka Board -26.78 -98.43 -355.14 Kerala 4.83 -16.18 -119.56 Maharashtra -57.43 -3#9.10 -487.80 Punjab -144.97 -565.15 -1,696.01 Uttar Pradesh -325.28 -172.06 -615.49 Total -874.09 -1,528.38 .5,539.97 Source: Government of India, Power and Energy Division; Planning Commission, Annual Report on the Working of SEBs and ED; August, 1992. Note: Data representing good, medium and poor performing SEBs have only been tabulated. The totals are however of all states. Detailed Table is given in Annexure IB. COMMERCIALIZATION OF THE PowER SECTOR nv INDIA 163 effect, the SEBs have been reduced to the levels revenues payable to the Board. For example, of subordinate offfc.es of the state governments. APSEB, the total number of consumers to be Given this situat-on, any managerial change served is over 7 million, while the HT consumers which does not distance the state governments are only 3,500 but account for 60 percent of from the SEBs wi'l be no solution. Some states power consumption and 70 percent of revenues. have attempted to separate power generation The ten largest consumers in each SEB may from transmission and distribution (T&D). This consume over 10 percent of the total load. There has only created a power company like central is an interesting possibility of treating the HT power companies which is unable to collect the consumers above 132 KV as part of the national cost of power sold to the T&D entity. grid supply system. The total number of HT The key issue is the extent to which the T&D consumers in the country is about 40,000 of entity can function as a commercial institution. which those who take their supplies at 132 KV For this, the state governments should be kept would be about 1,000 only. These consumers out of the affairs of the SEBs. Distancing of state can be liberated from the state supply system governments from the SEBs could be chieved and given the freedom to purchase their require- by converting the SEBs into companies with ment from any source in the country. They equity participation by the stakeholders. The should be permitted to purchase power from existing provisions of the E(S) Act permit equity another source within the state or outside. participation. Under Section 12A, the state The Power Grid Corporation and the State governments can declare the SEBs as a corporate Government Boards who own and operate the body with equity capital of Rs. 10 crores initially. transmission lines will have to accept respon- Under the same section, the state governments sibility to wheel power from the source of pur- may take the approval of the state legislature chase to the point of consumption. This will and increase the level of capital in the com- create a separate market. The bidders would be panies. Under Section 66A of the E(S) Act, state the 1,000 and odd large industrial consumers government can convert the loans advanced into who take power at 132 KV. The sellers in the equity. market would be independent power generators inside the state and outside, the central power 2.3 Deregulation of the market for large HT generating companies within the state or outside consumers any other. A strong element of competition could be generated In this market by allowing Under the existing system, all consumers have to the tariff to these consumers to be deregulated. depend on the electricity boards for their power The success of this proposal will depend on the supply. Electricity boards have tariff systems ability to transfer power from the purchase point which are regulated by the state governments. to the point of consumption. This would depend In times of power shortage, usually in the sum- on the legal framework that would impose on mer season, power to consumers is regulated Power Grid Corporation the responsibility to under the direction of the state government who transmit power, provided the hardware has the divert large quar.tities of power to the agricul- capacity. An office of power regulation has to tural sector, starving large industries. In the decide In case of a difference of opinion. Over power sector, there is no competition at all. The the years, the success of this could lead to the efficiency of the power system in the final deregulation of HT consumers of 33 KV and analysis would depend upon the introduction of later all HT consumers. real competition. The SEBs have very strong views against this Given the present structure of the power deregulation. The objection is based essentially industry, it is very difficult to introduce com- on the fear that the deregulation of high-value petition at all levels and for all consumers. consumers who pay large sums as lump sum, However, a beginning could be made with HT every month would make the SEBs dependent consumers who take their supply at 132 KV for on small consumers from whom the collection is the whole country. The composition of the con- difficult. Their fears are justified as the social sumer size class in the SEBs makes this an inter- obligation thrust on the SEBs of serving villages esting proposition. While the LT consumers to In remote areas and taking up large-scale electr.- be served by each SEB run into several lakhs, the ficatlon of agricultural pumps is now, to some HT consumers are only a few hundreds. How- extent, made possible by subsidization from the ever, the HT consumers account for a major large consumers, as can be seen from Table 3. share of the electricity consumption and also The large consumer subsidization would not be 164 COMMERCrAUZATION OF THE POWER SECTOR IN INDIA Table 3 (palselkWh) Average revenue - cost gap of the SEBs 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 Average cost of 22.52 30.45 41.90 65.07 74.64 81.17 91.47 96.07 101.65 generation & supply Average realization 18.82 22.69 32.30 49.39 59.78 67.02 71.59 74.16 76.89 (including agricul- tural supply) Gap 3.70 3.76 9.60 15.68 14.86 14.15 19.88 21.91 24.76 Source: Government of India, Planning omnmission, Report of the Working Group on Power, Eighth Plan, Power Program, September 1991. possible and losses of the Board will Increase. try to operate. The inefficient units during the These fears are totally unfounded in the new off-peak hours would cost the SEBs' fuel cost as context when the proposal for commercialization the incremental cost. If, for optimizing the of the SEBs is implemented. Under the new efficiency of fuel, a fuel inefficient plant owned proposal, the SEBs will fix tariffs, and consumers by the SEB has switched off, and a more fuel- are left with it in such a way that the revenue efficient plant under the central generating covers the total cost plus providing for adequate company or with another SEB is brought in, the surplus. The state governments will have to SEB taking supply would have to pay the full give subvention when they want to propose any cost instead of the incremental cost. Further- schemes which are nonviable. Second, deregula- more, the obligation to purchase a certain tion would make the Boards compete with other amount of power under the PPA with the central generating plants, as well as other Boards in the generating station also forces the SEBs to use the market. The efficient Board is one which suc- resource suboptimally. There were occasions ceeds in getting business. when thernal power from the NTPC was used because of contractual obligations, when hydel 2.4 Organizing the regional power pools power station within the region was spilling due to the lack of demand for power. Currently, the SEBs operate the power system This situation will be aggravated if, in the under their control as a separate independent process of encouraging private power generators, power system, and the optimization of resources the SEBs enter into single part tariff rates which is done by following the merit order of genera- are very high with high levels of contracted load. ting stations to be brought in use as the demand These anomalies will be remedied by setting up increases and takes them out when the demand power pools at the regional level. The potential diminishes. Though at the regional level, for power supply over and above the quantity Regional Load Dispatch Centers (RLDCs) are required to meet the demand of each SEB will able to monitor the fluctuation in demand and notionally be taken as an inflow into the regional supply in the region on a real-time basis, there is pool. This information on a real-time basis no attempt to optimize the resource utilization at would anyway be available at the RLDCs. As of a regional level. Even for the dispatch of power now, the RLDCs are operated by some officials from a central generating station located in one of the Regional Boards, (usually, deputationists state to another, whenever the state grid is from the SEBs). This RLDC operation should be involved, special efforts are made to get the entrusted to the Power Grid Corporation. The frequency of the two states to appropriate levels REB should give commercial guidelines regard- to effect the transfer of power. ing the distribution of power flowing into the The lack of commercial understanding between regional pool. Needless to say, these guidelines the SEBs within the region makes it difficult to would be backed by legally valid agreements operate the regional grid as a resource opti- regarding the price and quantity acceptable to mizing unit. The tariffs being fixed on single different SEBs at different times of the day. part basis is also a deterrent to the operation of The same kind of arrangement could be made an efficient regional grid which the SEBs would for using surplus from efficient thermal stations, COMMERCaAUZATION OF THE POWER SECTOR IN INDIA 165 in some SEBs during seasons of the year when The nature of the regulatory agency comes into their hydel contribution is high. Other SEBs prominence, as this would determine the efficacy with totally or mostly thermal plants would gain of arm's-length regulation, while also minimizing by the pool supply from efficient thermal plants. the scope for regulatory capture. The instru- If the policy initiated to bring in independent ments of regulation are mainly price, subsidy, power developers succeeds, the scope of the taxes, and, of course, the legal powers of a regional pool could be increased to include regulatory agency through licensing. Regulation private generating companies on the supply side can be broadly categorized into economic and and large HT consumers on the demand side. social regulation. The main intention of The efficiency of such operation would depend economic regulation is: How to induce privately on the presence of a well integrated regional owned utilities to act in an optimal manner that network with a hierarchal network of load is compatible with social goals? Optimality is dispatch centers equipped with the facilities for usually defined as maximization of producers metering, computation, and control. and consumers surplus. The main responsibili- REBs should settle the price for all possible ties of an efficient regulator are to: power flows. All these prices will have to be based on a two-part tariff. REBs would also set e Promote competition out clearly the operating principles and the sys- * Prevent noncompetitive behavior tematic operating procedures for the grid as a o Regulate where monopoly elements prevail. whole. To begin with, the Regional Board may specify only certain circumstances that the grids In recent times, environmental regulation has will operate as state grids, and optimizing become very important. Operational and safety between generating stations within the region regulations form one dimension of social regula- would be resorted only under specified circum- tion. Regulation for commercialization is to stances. The rules, with adequate experience, ensure competition. The contradictory statement may be extended to the optimization of opera- of 'regulation for competition' is an overriding tions on a regional basis at all times of the year. concern dufing the period of transition. Entry The other requirement for successful operation regulation or deregulation is preeminent to would be to specify a neutral agency like the simulate competitive conditions. By and large, Power Grid Corporation as the operating agency, competitive bidding of the franchise enables the and indicate that all the surplus power would be government to select the bidder whose price is taken into a notional pool. There would be a closest to long-run marginal cost. need for a regulatory body to oversee the opera- There are two prerequisites to entry regulation. tions at this stage. First, there should be a large number of bidders As examined later it may be necessary to and there is no cartel among bidders or between indicate to the national regulatory Board the the regulator and the entrant. Second, no one areas of regulation by the regional regulatory bidder should have privileged access to informa- Boards. Needless to say, the regulatory Board tion. These conditions, however, do not yet will only become operational when self-regula- prevail in India, partly because the central gov- tion by the REB is not able to solve the problem. ernment is keen to clear projects due to the prevailing energy demand, and partly because 2.5 Regulation and the need for restructuring the SEBs, the CEA, and the central government have not yet evolved the norms for ranking The commercialization reform process of the projects. In lieu of simulating competitive SEBs can proceed smoothly only with requisite conditions, a distinction is drawn between reforms to the regulatory process. The forms of 'purchase price' and consumer tariff. Regulation regulation vary with the extent of market opera- of 'purchase price' and consumer tariff have to tions and commercialization prevailing in the be estimated, and sometimes negotiated by a electricity industry. One can therefore envisage neutral regulatory agency. Purchase price two scenarios. The first scenario is the transition involves an incentive scheme that does not allow stage where more traditional regulatory mech- for capital waste. anisms are inevitable. The second scenario is Consumer tariffs are aimed mainly at two where discretionary regulation (arn's-length) or considerations. They are: internalized reguiatory mechanism come into use. * Maximizing consumer surplus Flattening out peaks. 166 COMMERAUZATION OF THE POWER SECFOR IN INDIA The prevailing practice of incorporating the other countries, information flows are best left to distribution of equity should be divorced from the regulator. tariffs of the electricity industry and be reverted In India, currently, the reverse situation to state fiscal policy. Purchase-price fixation and prevails where the information flows are against consumer-price fixation set by a regulatory the agent (the new private sector entrant). agency has raised worries of regulatory capture. Unfortunately, this advantage has not been There are two ways of handling it. One way is sufficiently appreciated to evolve sensitive to ensure a regulatory agency that has member regulatory norms. Similarly, transaction costs representation of all stakeholders. It may be determine the choice between internal and headed by a retired judge or an academnician external regulatory mechanisms. Ti-he gover- whose objectiveness is not questioned. Alter- nance of regulation in combination with transac- natively, attention has been drawn to schemes tion costs may often weigh in favor of simple that operate in dual markets where captive and mechanisms as compared to more complicated free sales of energy are combined. Private com- and sensitive regulatory schemes. The regula- panies are free to sell power in the open market tory Institution could be one at the national level after meeting their contractual agreement with and the others at the regional level. The national the SEBs. Private utilities ensure their returns level regulatory body could be a part of the through cross-subsidization between the two CEA, and could deal with entry regulation and markets. Consumer prices can then be concen- regulation of the price of power from govem- trated on the regulated markets only. This ment generating plants. complements our earlier reforms. Dual markets can succeed, provided the dis- 3. Micro-level measures to tributlon of power Is also commercialized. [ m Regulation of operational and safety regulation improve the to ensure the smooth operation of the grid, either L commercialit of SEBs by evening out peaks or by ranking the peaking facilities, may be necessary in the transitory period. External regulatory agencies have tradi- The suggestions for reform of the power sector tionally coordinated operational and safety are more clearly focussed at the micro-level. In regulation. Pricing schemes, to a certain extent, this section, we have attempted to streamline the can be designed to prioritize grid operation. factors responsible for the financial viability of Safety regulation may require further clauses of the SEBs. The reform measures suggested tax restrictions. Social regulation or environment emerge from the analysis undertaken here. regulation, In recent times, has assumed impor- tance. Of primary concern under environmental 3.1 Factors which contribute to financial regulation is the problem caused by acid rain viability deposits from thermal power stations. Regulatory agencies that set commission The factors which contribute to the financial standards have been the basis, until now, of soundness of the SEBs include: regulation with control methods derived from the threat of fines or even imprisonment. Even * Effident operational performance in tech- here, efforts should be made to intemalize the nical, managerial, and commercial aspects costs to the environment through a method of a Sound financial policies relating to capital regulation which is supplemented by economic structure and accounting policies, tariff incentives involving the use of 'tradeable per- policies, and the resulting tariff structures mits'. The task of regulation is complicated by adopted by the SEBs' pricing of inputs the asynunetry in information flows, inade- a Efficient investmnent choices to meet quately defined property rights, and excessive increasing demand and efficient implemen- transaction costs. Often, the debate on the tation of capital projects. privatization of utilities and regulation of utilities The SEBs are statutorily required to earn a without introducing a new set of factors has state government prescribed minimum rate of often weighed the evidence in favor of public return of 3 percent on their net fixed assets, after ownership. This scenario is different from fully meeting fixed and operating costs, depreci- industrialized countries such as the US. where ation, Interest, reserves, and state electricity duty. public ownership in utilities is more the excep- The state governments could increase the mini- tion. Thus, we find in the regulatory systems of mum required rate of return to any value higher COMMERCIALIZATION or THE POWER SECTOR N INDMA 167 than 3 percent (Section 59, E(S) Act). It is note- Committee, set up in 1980, recommended an worthy that not a single state has increased the overall average PLF of 58 percent. On an aver- minimum rate of retum. The very fact that the age, the PLP decreased in 1992-93 to 48.3 percent. minimum surplus has been statutorily legislated The mix of good performning SEBs from bad indicates the govenmmen.'s appreciation of the performance SEBs is evidenced in Annex 2. A need for the SEBs to operate as financially viable point of interest is that the PLF of central sector entities and to contribute towards future expan- and private sector plants has been higher than sion programs. Barring a few exceptions, most the national average, while the PLP of most SEBs have not been able to comply with this SEEC.' plants has been lower than the national requirement. In fact, the average rate of return average, although there have been noteworthy on capital, which was -16.4 percent in 1989-90, exceptions. Improveme.its in PLF can result in and -13.8 percent in 1990-91, further deteriorated significant savings. At 1991-92 levels of genera- to -17.3 percent in 1991-92. Furthelmore, the tion and tariffs, it can be seen that a 1 percent SEBs have not been able to meet their commer- improvement in PLF would mean an additional cial obligations to suppliers of inputs and equip- generation in the order of 3,800 million units and ment, and central sector power generating cor- a sale of about 2,800 million units, resulting in porations from whom they purchase power. an additional revenue of Rs. 280 crores. Further- This has created major problems for the latter, more, it would avoid an addition of installed who as a result, have been unable to fulfill the capacity in the order of 790 MW, at a cost of financial covenants for loans from multilateral/ over Rs. 1,600 crores'. PLF however, depends on international lending agencies. a number of factors such as plant availability, All the states uniformly display negative availability of transmission facilities to evacuate profits (Table 2 and Annex 1B), even though the the power, adequate fuel supply, system magnitude vary between states. The weak demand, the availability of alternate sources financial position of the SEBs gets reflected in from which demand can be met. The multitude their inability to meet debt servicing or debt of factors make it difficult to pinpoint the main redemption obligations, particularly to state cause for low PLF. With continuous monitoring govenmments. Some SEBs have not been able to of PLF by the SEBs, efforts to rectify low PLF provide for depreciation. can be covered. Often, high availability and low PLF indicate a surplus situation or inadequate 3.2 Factors responsible for poorfinancial transmission facilities. perfotmance T&D losses are known to be a major factor of electricity availability. The Eighth Plan specifi- The causes of poor performance which are cally has identified reducing T&D losses to within the control of the SEBs are: 19.6 percent by 1996-97 from the current 22.9 percent. T&D losses increased from * Low generation output 17.6 percent in 1970-71 to 20.6 percent in 1980-81. • High T&D losses By 1991-92, T&D losses increased to 22.9 percent o High establishment costs arising from exces- (Table 4). The causes for T&D losses are tech- sive levels of manning, and ineffective nical as well as commercial. Technical factors management practices include the extension of LT distribution network o Poor revenue collections to cover increasing areas and low load densities * Overruns in completion of projects with long lines. The major commercial factor for * High operations and maintenance costs due T&D losses is the system. Flat rate tariffs, to poor management of inventories, high instead of metered supplies, do not reflect the consumption of secondary fuel, etc. true level of consumption. Organized pilferage o Unremunerative tariff structures. of power is another factor for high T&D losses. In the plan outlay (Eighth FYP), T&D was fixed The following deals with some of the factors at Rs. 22,281 crores of which states would outlined above. account for 16,782 crores and the center for Low generation of output plant load factor 4,437 crores. Over and above, rUocation for (PLF) is an important indicator of the utilization T&D in the Eighth Plan has been about of thermal power plants. The Rajadhyaksha 36-37 percent of the total allocation, against a Government of india, Mnty of Energy, Report of the working group for suggesting steps for strengthening the Finanes of State Elecridty Boards (Chairmanship of KP. Rao), May 1989, New Delhi. 168 COMMrRMIA7ZATION Or Tllt: POWrR SrCTr(R IN INDIA 'rable 4 Transmission and distributtion losses SI. board 1989 90 (RE) 1990-91 1991-92 1992-93 (tS7') 1. Andhra Pradesli 20.1 19.9 19.3 19.0 2. Assam 21.3 21.0 20.5 20.0 3. Blihar 22.8 21.0 22.0 21.5 4. Gujarat 22.1 22.1 21.7 21.4 5. lIaryana 24.5 26.4 24.5 23.5 6. Hlmachal Pradesh 18.7 17.5 19.2 20.1 7. J & K 49.5 56.7 49.7 45.0 8. Karnataka 20.0 19.6 19.3 18.9 9. Kerala 22.0 22.0 21.0 20.0 10. Madhva Pradesh 19.5 24.2 23.2 22.7 11. Maharaslhtra 17.6 15.5 15.5 15.4 12. Meghalaya 10.9 13.0 13.3 12.2 13. Orlssa 24.0 24.0 23.0 23 0 14. Punjab 19.0 19.0 18.8 18.6 15. Rajasthan 22.0 24.9 22.5 22.0 16, Tamil Nadu 18.5 18.4 18.4 1?(.3) 17. Uttar Pradesh 26.1 26.1 25.0 24.0 18. West Bengal 22.6 22.0 21.5 21.0 All Boards' Average 22.0 21.9 21.4 20.7 Source: Same as Table 3. requirement of about 40-41 percent. For various at the end of 1989 and 1990. In some Boards, reasons, the actual investment in T&D has been 0/S have exceeded 40 percent and sometimes well below the allocation. exceeded 80 percent of annual sales such as The emphasis on rural electrification without Bihar and Meghalaya. Among the efficient appropriate investments in strengthening the states, Tamil Nadu has the highest recovery supporting distribution and subtransmission ratio2 (See Annexes 4A and 4B). Poor collection systems is a major contributing factor to the of revenue is due to: problem. T&D losses could be reduced only by making adequate investments in tne moderniza- * Outstandings pertaining to other govern- tion of the distribution system and effective ment departments-central and state, public policing to prevent pilferage. sector organizations, local bodies, etc. Manpower costs account for 20-25 percent of e Litigation against tariff revisions which the cost of generation and supply of power. impedes collection. Invariably, the efficient SEBs have lower man- * Poor collection from agriculture in spite of power costs. Also, lower manpower per unit, as low tariffs. can be seen in Annexes 3A and 3B, appear to be in excess of optimal levels. A mulft-pronged approach needs to be In the last few years, attempts have been made adopted to improve the collections of the SEBs. to reduce the extent of overmanning and also to A few suggested measures include: rationalize the use of manpower. Scope for further rationalization always exists. * State government departments' dues can be adjusted against State Electricity duties RECOVERY OF RENUE: Poor revenue collection collected, interest payable, etc. The state has also becn one of the factors contributing to government, in turn, can debit the respec- the poor financial health of the SEBs. Normally, tive government departments. Central outstandings should not exceed 2 months government should instruct its departments revenue or 16.5 percent of sales. The all-India to pay promptly. average was 24.46 p^rcent at the end of 1983, e Prompt rectification of billing discrepancies, 24.71 percent by the end of 1987, and 31 percent and the treatment of billing disputes on the 2 Ibid. COMMERCAUZATION OF THE POWER SECTOR IN INDIA 169 basis of an Initial partial payment from the at least the minimum prescribed surplus. In customer, pending final settleme;dt, would practice, however, the tariffs have remained Improve the collections position. below the cost of generation and supply. It can o Litigation on tariff revisions should be kept be seen from Table 5 that the percentage gap out of purview of local courts. A tribunal between the average cost of generation and should be set up to settle disputes promptly supply and the average realization, which was and give directions binding on both parties. increasing until 1990-91, has shown a decreasing o Often the dues to the SEBs from sick indu- trend thereafter. This can be attributed to special tries which are being reconstructed are initiatives taken by the various SEBs to reduce waived. This should not be resorted to the gap through tariff increases. when the SEB Itself is making losses. If so, These figures do not take into account provi- central/state governments should compen- sion for RE subsidy, because by and large, the sate the SEB. subsidies have not been paid. In practice, sub- sidies are only transfers, and do not add to OTHER FACTORS: In the final analysis, the overall resource availability. The Table also efficiency of the SEBs can be improved through: shows that the average realization from agri- improved management practices in the areas of cultural consumers has been far below the inventory management, maintenance manage- average cost of generation and supply. The ment, operations management with respect to losses to the SEBs on account of unremunerative auxiliary consumption and fuel consumption. tariffs to the agricultural sector have been in the Demand management would further improve the order of Rs. 5,000 crores to 5,500 crores annually, cost performance of the SEBs. and are likely to cross Rs. 6,000 crores in future. TARIFF REFORMS: Tariff reforms form the crux of commercialization of the SEBs. At present, the 4. Transitional measures resort to noneconomic objectives in arriving at o i e a tariffs tend to affect the functioning of the SEBs, for immediate and also introduce distortions within the rest of implementation -the economy. In Part 2 of this paper, the tariff setting process and its consequent impact on the SEBs and state A complete commercialization of the power governments were highlighted. In this section, sector and SEBs, along the lines suggested, we examine in further detail the tariff structure would take time to be fully implemented. and the need for reform. Computation of tariffs Benefits accrue over time as and when the should be such that the SEBs obtain a revenue reforms initiated fruitify. In the intermediate or which enables them to meet operating expenses, transition stage, certain immediate measures can interest, depreciation, and taxes if any, and lei Table 5 Average cost vs average realization 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 Average cost of generation & 74.59 8037 88.96 93.40 101.50 116.90 119.20 124.03 supply (p/kWh) Average realization from all 59.43 66.49 71.09 74.03 74.62 77.86 9.50 9337 categories (p/kWh) Gap (p/kWh) 15.16 13.88 17.87 20.17 26.88 39.04 29.70 30.66 Gap as % of cost 20.32 17.27 20.09 21.60 26.48 33.40 24.90 24.72 Average realization from 18.15 17.70 NA NA 14.89 13.47 14.71 15.06 agricultural consumers (p/kWh) Source: Government of Indi, Ministry of Energ, Rqt of teWorking Cmnupfr suggesting steps for strmgthening the finaces of SEBs, May 1989, New Delhi. 170 COMMERCZAlTION OF 7HE POWER SECTOR IN INDIA be taken up. These transitory reform measures tariffs unifornly since the measurement of actual involve: power consumed by meter reading is a very tedious task. Moreso, since the meters are yet to * Reconstitution of the Sils: Currently most be installed in most of the places. Even if they of the board members of the SEBs are con- have been installed, they are located in far away stituted with full-time members and ex- fields where there will be no person to open the officio members from the government. pump shed and allow the meters to be read. It There are very few SEBs which provide for Is, therefore, necessary that some arrangement of membership to non-officials representing nurturing the total power consumed from the consumer interest. Wherever a public size of the pump installed should be arrived at. person has been nominated, he is usually a It would be appropriate if the SEBs start nego- person with great political interest whose tiating with organizations representing the time and attention available for this work is agricultural consumers of power, to arrive at limited. The immediate measure that will feasible consumption norms. If this is not pave the way for further reforms is the acceptable, and agricultural consumers are not reconstitution of the electricity boards with willing to negotiate, SEBs may appoint judicial at least two members representing con- bodies to arrive at a decision. The regional tariff sumer Interest and one, a nominee of the commission for power which has been set up funding agency. That would leave four may take a long time to come into effect and, members to be filled by other full-time thus, at each stage, individual state level initia- members of the Board or ex-officio tives are required. nominees. e Improving sys!em load: Several measures * Brief for the member representing the were Identified for increasing the power financial institution: The member factor. It is better that a drive is undertaken representing financial institutions should be to persuade the consumers to install capaci- given a clear brief that he press for the tors, as required by the electricity Boards. completion of accounts and collection of LT This would immediately bring down the arrears. While the tariff Is low in respect of demand on the system. several categories, it is unfortunate that F Flattening of peaks: SEBs should immedi- collection is greatly in arrears even with ately undertake some work to improve the regard to LT consumers. Arrears of LT to supply of power between different states some extent create financial problems for within a region to take advantage of the the Boards. daily peak load. The introduction of time of • Agricultural tariff: The GOI issued instruc- the day metering can be done for large tions that the agricultural tariff in all the industrial loads, or the tariff for the night states be fixed at a minimum of 0.50 ps. per load can be reduced. If these measures are kWh. As all the states have been having initiated at once, it would create the neces- tariffs of less than 0.50 ps., there is an sary ambience for the pursuit of other attempt on the part of the SEBs to raise reforms. COMMERCALIZATION OF THE POWER SECTOR IN INDIA 171 Annex IA Commercial profit/losses (-) at current rates (excluding subsidies) during the Seventh Plan (1985-90 period) (Re. crores) Sl. Board 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1. And:ira Pradesh -9.65 -53.87 7.86 8.36 -54.36 -101.66 2. Assam -107.31 -122.83 -134.42 -168.44 -217.44 -750.44 3. Bihar -191.73 -224.93 -293.85 -218.24 -283.10 .1,211.85 4. Gujarat -123.00 -87.43 -167.57 -190.81 -383.57 -952.46 5. Haryana -78.03 -94.58 -110.33 -79.58 -193.45 -555.97 6. Himachal Pradesh -22.70 -28.02 -50.15 -50.13 -50.87 -201.87 7. J & K -40.66 -49.66 -68.32 -73.62 -103.21 -335.53 8. Kamnataka Board -26.78 -74.59 -104.64 -50.70 -98.43 -355.14 9. K.P.C -50.93 -75.93 -85.13 -67.61 -103.15 -382.75 10. Kerala 4.83 -16.34 -48.19 -43.70 -16.18 -119.58 11. Madhya Pradesh -21.11 4248 -7.34 -78.98 -9.41 -32.14 12. Maharashtra -57.43 54.00 47.31 -192.58 -339.10 -487.80 13. Meghalaya -3.28 -10.12 -4.49 -10.99 -15.63 -44.51 14. Orissa -22.70 -18.61 -63.81 -70.50 -8.66 .184.27 15. Punjab -144.97 -216.03 -345.17 -425.69 -564.15 -1,696.01 16. Rajasthan -60.57 -58.80 -135.87 -121.17 -199.89 -576.30 17. Tamil Nadu -182.86 -145.47 -223.42 -396.16 -493.30 -1,442.21 18. Uttar Pradesh -325.28 -343.22 -399.63 -543.17 -708.02 -2,319.32 19. West Bengal -92.87 -84.59 -121.51 -144.46 -172.06 *615.49 Total -1,514.89 -1,608.54 -2,308.67 -2,918.23 -4,014.97 -12,365.30 source: Government of India, Power and Energy Diwsion, Annual Report on Working of SEBs and Electrity Departments (ED), August 1992. Annex 1B Commercial profit/losses at cunrent rates (excluding subsidies) for 1990-91 to 1992-93 (Rs. crores) Si. Board 1990-91 1991-92 1992-93 1. Andhra Pradesh -17.23 59.15 112.81 2. Assam -242.04 -292.50 -261.56 3. Bihar -344.23 -365.36 -370.71 4. Gujarat -442.72 -581.38 -594.84 5. Haryana -155.20 -285.82 -361.25 6. Himachal Pradesh -19.62 -59.77 -71.83 7. J & K -151.36 -217.10 -244.10 8. Kamataka Board -14.43 -86.41 -257.17 9. K.P.C -38.98 36.83 19.96 10. Kerala -52.51 -69.06 3.02 11. Madhya Pradesh -302.66 -261.65 -366.37 12. Maharashtra -4.10 -167.47 203.64 13. Meghalaya -22.90 -27.57 -21.95 14. Orissa 21.51 -6.70 0.19 15. Punjab -573.45 -561.70 -748.69 16. Rajasthan -210.59 -118.70 -300.83 17. Tamil Nadu -369.15 -432.19 -753.26 18. Uttar Pradesh -657.73 -873.50 -949.94 19. West Bengal -229.00 -186.45 -157.37 Total -3,748.36 -4,498.27 -5,120.60 Sourc.: Covnment of India, Power and Energy Division, Annual Report on Working of SEBs and Electicity Detments (EDs), August 1992. 172 COMMEPACMZATION OF THE POWR SECrOR IN INDIA Annex 2 Annual PLF of thermal stattons St. agency SEBs/region 1980-81 1984-85 1985-86 1986-87 1987-88 1988-90 1989-90 1990-91 1991-92 1. Haryana 31.7 34.7 32.8 33.8 40.6 41.2 44.1 34.6 45.9 2. Punjab 37.8 64.3 58.7 68.3 71.7 56.1 60.8 53.0 52.8 3. Rajasthan - 57.2 57.6 54.8 71.5 502 57.7 623 66.3 4. Uttar Pradesh 36.5 31.6 37.3 40.8 47.1 54.2 48.9 52.1 44A Northern Regton 40.9 47.5 48.9 52.8 583 58.2 58.2 55.3 58.0 S. Gujarat 50.0 54.0 53.3 54.0 60.0 56.1 60.4 57.7 57.0 6. Maharashtra 52.0 46.6 54.8 50.7 57.0 53.5 58.6 58.2 61.3 7. Madhya Pradesh 52.4 51.7 53.3 53.8 53.3 50.1 50.9 52.7 49.1 Western Region 53.1 53.0 Ss. 5S.4 59.8 56.6 60.3 57.7 59.6 8. Andhra Pradesh 36.3 54.4 64.8 69.7 76.2 69.4 66.1 65.8 62.1 9. TamU Nadu 34.5 49.0 56.5 64.7 68.7 66.7 643 583 55.4 10. Kamataka - - 335 45.6 64.5 662 76.9 76.3 59.1 Southem Region 41.4 57.0 64.6 69.5 71.8 693 66.6 61.7 60.8 11. Bihar 31.4 30.5 34.1 333 33.0 37.1 31.9 24.0 213 12. Orlssa 34.0 32.2 31.7 31.7 325 31.0 35.6 34.0 30.2 13. West Bengal 42.1 365 40.5 42.1 38.6 35.7 34.8 30.9 30.7 Eastem Region 38.1 40.8 42.0 40.1 38.7 386 38.7 36.5 37.3 14. Assam 36.5 29.6 275 18.5 31.0 27.9 27.8 27.7 24.7 NE Region 36.5 29.6 27.5 18.5 31.0 279 27.8 27.7 24.7 All SEBs 42.7 44.8 49.2 49.8 53.5 51.6 53.0 51.3 50.6 Source: Government of India, Power and Energy Diision, Annual Report on Woring of SEB and EDs, August 1992 COMMERcIAIJzATION OF THE PowER SECtOR IN INDIA 173 Annex 3A Employees per '000 Consumers SEB 1985-86 1986-87 1987.88 1988-89 1989-90 1990-91 Andhra Pradesh 14.3 12.8 11.9 11.0 10.3 10.4 Assam 662 61.0 622 55.0 55.2 42.7 Bihar 39.5 37.8 355 333 33.1 32.9 Gujarat IOA 10.1 9.9 9A 9.5 9.5 Haryana 21.1 20.1 19.0 18.4 18.1 17.7 Hinachal 15.3 14.8 13.5 13.0 13.3 12.7 J8&K 25.6 29.6 25.8 26.7 27.6 27.6 Karnataka Board '1.3 10.7 10.3 10.0 9.7 8.1 Kerala J1A 9.9 8.8 10.1 10.1 10.1 Madhya Pradesh 21.5 19.7 19.2 18.5 18.5 18.5 Maharashtra 175 16.0 15.0 14.9 13.7 13.7 Meghalaya 70.6 65.8 63A 59.6 62.9 563 Orissa 43.6 42.7 40.8 40.1 402 40.2 Punjab 20.7 19.7 19.8 19.5 18.6 182 Rajasthan 28.0 262 24. 239 21A 20.0 Tamil Nadu 15.2 15.1 145 13.1 12.3 11.8 Uttar Pradesh 35.2 33A 31.3 29.1 26.1 23.2 West Bengal 45.5 43.4 37.8 34.0 30.2 27.3 AlU boards average 20.0 ss9 17.9 17.1 16.3 15.7 ED's average 23.3 233 22.1 21.3 20.2 19.7 Source Goernment of Indic, Ministry of Enaxy, prt of the Working Group for suggesting steps for strengthening the finances of SEBs, May 1989, New Dehi. Annex 3B Employees per MU sold SEB 1985-86 1986-87 198748 1988-89 1989-90 1990-91 Andhra Pradesh 5.3 4.9 5.2 4.7 4.4 4.0 Asamn 18.7 17.1 17.9 16.2 14.9 15.0 Bihar 113 11.0 9.7 8.5 7.5 7.6 Cujarat 4.2 3.8 3.2 3.1 2.8 2.5 Haryana 8.6 8.1 7.5 7.0 7.1 6.7 Hinachal Pradesh 135 12.5 10.2 9.3 9.7 7.1 J & K 12.5 13S 11.7 12.9 11.6 13.5 Kanataka Board 6.6 6.5 6.5 5.8 3.9 3.5 Kerala 6.5 6.9 6.7 6.8 6.2 5.6 Madhya Pradesh 6.8 63 6.5 7.3 7.0 6.0 Maharashtra 4.6 43 4.1 4.3 3.9 3.8 Meghalays 11.0 14.1 95 10.8 12A 15.4 Orissa 10.1 8.8 8.0 8.0 7.9 7.2 Punjab 8.0 7.0 6.7 6.5 5.6 5.4 Rajasthan 11.8 10.0 95 8A 7.6 7.2 Tamil Nadu 8.6 7.7 7.8 6.6 6A 5.8 Uttar Pradesh 8.1 7.2 6.8 6.3 5.6 5.1 West Begal 10.9 10.4 92 8.5 8.1 7.9 All Boards average 73 6.7 6A 5.8 5.7 5.2 ED's average 9.2 9.1 8s 8.1 7.3 S.7 Source: Goenment of India, Ministy of Enew, Repwt of the Wrkng Gmup pfr s ting steps Por strengthning the finances of SEBs, May 1989, New Ddhl. 174 CoMmAERAL4TION OF tNE POWER SCTR IV INDU Annex 4A Revenue amars of the SBUs As t end of 194 As at end of 1988-89 As at end of 1989-90 SEB Amount Amount Amount Rs.Cr. %of ss Rs.Cr. %of sals RS.Cr. %of sales Andhra Pradesh 100.0 20.0 166.0 21.0 265.0 26.4 Assam 15.0 25.0 30.0 24.0 33.0 24.5 Bihar 163.0 71.0 337.0 68.0 403.0 824 Gujarat 86.0 14.0 124.0 12.0 124.0 12.0 Haryana 43.0 25.0 174.0 51.0 23.6 67.2 Himachal 8.0 29.0 41.0 49.0 67.0 48.0 J & K - - 24.0 51.0 24.0 51.0 Karnataka Board 111.0 33.0 361.0 56.0 315.0 43.2 Kerala 40.0 31.0 46.0 20.0 51.0 18.2 Madhya Pradesh 125.0 25.0 470.0 51.0 595.0 57.9 Maharashtra 182.0 21.0 432.0 22.0 594.0 22.0 Meghalaya 14.0 93.0 18.0 93.0 17.0 94A Orissa 54.0 37.0 120.0 45.0 143.0 46.7 Punjab 36.0 14.0 83.0 16.0 91.0 15.6 Rajasthan 65.0 29.0 116.0 21.0 135.0 22.1 TamUl Nadu 54.0 10.0 51.0 6.0 47.0 4A Uttar Pradesh 204.0 34.0 434.0 43.0 608.0 47.0 West Bengal 45.0 21.0 140.0 30.0 160.0 29.8 All Boards 1340 25.0 3,167.0 31.0 3,690.0 30.7 Annex 48 Financial performance of the SEBs Peqi7rince pawnet 1989-90 2990-91 1991-92 2992-93 1. PLF % 53.00 51.30 50.60 48.30 2. T&D losses % 22.00 21.90 21.40 22.90 3. Total sales (BU) 162.27 176.35 187.19 204.37 4. Average realization through energy 74.62 77.86 89.50 93.37 sales (pabse/kWh) 5. Average cost of gneration and supply 116.90 119.20 124.03 (palse/kWh) 6. Average realization from non-agd, 127.85 138.30 non-domestic consumers (pise/kWh) 7. Average realization from agrl. con- 14.89 13.47 14.71 15.06 sumers (palse/kWh) 8. Sales to agri consumers (BU) 42.03 48.81 51.93 5538 9. Loss of revenue due to sale to agri. 5,018.21 5,426.58 6,035.19 Consumers (Rs. Crores) (Item 8(1tem 5 - Item 7) 10. Sales to domestic onsurmers (8) 24.67 263 29.8 11. Loss of revenue due to sales to domes. 821.00 1,056.00 1,301.01 1,565.20 tic consumers (R. Crore) 12. Revenue receipts (Rs. Crore) (from all 15,324.11 17,733.34 20,672.57 sources) 13. Commaerdal profits/losses s Crores) 4,014.97 -3,7436 -4A98.27 -5,120.60 ExcL RE Subsidies 14. Additional resource mobized (s. 3,3396 957.62 2,205.80 1,232.09 Crore) 15. Internal resource mobilzed (Ra Crore) -1,38739 -1,723.78 -1717.55 -2251.16 An approach for trading in the Indian power system by Powrergrd Corporation of India Ltd. Further, there are some private power gen- erating and distribution companies like [I] Ahmedabad Electricity Supply Company, Tata L___J1. Introduction Electric Company, Calcutta Electric Supply Company, etc. In August 1991, the Government of India made an important policy decision to "Electricity" is a concurrent subject in India; i.e., encourage private sector companies, both Indian it is the responsibility of both central government and overseas, to invest in the electricity sector, and state governments. Due to diversity of either on their own or in joint venture as inde- resources in various states/regions, the Indian pendent power producers (PIPs). In addition, power sector is quite a complex system. The there are nonconventional energy sources Indian power sector has been developed on the (NCESs) such as solar, geothermal systems, wind regional concept of power planning and the energy systems, mini/micro hydel projects, country was demarcated into five regions: biogas plants, etc., which have immense poten- northern, eastern, northeastern, southem, and tial to bridge the energy gap on a long-term western. It includes a large number of central basis. agencies that are superimposed on the state Though rapid strides have been made in power sector. The Central Electricity Authority manifold increase of generation capacity in the (CEA) is responsible for the formulation of the post-independence era (from 1,300 MW to the national power policy, overall planning, and present level of 72,319 MW), the power sector coordinating power development at the national has been unable to supply quality and reliable level. The State Electricity Boards (SEBs) are power, and demand is continuously outstripping responsible for promoting coordinated develop- supply. Currently, energy shortages on all-India ment at the state level for generation, transmis- basis is about 10 percent and peak deficit is sion, and distribution of power. The Regional about 19 percent. The total demand for elec- Electricity Boards (REBs) coordinate and formu- tricity is likely to grow at the rate of 8 percent late polices and guidelines for integrated opera- per annum. This is bound to be reflected in tion of the regional power grids. continued shortages of power in different AN APPROACH FOR TRADYG IN THE INDIAN POWER SYSTEM 175 176 AN APROACh FOR TADNG I NE INDIAAN POWER SYSTEM regions of the country and would further con- region were 481 GWh. On the other hand, by strain economic and particularly industrial 1989-90, this region was exporting around development. The Eighth Five Year Plan period 950 GWh to the neighboring regions. During (years 1992-97) envisages an addition of about 1992-93, the region imported 472 GWh during 30,000 MW of new generation capacity including the year but was net exporter of 281 GWh. generation from IPPs along with associated Similarly, the southern region, which was transmission and distribution facilities. How- exporting energy until the early 1980s, became a ever, due to resource constraints faced by net importer of energy in 1989-90 and in 1992-93, Central Power Sector Undertakings (CPSUs), as its net import was 243 GWh. In the case of the well as SEBs with no budgetary support avail- eastern region, the net imports which were of the able from the government, the actual capacity order of 290 GWh in 1979-80 gradually increased addition may be about 15,000 to 20,000 MW to 1,856 GWh by 1989-90 and in year 1992-93, it only. Further, the paucity of funds will delay was net importer of 412 GWh. The northeastern setting up of long gestation period, hydrostations region continued to be a net exporter of energy adding further to the existing imbalance in during the last decades. hydro-thermal mix. While o;r one hand, demand for power is continually exceeding the supply, backing down Table 1 of generation to the tune of 9,700 GWh in Interreglonal power exchange 1991-92 and 8,600 GWh in 1992-93 actually took ow,a place, which is most undesirable. This results in the uneconomic utilization of generating plants 1988.89 2,042 which continue to operate and waste fuel while 1989-90 2,146 water is being spilled at hydrostations, 1989-90 1,4 particularly during off-peak periods. 19993 1,748 7] 2. Status of interregional Table 2 exchange of power lntetatels'tem ener exchange yfr GWh As a result of the changing supply and demand 1988-89 5,800 scenarios in different regions, the pattern of 1989-90 6,330 interregional flow of power has undergone a 1990-91 4,166 change (Table 1). The interdependence among 1991-2 493,5 various states and regions has also been wit- 19-93 3,588 nessed (Table 2). For example, the northern region was exporting around 585 GWh of energy to other regions in the years 1979-80. A decade later, the net imports in this region were as high as 342 GWh and in year 1992-93 the net export was 432 GWh (Table 3). During the year 1978-79, net imports in the case of the western Table 3 Net export (import) of energy (GWh) Region 1988-89 1989-90 1990-91 1199-92 2992-93 Northern region 260 234 565 946 432 Eastern region (283) (333) (923) (823) (412) Northeastern region (51) (57) Southern region (1,259) (11009) (499) (87) (244) Western region 1,282 1,108 857 120 281 AN APPROACH FOR TRADING IN THE INDIAN POWER SYSTEM 177 - 3. Constraints in the unutilized over the year in different regions, as ,I , at certain times of the day/season, generating Indian power system for stations in one region have to be backed down trading of power while simultaneously, there is perceptible power shortage in the neighboring region (Table 4). The establishment of these interregional links Ideally, each of the regional power systems needs to be taken on priority basis to ensure should operate in a coordinated way. However, considerable economies in power generation as even though the operational plans are delib- well as increased power availabilities. The erated by the SEBs within their REB for the distribution system is to be strengthened to a following day/month, the same are not fully high level of voltage up to 6.6/11 KV instead of coordinated and actual operations vary In dif- 440 V to reduce technical losses (at present ferent degrees. Various constraints which come 5 percent), distribution losses (at present in the way of the minimum level of coordination 18 percent), and theft of power in both urban required for integrated operation for power and rural areas. trading can be classified in the following categories: 3.1 Infrastructural constraints Table 4 Backing down of generation (GWh) BIAS TOWARDS SHORT-TERM GOALS: The Regio 1990-91 1991-92 1992-93 regional pattem of power development has led to imbalances in the hydro-thermal mix. As Northern region 4,559 3,644 2,676 against the desired hydro-thermal mix of 40:60 to Eastern reglon 74 213 provide peaking support and prevent suboptimal Northeastere region level operation of thermal plants during off-peak Southem region 393 1,068 265 hours, the ratio is, today, 28:72 on all-India basis. Western region 8,438 4,779 3,699 Hydro resources, which are unevenly distributed in various regions, could not be optimnally har- T 17 nessed due to resource constraints, long gesta- tion period of projects, and other bottlenecks. In spite of the culture of centralized planning, there has been a strong tendency to achieve short-term goals instead of going in for integrated long-term It has been estimated that in the year 1996-97, development. Thus, even though advance plan- in the eastern region, total energy to be backed ning was done in the Seventh Plan for the suc- down will be about 16 GWh during maximum ceeding Eighth Plan for taking up various thermal day and 17 GWh during maximum schemes, particularly hydro schemes, due to the hydel day. Similarly, for the western region, the paucity of funds, the hydrothermal mix con- respective values are 12 GWh and 19 GWh. tinued to shift in favor of thermal generation and With the overall energy shortages in one region to the gas-based thermal plants having much and surplus in another region, which we are shorter gestation periods (2 to 3 years). currently facing, the situation is utmost undesir- able. Installation of interregional links will lead MISSING TRANSMISSION LINKs: It is to be to additional energy generation of about 6,500- emphasized that thk^e Is a need to avoid the 6,700 GWh through improved hydro-thermal mix temptation to let transmission and distribution of combined regions. (T&D) outlays slip. As a result of continued neglect of the transmission and distribution LACK OF COMMUNICATION FACILITIES: Focus on sector over the last two decades, there are now the development of load dispatch and communi- serious problems in the transfer of power and cation facilities has been mninimal and there is also high distribution losses. Little attention has almost everywhere a serious lack of communica- been paid to strengthen the regional grids by tion facilities between the control centers and the providing missing transmission links and inter- power plants which has resulted in inadequate regional ties for adequate exchango of power monitoring and control of the complex power between different regions. There are substantial system. Presently, most of the system data is quantums of energy resources which remain being acquired manually through power line 178 AN APPROACH FOR TRADINC IN THE INMIAN POwEA SYSTEM carrier communications and telephones, telex, which will facilitate exploitation of energy etc., which is grossly inadequate to assist the resources In the most optimal locations and load dispatchers in ensuring healthy and effec- meeting the demand of widely spread load tive operation of the integrated power system. centers across the country with reliability, Lac}k of appropriate communication systems security, and economy. results in a large number of grid collapses, long Considering the present financial status of system restoration time, and unscheduled flow SEBs, it is difficult to imagine how most of them of power from one state to another. will be In a position to bear the additional burden of capital servicing cost of suci facilities DEFICIENCIES IN METERING FACILMES: At pres- if the same are to be built by raising resources ent, energy accounting is done every month from the financial market and charging full based only on manual readings of energy meters commercial tariff to start with, as is presently at each end of the inter-system tie lines. Time- envisaged. Considering the vital necessity of of-day (TOD) energy accounting 'n the present building these facilities without any delay, it is day system is not possible. Most of the systems imperative that we explore the possibilities of lack adequate metering and instrumentation reducing the burden of capital servicing cost on facilities. These include, besides normal indi- the already financially squeezed SEBs by finding cating and recording, energy meters of the out some via mi 'ia. One of the ways this could requisite accuracy and capabilities; disturbance perhaps be ac. eved is by providing some recorders; sequential event recorders, etc., which element of budgetary support, supplemented are essential for real-time monitoring of the with initial subsidy for a period of about system and efficient accounting system for 5-10 years on the capital servicing cost of these power exchanges. Input data and information facilities, while the SEBs and the power sector from these instruments are also vital for diag- are being restructured to bear the full commer- nosis and analysis of major events and grid cial cost of a' the facilities in the long run. disturbance. While this budgetary support and initial capital servicing cost subsidy may look large in the FINANCIAL CONSTRAINTS: In view of the present financial terms; in economic terms, these facilities budgetary constraints, government is finding It will have a pay back period of hardly 2-3 years extremely difficult to provide budgetary resource each. Extending such limited budgetary support for funding vital infrastrr tural sector schemes. and financial subsidies will not be a burden as a In the Eighth Five Year Plan (year 1992-97), the whole on the nation and will go in a long way in capacity addition required was 38,000 MW for the optimal integrated development of the power which minimum Plan allocation of Rs. 120,000 sector for fulfilling the vital needs of the crores was considered necessary. Against this, growing economy. The study conducted by the the outlay for the power sector is only about World Bank in 1991 on "Long-Term Issues in the Rs. 80,000 crores with the targeted capacity of Indian Power Sector" indicates that interlinking about 30,500 MW. As such, the power sector has of regional grids could reduce the unserved been opened up for private sector participation, energy demand by 50 percent and accrue bene- and all possible efforts are being made to attract fits of Rs. 1,100 crores per year. Studies con- private capital to support the efforts being made ducted by CEA in 1991 on the perspective plan by the resource-starved CPSUs and SEBs for of "National Power Development up to 2006-7" meeting this target. Efforts are also on to com- also reveais that interregional links will save mercialize the PSUs and the SEBs with a view to about 10,000 MW power generation capacities by increase their internal resource generation for the end of the Tenth Plan. further reinvestment in the sector. There are however, few vitdl areas which 3.2 Operational constraints require massive induction of capital for building basic infrastructure facilities like interregional The regional grids suffer from very serious links and system control and coordination frame- problems such as wide frequency and voltage work which will, in the long run, facilitate fluctuations, frequent grid disturbances, lack of optimal utilization of generating resources while grid discipline, uneconomic operation, etc. In meeting the energy requirements of the growing our systemT load changes dictate the system fre- economy. On a rough estimate, it will cost quency and generators are unable to control approximately Rs. 5,000 to 6,000 crores for frequency because of low reserves and energy building these facilities in the next 8-10 years shortages forcing utilities to serve as many AN APPROACH FOR TRAING IN rt IENDZAN POWFR SSrrM 179 consumers as possible at a given time. Voltage load hour/off-peak hour) or existing system fluctuations take place not only on a seasonal conditions (generation deficit/sutplus), nor basis, but also on daily basis. During light load changes with the extent of drawal. Commercial conditions, the voltage level is In the order of arrangements seldom reflect marginal cost as 420-430 KV whereas in the peak load conditions, tariff rates are set at average total cost and, while the voltage dips to as low as 320 KV on 400 KV making dispatch decisions, SEBs compare these buses, causing serious grid disturbances. average rates with the marginal costs of oper- The reasons for this type of system behavior is ating their own plants which distort operating attributable to inadequate reactive compensation decisions. There is no provision for enforcing at all voltage levels especially at the subtransmis- the agreed conditions in the MOUs to discourage sion and distribution network. The lack of overdrawal by SEBs, particularly during peak proper agreements spelling out the reliability hours, nor to induce power plants to back down criteria, obligations of suppliers, and beneficia- during off-peak hours. The generators ignore ries are other deficiencies in the system for back down requests but still charge for operational discipline. As of now, generation unwanted energy and conversely, no penalty is units are generally reluctant to back down even imposed on SEBs which exceed their generation during off-peak time as the generation Incentive shares. MOUs do not provide for trading of the is linked to PLF. Similarly, an SEB will not buy SEBs' share of generation. Energy is traded power from the other efficient (lower marginal under ad hoc arrangements rarely related to cost) generating stations as the purchasing price, marginal costs without appropriate division of as per present tariff arrangement, is higher than benefits between exporters and importers. There the marginal cost of its own generation. There is no financial compensation to any party for are no means of enforcing operational discipline. over-stressing its power plants for assisting the In the case of a state drawing more than its system during contingencies nor do they dis- allotted share of power, the Regional Load courage MVAR drawal from EHV grid. Dispatch Center (RLDC) can, at the most, request the erring state to regulate its demand, and in UNREMUNERATmE TARwF sTRUcTuRE: The most of the cases, the response from the state is problems are further compounded by the struc- only partial. The continual overdrawing of ture of tariff charged by SEBs to the consumers power by deficient states at the peak time, while and subsidies provided to certain categories of the same states do not back down during off- consumers and tariff for bulk power supply from peak hours as the frequency becomes very high, the CPSUs to SEBs. Consumer tariffs are by and is testimonial to the grid problems. The pre- large decided by the respective state govern- vailing accounting system based on monthly ments. SEBs have been directed to supply energy readings with no TOD metering have no power to certain categories of consumers, partic- financial repercussions on erring states. Most ularly agricultural and domestic consumers, at generating units operate on constant load mode highly unremunerative rates. While some of the with turbine governors made virtually inopera- state governments compensate SEBs through tive. As such, they neither participate in fre- subsidy, most of the other state governments do quency control nor do they respond to load not, thus pushing the SEBs into incurring huge fluctuations. The basic reason for operating on losses. As per the Electricity (Supply) Act, 1948, constant load mode is that frequency fluctuation SEBs are required to adjust their tariffs, so as to are too wide (48 Hz to 51.5 Hz) and any gener- ensure the total revenue in any year on the ating unit, if left on normal free governor mode, amount of sale after meeting expenses, leave would suffer violent load changes and prema- such surplus not less than 3 percent or such ture equipment failure. higher percentage as the state governments may specify of the value of fixed assets in service at 3.3 Institutional constraints the beginning of such financing year. SEBs are not given a free hand to fix their tariffs in a COMMERCIAL ARRANGEMENTS: The existing manner to comply with statutory obligation, nor commercial arrangements between the gener- are they fully compensated by the state govern- ating and transmission utilities and SEBs are ments for subsidizing a particular section of based on the tariffs specified in the MOUs on a consumers. Further, there are no laid down regional basis. All the exchange transactions are operating parameters to keep a check on SEBs' based on simplistic flat paise/kWh in which the operational efficiency and make them account- rate neither changes with time of the day (peak able for any shortfall on this account. 180 AN APpROACH FOR TMDINC IN ME INDIAN POWER SYSrEM The structure of tariffs charged by the SEBs to the central electricity generation and transmis- the consumers are not based on commercial and sion PSUs. In case bulk power as well as retail scientific consideration which should reflect the tariffs are set on sound commercial principles, cost of supply and be conducive to energy merit-order operation of generating units will be conservation and optimal utilization of electricity ensured for overall economy. Further, the SEBs resources. A particular case is the "fixed charge will earn reasonable returns, thereby being in a tariff" charged by most of the SEBs from the better position to provide reliable power supply agricultural consumers accounting for 28 percent to the consumers to their satisfaction. For the of power consumption for their agricultural year 1992-93, average unit cost and revenue in pumpsets based on the rating of their installation states was 141 paise/kWh and 106 paise/kWh, (per bhp/kW). These consumers are not levied respectively, resulting in a negative rate of return any charges on their energy consumption and of 12.9 percent, negative intemal resources of have no electricity meters at their premises Rs. 175 crores, and total commercial loss of leading to wasteful use of electrical energy and Rs. 500 crores. The unremunerative tariff and aggravating energy shortages. the subsidies provided by SEBs have not only Presently, CPSUs are supplying power to the affected the financial health of central electricity SEBs based on a flat rate tariff (paise/kWh). generation and transmission PSUs, but have also Even the interstate exchanges of power, as well put a strain on the already resource-starved as interregional exchanges of power, are taking power sector. place on a per unit charge basis causing distor- tions in the electricity generation based on merit- order operations of the power plants. Thus, even the pithead stations owned by the CPSUs are asked to back down in spite of having a 4. Concept of power lower short-run marginal cost, while generation pooling continues at load center stations having higher short-run marginal cost. Recently, government has taken a decision to introduce a two-part The concept of power pooling as applicable in tariff system for bulk power for National the country implies that each SEB would be Thermal Power Corporation's (NTPC) coal-based responsible for supplying the load on its system. thermal power stations based on K.P. Rao Com- Each SEB would do this either by using its mittee recommendations (June 1990). Under the generated power or power purchased from system, the fixed cost of the power station is central sector utilities, other SEBs or private charged to the beneficiaries in proportion to the generators and trading power in accordance with actual energy drawn and the variable cost is agreements made with these parties and the grid charged separately for the actual energy con- code (operating rules of the pool). sumed by the respective beneficiaries. The For a coordinated and integrated operation of power station will be reimbursed 100 percent of the power system, at the outset, it is critical to the fixed cost on achieving the targeted plant form a clear proposal on the operational arrange- load factor (6,000 hours per annum - 68 percent ments for scheduling and dispatch and to build PLF) and for operation beyond this target, incen- commercial procedures and signals to support tive is given as a part of the variable cost on a those arrangements. This is a prerequisite for sliding scale with incentive going up per per- trading of power between the utilities. The centage point increase in the PLF above the trading system constituting a power pool should target level. This is an important step towards provide financial incentives for utilities to oper- introduction of a rational tariff structure for bulk ate their plant in a way which minimizes overall power. A number of further steps are required supply costs to the benefit of end consumers. In for making the bulk power tariff structure India, with the division of responsibility for rational for facilitating development of a bulk power supply between the center and the states, power market as well as to pave the way for and presence of central government and state- optimum system operation. owned utilities, the loose power pool' model is Unremunerative tariffs result in the lack of an appropriate mechanism for system operations. merit-order operation of the power stations The 'loose pool" concept is built on a presump- leading to poor financial performance of the tion of a high degree of autonomy in scheduling SEBs. Poor financial performance of SEBs also and dispatch for the participating utilities. The has a cascading effect on the financial health of goal is always to design procedures and pricing AN APPROACH FOR TRDING IN THE INDIAN POWER SYSTEM 181 arrangements which Induce members to trade territory. Central generating units are respon- electricity (to buy and sell) when it is economic sible for generating power within the region and to do so, both for their own and in the system's their capacities are allocated on a firm basis to perspective. the various beneficiaiy states within the region The purest form of 'loose pool" involves trade based upon the Gadgil formula. Private genera- among vertically integrated utilities. The utilities tors presently meet requirements confined to here are responsible for scheduling and dispatch- their existing states or for their own requirement. Ing of their own plant to meet their demand and Distribution is done by SEBs, except in the case can elect to buy or sell under the terms of the of a few private organizations. In the northern pooling mechanism. The pricing rules which region, interstate exchanges of energy ate pnced determine the payments made for such trades, at a global rate (fixed cost plus variable cost of encourage utilities to trade in preference to load center) and net trades are settled at the end generating from a more expensive plant of their of each month. In the western region, the own. This pure model is ideal to accommodate philosophy is more towards independent opera- the mixture of vertically integrated SEBs and tion by the SEBs with trading limited to surplus central generating companies as well as new after meeting the state's own requirements. private generators (IPPs). In the event all SEBs Here, trading is largely on ad hoc basis and decide to have their plants dispatched by REB, prices reflect the costs of central generation more the pool would in one sense become "tight"; i.e., closely than to system marginal cost. In the having an established arrangement for joint southern region, region-wide shortages of energy planning on a single system basis, and provision provide very few opportunities for coordinated for centralized dispatch of generating facilities dispatch. Operations are highly constrained by with contractual agreements of specific financial required releases of water for irrigation which penalties in the event the contractual agreement takes preference in multipurpose schemes and relating to all generation capacity and margins then scheduling priority of a limited amount of are not met. The advantage of "loose" pools in thermal plant to conserve stored hydro energy the Indian environment will be that SEBs can for the dry season. The regional power pools retain considerable commercial independence will be ideal functioning markets for surplus while participating in their regional pool to the generation. As capacity may continue to be a extent most appropriate to each Board's balance constraint, most of the trading within a region of economic, social and other operational objec- will be confined to off-peak periods for some tives. However, pool members have to adhere to time. However, due to differences in times of certain fundamental rules (grid code) of opera- high demand in different regions, the western tion which are essential for maintaining the region can provide substantial energy to meet technical integrity of the system and that pool the demand of the southern region. As capacity members do not involuntarily incur cost as a constraints ease, trading within the regions could result of action by another pool member. In also get enhanced during intermediate and peak addition, states could retain their existing demands. However, for interstate power responsibilities for the development of their exchanges, today, neither tariff nor agreements power sector. Since the pool will be a voluntary are well defined, treatment of overdrawal or cooperation of public and private utilities, each underdrawal begs commercial principles. There member of the pool will benefit from the is no single point of responsibility for reliable association. system operations. [7r 6. Role of Powergrid - 5. Present status regarding coordination for power power pooling pooling At present, the country's generation resources Powergrid will promote the creation of regional are owned and operated by a mix of central power pools in all regions, on a voluntary coop- agencies, SEBs, and private organizations. SEBs eration basis of public and private utilities are responsible for servicing load in their including alternative nonconventional energy 182 AN APPROACH FOR TRNADIG IN THE INDIAN PoWER SYSrEM syste,ms for benefits of *.e members. Powergrid eetting of tariffs for interagency power transfer, will be in charge of operating the Regional billing, etc. Consistent with the need to preserve System Coordination Centers (RSCCs), the the commercial and operational freedom of SEBs decision for which Is already taken by the gov- to retain responsibility for scheduling and dis- errunent, to provide economy and reliability with patching their own plants within the "loose generation dispatch and transmission operatioin pool" arrangement, a decision is required on closely coordinated. With adequate com- how to treat plants owned by central generating mur&-ation and control facilities in RSCCs, companies. There are few options which need Powergrid will manage operations of the loose careful consideration on this aspect. power pools, while tnembers will continue to have basic responsibility for operating their o Responsibility for scheduling and dispatch- plants and serving their consumers, but coor- ing the plants could rest with companies dinating many of their activities for mutual themselves: In this case, the companies benefits, voluntarily and effectively. The pooling would participate directly in trading arrangement will allow SEBs on their own to through the power pooling arrangements. coordinate their activities to pr' duce economic The central generating organizations would and reliability benefits which all could share. enter bilateral contracts to sell capacity and SEBs can agree on short-tenr and long-term energy to SEBs and themselves decide energy transactions, with those parties w hich whether to generate to fulfill those contracts have low incremental cost surpluses selling them or whether instead to purchase energy more to others, who can thereby avoid generating cheaply on the day from other generators from sources with higher incremental cost at (including the SEBs also). mutually agreed prices beneficial to both the * Responsibility for scheduling and dispatch- parties. These transactions will also aid SEBs to ing the plants could rest with the concerned perform maintenance at a convenient time as SEBs: In this case, the SEBs would specify well as in the purchase of power from the utility the physical energy requirement from the having lower cost surplus capacity durinig the plant with which they have "contracted" prolonged gestation period of construction of and require the plant to operate at that new stations. SEBs can be of mutual assistance revel. With capacity and energy "allocated" to each other in the case of outage of major units or 'contracted" to more than one SEB, the or -pinning reserves may be shared by neigh- final dispatched output from the plant boring systems. should be the sum of all SEBs requirements. Powergrid will coordinate closely the genera- If all SEBs act to minimize costs, the plant tion dispatch and transmission to optimize should only be dispatched if it falls within operation of total power system. As an operator the national "merit order", so long as SEBs of power pools, Powergrid will provide infor- are purchasing on a two-part, capacity and mation on available capacity, energy to members energy charge. Failure to meet the for their needs and a price range; a forum for Yequested load would trigger availability coordinating generation maintenance schedules; penalties in the form of reductions in monitor tie-line flows for ensuring system relia- capacity charge payments by the relevant bility and informing the parties accordingly; SEBs. deviations from agreed transactions; information * Responsibility for scheduling and for raising bills and settlement, etc. This system dispatching the plants could rest with will ensure the imost economic generation of Powergrid: This would be a mixture of power based on commercial principles. States "loose" and "tight" dispatching and will be able to contract for a specific type and pooling arrangements. While each SEB quantum of power and will be free to contract would dispatch its own plant, it would be the cheapest power. This will also help the for Powergrid to determine the total output generating organizations in the optimum utiliza- of ;;te central generators and each of the tion of their capecities. SEBs portfolio of plant-on the basis of information about the cost of each central 6.1 Scheduling and dispatch arrangements plant and the cost at the margin of each SEBs generation subsystem. The REBs 'are presently responsible for sched- uling and dispatching the regional electric Thus an appropriate balance between tAe inde- system which includes maintenance schedules, pendence of SEB dispatching, decisions and AN APPROACH FOR TRADNG N THE INDMw POWER srYSM 183 optimal use of central generating stations would and transmission pricing proposals as be a key area in the design of the pooling PowergrId will eventually be assuming e rangement. integated national dispatch function. * 'Transmission constraints" will be assessed 62 Inter-utility trading nnd their effect in the peoling arrangements will also be taken into account in bulk In this regard, the role of Powergrld is of vital power and transmission pricing proposals nature for the power sector as it will want to act as the energy transactions will be limited as administrator rather than as principal in the and affected by actual or potential power energy transactions, for reasons of credit risk and flow oDnstraints on the system. avoidance of overly central control. The broad * "Grid support services" will be provided spectrum of roles that Powergrid can take for And proposed arrangements for operational operating loose power pools as facdlitator/ and financial treatment of grid system clearing house for power trading between the services will ke clearly specifed. states to enhance the interstate cooperation for commercial power exchange arrangements are as folloWS: PURELY ADMINJS=TATJVI Here, Powergrid W p would simply provide a financial settlement 7. Why power tading? service and it would be for the SEBs to seek out and agree to bilateral transactions. A form of price declaration process will be provided within Until a few years ago, trading of electric power the loose pool' whereby each SEB can elect to had not been an issue in India. All ultimate declare a pr;ce at which it is willing to buy/sell consumners of electricty in India were, and still energy. It will be left to the SEB, on the basis of ae, being served by their respective SEBs, bids, to determine bilateral arrngements, with Electricity Departments, private licensees, etc., rules for determining the trading price specified and their relationship is primarily that of captive and agreed in advance. Powergrid will play no customers versus monopoly suppliers. Even the role in detemining the transactions to take relationship between the SEBs and the central place. generating companies/jointly owned projects has bsically been similar, with each SEB having an "POWER BROKER" ROLm In this case, Powergrid allocated share in all such generation, and being will act as recipient of all of the SEBs price expected to draw its allocated share, without declarations and will letermine the pattem of really bothering about the price. In other words, bilateal transactiom- to take place, the basis of the suppliers of electricity have had little choice which wil be established and agreed by all about whom to sell their product to, and the parties Including the SEBs. buyers had no choice about whom to purchase In either of the options, Powergrid will entail their requirements from. The prices are pri- to resolve the following issues: marily being fixed and controlled by the central and state governments. e Inadvertent trade, i.e., problems of SEBs Trading inherently means a transaction where taking more power than had been pre- the price Is negotiable and options exist about contracted especially during times of short- whom to trade with and for what quantum, to ages and causing interstate disputes. obtain the best bargain. Power trading will Powergrid will bring out the pricing mech- allow utilities to use the most economical energy anism which wIll charge such transactions available in the system, and through pooled at their fuUl value to deter deliberate power operation, more power will be derived from the diversion or through physical network integrated resources than If each entity operated control. on its own. The basic essentials for economy * $Pree-riding' viz. no participant can gain transactions are the available capacity and access to long-term energy supplies through different generating oDsts of various sources of the mechanism without paying the full cost power. If available capacity is limited, then of both capacity and energy on the system. there will be little opportunity to buy or sell o "Losses" treatment in the power system energy regardless of price. In addition, if an which would be consistent with bulk power energy production cost differential does not 184 AN APPROACH FOR TRADIG IJ THE INDLAN POWER SYsTEM exist, there would be no economic incentive to make transaction regardless of the amount of available capacity. In India, all the five regions S. Proposed approach for are in deflcit in meeting the peak load require- power trading ments, whereas there have been substantial quantums of energy resources which remain unutilized over the year in different regions at Almost all SEBs today have a shortage of gen- certain times of the day and season. Generating erating capacity to meet their peak demands and, stations in one region often have to be backed consequently, have had little surplus to offer for down while simultaneously there is perceptible trading with their neighbors. The lack of requi- power shortage in the neighboring region. site transmission links in some cases, and Installation of interregional links will improve absence of the requisite commercial mechanism, the hydro-thermal mix of combined regions, and have further prevented electricity trading by transmitting the surplus energy of the eastern between the SEBs, even when the off-peak and western energy to the northern and southern surplus of one SEB coutd be taken by a needy regions, we can have better utilization of existing neighbor. The situation is now changing in resources. many ways. While peak-hour shortages may continue, and there may be very little surplus 7.1 Advantages of trading from round-the-cock capacity available for trading, there is a big scope for off-peak trading RELIAB1rry: The consumer demands and has a between the SEBs, both intraregional anid inter- right to expect a continuous supply of power to regional. It would basically entail utilizing the meet his different needs. A utiSlty's primary differential between their respective incremental function is to meet this demand and to ensure its costs, and optimum utilization of their hydro- reliability. An individual system, unconnected electric resources. with neighboring systems, could find its resources depleted and continuous supply in 8.1 Illustrative example jeopardy as is the case in most of the SEBs when maintenance of the system, excessive peak Let us consider what should ideally be demand, and loss of generation all occur at the happening through the foltowing simple illustra- same time. However, operating, as a single tive example. SEB-A and SEB-B each have an system, the regions and SEBs can rely on the installed generating capacity of 1,000 MW of capacity of the transmission ties between each their own, and 25 percent shares in a 2,000 MW other, and pool to provide the surplus power to central generating station (pit-head) in the meet the continuous demand with increased region. The peak demand of each SEB's con- reliability of supply. sumers is 1,200 MW, and the off-peak load is 700 MW. If the central plant has a capability of ECONOMY: The coordinated scheduling of delivering 1,600 MW (ex-busbars) on a particular generation in the pool to meet the expected day, the entitlement of each SEB on that day combined peak demand allows for planned would be 400 MW. Assuming that this pit-head operation of the least expensive generation power has a lower incremental cost (say irrespective of location within the pool. In 30 paise/kWh) than all of SEBs' own generation, addition, the surplus capacity can be shared over each SEB should endeavor to draw 400 MW the entire system, thus avoiding the necessity of from the grid throughout the day. The SEBs can generating units running at higher marginal cost do this by replating their own generating for its own security. Sharing of resources will stations such that their total generation is also result in reduction of both operating costs 400 MW lower than the total load of their and capital expenditures. respective consumers. In tum this would mean that the SEBs have to reduce their own genera- tion to only 300 MW during the off-peak hours, and raise it to 800 MW during peak load hours. AN APPROACh FOR TRADINC IN TME INDIAN POW£ SYSEM 8SS Suppose 300 MW out of SEB-A's installed One must also appreciate that the above is not capacity is hydroelectric (storage type), which a one-time exercise. It has to be done again and would straight away be backed down during off- again, typically every hour, as the generation- peak hours. Even then, the SEB would have a load balance keeps changing. For example, surplus (thermal) capacity of 200 MW during the SEB-A may have agreed to supply 100 MW to off-peak hours, presuming that SEB-A has the SEB-B at 65 paise/kWh up to 6 a.m., based on requisite plant availability (800 MW) to meet its the respective incremental cost of 60 and obligations on that day. SEB-A can offer this off- 70 paise/kWh. Now suppose SEB-B had to take peak surplus of 200 MW to SEB-B, and the latter out a 100 MW unit with an incremental cost of could accept it, if it can use it to replace costlier 56 paise due to some problem at 3 a.m., and the generation, or if it has a shortage during those 100 MW unit with 70 paise/kWh incremental hours. cost (which had been backed down consequent Suppose the above 200 MW (which SEB-A to the deal with SEB-A) was run up again. In would have to otherwise back down during the this new situation, SEB-B would perhaps be night) has an actual incremental (fuel) cost of replacing 100 MW of 80 paise/kWh generation 60 paise/kWh. Suppose SEB-B is so placed by the 100 MW it is receiving from SEB-A. The during those off-peak hours that it can meet its new price should therefore be fixed at 70 paise/ obligations from cheaper sources except for the kWh instead of the 65 paise agreed earlier. This last 100 MW, which has to come from load- is possible only if SEBe-B faithfully reports such center capacity having an actual incremental cost a development (for upward revision of its pur- of 70 paise/kWh. In such a case, the two SEBs chase price), o. if there is an overall monitoring should ideally agree for supply of 100 MW from mechanism. SEB-A to SEB-B at a mid-way price of 65 paise/ In a multi-utility system, the above negotia- kWh, so that both derive equal benefits from tions become so involved that extensive compu- such a transaction. tations become essential. These are generally For the above transaction to be mutually centralized at power pool control centers. beneficial and equitable, both the quantum and price have to be determined judiciously. Also, 8.3 Maintaining net interchange as per schedule the two have to be determined simultaneously, considering the incremental costs of the two The next basic requirement is that each SEB must parties, for the various slabs of generation. For maintain its actual net interchange as per example, SE-A above has an incremental cost of schedule. For example, in the above illustration, 60 paise/kWh for the 200 MW surplus whereas SEB-A should be getting 400 MW of its central SEB-B has an incremental cost of 70 paise/kWh generation share, and should be supplying for 100 MW and perhaps 56 paise/kWh for the 100 MW to SEB-1 (during off-peak hours); In next 200 MW. In such a case, if SEB-A supplied effect SEB-A should have a net drawal of more than 100 MW to SEB-B, 60 paise energy 300 MW from the grid. On the other hand, would be replacing 56 paise energy, which scheduled interchange of SEB-B would be would be meaningless. 500 MW during these hours. As mentioned earlier, this calls for a continuous regulation of 8.2 Correctness of data own generation for absorbing the own-load changes. For this, each SEB must have full- The success of any such trading depends on the fledged load dispatch and communication facili- conectness of data. For example, if SEB-A ties, to (1) get all tie-line flows, to determine the deliberately declares its incremental cost as SEE's actual net drawal from the grid, and (2) 64 paise/kWh and demands the sale price to be send commands to all of its major generating fixed at 67 paise/kWh, it could pocket a bigger stations to maintain a genieration-load balance share of the trading benefit than rightfully due such that any difference between actual net to it. An SEB may also fall to make the best use drawal from the grid and the schedule is of the trading opportunity if it does not have brought back to zero. Ali this has to be done correct and up-to-date infonnation about the almost on a minute-by-minute basis, and in a status and incremental costs of its plants in manner that it simultaneously conforms to operation. economic dispatch, or merit-order according to incremental costs. 186 AN APPROACa FOR TRADNwG In TE INDIAN POWER SYSrEM 8.4 Operational discipline 5. Each SEB has full-fledged load-dispatch and communication facilities, for continuous The above calls for an operational discipline. monitoring of Its actual Interchange, and for Basically, it means that no SEB should unilat- on-line regulation of its generating units to erally decide to deviate from its net interchange ninimize deviations from its interchange schedule. For example, when SEB-B was forced schedule. to take out its 100 MW unit of 56 paise/kWh 6. A mechanism exists for determining hourly incremental cost, it could have simply not run deviation from the net interchange schedule up a costlier generating unit. In such a case, for each SEB, and then either attaching a SEB-B would have developed a deficit, which monetary value to It or rnaking a compen- would have come automatically from the grid. satory adjustment in future schedules. In effect, its net drawal would have increased 7. There is willingness on the part of all SEBs from 500 MW to 600 MW. Most likely, this to maintain their drawals from the grid as additional 100 MW would have come from the per schedule, even during conditions of idling surplus of SEB-A, without any agreement generation shortage. They should be about its supply or price. Such deviations from willing to buy tht required capacity/energy schedules are not permissible, except for short from their neighbors through advance durations (in which the defaulting SEB must negotiations, In case their own central gen- correct the situation). Ideally, SEB-B must either eration share is insufficient to meet their run up its own generation to meet the deficit, or consumers' total demand, and they should negotiate an additional purchase duly identifying have the capability to pay a reasonable price the quantum and price. In Western countries, for the same. any such inadvertent (short-time) deviations from scheduled interchanges have to be made up Unfortunately, not even one of the above in kind, by correspondingly adjusting the future assumptions would be valid in India today. schedules. While considerable discussions may sucreed in bringing about (1), (3), (4), and (7), the facilities 8.5 Ideal working requirements for required for (2), (5), and (6) simply do not exist interconnections in most of the SEBs and may take another 6-7 years to get established. Without these failities, What has been described above is the Ideal way the SEBs simply cannot control their net drawals of the working of interconnections, generally from the grid, and maintain them as per any according to the concepts universally adopted in given schedule. This is the basic point that we the developed countries. The underlying all must appreciate. All Westem theories based assumptions and requirements are: on a tight control of net interchanges therefore cannot be applied in India, for the next 6-7 years 1. The SEBs' shares in central and jointly- at least. Further, all deviations from schedules owned power plants are identified in hourly across the board cannot be penalized just energy or MW, not just in monthly or daily because they are perceived as an indiscipline energy. from the Western point of view. Due to the 2. The load-dispatch center of each SEB has a requisite facilities being absent, even a full, up-to-the-mninute picture of the SEB's disciplined SEB cannot comply with this complete system, particularly regarding requirement. incremental costs, spinning reserve, etc., of Another problem is that incremental costs do its generating units in operation and on not figure at all in the present interutility tariffs. standby. While the actual incremental cost of a central pit- 3. Chief load dispatcher of each SEB has the head station may be 30 paise/kWh, the incre- requisite authority to negotiate over tele- mental cost for that power, as seen by the SEBs, phone the quantum and price of such may be 60 paise/kWh. The result is that SEBs trading with his counterparts, and is willing insist on backing down of central pit-head to take crucial on-the-spot decisions having stations along with their own load center a high monetary value. stations. In this situation, the SEB does not even 4. There is adequate transparency and/or faith know what its correct incremental cost is: between the SEBs such that incremental 30 paise or 60 paise? And what benefits of costs of available/avoided generation as trading between SEBs can be thought of, when stated by one SEB are accepted by others. the SEBs are being deprived of full benefits of AN APPRxOAC FOR TRADIN N TMHE INDIN POWER SYSrEM 187 their own central pit-head share? In such a facilities, frequency-linked load dispatch guide- situation, trading has to be based on a different lines can be used as an interim measure, concept altogether. primarily for achieving region-wide economy dispatch (merit-order generation) during the next 8.6 Identification of hourly drawal schedule 6-7 years. In this scheme, the frequency thres- holds up to which different types of generating The starting point for negotiating any power units should work at full load, and thereafter trading between two SEBs is identification of how they should back down, would be specified. their hourly drawal schedules from central and A typical guideline would be as shown in joint projects. In the scheme that Powergrid is Figure 1. Once such a guideline is given to and proposing, each central and jointly-owned power adopted by all power plants, a definite relation- plant would have to advise its expected MW and ship will get established between the grid fre- energy availability for the next day. Based on quency and the system-wide incremental cost, as their respective shares in these power plants, all shown. It will then not be necessary for load SEBs would then have to indicate how they dispatchers to continuously communicate with propose to draw their shares over the next day. their various power plants for obtaining their For example, if a hydroelectric plant is expected status, incremental costs, etc. Just by looking at to have enough machine and water availability their frequency meter, they should be able to to generate up to 100 MW and 1,000 MWh the know their own current incremental cost, largely next day, an SEB having 50 percent share in the meeting the second requirement for trading. plant would be entitled to draw 500 MWh, with Further, since the incremental cost vs. fre- a peak of 50 MW. As such, the SEB may specify quency relationship would be identical for all that it would draw 25 MW from 6 am to 4 pm SET3s, everybody can reasonably be assumed to and 50 MW from 4 pm to 9 pm. Summation of be having the same incremental cost at a parfic- such schedules for all central and jointly-owned ular time, such that the transparency is auto- stations shall become the datum interchange matic, and no negotiations between load dis- schedules for the respective SEBs, and would patchers are necessary regarding fixation of provide the first prerequisite for trading. transaction price, substantially meeting the intents of the third and fourth requirements 8.7 Frequency-linked load dispatch guidelines listed above. All short-term, as-and-when-avail- able exchanges, unless otherwise agreed between Since most of the SEBs today do not have the the concerned SEBs, can simply be priced required load dispatch and communications Figure 1 Typical frequency-linked load dispatch guideline CL- -4-4-4-t1-l-4t41- e-H++e1-+5~~~~~~-- 1-e __o - WsA~~~~~~~~~- t44 _ H AH- I9 I .I .I I I I I I I 50.6 .o 49.8 49.4 H9.S H9.6 49.? 49.9 49.9 iO 60.1 W0.D5W.S 8.4 50.5 50.5 W0.7 6O.9 71wuuIC1 188 AN APPROACH FOR TRADING IN THE INDIAN POWER SYSTEM according to the predefined frequency-based 8.9 Time of the day special energy meters incremental cost. Not only this, lack of or gaps in the required As for the sixth requirement, Powergrid has load dispatch and communication facilities already done considerable work on development would no longer be a bottleneck for trading, in of requisite special energy meters. Such meters the sense that actual interchanges could be would have to be installed on all interutility ties allowed to deviate from the schedules, and the to record energy flows for every 15-minute time fifth requirement would no longer be a con- block. If the SEBs give a go-ahead, Powergrid straint, as explained below. can immediately take up procurement action, The whole concept of interconnected operation and get them installed on all interutility ties in as practiced in developed countries is funda- all five power regions within a year or so. mentally based on the premise that each control Further, once we are not intending to minimize area (which has to be clearly identified in the unscheduled interchanges, and are also not advance) shall regulate its actual net interchange contemplating their return in kind, it is no and keep it as close to its Interchange schedule longer critical to have the required measure- as practicable. There are two basic reasons for nents and telemetering for on-line indication of this. Firstly, unless each control area closely each SEB's actual net interchange. It is thus regulates its net interchange, the overall fre- possible to apply the whole scheme as soon as quency regulation wouid not be possible, partic- we can get the special energy meters installed on ularly in the large, multi-area interconnections. all interutility ties, without waiting for anytlhing And a very stable frequency is essential for else. applying the concepts of tie line bias, etc. As for the seventh requirement, the SEBs' Secondly, pricing of deviations from interchange overall willingness to maintain their drawals as schedules (termed as unscheduled interchanges) per schedules is desirable, but is not critical. As is a problem. Mostly, these are not given a price mentioned earlier, deviations from schedules tag at all, and are required to be returned in would be permissible, but will be appropriately kind. priced: at pit-head incremental rate of about 30 paise/kWh when frequency is above 503 Hz, 8.8 Need for adopting a pragmatic approach at load-center incremental rate of about 60 paise/ kWh when frequency is in 49.7-50.3 Hz range, In view of our present limitations and ground and at diesel-generator incremental rate of about realities in India, Powergrid is proposing a 150 paise/kWh when frequency is below departure from the above concepts. We know 49.7 Hz. Overdrawal during peak-load hours from our past experience that system operation would thus be discouraged, while overdrawal is not adversely effected in any manner in case during off-peak hours would be encouraged. the frequency deviates by up to +/-0.5 Hz from Paying capability of the SEBs is, however, a the rated value of 50 Hz. We intend to permit serious matter, since the concept is based on this. There should be no difficulty in reconciling financial disincentive for overdrawal during a to this when we have been used to +/-2 Hz deficit situation. This disincentive would variation over the past 10-15 years. Tie line bias, become ineffective if an SEB can get away when etc., are still too advanced fer us, and are even it does not pay for the energy drawn from the otherwise only theoretical until the full-fledged grid. Timely payment of dues by all SEBs has, load dispatch and commnunication facilities in any case, to be ensured, for the very survival become operational, hopefully by the year 2000. of the Indian power sector. Once you are not sticky about the frequency, you also do not have to be too fussy about unsched- 8.10 Interchanges and trading modes uled interchanges. We intend to permit, recog- nize, and price these. Once we are adopting the In the overall scheme being proposed by frequency-linked load dispatch guidelines and Powergrid, interchanges and trading would take are allowing the frequency to modulate, it is place in the following modes only logical to price the unscheduled iEter- changes (or all deviations from interchange Supply of allocated shares to all SEBs from schedules) as per the saame frequency-based the central and jointly-owned power plants. incremental cost. Such power plants would have to indicate AN APPROAcH FOR TRADIWN DV THE INDIN Po.R SY$TEM 189 their MW and energy availability on a day- effect be unscheduled exchanges with the power to-day basis, and the SEBs would have to pool, the summation of which would be zero. specify how they propose to draw their respective shares over the next day. SEBs 8.11 Non-utility generation would pay a capacity charge (at a pre- calculated rupees per MW per day) rate for Non-utility generation (NUG) is the next area for the MW availability forecast, and an energy which the Powergrid scheme provides a solution. charge (fuel/variable cost) for the drawal India already has many thousands of MW of schedule advised by the SEB. captive generation in industrial plants, but the 2. If an SEB does not need its share in a same is not being integrated with the grid central plant as per the prevalent formula, it because of present frequency fluctuations and would be allowed to transfer or forego its due to the absence of a proper commercial share in full or in part, at its own option. mechanism. Powergrid already has a compre- Any such foregone share would be offered hensive scheme for tackling the frequency prob- to the other beneficiaries, first in the same lem. On the commercial side, any NUG injection ratio as per prevalent formula, and then on into the grid would be priced as pe. -e fore- a first-come, first-served basis. mentioned frequency linked rate. , nat the 3. The SEBs would be allowed to similarly NUG injects into the grid can be left entirely to contract with each other and with any be decided by the NUG. It would mean that all private generators, identifying the daily NUGs having a fuel cost less than the declared drawal schedules and the price to be paid diesel generator incremental cost (which would through a two-part tariff, duly identifying include a wear and tear element) would have an the capacity and energy charges. incentive to inject all their surplus capacity into 4. The constituents of a regional pool would the grid during peak load (generation deficit) also be freely allowed to enter into long-/ hours. short-term agreements with each other for A recent study has brought out that sugar as-and-when-available energy, or for off- h-dustry itself can provide 3,500 MW of peak energy on a regular basis (duly identi- cogeneration provided we have a commercial fying the drawal schedule) on a negotiated mechanism in place for properly pricing its price basis. injection into the grid. Overall, adoption of the 5. The regional power pools could also negoti- Powergrid scheme may therefore be sufficient to ate interchanges/trading with neighboring overcome a substantial part of the present power regions on behalf of the member SEBs, duly shortages. At the same time, there would be no identifying the drawal schedules, SEBs incentive to NUGs to inject costly power during capacity, and energy shares, etc. Similarly, off-peak hours and raise the frequency. And the a consortium of certain SEBs could negotiate whole system would operate without any on-line long-term/short-term contracts with neigh- communication between the load dispatch boring countries as well. centers and NUGs. It was mentioned earlier that for any trading, quantum and price have to be The only restriction for the above modes of agreed to in advance. NUGs are posing a chal- interchanges/trading would be a check from lenge even in the U.S.A. in this regard, because transmission constraints angle. As long as no it is difficult to comnmunicate with every NUG, segment of the transmission system of Powergrid on-line, to find out what surplus he has available or a third agency is over-stresced, there would and how his cost compares with the utility's be no bar on any such bilateral transaction. current incremental cost. The utility cannot Besides such scheduled interchanges and decide how much power to take from which trading, the Powergrid scheme would provide a NUG, in the absence of the above data. Their vast scope for unscheduled (but desirable) frequency remains so constant that it can give no interchanges of as-and-when-available energy. signal to either the utility or the NUG. So much so, that pool members may even prefer In India, as it happens, we are not tied down to suipply/receive as-and-when-available energy to a constant frequency thinking. So we can as as unscheduled interchange (at the frequency- well allow the frequency to modulate and pro- governed price) rather than bother to negotiate vide the signal for streamlining our system the appropriate quantum and price in advance operation, pricing of NUG, pricing of deviations with a neighbor. Such interchanges would in 190 AN APPROACH FOR TRAVDNG IN THE INDIAN POWER SYSMU from schedules, encouraging trading of as-and- should be, at least, priced equal to the cost that when-available energy, inducing efficiency and the utility would have incurred to generate the availability improvement, etc. same power and sell the output to other utilities or customers through their transmission system to encourage innovative developments and _fl 9*9. Dovetailing private promotion of energy conservation. The Public .I Utility Regulatory Policies Act is a similar type sector and altermative of regulation which is already in practice in the _i energy sources US.A. to promote alternative sources of energy. In the recent past, government announced a policy decision of allowing private sector par- ticipation, in power generation and distribution so as to bring in additional resources as well as 10. Regulatory body expectations of bringing competition for increased efficiency in power sector operation. Keeping in view that private/joint venture There is a need for the establishment of an generating companies will be entering soon into independent regulatory body for the power the arena, it is suggested that power generated sector on the line of Federal Energy Regulatory from such ventures should be dovetailed into the Commission, US.A., which could regulate overall planning of the transmission system private, state, and central generating, transmis- envisaged by SEBs and Powergrid. The gen- sion, and distribution projects; endorsement of erating plants should be of optimum size to bulk power and transmission tariffs; establish- ensure that economies of scale can be achieved ment of standards and inspection, and audit of and location of the power stations should be compliance of such laid-down statutory provi- based on economic criteria only. In the case of sions besides playing a catalytic role in planning small size private generating stations where the of the Indian power system at apex level. power is to be fully absorbed within the state Keeping in view the fact that CEA has been system and the generation is not likely to have playing a key role in planning of the Indian significant Impact on the tie-line flows of the power system and is fully equipped with knowl- regional grid, the power evacuation system will edge and expertise about the sector, it will be normally comprise of a few links within the state only appropriate to restructure it into an grid and the same should be designed in associ- autonomous regulatory body. This will require ation with the concemed SEB. However, in the provision of an independent funding mechanism cases where significant size of generating plants possibly by an appropriate levy on regulated are being planned, the power evacuation system entities and having ability to independently of the same has to be planned in an effective and recruit and administer staff and to procure reliable manner. The evacuation system is to be facilities and technical assistance to carry out its properly dovetailed within the regional power functions. While doing so it has to be ensured grid to not only ensure proper dispersal of that CEA is not involved in the day-to-day power generated from such stations, but also to operatioin of the power system in any manner to keep tie same within the safe anJ reliable ensure its independence and unbiased character. operation limits of the grid. The state and In order to service widely dispersed areas, it will regional systemn coordination facilities have to be, be appropriate that CEA have its own offices in accordingly, properly enhanced to take care of each power region to cater to the regulatory reliable and economic operation in the integrated requirements appropriately. power system. As a regulatory body in the power sector, CEA To speed up development of nonconventional should be responsible for the following aspects: energy sources lNCESs), it should be made mandatory for SEBs to purchase power from e Planning regulation small power producers using alternative energy e Tariff regulation technologies and high efficiency cogeneration a Operating regulation units through a special regulatory act. However, o Arbitration. the price of power purchased by the SEBs should be Just and reasonable, in the public interest. It AN APPROACHi FOR TRADING IN 7TE INDIAN POWR SYSrEM 191 10.1 Planning replation proposed structure of RLDCs operating as a part of Powergrid with respective operation of the CHA should continue to play the catalytic role in regional system and dispatch. However, Power- the national level planning. However, the plan- grid should provide all the necessary inputs on ning process should shift focus on "indicative operational developments on a regular basis planning" instead of the current emphasis on which are of importance to CEA fe- ensuring the "command-and-control" planning. This implies technical stability and reliability of regional grids that it should provide the broad signals on on merit order dispatch. Since Powergrid will anticipated demand, capacity needs, time frames, be operating the RSCCs in the near future, it and other constraints and bottlenecks, but should develop, for each region, clear operating leaving exclusively to the various players in the principles, standards, and procedures for main- sector to select their means to meet the planning taining reliability of the power system within the goals and markets. It should be contrasted to broad national policy framework. detailed "command and control" planning which attempts to debate the exact means by whicn 10.4 Arbitration these goals should be met. CEA should be the only body to enforce com- 10.2 Tariff reulation mercial arrangements between the generators, SEBs and other entities to implement the CEA should be vested with exclusive jurisdiction proposed regulatory scheme and to build the and autonomous character to review and necessary cooperative spirit among various develop tariff policies for bulk power and trans- entities in the operation and planning of the mission tariffs to various power entities. It regional system. should be also empowered to develop statutory In the case of disputes among different entities prindples, methodologies to implement and in the power sector, in the first instance, all enforce general principles and guidelines in the efforts should be made by the concemed parties public interest. CEA should continue to review to try to resolve the disputes amicably through and approve cost-based tariffs for a) all central discussions. However, in case they are unable to sector generating entities; b) interchange tariff arrive at a satisfactorily acceptable resolution, the between SEBs and private utilities; c) all private case could possibly be referred for formal arbi- generating tariffs (IPPs); and d) transmission/ tration to CEA. The decisions of CEA should be wheeling services to be provided by Powergrid final and binding among all parties. As a matter and other entities ("unbundling' services) for of principle, there should be no appeal for the long-term power interchange transactions to CEA decision; however, where very significant safeguard the interest of various entities, as well Issues of law or the Constitution is involved, as ensuring the most efficient utilization of then only CEA should permit a review of the resources to develop an efficient bulk power decision at the apex court level (Supreme Court). market. CEA should regulate pricing for transmission services and assurance of reasonable rights to transmission service for generators to reach the bulk power market as and when they evolve. 11. Proposed unbundling CEA should have a provision for enforcing clear L of Indian power system legal obligations to all the national providers of tansmission services and all SEBs, other licensee The Indian power sector has been operating on utilities with the transmission systems that inter- the regional concept of power planning with connect with the transmission grid to provide development through SEBs, which were orig- wheeling services in the most equitable and inally established in the vertically integrated efficient basis, subject to the constraint of CEA's model (generation, transmission, and distribution administered planning process. assigned to a single body). But as the demand grew and other hydro, solid fuel, gas resources, 103 Operating regulation etc., were identified, a large number of new Ihab rely organizations were set up with specific responsi- In this area, CEA's role should be purey bilities and functions such as NTPC, National advisory in nature for the long-term econonic Hydroelectic Power Corporation, North Eastern health of the power sector, as per the current Electric Power Corporation, Neyveli Lignite 192 AN APPROACH FOR TRADING Im THE iNotAN POWER SySrEM Corporation, Nudear Power Corporation, etc., of SEBs should work in tandem with Powergrid making additional alternative sources of gener- with mandatory wheeling of power for all the ation available to SEBs. The formation of Power- generating organizations including the private grid for transmission activities represents another sector and CPSUs. This will then ensure step in the restructuring the power sector in optimum system design and efficient, secure, India. The process received further fillip by economic, and reliable transmission of power. encouraging the private sector to construct and This would also help in optimizing the invest- operate as IPPs. Keeping in view the trend that ment required for development of the trans- the Indian power sector is witnessing in mission system in the power sector for the unbundling the central power sector entities to nation as a whole. This will also bring in com- introduce some form of competition and to petition between the generators and also in become more market oriented, the following distribution which, at present, is under the SEBs' organizational structure for enhancing the opera- ambit. The private sector entry in distribution tional efficiency and management of the power will make it much more flexible and can bring in system is proposed (Figure 2). spot, medium- or long-term trade of power. The The process of unbundling of the power reforms will also allow generators, in the short system has been initiated in the central sector term, the option of trade of surplus power to the and the same has to be carried through in the various utilities. state sector for realizing the full potential and There should be a separate organization to benefits of the same. It will be worthwhile construct and operate the rural electrification considering segregation of SEB activities into system equipped with adequate capital and an generation, transmission, and distribution as appropriate capital structure to fulfill the social independent divisions/entities. State-owned obligation for providing the minimum lighting generation could be supplemented by promoting needs to the poor rural nouseholds and supply IPPs either at the state level connected to the power for irrigation at affordable rates. The state grid or at the regional level connected necessary subsidies should be provided by the through the Powergrid-owned regional network. state government through their budget as is The distribution system owned by the state being done in the case of welfare schemes for could possibly be considered for restructuring education, family planning, and other poverty into area distribution companies and could alleviation programs. possibly be made to compete with private dis- CEA, as a proposed independent regulatory tribution companies which are likely to enter, body, will be responsible for regulating the though in a small way initially, in some of the entire power system as described above. major commercial centers. The transmission part Keeping in view the importance of the energy Figure 2 Unbundling of the power system 0~~~~~~ AN APPROACH FOR TRADING IN THE INDIAN POWER SYSTEM 193 sector in the economic development of the country, it is worthwhile to consider appointing an empowered commlssioa, possibly under the chairmanship of the Prime Minister, which could Conclusion provide the overall guidance. The present scenario in India provides a grim picture of the "energy-debt" crisis and, if left unattended to Keeping in view the present economic itself, the widening gap between demand for restructuring process, with particular emphasis energy and dwindling supplies will have on liberalization in the powe: sector, it is imper- deleterious consequences for the economy as ative that immediately appropriate decisions are a whole. The present state of affairs can taken for expediting commercialization and eventually lead us to a very piquant situation of corporatization of various entities in the sector, power riots. Unless we move to a market- without compromising on the need for ful- oriented mechanism to overcome the besetting fillment of social obliggations while, at the same problems of operational, commercial, and time, introducing a culture of competition for financial discipline, the situation will keep on infusing efficiency and improving the quality of deteriorating and we will have bleak prospects service through an efficient power pool opera- of a turnaround in any future. tion. This will lead to regional coordination approach and will ultimately lead to the forma- tion of a national power grid, for bridging the presently unbridgeable demand-supply gap. Energy financing: an institutional challenge by Anthony A. Churchill, Principal Advisor Finance and Private Sector Development The World Bank As incomes grow and efficiency improves, commercial energy services reach a new and expanding range of users and purposes. The 1. Introduction challenge faced by all developing countries is the mobilizing of the necessary resources to ensure the continued and growing production of this Producing energy services is an expensive busi- basic need while at the same time, maintaining ness. Whether it is the development of primary high levels of efficiency. energy resources or their transformation into The size of the requirements has placed in useful services, the process will require large question the avadiability of the financial amounts of capital On average, countries invest resources. Tne numbers are large. In this region between 2 and 4 percent of their national output alone, it is estimated that between US$30 and or about 20 percent of total investment on $40 billion per year will be needed over the next energy-related capital expenditures. A typical ten years. Where will the money come from? household will spend 10 percent of personal It will come from the same place it has always income. on purchasing the services produced. come from-the savings of society. In this Very poor households can spend close to region, savings rates are high, usually over 30 percent. 20 percent of national income is saved. The The efficient use of this capital is an important future demands of the energy sector will place factor in successful and sustained economic no more demands on these savings than they growth. As societies grow richer, commercial have in the past. Foreign savings can help, but sources of energy are substituted for human only marginally. Typically, foreign savings have labor. As societies grow more complicated with accounted for less than 15 percent of energy increased trade and transport, the demands .. investments, and they eventually do have to be energy grow even more. In most rapidly devel- repaid. The issue is not the adequacy of oping countries, energy demands grow between resources, but rather their mobilization and one and two times the rate of growth of income efficient use. ENERGY FNmaNJG: Am INEMNAL CHALL GE 195 196 ENERGY FINANCING: AN INSTITU77ONAL CHALLENGE Why is the mobilization of these resources will be possible for the private sector to assume regarded as such a challenge? The answer to most of the responsibility for financing electric this lies in the institutional structure in most of power. the energy sector. History, economies of scale, technology, government, and a great variety of social, political, and economic factors explain the shape and form of today's institutional structure. It is a sector dominated by large enterprises, both public and private, usually with consider- 2. Market structure able monopoly powers. Governments have traditionally played a critical role in both con- trolling and managing the sector as well as in With a few notable exceptions, in most of the mobilizing tlhe resources required. The cost, world, electric power is produced, transported, scale, and long life of most investments have and distributed in markets dominated by a required an understanding or social contract verticall} integrated monopoly. For the most between investors, consumers, and the energy part, these monopolies are owned by the state enterprises. and run as public enterprises. In the U.S., the Nelther society nor technology remains in combination of the size of the market and its place. The world is undergoing a dramatic early development relative to the rest of the period of change with the increased globalization world has led to an industrial structure of of production. Communications, transport, and regional monopolies, most of which are privately technology are changing the way economic owned. systems operate. Many societies have had to Until recently, few would have questioned the redefine the role of government. Financial mar- "rightness" of this structure. The electric power kets have changed in an equally dramatic fash- industry always has been considered a natural ion. These changes have combined to call into monopoly. Economies of scale and the inte- question the existing social contracts as they grated nature of the system meant that only one apply to the energy sector. service provider made the most economic sense. Although the pressures for change are being These assumptions are increasingly being chal- experienced by almost all countries, the r.eed lenged. In the U.S., the rise of independent and the ability to respond is different across non-utility or non-integrated generators has countries. For some countries, particularly in resulted in competitive alternatives to some of this region, the need for change is being driven the services offered by the regional monopolies. by the need to access capital markets. In others, In the U.K., the services provided by a state particularly in Africa or India, the need to monopoly were unbundled and competition improve service delivery is paramount. This introduced in almost all parts of the system. In paper is about the need to revise the existing Sweden, third-party access (TPA) has been structures in order to meet the challenges of a established and independent generators compete changing world. Market structures need to be within a framework of a common carrier trans- reexamined, the relevance of today's institutions mission system. In New Zealand, the utility was questioned, the role of government reconsidered, split into different services and their legal and new understanding reached between inves- monopoly eliminated. In Chile, orivate firms tors and savers. This paper sets out some of the compete. In Argentina, the state monopolies elements of this common framework in the have been broken up and private firms compete hopes that all will gain from sharing this for franchises. In one country after another, experience. pkns are being drawn up to radically alter 1'1-e The general direction of change discussed in existing structure of the industry. this paper is the need to move towards greater What has brought about these developments? reliance on markets and market-based institu- Why has this industry whose market structure tions and less reliance on the commanding has been remarkably stable for so long a period heights of the public sector. But this will take suddenly being confronted by these pressures for time. For most of this decade, the public sector change? Three factors account for what is will continue to be the major source of finance happening. for the power sector. A more realistic goal is one in which the process of institutional changes starts today so that by the turn of the century it ENERGY FMNANG: AN INSTITUTIONAL CHALLENGE 197 2.1 Technology introduced increasing costs in terms of efficiency and management. Up until about the mid-seventies, the economies of the industry were dominated by economies of 2.3 Performance scale. hi the construction of power plants, changes in technology produced lower and Efficiency is always a problem with monopolies. lower costs with larger and larger plants. The The electric power industry is no exception. growing efficiency of the large central power Without the discipline of the market place, station combined with the need to coordinate efficiency is difficult to maintain and political transmission, communications, and distribution imperatives substitute for normal commercial nteant lower overall costs were achieved by an practices. This has been particularly true in most integrated monopoly. That the efficiency gains developing countries. associated with size appear to have leveled off. Even in the developed world, the utilities have In recent years, technology has moved in a not been models of efficiency; neither have they different direction. In power generation in been models of inefficiency. Service demands particular, economies of scale have become less have been met. Perhaps not at minimum cost, and less relevant. New turbine technology and but nevertheless at costs tolerated by the society.' the increasing use of natural gas have resulted in In contrast, in many developing countries, there new generating units that show few economies has been a failure to maintain service levels, and of scale. The costs per kilowatt of capacity show problems and inefficiencies appear to have little difference between large and small stations. grown along with the monopoly. Frequently, In addition, these technologies are less capital the poor financial performance of these utilities intensive. A combined cycle gas plant, for has meant inadequate resources to maintain example, costs less than half that of a traditional assets and meet the needs of growing markets. coal plant and can be built in about a third of The result has been a growing dissatis-faction the time. with performaw .ce; governments, consumers, and Communication and control technologies have the enterprises themselves are expressing their changed dramatically. The growing sophistica- discontent in greater volumes. tion and cost declines of telecommunication and computer systems has meant that the informa- 2.4 Using the market: the role of competition tion requirements of system management can be met in ways that do not require a vertically If a monopoly structure for the market is not integrated firmL In fact, there may well be always producing satisfactory results in terms of substantial diseconomies or communication and performance and finance, what are the altema- information failures associated with integrated tives? Can they be realistically applied to devel- operations. oping countries? Are they different for large or small systems? What are the institutional 2.2 Size requirements for managing a more competitive structure? Most of what is discussed below In both the developing and developed countries, applies to networked services. The other com- electric power has been an industry of rapid mon public monopoly in the energy sector in a growth. Systems doubling in size every decade number of developing countries is petroleum has been the norm. Although these growth rates production and/or distribution. Since this is a appear to have peaked in the industrial coun- traded commodity in whch there is iterational tries, demand continues to grow rapidly in most competition, the justification for this market developing countries. A few decades ago, structure must lie in non-economic objectives. adding 100 MW to a system was a major invest- These monopolies are not usually efficient. ment and usually a significant part of the totaL The availability of altematives to monopoly Today, countries such as China are adding provision of these networked energy se.vices is 1,000 MW a month. Over this decade, Korea not a theoretical concept. Almost all forms of intends to double its capacity from 20,000 to altemative competitive provision of services exist 40,000 MW. Systems have grown to the point in practice. They range from almost completely where economies of scale have become less and competitive structures for an unbundled struc- less relevant. Size, by itself, also appears to have ture of services to hesitant first steps, for a The greater reliance on private capital markets has been the main fctor in maintaining an acceptable level of efficienr. 198 ENERGY FINARClNC: AN INSTNUONAL CHALUWCE limited range of services. New combinations are of a substantial part of total generation capacity, being developed every day. They do work; the within the country, in the hands of the private question is how well and under what sector or industrial enterprises (Nigeria, circumstances. Indonesia, and India). Most of this capacity is The options of alternative market structures not available to the network. This capacity has presently available faU into roughly six cate- grown over time in response to the failures of gories. These are broad classifications--various the public networks to meet both the demands permutations and combinations are possible. In for quality and capacity. addition, the way in which the different market The efficiency of these public monopolies structures are managed in practice can make a varies considerably. Some are reasonably effi- difference to what happens in reality. They cient in meeting a country's needs for quantity range from the vertically integrated monopoly to and quality of services. Others have failed to largely competitive systems. meet these goals. In most cases, politics domi- nates the investment decisions and there are 1. The integrated public monopoly. many examples of costly investment decisions 2. Regulated private monopoly. even in well-managed systems. A general obser- 3. Monopoly (private or public) with seme vation is, that the more efficient is the overall competitive procurement of generation. governance of the country the less costly is this 4. Unbundling the services; competitive provi- market structure. sion of generation. 5. Unbundling the services; transmission and REGULATE MONOPOLIES WrT PRIVATE OWNER- TPA. SHIP OR PRIVATE CAPITAL: The present systems 6. Unbundling of all services except network in many of the developed countries fits in this management. categoky. 'Vhether ownership is public or private, th, key feature is the use of private THE INTEGRATwD PUBLIC MONOPOLY: This is the capital markets to raise the necessary capital. In most common market structure for the power order to satisfy the requirements of the capital sector (and in a few cases, natural gas) in almost market, a rate of return on capital is targeted all developing countries. In larger countries with the market acting favorable or unfavorably (Brazil and India), it may take the form of to whether or not this target is achieved. It is several regional monopolies together with some essentially the substitution of a market deter- administrative divisions, particularly at the mined target for the LRMC type of target used wholesale level, of generation, transmission, and by extemal lenders in the case of national public distribution. Public owrership and more impor- monopolies. Where private ownership is per- tantly, public responsibility for raising the neces- mitted (US.), greater accountability exists for sary capital, are the key features of this structure. investment decisions. Where private ownership One of the most important advantages of this does not exist, politically motivated, and usually structure is the ability of the political system to expensive, investment decisions (e.g., nuclear use it to meet non-commercial objectives. power in Ontario, Canada, and the U.K.; lignite Whether the utility is operated as a public plants in Victoria, Australia) are possible and enterprise or public corporation, entry into any ulfimately require the government to bail out the part of the sector is restricted and pricing and utility. investment decisions ultimately are made by In order to attract private capital, a clear set of government. Usually multilateral, external rules and a means of enforcing the rules on both lenders have attempted to provide some disci- the government and the enterprise, is required. pline by use of targeted variables such as the The relationship between the government and rate of return on assets or the requirment that the enterprise has to be predictable and subject prices, on averge, cover the long-run marginal to an open and well understood judidal process. costs (LRMC). Sometimes there are regulatory An independent judiciary is an essential require- boards or price commissions established to assist ment particularly where private ownership is in the process of developing tariff structures. In involved. general, the signals of the market place are weak Although the use of market-determined targets and conflict resolution is managed through the provides an important element of discipline into political procesa the overall operation of the system, the deter- A common feature of this type of market mination of the actual pricing structure is subject structure in developing courtries is the existence to a substantial element of political control. As ENEicr F NAN&NGC AN INST7IWIONAL CHAENGE 199 long as overall targets are met, the existent e of plants in lamaica, Philippines, and many other monopoly !eaves open the possibility of various countries are of this type. Since the public sector forms, of either pr,ce discrimination or cross- is making most of the decisions, it winds up subsidies among consumer groups. In some having to cover most of the risks. The priva.e cases, there is an attempt to base tariff structures party is simply selling management, technical, on cost categories, but because there is little and increasingly, financial services to the govern- market feedback on actual costs, this tends to ment or its agents. Competition is, at best, become a somewhat arbitrary process and sub- lindited and constrained-as are the financial ject to a good deal of manipulation for political resources. and other purposes. In the U.S., complex legal In these circumstances, the main regulatory and accounting structures have been developed conceun is over the nature of the contracting to support the tariff-making process, but it has process between the private producers and the not prevented the use of regulatory bodies to utility that is now a monopsonist in the market achieve other social objectives. In recent years, for capacity and energy. In order to protect his the regulatory system has been used to reinforce investment, the private investor will focus on environmental goals, using the ability to discrim- obtaining a satisfactory power purchase contract inate among consumer classes to subsidize these from the utility and look to government to objectives. underwrite the risks with respect to its own The overall economic efficiency of the system behavior or that of its agent (the utility). can vary considerably depending on the degree In the US., with a predictable regulatory of ineffidency introduced into tne pricing sys- framework and a strong judicial system for tem. The capital market provides some feedback contract enforcement, it has been possible for on the efficiency of investment decisions independent producers to work out satisfactory although in most cases, this is muted by both power purchase contracts. In the US., a greater explicit and implicit government guarantees on degree of competition is being introduced which the debt. For the most part, the signals from the has greatly simplified the rule-making process. capital market are a commentary on the ability In Virginia, for examp:le, the regional monopoly of the regulatory system to balance she con- (VEPCO) has requested bids for construction of peting demands of the political system. power plants mainly on the basis of the price it is prepared to pay for power. It has indicated MONOPOLY WITH SONM COhflTIVE PROCURE- the amount of and type of power it needs and MENT CIF GENERATION: Introducing competition approximately when and where, stated the price into what has been a vertically integrated electric it is prepared to pay, and then asked for bids. pow : monopoly is a step a number of countries The developer is then taking the risk on what have taken. Countries (India, China, Malaysia, plants to build and where. Given the final price Philippines) are struggling to write the rules (and certain technical qualifications), the profit- goveming this co-,, . n ir. the face of both ability of the enterprise will be dependent on the solicited and unsolicited proposals. It has turned decisions of the developer. The public sector out to be a complex process and one with many need not be involved. moral hazard risks. As yet, no developing Fixing a price or a set of rules on how prices country has devised a satisfactory set of rules. will be established would avoid the difficulties One of the main reasons for this is because the being experienced by countries as diverse as competition has been so limited that what is left India, Indonesia, and Honduras as they try to is another form of public procurenent, albeit contract for new plants. In the case of VEPC0 more efficient. The private sector or private firm and other utilities that have developed this has become a contractor to the existing monop- process for future capacity additions, bidders oly for a set of specialized services which now have come forward with proposals to more than indudes finance. In some cases, there may be meet the capacity requirements. competition among private firms for provision of The limitation on this approach in developing these services, but more often than not, It is a countries, in addition to country risks, is the lack "negotiated" deal. The public utility or the of credible rules or operating experience with government is deciding what plants are to be pricing regimes. Private suppliers will be built, what technologies are to be used, where unwilling to enter into contracts on this basis the plant is to be located, what product is to be with the dominant public monopoly unless produced, and at what price. The Hub River significant government financial guarantees are project in Pakistan or the proposed private sector forthcoming. Perhaps, over time, investor 200 ENERGY FINANCING: AN INS7rTUTIONAL CHALENGE confidence can be ;ncreased to the point where Perhaps even more important has been the contracts based on the price of power alone will development of communication and information be sufficient to induce investments in new systems that permit the dispatching of electric capacity. In terms of the requirements for regu power within a more market-oriented frame- lation, a predictable pricing regime is essential. work. In small systems, usually operating Chile is the only example of a country in which within a well-defined region, it was necessary to investors have been willing to undertake capa- maintain close control over generation and its city expansions on the basis of predictable expec- dispatch, insuring, on the basis of technical tations about prices and market structure. criteria, adequate reserve requirements and In the Philippines, for example, the procure- service quality. As systems have grown and ment of private generation capacity has been started to interconnect, new protocols have had possible only with the government taking all to be developed with respect to the trading of risks with respect to prices and quantities. The power among systems. In both North America independent producer receives a physical quan- and Europe, a number of power pools have tity of fuel from the dominant utilit' and then developed to trade power and reserve require- converts it to kilowatt hours for a processing fee. ment among large regional monopolies.2 These The independent producer takes no risks with power pools reflect various degrees of system respect to either input or output prices. integration, from exchanging power at the mar- Expanding generation capacity through public gin to more centralized control of the combined procurement may introduce some efficiency in systems. plant construction and operation, but may prove Since members of the pools had different sets to be impossible to develop on the required scale vf owners, different governments in the case of given the limitations of the institutional and Europe, and different combinations of private regulatory systems. At some point, given that and public owners in the case North America, they take all of the risks, governments will balk rules have had to be developed to govern the at undertaking these operations on too large a interaction among the members. Initially, most scale. The various BOT, BOO, and BOOT of these arrangements were fairly simple and schemes have all required a long and complex reflected only marginal transactions, but as process of negotiation and many, particularly the greater integration has been achieved and in larger ones (e.g., Turkey), have failed to get off particular where club membership has no longer the ground. become exclusive-where independent genera- tors become part of the system-rules have had UNBUNDLING THE SERVICES - GENERATION: The to become more complex and inevitably this limitations for improvements in efficiency of complexity has forced the rules to become simu- simply moving to more competitive procurement lations of what would happen in a competitive of generation are obvious if they take place wholesale market. within the trditional monopoly structure. The In the U.K, it has developed into a wholesale vertically integrated monopoly is a formidable spot market for generation services. In North institution and even with the most sophisticated America, some of the larger power pools are of rules and rule making processes (e.g., as in moving in the direction of similar market struc- the US.), it's existence will make it difficult to tures. In the U.K, generators bid at half hour introduce real competition, improve account- intervals for a place on the load curve, for the ability, and avoid corruption. provision of spinning reserves, and other tech- Does generation have to be provided under nical services. The order and amount dispatched conditions of monopoly? A few decades ago the is determined by the prices offered rather than, answer to this question would have been, yes. for example, on a basis of the traditional Small systems dominated by one or two large engineering-determined merit order used in most central power plants and growing economies of systems. In other words, market prices have scale would be the reasons given. As systems substituted for technical parameters. The profit- have grown and as changing technology has ability of each plant on the system is thus depen- made economies of scale less relevant, it is now dent on the ability of the plant owner to compete possible to consider the competitive provision of with respect to prices and costs. With the generation services. market determi.lng prices, other market-based 2 There is a nice discson of various power pooling arangements In Bardak Enargy Sevices, report for the Australian Distribution Authorities, A Discsion Paer on Power Pooling in Australia, Melbourwe, December 1992. ENERGY FJNANCJNG: AN INS7TrUrIONAL CHALENCE 201 mechanisms have developed to arbitrage risk; a Transmission services can be further small but growing futures market for kilowatt unbundled by separating out the system man- hours is now developing in the U.K. agement. In an integrated monopoly, the system management-what plants are on line, when, UNBUNDLING THE SERVICES- TRANSMISSION AND which are in reserve status, which provide TPA: Transmission services, of all the spinning reserves, over which links is the power unbundled services, appears to have the transmitted, maintenance of voltage and fre- strongest element of natural monopoly. In most quency, etc.,-are all centralized functions. cases, it is either part of a vertically integrated Whether TPA is permitted or the transmission monopoly or it is run as a separate and regu- lines are privately owned, there will still be the lated public monopoly (India). In the U.K., the need for the centralized management of the transmission system is owned by the private system. This need for centralized management regional distribution companies and is subject to of the system is usually advanced as an argu- public regulation regarding who may sell and ment against TPA and for the maintenance of an buy from the system. In the US., recent changes integrated monopoly. in legislation (November 1992) have started the Recent experience, however, suggests that it is process of opening up the transmission systems possible to separate out the system management owned by the regional monopolies to permit functions and earlier fears that this would result TPA.3 TPA has been permitted in Sweden and in deterioration of the system's functioning have a few other countries, but has been rejected by proven to be unfounded. In the case of the U.S. several of the major countries of the European power pools, many of the system management Community interested in protecting their state functions have been delegated to jointly owned utilities from competition. and managed control centers. In Europe, many TPA permits generators to directly reach of the national utilities have conceded consider- consumers without going through the intermedi- able authority to centralized management cen- ation of the regional utility. The large 2,000 MW ters. In the UX., the National Grid Company is Tysdale plant built by ENRON in the U.K. was both the owner of the transmission network and financedt on the basis of power purchase con- tine manager of the system. In Australia, consid- tracts negotiated between the company and eration is being given to the establishment of a power consumers. This would not have been national grid or system management function possible unless producers and consumers were that is separate from the ownership of the inter- confident that adequate transportation arrange- connected transmission system. ments existed. The system management functions are clearly Permitting some degree of competition for the a natural monopoly and present a number of larger customers, which in most developing issues for public regulation in addition to those countries could account for over 75 percent of discussed above under ownership and access to the load, by permitting TPA to high-voltage the transmission system. System managers are transmission lines could be an attractive way for in a position to determine the operations and pressuring greater efficiency from the system. It profitability of all parts of the system. Unless will create pressures to price energy to reflec! the rules are clearly specified and understood by costs. If customers are given a choice, they will all parties, there is the possiblity of considerable shop around for prices and qualities of service discord and political fallout, particularly where that best meet their needs. At present, custo- the legal structure for contract dispute is mers have few choices-usually a poor quality of underdeveloped. service at subsidized prices from the public monopoly. There are many examples (Indonesia, UNDUNDUNG SERVICES - DISTRBUON: Distri- Nigeria) of customers paying a multiple of the bution systems remain one of the more difficult public price through auto generation in order to areas for changing the market structure. obtain a better quality of service. 3 TPA to transmission lines (or In the case of oil and gas, pipelines) oomrs when another seller of the service, other than the owner of the tansmision line, has access to the physical facles for the transport of power on their own account. Essentialy, thls requires the owner of the transmission faclity to act as a common carrier. TPA generally Is strongly opposed by the existing carrier because it gives competitofs direct access to oustmers Its previously monopolzed territory. French and German opposition to the concept has stalled the inhtroduction of TPA into the European CQonmunity. 202 ENERGY FINANaNG: AN INSTrFUrIONAL CuALLENGE In New Zealand, contestability was introduced at by municipal electric associations (MEAs). the generation stage and transmission structured Ontario Hydro "suggests" a set of retail rates to as a national monopoly, but the basically munici- the associations which presumably reflect a pal distribution systems were left untouched. sufficient margin to cover distribution costs. The gains in efficiency-lower wholesale These rates are widely publicized and it is prices-were not passed on to the bulk of the difficult for any association to put in place a consumers but were absorbed by the regional different tariff structure. The profitability of the distribution monopolies and in profit taking by association, or the deficit to be paid by the the government. Recent legislation is changing municipality provides an incentive for efficiency. this and the regional monopolies no longer have This system of benchmark competition is not exclusive rights to distribute in their territory. In without its problems. What is a reasonable set the U.K., larger customers (presently 1 MW and of rates both at the wholesale and retail level is above) are free to negotiate directly with eup- still a matter of considerable public intervention. pliers, with the regional distribution company In the case of Ontario, there are numerous required to move or "wheel" the power over its disagreements between the utility and the mun- lines at established prices. Australia and a few icipalities over what is a reasonable structure of other countries are considering similar arrange- tariffs. Recently the MEAs, who have to deal ments for permitting competition at least among with the final customer, have been complaining the larger customers. In those countries with that the wholesale rates are excessive and that reasonably functioning billing and payment they are bearing the burden for inefficient invest- systems, there is no reason to presuppose that ment decisions at the wholesale level. competitior cannot go down to the level of the The effectiveness in developing countries in a residential household. In the U.K., the intention system of benchmark competition will have to be to do so has been publicly announced. determined by experience. Key parameters These type of changes in the market structure necessary to make it work are the openness of of the distribution systems, limits the degree of the information system and the willingness of monopoly to what can be described as the wires government or the regulators to accept the service. Customers deal directly with the sup- consequences (the profits and losses of the plier, and the wire service or common carrier distributors). Poor and unreliable information transports the energy at established rates. The systems, a common feature in many developing advantage of this is that it limits the public countries, will make comparisons difficult and regulatory burden to determining access and leave ample space for argument and excuses. pricing to the distribution and ransmission networks. Long-distance telephone services have reached this point in a number of major countries. One alternative that has been considered in a number of countries is what is known as bench- 3. Institutions mark or yardstick competition, where there are a number of regional distribution monopolies, usually owned by municipalities and in some Confusing institutional development with man- cases by private companies. Most of the distrib- agement is a common misperception. Improving utors are likely to face the same set of wholesale management is only a narrow part of institu- prices; the range of profits and prices of the tional development and is usually associated distributors should then reflect their relative with specific enterprises. It is a much broader efficiency. If the regulatory authorities have concept and covers those structures in society control over consumer prices, tariffs can be set to that govem the way in which individuals, busi- reflect best practices, and local government ness, and government interact with each other. forced to absorb the inefficiencies. Widespread Institutional development is about how these knowledge of the relative performances of the structures change in response to the changing various distributors wili apply public pressure needs of society. Property rights and how they on the poor performers. are reated, for example, Is one of the more The Province of Ontario.. in Canada, has such fundamental institutions of society. It is this a system. Electricity is wholesaled by Ontario broader definition that is used in this paper. Hydro which has a virtual monopoly on genera- There are many ways of classifying society's tion and transmission, but power is distnbuted institutions. In examining the options for change ENERGY FiNANCING: AN INST7rTlmONAL CHAuENGE 203 in the energy sector, and electric power in partic- rLarket structures such as the example cited ular, the following figure presents a simple earlier of a power company contracting out framework that provides useful insights.' generation solely on the basis of price. In many developing countries, he lack of openness of the political system is a serious nEL" impediment to promoting effective regulatory CONTROL structures. This shows up in the difficult and contentious issues surrounding the resettlement of populations affected by hydro projects. The adiected populations are often excluded from the decision-making process and this, combined with weak administrative and legal structures, leads to confrontation rather ian negotiation. These fundamental institutional structures of society are slow to change. Revolution occurs when existing structures reach a breaking point, but even in these extreme cases, the change is likely to be comfined to the political sphere with other institutions adapting at a much slower pace. The difficulties now being encountered in AUTONOWY COPthON e former Soviet Union are a good example of ___________________________t_ he strength of existing institutions and their resistance to change. The use of triads of this type is cmmon n academic and popular Any change or process of reform will have to mmagement literture. This Ow OWes much to A.O. HksChmnm, take into account the existing institutional struc- Exit, Vokce anW Lalt (Cmbridge, Mass.: Harad Univ., Pms tures-the strengths and weaknesses of the 1970). For fitrt her discussion and a more extensive list see R.W. KeXdel, Game Plans: Svorts Srateaes for Busness (New York. political, judicial, and market institutions. Insti- Dutton, 1985) and Keidel, "Team Sports Models as a Genric tutional structures are inherently conservative Oranizational Framework," Hwmna Relations 40 (1987): and will move only under pressure. Yet the 591-612. This particularframework was originally developd in a ability to change will be limited by this same paper Privat Power the Reguoatry Implications, delivered to the institutional structure. This is the basic tension Singapore Natonal Committee/World Energy Council, ASEAN theureorm proce. Energ Confience, Singapore, June 4-5,1992. of the reform proem. The tension between the need for change and Society's institutions are divided into three the limitation of institutions produces a number main categories according to their prnciple of issues that will have to be addressed in any means of social interaction. There are the politi- program of reform. cal institutions that rely primarily on voice or cooperation, the judicial institutions that empha- 3.1 The pace of reform size the rules of the game or the legal structure, and finally, the market-based institutions the rely Either too fast or too slow will present problems. on negotiations or the exchange of property Determining what is "just right" will depend on rights. a country's institutional endowments and the The stage of development of these institutional political capacity to manage change. structures will set the limits on the options The developed world has produced contrasting available for reforming the energy sector. If, for models of the reform process. In the US., example, a country has an underdeveloped change has been of the more stately variety, definition of property rights or lacks the means probably because the need for chge was of a or will to enforce those rights, market-based lower order of magnitude in terms of potential institutional structures are unlikely to function gains and political costs of resistance from a well welL Business relies on the negotiation and established institutional structure. In the U.K., in exchange of property rights. The inability to contrast, there were considerable pressures for enforce contractual arrangements can be a change because the existing public monopoly serious impediment to the development of some was begining to develop higher levels of 'This framework was ongaly deveoped in a pamer, Priaate Power Th Reulty Implications, delivered to the Singapore Natinal Committee/World Energy Council ASEAN Energy Caferen, SiWapore, June 4-5,1992. 204 ENERGfy FNANCING. AN INSTrnmlOvAL CALLENG£ inefficiency and potentially greater financial the past two decades urged on these countries demands on the public purse. Both the need by the World Bank and other international and the capacity for change were greater and the lenders, has produced little in the way of resulting reforms were of a more radicl and improvements in efficiency.) urgent nature. Somewhere in between are Australia and New Zealand: the initial steps of 3.2 Disequilibrium commercialization rnd corporatization have taken place but the process of further change has Institutions, like people, do not change unless been stalled . ->posing forces have had time to there is sufficient discomfort with the present marshal their . urces. situation. In trying to manage the process of What lessons for the developing countries can reform, there is the temptation to try to minimize be drawn from this experience? In many cases, change to the point where it just relieves the the need for change is more obvious, yet at the present discomfort. In the power sector, the same time, the institutional capacity to manage inability to attract financial resources is forcing change is weakest. The temptation in most many countries to consider alternatives to countries is to go for a gradual or controlled present institutional stiuctures. The temptation process of reform. Commercialization is is to try to find a path of reform that requires followeo by corporatization, some competition the minimal amount of change in existing for procurement and operation of power plants institutions. is permitted, and perhaps the sale of some part Reforming institutional structures is essentially of ownership to the general public. In all cases a messy process. Once the first, tentative steps the dominant monopoly has rernained firmly in have been taken, they will produce their own control. dynamism and set in motion a process which This may make sense in countries such as will stagger from one disequilibrium to the next. Thailand and Malaysia where reasonably effi- Often the outcomes are unpredictable and there cient national monopolies exist and prices gener- is a general tendency to underestimate the speed ally covered costs. The pressures for change are at which change will be induced. What hap- driven by the need to access new sources of pened in the U.K. is a good example of the capital and the desire on the part of governments process. and utilities to develop more efficient, and less Most countries are trying to find a path of political, forms of governance. compromise between the present prohibitions on In other countries, such as Argentina, poor and entry and the alternative of a completely deteriorating quality of service and a tradition of unrestricted market. There is an understandable public mismanagement, required a more radical reluctance to give up ail controls over what has restructuring. Attempts at managing public beeni a tightly controlled industry. No country enterprises through a more efficient regulatory is willing to risk uncertain or unpredictable structure (commercialization and corporatization) outcomes in such a politically and economically had failed and a new paradigm was required. sensitive industry. The dominant monopolies were split up and Finding an institutional path betwveen protec- sold to private interests with significant foreign tion of monopoly privileges and introducing participation. (This also has been the pattern for competition has proved to be extraordinarily many telecommunication reforms where the difficult. Once any degree of competition is sector has been characterized by poor and deteri- introduced, the system will be pushed in the orating quality of service.) direction of either falling back on former restric- One simple lesson emerges from the exper- tive practices or in the direction of further com- ience of both developing and developed coun- petition. In the US., for example, once indepen- tries: the more extreme the problem, the more dent power producers (IPPs) were permitted radical the required solution. Speed is also entry, pressures for TPA were quick to grow and important. A stately pace of reform produces a the system is being pushed in the direction of a stately pace of results. In most countries with complete unbundling of services in a competitive severe problems (e.g., Bangladesh and Eastern market frameworl A similar situation has Europe), the political system is unlikely to be arisen in the case of telephone services; once the able to manage a slow pace of reform or to long distance monopoly was effectively chal- accept the slow payoff in terms of improved lenged, competitive forces were released across efficiency and service levels that will follow. (In the spectrum of services. In the U.K., the struc- fact, one can argue that the "gradual" reforms of ture of the electric power industry has changed ENERGY FnANaNcG: AN INSTMIrIONAL CHAUENGE 205 at a more rapid pace than anyone had predicted. sector will also force the pace of regulatory Regulation has been scrambling to keep up with reform. In Argentina, for example, significant the pace of change. change has taken place, but the regulatory structure required to manage the new institu- 3.3 Capacity constraints tional structure is still in its early stages of development5 In the US., the recent changes in What about the constraints of institutional capac- legislation and attendant regulations, are the ity? It has been argued that those countries in result of the technology induced competitive the worst shape are also those with the weakest environment. In the U.K., regulatory practices capacity for institutional reform. This has been are evolving as more and more experience is interpreted to mean that in these countries the gained with operating a competitive system. In pace of reform must be set by the limitations of India, the intention to allow investments in this institutional capacity and therefore reforms private power is forcinb the public sector to must be of the slow and deliberate kind. The consider developing the appropriate regulatory capacity to develop and implement a regulatory framework. Regulators are inherently conserva- framework is sufficiently limited to require a tive and a;e more likely to react to change rather long period of time to gain both experience and than be the inducers of change. There are no to develop the necessary skills. examples of a detailed and comprehensive The question on institutional capacity needs to regulatory framework being put in place prior to be divided into two parts: 1) the capacity to the reform or structural changes in the sector. manage change, and 2) the capacity to accept change once it has taken place. The processes 3.4 Ownership presently underway in Australia or Thailand all require the existence of a signifcant institutional State ownership of many of the energy enter- and political capacity to manage a process of prises is a common feature in most countries, change. And even in these cases, it is not clear developed and developing. Although it is easy whether or not this capacity will, in fact, be used to see how this came about because of scale to thwart change. In Argentina, in contrast, the economies, the weakness of capital markets, etc., changes were radical enough to require a com- it would be unrealistic to ignore the political or pletely different fonn of Instf±utional capacity. control aspects Ot state ownership. Direct, polit- In this case, the management and financial skills ical control means considerations of equity, of both the domestic and foreign private sector redistribution of income, employment, national were utilized to overcome the limited capacity of security, regional development, and other social the public sector. goals become an important part of the public In Ba igladesh or India, the capacity of the interest in this sector. public sector to manage change is undoubtedly The exercise of this political control is reflec- limited, but the needs are great and alternative tive of the societies themselves. Where stable skills exist in the private sector that could governments exist, policies and practices in the respond to the immediate imposition of a more power sector are more predictable; where gov- competitive framework. Importing some of ernments change frequently, so does governance these required skills by involving foreign pro- of the sector. In the more open, pluralistic soie- ducers and financiers is also an option that may ties, the sector is caught up In the numerous and be required by a weak capacity to manage often conflicting goals of the society. In the change. In other words, putting in place a more more closed societies, the sector often serves the radical structure to begin with may be easier and interests of the elite. may be the only alternative for countries that In the developed countries, the political control lack the capacity to manage a process of dhange. of the sector is tempered by the more open Historically, regulations have tended to nature of the society and in particular by the develop in response to demands created by new checks and balances provided by existing social situations rather than the other way around, and economic systems. Probably most important where regulations are changed to induce new of these checks and balances is the need to situations. Forcing the pace of change through access private capital markets. Rather than more radical institutional restructuring of the direct investments in the sector, these S See M. Alexander & C Cortt Argentina's Priation Ptranm, Cofinancing and Finandal Advisory Sevmes D3scussion Paper, World Bank, Washington, D.C, August 1993. 206 ENERGY F?iANCING: AN INSTUrlONAL CAuLLEP.E governments (e.g., France, U.K, Canada, U.S.) activity is usually what is meant by regulation. prefer to tap the private capital markets usually The need for these "extra" rules is assumed to with some form of government guarantee. In be the result of market failure, the existence of seeking private capital, these governments have natural monopolies, and significant public good to confront the contradictions between social and qualities of the sector. Any one of these is commercial objectives. Enterprises that ran large assumed to be a sufficient reason for introducing deficits are unlikely to attract private financing, some form of countervailing power through even with a government guarantee. Thus, some public i-gulation. balance is achieved between social and commer- Control over excess piofits of monopolies has cial objectives. In contrast, in developing coun- always been the traditional reason for intro- tries, the existence of what can be described as a ducing public regulation. In fact, in most of the soft budget constraint, allows noncommercial developing world, contrary to the expectations of objectives to dominate. theory, these monopolies generally produce In addition to the discipline provided by substantial losses. In exercising control over capital markets, the more open nature of these these monopolies, governments obviously have societies permits the existence a numerous had other objectives in mind. mterest groups to organize and to voice their Whether rightly or wrongly, this industry demands on the political system. In gesteral, a along with a few others, is assumed to be of better educated groups of consumers, industrial strategic interest to the state. The imp.ortance of users, regional interests, environmentalists, etc., the industry in economic growth, the strategic are all able to voice their demands and the nature of energy choices in defining the national public sector is required to set up memhnisms well being, and the potential redistribution of that permit the resolution of the inevitabie income that can be achieved through deter- conflicts. Public regulatory commisions and mining access to services, are among the many other mechanisms permitting a more open public and varied reasons given for exercising a greater debate help to moderate conficts and discourage than normal degree of state control over this the more extreme demands of special interest activity. Sometimes these are referred to as the groups on the political system. public good aspect of electric power production These political demands, however, cannot be and consumption. In many cases, these aspects ignored-but neither can their costs. How to have been considered of sufficient importance to balance these conflicting objectives is the corner- warrant direct control or ownership by the state. stone of the regulatory process. Even in many developed countries these "public" goods have justified a substantial level of state intervention. In France and the U.K, for example, the investments in nuclear power were viewed in terms of strategic or defense related decisions. 4. lRegulation The public good considerations associated with this industry have invited the broader partici- pation If political controls in its management. Why regulate at all? This is not a trivial ques- Once this happens, the industry becomes subject tion and needs to be answered before moving on to a negotiated process of control in which to asking how and what to regulate. Govern- varying interests and groups compete for lever- ments regulate in almost all matters of business age. Commercial concerns for profitability and or commercial activity, even if it is only pro- financial viability are only one of the competing viding the framework for property rights and elements in this process of control. enforcement of contracts.6 This is the setting of This process of political negotiations results in the "rules of the game" that is considered the a social compact or understanding where indus- normal function of govemment. Going beyond try is managed in each society. In many devel- these rules of the game to a special set of rules oping countries, this social compact is one which and regulations that apply uniquely to one results in the state treasury bearing the ultimate 6The term reuIsion as it is ud hee genally refers to ecnomic regulation. Most countries have a variety of lienming and other rments with respect to physial sighting of facidtes, health and safety rqirements, etc. Although they may, in some a, be specific to the sector, te re usually pat of an overall package of rules govening most industrial and comnmera activities. ENERGY FINANCING: AN INSnTUTIONAL CHALLENGE 207 costs. Labor receives higher wages or greater than those presently in force. No special regula- employment in return for its support of the tion but iiiformal understandings between gov- system. Industrialists receive subsidized power, emnment and the utility, New Zealand style, may regions get their dam, other groups, either the not been an option. poor or the politically deserving, get privileged Thus, the determination of the appropriate access. regulatory franitework is more than simply a The consequences of this process are likely to matter of optimizing economic performance but emerge only slowly over time. In many coun- must take into account other objectives of the tries, the constraints of the state treasury, and a society. Inevitably, this requires a process in management beset by conflicting objectives, which conflicts of interest are resolved in a way ultimately leads to a deterioration in access and that is not excessively costly to the basic eco- service levels, along with increases in costs and nonmic concems of profitability and efficiency. inefficiencies. Consumers complain about poor Using the institutional model developed services, business develops alternatives and opts earlier, regulatory institutions in most devel- out of the system, and ever,-body petitions for oping countries a.e somewhere in the bottom larger subsidies. Under these pressures, the right corner of the triangle: it is essentially a industry has become a political liability and the political process. The incipient regulatory bodies political and strategic nature of the industry is are simply another department of government. being subject to greater scrutiny. They are run by civil servants or technicians and In an increasing number of countries, the are responsible to a minister of government. The strategic or public good aspects of this industry major advantage of this type of structure is that are being questaned. In New Zealand, it has it simplifies political control. The major disad- been assumed to be just another commercial vantage is the predominance of the short-run activity and subject only to the regular rules political imperatives that can result in excessive governing commercial activity. In Chile, the long-term economic costs. government has withdrawn from most of the In the US., the institutional structure is some- specialized regulation of the sector and settled where in the top part of the triangle where a for simple pricing rules to control monopoly judicial process dominates. There are numerous profits. In the U.S., the concept of obligation to quasi-judicial bodies where a commissioner or serve in exchange for monopoly rights is being group of commissioners, usually politically eroded by competition from IPPs. In other appointed, sit in judgment over the interested words, the existing and increasingly unstable parties. The independence of the commissioners social compacts are in the process of being can vary considerably as can the openness of the rewritten. The role of the industry in the society discussion. Their effectiveness depends on the is being redefined and the boundaries between existence of well-established judicial procedures public and private interests re-drawn. and a tradition of public participation. Their It is within this framework that the question of costs, however, are not insignificant. whether to regulate and to what extent must be In recent years, there has been a greater answered. In the more developed world, there interest in developing institutional structures that a ?ears to be a greater confidence in the use of would place greater reliance on market signals, market mechanisms in directing the public that is more in the direction of the bottom left interest and an increasing willingness to treat side of the triangle. Recent changes in the this industry within the normal commercial regulatory process in the U.K. are of this type. framework of rules and regulations? The devel- The answer probably lies somewhere in the oping world, perhaps justifiably, does not have middle. There is a need to find an institutional this same sense of confidence in its more under- structure that utilizes existing strengths of the developed commercial environment. Govern- deliberative or cooperative traditions of many ments still seek to exercise the public interest, societies but which, at the same time, recognizes but are looking for alternative means of the weakness of the judicial process and places control-a new social compact that will be less greater reliance on more impersonal market destructive of efficiency and financial viability forces. 7 In the developed world, however, regulation is not dead. Concens for the environment are being substituted for distributional and other economic objectives by those seekdng to redefine the eisting sodal compact, Integrated resource planning and some forms of demand side management now being pursued by regulators is sinply another fonn of social goods or objectives being imposed In the name of the general public interesL 208 ENERGY FINANCnG: AN INSrTfUFIONAL CIALENGE Given the limitations of present administrative skills and limit the calls on a usually weak and structures and political systems, there is prob- overburdered structure of public administration. ably no alternative but to increase the competi- It also makes a difference if regulation is seen us tive forces in the industry being regulated and, the means of limiting monopoly or as the means ultimately, in the economy as a whole. It makes of promoting competition. In the examples of a difference if you start with the view that what New Zealand and the U.K., the primary eco- you are regulating is inherently a monopoly and nomic function of regulation is seen as thus your job is to minimize the potential disor- promoting competition; in contrast in the U.S., tions, or that monopoly i6v - ':-.aJ and regulation is seen as the means of limiting your job is to maximize competition. monopoly power. Depending on which of these In the past decade, there hdve been some underlying prr.rnises is used, the demands for important developments in both theory and regulation can be quite different. practice supporting the view that competition is Given that the need for regulation has been the most effective and efficient framework for minimized, there is still the question of the most under-pinning the regulatory process. The appropriate structure for the regulatory frame- theory of contestable mcikets where the focus is work. Who should regulate? Is it a technical un opening up markets and understanding the group or a political group? Who should appoint barriers to competition, has had a major impact the regulators, from where, and for how long? on the intellectual foundations on how govem- What are the checks on abuse of regulatory ments should regulate.8 The regulatory reform power? How independent (and from whom)? process in New Zealand offers a dramatic Who participates in the decision-making process? example of the power of these ideas. The reform What is the legal status of the regulatory author- process has focused on entry and exit conditions ity; can It make decisions or Is it just an advisory or, in other words, contestability. The job of the group? Should there be more than one, and at regul. tow in addition to protecting the consumer, what level of government? Should there be setting standards, etc., is perceived as one of special authorities for each sector? ensuring fair entry into any aspect of a regulated The answers to these auestions will depend on business. Anyone willing to put their own the process of reform underway and, equally resources into a business has a de facto right to importantly, on the institutional and political do so, provided he bears the investment risk. structure of the country. "Borrowing" models The regulator is there to ensure that existing from other countries could prove ineffectual institutions do not use their market position to because the underlying institutional structure prevent entry. that makes it work in one country and is not The effect this has on the deliberative side of present in another. In terms of the model above, the process is dramatic. Deliberative bodies have it is dependent on the strength and capacity of used their powers over monopoly providers of market-based institutions, the independence and services to redistribute with considerable impun- effectiveness of the judiciary, and the openness ity, income and privilege. Insisting, for example, of the political system. The section below takes that household consumers be subsidized at the up some of the issues that have to be addressed expense of industrial consumers no longer is before modifying the regulatory framework. The possible. Suppliers will come forward to pro- answers are necessarily tentative and have to be vide power to industry at prices that do not considered in light of individual country include the consumer subsidy. A telephone circumstances. company that provides an inefficient service will Regulation is generally considered to be a find new competitors entering the market. public good and therefore the function of gov- ernment. The issue is how should the govern- 4.1 Regulatory institutions ment exercise this function. irt developing countries, there has been a tendency to appoint The inference drawn from the discussion above administrative boards that act in an advisory illustrates that in developing countries, maxi- capacity to the minister. With few exceptions, mum use should be made of market, rather than these boards have focused narrowly on tariff and administratively devised signals. This will mini- pricing issues; investment decisions and environ- mize the demands placed on scarce management mental issues are handled elsewhere. Even 8 W.J. Baumol etal, ConstahbkArketsand the Thwyofnd*OySture(NewYorl Harcowt Brace, Jovanovlch, 198vised edition. ENERCY FINANCNG: AN INSTIrUlONAL CHALLENGE 209 within their narrow mandate they have not been explain or defend its needs for a rate increase or notably successful. As long as the real decisions for consumers to understand the link between are made at a ministerial level, the temptation tariffs and the quality of the services received. will be to bypass the regulator. The make-up of Opening up the process is essential. One way these boards reflects their status and they often of doing this is to recognize the regulatory board become patronage jobs. Few have the technical as a political body rather than confining its capacity other than to accept the information mandate, as is presently done, to technical provided by the dominant monopoly. reviews. By explicitly maki.g it a political body, Attempts to increase tIe independence of tne a broader representation of intere.sted parties can regulators through legislation or through the be invited. In other words, it is a move towards "independence" of the appointees has not the center of the triangle where the deliberations worked, because the required underlying institu- are influenced by better representation. On the tional structure is not in place. In the U.S., for board, one could include the representatives example, where such regulatory bodies are from large and small producers and con- common, there is a strong judicary system for sumers-the CEO of the power company and the arbitrating di.putes, a technical capacity for housew;fe, representatives from the financial managing information, and a greater willingness community, environmental interests, the press, on the part of the political system to delegate etc. This is in contrast to most present systems cc.ntrol. The openness of the system encourages in which the interests of producers rather than debate and compromise. In most developing the users of the services piedominate. The countries, there is no tradition of open public objtive is to provide a structure where difficult hearings in which interested parties are asked to and often contentious issues can receive an open come forward with their views and positions. airing-where users as well as producers have a Until the necessary institutional structure is in voice. place, the regulatory systems of most developing The effectiveness of the process will depend, of countries will have to rely on a combination of course, on the information that is available. The more effective political or voice systems and use civil service in providing the technical and of market information. The issue is not that secretarial functions for such a body, would play regulatory bodies lack independence, but rather this important role. This type of a more coop- they lack the political representation required to erative decision-making process mirrors many of be effective. the more traditional ways in which decisions are The trouble with the present predorinantly made in many developing countries. political approach is not the deliberative process How much independence should be given to itself but the narrowness of the participation. regulatory bodies? This is a difficult question to There is little public debate and there is no answer. It would be unrealistic to assume that structured forum where interested parties can such important bodies could be completely pass information to each other or engage in a isolated from the normal political process. Who process of negotiation and mediation. When the gets cippointed, for how long, under what condi- World Bank comes into town and requires a tions, and with what authority and scope-are tariff increase as a condition for its loan, the all political decisions. Ultimately, 3overnment general manager goes to the minister, who in and its political leaders must answer to the body turn sees his job on the line and an impasse is politic for all aspects of governance, including quicldy reached. At best, there are unflattering regulation. Different societies will draw dif- editorials in the local newspape. about either the ferent lines of responsibility around their various cold hearts of the bankers or tl.e inefficiencies of institutions. Over time, many of these boun- the power company. Nowhere is there a struc- daries will be re-drawn. ture that would allow the power company to 9 An interesting recent example of this type of regulatory structure occurred in the Province of British Columbia, in Canada. Service is provided by a publicly owned, dominant monopoly. The utiity had been facing Increasing opposition to its plans and polices from a wide range of commurdty interests. The government and the formal regulators were unable to find a politically acceptable way out of the Impasse. An informal advisory group was established by the utility and all Interested parties were invited to participate. Independent cosutants were hired to provide Information to all parties and to facilitate the process. After a difficult and contentious beginning, the different groups came to the realization that no decisions would be taken by the government untlt their reconmendations were received. This forced the groups to seek the necessary compromies 210 ENERGY FIN. WONG: AN INSTITUTONAL CFALtNC The effectiveness of these institutions w4!l be How does one avoid the capture by the indus- governed less by their "independence" than by try of the regulatory process? The history of the degree to which the process is open, account- regulation in many countries is replete with avilities clear, and adequate information avail- examples of the capture of the regulators by ability. It Is possible, for example, for a regula- those being regulated. The broader type of tory board to be a purely advisory committee to regulatory body found in the New Zealand helps the ministry and have little or no independence. avoid this problem. In New Zealand, the regula- But, its effectiveness will depend on how well it tion of all utilities falls under the Commerce represents the interested parties, the openness of Commission which is responsible for normal its decision-making process and the reliability commercial activities. In other words, utilities and comprehensives of the infornation it are treated just as any other industrial or com- receives. On the other hand, even with complete mercial activity. Given its broad mandate, the independence and binding decision making Commission has no option but to focus on the powers, it will be ineffective if it is an entry and exit process, competitive conditions, unrepresentative body with processes that are monopoly practices, commercial codes, contracts, secret, and with limited access to information. etc. In the U.K., there are separate regulatory The status of the staff or technical support for offices for each of the utilities, but given the regulatory bodies is another independence issue baiically competitive framework that has been that needs to be considered. It may be more established, their role is focused on the main- important to ensure that the staff is protected taining the competitive framework and the from political pressures, than the Board itself. prevention of the abuse of monopoly powers. In The timely provision of adequate information the U.S., there are examples at the state level will be a critical part of the process of negotia- (Ohio) of regulatory commissions with authority tion and compromise behind any regulatory over multiple sectors. decisions. The process will be made easier to the This option of regulating multiple sectors may extent that all parties can agree on the facts. not be particularly effective in most developing There are numerous ways this can be done and countries. The single authority covering all each country will have to evolve its own system utilities requires that a well-functioning commer- that best fits its own institutions and political cial code and its supporting institutions be in processes. place. Few developing countries, for example, A more open decision-making process is a have policies or legal structures that seriously necessary but far from sufficient condition for an address anti-competitive policies. This will be a effective regulatory framework. There must be slow and difficult process and is equivalent to a a means of enforcement, of bringing a reality movement towards the upper part of the triangle check to the discussions of political and eco- in the model. The type of more politically nomic interests. In terms of the diagram, it is representative body suggested above can avoid not sufficient to remain only in the right half of the problems of capture by ensuring that all the triangle. Even in the US. system, where the parfies are represented. rules of the game with respect to discussion and Of particular concern will be the role of the representation are structured and reasonably dominant supplier. In almost all cases, the open, the system has an ultimate reality check in development of competitive alternatives will take the market. Public commissions and interest time, and the new suppliers in the market will groups cannot make or change the rules without be small relative to the existing monopoly. The keeping a careful eye on the capital mart ats. At national monopoly tl-rough its power purchase the end of the day, utilities are going to have to arrangements and in its day-to-day operations is face a market test which provides an unambig- usually in a position to determine the commer- uous set of signals. In recent years, for example, cial success of any potential competitor. It is regulatory bodies have introduced the concept of likely to have mixed views on the participation "due prudence" in determining what invest- of independent producers in the generation of ments can or cannot be included in the rate base. electric power. On the one hand, it will This has increased the risk to investors and welcome the addition.< to capacity, but on the raised the cost of capital. All parties, the inves- other hand, it may well see the project as a tors, the utilities, and the consumers have had to competitive threat and use its controlling modify their behavior in response to the signals position to either threaten the commercial sur- of the market. cess of the project or, altematively, collude with ENERGY FnmANCw: AN INSrmiONAL CnALNGg 211 the private investors to share the gains from PRICE' Few issues are as contentious and diffi- non-competitive practices. cult to deal with as pricing of services provided It will be essential for the government to by "natural" monopolies. In the case of services establish, through the regulatory process, a produced in a competitive environment, price credible arm's-length relationship with this regulation is not an issue; prices are derived dominant supplier. Widening the base of the from the negotiations of many buyers and partici:ation in the deliberative process will sellers. In the case of electric power (as in other help, but inevitably, with its superior access to system dependent services), pricing can be quite information and substantial resources, the conplicated not only because of the different present monopoly will be in a strong position. qualities of service possible, but also by the fact Take, for example, the problem of what price that costs are both time-of-day and system is to be charged to alternative suppliers for use dependent. or access to existing transmission and distribu- Given the complexity of relating prices to tions systems. If one knew what were the costs costs, regulatory systems have tended to favor of providing these services, this would be a gross simplifications of the rules for pricing. In relatively simple problem. But unfortunately, most cases, an "average" price for a variety of because these enterprises are seldom operated on services and costs is used. Under rate-of-return a commercial basis, this information does not systems of regulation (US.), prices have been set exist and if it does exist, the costs are likely to be to insure that revenues are sufflcient to cover an arbitrary allocation of inaccurate historical costs, including capital costs. The distribution of costs. Thus, when asked to produce the required these costs over the customer base or load curve figures, the monopoly is in a position to set is usually accomplished by a set of rather arbi- prices on the basis of cost estimates that can be trary accounting rules and legal precedence. It easily manipulated to place them in a favorable is only in recent years, for example, that regula- position with respect to the competition. Most tory systems have permitted "time-of-day" based governments have no other alternative sources of pricing in spite of the fact that a major element information because they have relied exclusively of costs is related to the time of consumption. In on the data generated by their own utilities. the 1970s, the World Bank and other inter- In practice, this means if regulation is to be national lenders have introduced the concept of effective in encouraging new entrants into the LRMC as a complement to rate of return rules. business, all participants must be treated equally. In this case, prices are set so that average prices This will not happen unless steps are taken to cover projected system expansion costs. place the existing monopoly on a commercial In some ways, by focusing on one simple basis. Thus, removal of subsidies and harmful variable-the rate of return or LRMC-simplifies non-commercial objectives imposed by govern- the regulatory requirements. In others, it com- ment, followed usually by corporatization of plicates it. Since there are no market signals to existing state enterprises, is a critical first step in provide a clear guide to the structure of prices in regulatory reform. In the short-run, the most an industry in which there is considerable varia- effective means of protecting against the domi- tion in costs, the task of setting tariff categories, nance of a few special :nterests is to widen the especially for non-contracted supplies, falls on base of participation in the deliberative process. the regulator. It is at this point that inefficient prices and redistributional objectives come into 42 What to regulate play. One of the way monopolies make excess Trying to control everything is not likely to be profits is through discriminatory pricing- efficient. The more detailed or more comprehen- pricing not on the basis of cost of services but sive the control mechanism, the more regulation rather on the ability to separately price different substitutes for management. Fmding the balance classes of consumers. Regulatory systems do the between rules and administrative discretion in same thing but not always with che objective of setting the main parameters within which energy maximizing profits. Under the pressure of enterprises are to operate, is difficult to find in political and other demands, the tariff structures practice. Aside from safety standards, protecting of most regulated monopolies have evolved into consumers, and similar issues of public concern, a complicated pattern of cross-subsidies which the usual areas of regulatory action are prices, usually bears little relationship to real costs. In investments, entry and exit, and, increasingly, both developed and developing countries, these the environment. cross-subsidies have grown to the point where it 212 ENERGY FINANCING: AN INSTrFfIONAL CHAUENGE is difficult to achieve even the "average" price moment, it has not been implemented in any objectives. Often industrial or commercial users significant system. The pricing formulas used in subsidize the more numerous residential con- Chile come close; efficiency is promoted by sumers. Peak use is usually subsidized by off- basing prices on "xbest practices" and if, for a peak users; rural users by urban users; a few period of time, a firm can better this, it can keep special industries or consumer groups by every- the gains. Probably the reason why these cost one. In recent years, particularly in the U.S., a plus or minus systems have been slow to take new class of cross-subsidies has been introduced hold in the power sector is that likely direction to achieve environmental and other social objec- of changes in costs is less obvious than in the tives. The end result is that most systems wind telecommunications sector, and the existing up with tariff structures that have little to do pattern of cross-subsidies is so well entrenched with costs and with few incentives to manage that attemlts to change them too quickly will the system so that costs are r.ainimized. generate substantial opposition. The information systems are similarly dis- torted. If there are no "time-of-day" charges, INVESrmENT DECISIONS: Providing -tn adequate then there is no incentive to collect the informa- framework within which investment decisions tion. If plants are not dispatched on the basis of are to be made, is probably the most challenging short-run marginal costs, this information will area for regulation. Few do it well and it is in not be available. An integrated monopoly has this area that the greatest pressures come from little incentive to collect information on the the political system. The large and often various parts of the system, particularly if 'lumpy" investments of energy enterprises, pricing decisions do not take into account the together with their complexity, invite the appli- costs of the different parts of the service. In the cation of administrative discretion over simple U.S., for example, the information collected has rules. more to do with accounting rules, regulatory External lenders have made popular the use of requirements, and the tax structure than with least cost planning techniques. to produce the economic costs of the different services. investment alternatives, but a great many discre- These type of pricing systems put an enormous tionary assumptions must be made which offer burden on regulation. As the cross-subsidies get ample opportunity for accommodating a variety more and more complicated and as more and of social and political objectives. One of the more conflicting social objectives are introduced, problems is that these techniques have been the overall objective of achieving both efficient designed for public sector investments and production and consumption of the services generally require the existence of a monopoly in provided, is lost. As the cost of this type of order to be implemented. regulatory environment has become obvious, The private sector works with a different set of new attempts have been made to come up with assumptions, particularly about risks, and is pricing rules that focus on efficiency rather than more concerned about risk minimuzation than the redistribution of benefits. cost minimization. Given different assumptions One of the most promising of these is where about risk, th.e private sector will make different the regulator starts with existing prices and decisions about what is the appropriate invest- returns and, in exchange for the freedom to ment. The private sector, for example, will be adjust prices within tariff categories, the monop- unwilling to undertake investments that have oly is expected to lower average prices by some long construction periods, eight to ten years, for annual percentage. This has been particularly example, for a hydro project, or that projects that popular in telecommunications (U.K. and US.) have substantial construction risks, again, a high where the rate of technical progress has pro- probability with l.ydro projects. Some countries duced dramatic declines in cost over time. The have attempted to deal with these differences by principle is simple, the monopoly is encouraged having the public sector make the investment to improve efficiency by being allowed to keep, decisions and then inviting the private sector to for some fixed period of time, the gains that compete for the project. But because of the risks arise from these improvements. involved, the private financing has not come It is not without its problems; the determina- forward with much enthusiasm unless there are tion of the annual adjustment factor and the substantial public guarantees. length of time to which it will apply is not a Least cost planning techniques may be useful simple matter in practice. Its application in the as an indicative planning tool but are incompat- power sector has been discussed, but as of the ible eith competitive markets. In the US., these ENERGY FNANcINGG: AN INSTITUTIONAL CHALENGE 213 techniques have been used by private regulated power has been reserved for a state monopoly monopolies in well-established market structures, and any competition has been actively discour- but in developing countries it is unlikely that aged. Overcoming this essentially hostile climate much private capital wil be forthtcoming unless for competition and the power of the existing the investors, rather than the govenmment or its dominant monopoly to discourage entry will be utility, make the fundamental decisions on what a major challenge in any attempt to introduce a to build. As noted earlier, whoever makes the more competitive environment. decisions must bear the risks, and if the private As noted earlier, the need for additional capital sector is not making the decisions, it will not is the factor driving governments to look for assume the risks. additional resources from the private sector. The One of the arguments against allowing the alternative of raising private capital for public private sector to make these fundamental deci- entities through debt guarantees also has reached sions is that it will make the wrong decisions its limits. This has left government with no from the point of view of minimizing costs. The choice but to invite the private sector to partici- private sector will be "excessively" concerned pate in the management as weUl as in the finan- with short-term considerations. Clearly these are cing of electric power. By inviting this private different perspectives and in actual practice the sector participation, the present regulatory results are somewhat mixed. In the U.S., a num- structure with its protection of the state monop- ber of private utilities took long-run decisions in .'y will have to be reexamined. Private capital, their investments in nuclear power. Although in whether domestic or foreign, will be reluctant to retrospect, many of these decisions turned out to enter this industry unless there is a clarification be costly, the implicit understanding between the in the rules of the game. This will place a new regulators and the investors that all costs would set of demands on existing regulatory systems. be passed on to consumers, permitted the private Most countries are trying to find a path of investors to make "public" decisions. In the compromise between the present prohibitions on developing countries, the experience with least entry and the altemative of a completely cost planning has not prevented either exces- unrestricted market. There is an understandable sively costly decisions or the undertaking of high reluctance to give up all controls over what has risk projects."0 In other words, there is little been a tightly controlled industry. No country evidence to support the hypothesis that decisions is willing to risk uncertain or unpredictable made by the public sector will necessarily be outcomes in such a politicaly and economically '-right". sensitive industry. For most countries, the issue What are the alternatives? What type of is, what is the minimum amount of change regulatory framework is required to make sure required in the present system in order to attract the "right" decisions are made? How much the necessary capital to meet future needs. "guidance" from the public sector will be accept- Improving efficiency is sometimes part of this able to private investors? There are no clear goal. answers to these questions. It wil depend on In developing countries, the first tentative the relationships and understandings that exist oLeps have been taken towards permitting a between the various parties involved. It should greater degree of competition. Limited entry has be kept in mind, however, that whatever role the been permitted in a few countries into power public sector assumes in these decisions, it will generation. This has been tightly controlled with have to bear the risks for those decisions. the government or national monopoly making most of the decisions. As noted above, this is ENTRY AND EXwr. A more promising direction closer to a more sophisticated system of public for price regulation, particularly in the devel- procurement than the introduction of true oping countries, is to promote dearer price competition. signals through the utilization of competitive It is unlikely, however, to be more than a market forces. This will require major changes; temporary start to a process of change. It is at present, most regulation prohibits any form of requiring governments to come up with a set of competition. Until recently in Costa Rica, for rules that change the status of the existing example, even modest levels of auto generation monopoly with commercialization and cor- were prohibited. For the most part, electric poratization being the first steps. Without the °Edward W. Merow et al., "Understanding the Costs and Schedules of World Bank Supported Hydroelectric Projects," Energy Serie Paper No. 31, Ihe World Bank Industry and Energy Department, Washington, D.C., Jiuy 1990. 214 ENERCY FiNANCNG: AN INSrTrILfIONAL CHALLENGE development of a more arm's-length relationship ENvIRoNmENT: Most energy transformation between the dominant monopoly and the gov- processes effect the environment. Increasing eminent, it is not possible to write the new levels of public concern for these effects has procurement rules for generation without intro- introduced a new challenge for public regulation. ducing difficult to deal with moral hazard situa- This is particularly the case when these services tions. Also, given the predominant public sector are provided by public monopolies. It is role in almost all of the investment decisions, extremely difficult for one arm of the govern- private capital has been reluctant to come for- ment to impose restrictions on other parts of the ward in significant amounts without extensive government-consider the difficulty experienced government guarantees. This is defeating one of by most public utilities in developing countries the major objectives of these reforms-access to of collecting their bills from the defense estab- private capital without drawing on the credit of lishment. In the U.S., the Department of the public sector. Energy's management of nuclear plant pro- There is little option but to take the next steps; ducing defense related goods is an on-going introducing competition in which the customers environmental scandal. A typical response of a have a choice. In electric power, this means manager of a power plant in a developing allowing the generators access to the customer. country to the question of why the plant does In its most limited form, this takes place in not meet present environmental codes is that the cogeneration plants where the generator is necessary investments were requested in the permitted to sell a part of the output to third budget, but the money was not allocated. The parties, other than exclusively to the dominant finance ministry will usually confirm that there monopoly. This immediately results in demands were higher priority needs for the funds. for TPA to transmission and distribution sys- The challenge is to improve accountability. A tems. This will be a particularly strong factor in key feature in improving this accountability will most developing countries where industrial and be the development of a more arm's-length commercial demands account for nearly 80 per- relationship between the regulator and those cent of total system demand. At this point, all being regulated. Corporatization is a start but pressures are to expand access and the regula- will not be as effective as a clear difference in tory system is forced into defining a new set of ownership. The introduction of real competition rules that further increases competitive into the sector is an opportunity to improve the pressures. enforcement of environmental regulations. This evolution can be seen in the reform Private owners will respond to environmental process as it evolves across countries. Indonesia requirements in order to protect their assets. and Malaysia were early entrants into the reform A separate regulatory group for the environ- process and have restricted entry largely to the ment may be an unnecessary expense. Most of competitive procurement of generation services. the major decisions affecting the environment The results have been limited and both countries and costs and prices are part of the investment are struggling with the next steps. Colombia decision. It is the investment decision that and Ecuador are more recent entries into the should be the major focus of any public regula- reform process and are structuring their reforms tion in a competitive environment. to include from the start TPA as well as possibly Focusing public attention on the investment the complete unbundling of services urnder decision may be the most effective way of regu- different ownership. lating this sector. At present, in most countries, Thus, experience is pointing in the direction of the investment decisions are made by a relatively more radical reform in which competition is closed group of technicians, investors, and given a predominant role. Trying to write the politicians. Regulation focuses on prices and rules of the game to control a process that is more recently on the environment. Once an constantly changing may be more difficult than asset is in place, the costs and environmental settling on an approximate end point and then impacts have been predetermined. defining the rules as required by the evolving It is at the point of the investment decision situation. It may be better to focus the new that the type of open, more politically repre- regulations on promoting competition than on sentative body, suggested by the analysis above limiting the challenge to the existing monopoly. can be most effective. At this point, the environ- mental and other social concerns should be entered into the cost benefit analysis of the project. ENERY FNIaNCjc Av INsTm,TIONAL C{U.viCE 215 institutions. Commercial banks, for example, may have price controls on the interest rates they can pay savers which, in an inflationary situa- S . Finance tion, can amount to the confiscation of the savings. Compulsory reserve requirements or purcFlases of pubci debt may fthhfier erode the The last few years have seen a great deal of earnings of these institutions and the returns discussion in the need to use private capital to available to savers. Limits on interest rates for finance the power sector. In practice, in devel- loans will lead to non-price rationing of available oping countries, the resource flows have been funds. Either publi or private monopolies in minimal. The bulk of private capital still con- the financal sector can limit the range of services tinues to go into auto generation units that are available and risk taking of these institutions. A part of industrial investments. At best, some typical situation in many developing countries is US. $2 billion per year has flowed from external that only one-third of savings is collected by private sources and much of this has some form formal financial institutions. Of this one-third, of government guarantee or is more akin to two-thirds is allocated by -tie government traditional supplier credits. Compared to the through various administrative means, leaving over U.S. $100 billion annual needs, this is a about 10 percent of total savings available for disappointing performance. Why is private private capital markets. In contrast, in devel- capital so reluctant to put itself at risk? It is that oped countries, nearly 90 percent of savings is country risks are too high? allocated through financial markets. No amount of financial engineering will pro- The savings not allocated through financial duce gold from straw. In other words, unless markets tend to be used inefflciently. In some the basic market, institutional, and regulatory countries, the purchase of gold is a common way structures are such that an investment will of holding assets. In others, it results in an produce adequate returns relative to risks, the inefficient investment process. It is typical, for financial resources will not be forthcoming. example, for low-income urban dwellers to Only the government with its ability to tax and purchase and store building material in anticipa- provide guarantees, can underwrite unprofitable tion of home improvements-resulting in a large and excessively risky investments and still attract and inefficient build up of inventories. Farmers financial resources. The power sector with its continue to invest in low-yielding crops because traditions of consumer subsidies (estimated at they have no alternative way of using their over US. $100 billion a year in developing coun- savings. It is common to find huge differences ties), price controls, and non-comnmercial objec- in rates of return on assets which can only be tives, seldom meets the basic requirements that explained by the inability of savers and investors would make it attractive for private investment. to find means for intermediating their different needs for security, liquidity, and returns. 5.1 Basics If the domestic financial sector is in such an underdeveloped state, it will be extremely diffi- Financial markets exist to intermediate between cult for energy enterprises to tap into private savers and investors. Savers typically wish the savings. The funds available in domestic capital highest rate of return commensurate with as markets are small. In addition, the limited much liquidity as possible. Investors, on the supply of savings available, not already pre- other hand, wish to pay the lowest anount allocated by administrative measures, is subject conunensurate with the most commitment. A to strong competitive demands that usually power company wishing to build an asset with result in prices and terms that make it difficult to a thirty-year life wfll seek financing for the life compete for those seeking financing for large of the asset but few savers would be willing to amounts of longer-term capital. commit their savings for this period of time, Given the size of the energy sector and electric particularly in an underdeveloped financial power in particular, it will be a large part of any market. capital market and the ability of these enterprises In most developing countries, even with high to obtain financing from private sources will savings' rates, the capital markets are relatively move pari passu with the development of these underdeveloped. In many cases, this under- markets. Without a growing and more open development is the result of taxes and adminis- domestic capital market it will not be possible to trative controls on financial instruments and restructure this sector so that a major portion of 216 ENERGY FNANCING: AN INSTI77TIONAL CHALLENGE its financing comes from the private sector. that they produce marketable paper for the Many countries in this region are in the for- domestic capital market. There is no way a tunate position to have started the process of country can rely extensively on foreign savings reform in the financial sector thus making it to develop its energy sector. The sector is possible to increase the amount of resources usually too large relative to the rest of the coming from financial markets. economy to be able to do this without running into serious balance of payments constraints."3 It 5.2 The role of external finance wiU have to utilize domestic savings for most of the needed resources. Using external savings to External financing can play an important role to produce these marketable assets and then to assist in overcoming some of the limitations of develop a domestic market in which they are domestic capital markets. To the extent foreign traded, is an important way of introducing investors can be convinced to hold the assets of savers to the assets of this sector. these institutions, it represents n important first For the foreign investor, the existence of a step in establishing a market for these same domestic capital market is an important means assets. One of the major constraints in devel- of covering risk. Investments in the energy oping capital markets is the lack of attractive sector are large and immobile. If the foreign assets into which savers can put their resources."1 investor has no way of liquidating his assets at The fact that external investors are willing to any point in time, the investment decision must hold certain domestic assets is a first step in necessarily encompass the life of the asset-or developing marketable instruments to represent the initial returns will have to be high enough to these assets. These investors are taking the risk justify potential future losses. On the other that the institutional and regulatory framework hand, the existence of a domestic capital market will produce an adequate return and if this in in which the assets of the enterprise can be fact happens, these assets will become increas- traded, lowers the risk to the investor. The ingly marketable. market will provide the option of being able to One of the major disadvantages, along with adjust the amount of the asset the investor many others, of recent build, own, and transfer wishes to hold at any point in time. The invest- schemes (BOTs, BOOTs, etc.,) is that there is no ment decision (and the country risk) is thus not explicit consideration of using them for the an all or nothing decision covering a long period development of marketable assets.12 After some of time, but one which can be adjusted to meet period of time, the plant is usually transferred to changing circumstances. the existing monopoly and the market has no Usually, a foreign investor will not find a opportunity to develop experience in the buying ready-made market for these assets. It will have and selling of these assets. If power enterprises to be created. Inviting local private capital to are to be able to tap into domestic private participate, even on a small scale, in the initial savings, savers will need assurances that the investment is not only good politics but a good assets they hold have some degree of liquidity. means of familiarizing local sources of capital When the need arises to change, shift, or with the investment. Placing the assets with liquidate, their assets must be the expectation of local capital in a form that encourages its trade a predictable market of buyers and sellers for is also important: it sets the stage for later sale these assets. This market will only develop with of ownership or debt to the public in general. time and experience as buyers and sellers get This is seldom done. With a few exceptions, accustomed to trading them. most potential foreign investors have come from It is in the interest of both the external investor the energy sector and tend to look on invest- and the country to structure the investments so ments abroad as an extension of domestic In today's industrial counties, the early development of capital markets was based on a supply of assets creaed by investors in infrastructure, from the early turnpikes and canals to the later railways and power companies. By reserving these ftnctions for the public sector and relying on tax revenues for their funding, many developing countries have stifled the development of capital markets. u John Besant-Jones, ed. 1990. "Private Sector Participation in Power through BOOT Shemes." Energy Series Paper 33. World Bank, Industry and Energy Department, Washington, D.C. a In the Late 1970s and early 1980s, many Latin American countries financed their power sectors with external sources. When the inevitable debt aises hit, the countries found that between 15 and 40 percent of their external indebtedness was accounted for by the power sector alone. ENERGY FINANCI? AN INSIrLMTIONAL CHALLENGE 217 investments. Taking on a domestic partner is encourage holding rather than roll overs, may simply a cost of doing business. Building a well be acceptable in these markets. Offering power plant in a foreign country Is regarded as profit participation as part of the return on these another part of their system in a more exotic assets may also encourage local interest. Over location. In terms of risk, this is dearly not the time, it will be possible to lengthen maturities case. and lower the costs as the market becomes more In moving abroad, the investor has become a familiar with these instruments. venture capitalist, someone who takes risks in exchange for a higher rate of return. The Issue 5.3 The role of government is not one of whether he can build and operate a power plant in a satisfactory manner, but The public sector has an important role in pro- whether he can earn for his shareholders a rate moting these developments. Power investments of return commensurate with the risks taken. will represent a large part of any capital market Risks will inevitably be higher, particularly in and it will not be possible for this sector to be countries where the rules of the game are still in much ahead of developments in the financial the process of development. The structure of the sector. Financial sector reforms, which move in financial arrangements and the returns will have the direction of making financial systems more to reflect these risks. competitive, more open, and less directed The venture capitalist is in the business of towards publicly controlled credit programs, is building assets, but not necessarily in the busi- a necessary condition if the power sector is to ness of running them for the rest of their have access to domestic savings. The power economic life. Governments in most countries sector, because of its strong asset base and a will not allow power enterprises over any length predictable and growing demand for its outputs, of time to earn higher than normal rates of can be an important instrument in supporting return on investments. At best, a well-managed overall financial reform. power plant ought to produce a respectable and In addition, public policies which support the predictable rate of return. This type of invest- development of capital market institutions such ment is more appropriate for institutional-inves- as stock exchanges, rating agencies, accounting tors such as pension funds and insurance com- and auditing practices, etc., can all add to the panies who need to hold this type of asset. willingness of the public to hold the assets of the How does the venture capitalist earn a suf- power sector. The establishment of pension ficient return to compensate for the entrepre- funds and various forms of insurance can pro- neurial risks taken? The answer is, of course, in vide the demand for the assets of the sector. In the capital gains to be eamed by producing a Chile, after privatization of the sector, over three- marketable asset. In most developing countries, quarters of the assets of the power sector even- there is a great shortage of quality assets in the tually wound up being held by these types of marketplace and, properly structured, such institutions. Mutual funds and other market- assets should command a premium. In other making institutions which are prepared to hold words, the profit comes from producing an asset and trade these assets can add to their liquidity and structuring it in such a way as to rnake it and acceptance by the general public. desirable for others to hold.14 This means that as part of the initial invest- 5.4 Finance and the implications for sector ment plan, as much attention needs to go into reform the structuring of these assets as it does into the design and engineering of the plant. Information It would be unrealistic for countries to expect to will be needed on the type of assets most likely attract large amounts of private capital in the to sell in the existing, albeit small, market. immediate future from either domestic or exter- Usually, it will be difficult to sell long-term nal sources. The public sector, with support paper-most Jeveloping country markets will from the multilateral development banks and not take thirty-year bonds. On the other hand, bilateral sources, will continue to be the main paper with shorter terms, perhaps with various source of capital for some time to come. In most incentives such as rising coupon rates, to countries, the institutional structure is not in 4 It is also a way of nsng that the project sponsors have a stake h the successful outcome of the proJect. In most BOO projects, the proJect sponsors, usually contractors and eqipment suppliers, bear little risk, and are taking most of their profits up front leaving most of the risk to the govwenment and institutional Investors. 218 ENERGY FINANCINC: AN INSTrITIUONAL CHAU.ENG place to make the sector attractive for private the performance of the enterprise, can act as a capital without the use of govemment valuable counterweight to some of the excess of guarantees. political control. In Chile, for example, the The challenge of the Immediate future is to set ownership of most of the assets by pension in motion the reforms that will make it possible funds has created a strong institutional force for for governments to relinquish their responsibility maintaining the profitability of the enterprises. for financing this sector by the tum of the cen- Whether privatization and corporatization take tury. The broad direction of the reforms has place at the same time or one follows the other been indicated above in the discussions of mar- will depend on country circumstances. In those kets, institutions, and regulation. Increased cases where the public monopoly is performing competition, private ownership, and more open reasonably well and is govemed along commer- or transparent regulatory systems are all impor- cial lines (Malaysia, Korea, and Thailand), it is tant ingredients of the process. The amounts of possible to sell shares to the general public. In private financing likely to be available will other cases (Indonesia and Bangladesh), the depend on the speed and thoroughness of the combination of performance and intrusive gov- reform process. eminent management make it unlikely that the What are some of the steps that can be taken market would regard the shares as having much to move this process along? value. In these cases (Argentina), privatization has required the introduction of credible foreign CORPORAI=ZATION AND PRIVATIZATION: Many management and ownership. This has usually countries (Australia, Indonesia, Korea, and been the case in the telecommunications sector. Thailand) have been considering changing the As in the U.K., it is possible for government to institutional structure to one in which the public maintain a significant share holding for distribu- monopoly, now operating as a state enterprise, is tion at a later date when improved performance shifted to a corporate form of governance where results in increased share value. To be effective, the government holds all of the shares. The however, the new management must appear to objective is to set up the power monopoly as a be firmrly in control. corporate entity subject to the normal commer- In those instances where there is insufficient cial principles regarding accounting procedures, external interest in taking over the operations of profit making, employment practices, etc. the public utility (Bangladesh), consideration can This is only a first step. Subjecting the power be given to splitting up the present vertically monopoly to this form of governance is a neces- integrated monopoly into more manageable sary condition for improving the efficiency of the portions. Spinning off local distribution into sector by establishing a greater arm's-length separate entities with some form of benchmark relationship between the government and the competition is one possibility. Where substantial enterprise, but it is seldom sufficient. It is an parts of the system are isolated from each other opportunity to make some once-and-for-all (Indonesia and the Pi';lippines), independently changes in the enterprise, such as overstaffing or structured enterprises can be established. The tariffs (Australia), but these changes are likely to better performing enterprises can then be priva- be short-lived without taking further steps to tized and, if they are small enough, taken over introduce competition. As the Francophone by local capital and management. experience with contract-plans has shown, it is If the present system is large enough, each extremely difficult to alter the relationship generating plant (or perhaps a group of plants) between these enterprises and the political can be capitalized as separate entities and sold system without utilizing the discipline of the off after solid commercial performance has been marketplace. If an enterprise is owned by the established. Inviting existing interests such as political system, no matter how indirectly, any labor and management to participate in the initial degree of independence is likely to be ownership of these plants can provide a power- eroded over time. ful incentive for improved performance. It will Privatization is an important next step in be critical to establish, up front, the institutional solidifying some of the gains that can result from arrangements between various parts of the now corporatization. In some countries (Malaysia), separately capital structured system. Soft budget both steps have been taken at the same time. constraints, for example, will undermine any Even though the government may maintain a pressures for improved performance. In India, controlling interest, the existence of a group of the failure to establish an appropriate relation- shareholders with a vested interest in improving ship at the time of dissolution between the ENERGY FIN&ANCWNG: AN INSTUMONAL CHiALLENGE 219 transmission part of the system, the large genera- of public credit available can be an impor- tors, and the state distribution systems has tant instrument in promoting competition and simply shuffled the unpaid bills from one entity strengthening the development of an arm's- to the other. length relationship between the govemment and the dominant monopoly. By specifying each PUBLIC SECTOR FINANCIAL SUPPORT: In most year the amounts available and then requiring countries, the public sector will have to coi,tinue both the public sector and potential new entrants to provide financial support until appropriate to compete, can provide another way of both private-sector financial institutions are devel- developing financial instruments and improving oped. How this financial support is provided, the allocative efficiency of public funds. The however, can make a difference to the speed and banking sector and financial intermediaries can effectiveness with which these institutions are supervise the disbursement of these funds and, established. Covering the deficits of these insti- after some period of successful experience, may tutions through transfers from the government be willing to underwrite some risks on their own budget, the soft budget constraint, is probably account. the worst way. No potential marketable instru- ments are created and financial discipline will be USE OF GOVERNMENT GUARANTEES: Whether the weak. Crediting these contributions to increases funds are disbursed directly from the govern- in the government's ownership of capital in these ment budget or are in the form of guarantees to enterprises, fools no one. financial institutions and other debt holders, they Public funding of individual capital projects is represent the use of scarce public resources. also a problem. By earmarking funds for specific Many governments would like to limit the calls projects the government removes from the by the power sector on these resources. As enterprise much of the responsibility for prudent noted above, it is unlikely that governments, in management of investment selection and the the immediate future, can expect much capital to construction process. The dismal record of the be forthcoming without these guarantees. sector in making poor investment decisions Nevertheless it may be possible to structure followed usually by substantial cost ovenruns is these guarantees in ways that encourage the attributable to a combination of poor manage- development of capital markets and increase the ment and political pressures to understate both leverage exerted by limited public money. risks and costs.' Once a govermment is com- Most guarantee schemes have focused on debt. mitted to fund a project rather than an enter- The World Bank, for example, encourages co- prise, it will find it difficult to back out, regard- financiers to come forward by structuring the less, of how badly the project turns out (Yacireta debt so that it takes on the risks of later matur- and Argentina). ities and commercial banks and other lenders Better alternatives are to require the enterprise nearer-term maturities. A number of industrial to specifically structure its capital requirements support programs provide public guarantees for in a way that it creates debt instruments and only a portion of the debt with commercial or ones that are linked to the overall profitability. private lenders expected to bear some portion of In most cases, government will have to under- the risk. Similar programs can be applied to the write these instruments (India) and they are power sector. It will be important for the gov- essentially another way of utilizing limited ernment to indicate up front the amounts *nd public credit. But, if the paper can be made terms of its guarantees and inviting private attractive enough, particularly if it can be linked participants to compete within an established to enterprise performance, it is possible that framework of rules. markets independent of the public credit can be In addition, some consideration can be given gradually developed. Setting and enforcing to using public guarantees to cover income institutional limits on access to the limited public rather that debt risks. Investors in the power credit markets can enhance financial discipline sector have expressed concerns about the level of and provide a measure of management perfor- risk inherent in power purchase agreements mance (U.K). where no record of compliance or enforcement is Utilizing more effectively the limited amounts available. They may have faith in the intentions v EW. Merrow and R.F. Shangraw, Jr., with s.. Keinberg, LA. Unterkofler, R Madaleno, EJ. Ziomkoski, and B.R. Schroeder. 1990. "Understanding the Costs and Schedules of World Bank Supported Hydroelectric Projects." Energy Series Paper 31. World 5ank, Industry and Energy Department, WasWngton, D.C 220 ENERGY FINANCING: AN INSTrmZrONAL CHALLENGE of government or the national utility to live up to the agreements, but express understandable caution on the ability of government to follow through in a timely manner. 6. Conclusions Governments are notoriously slow payers. Coordinating complex bureaucracies is always a problem: the central bank, for example, may not The reform of the power sector is an extraordin- r-lease foreign exchange as it is required. Lack arily complex task. Without a major program of of timely legal means of resolving disputes can reform, few countries will be able to attract the lead to costly delays. All of this means that even necessary capital to insure that this most conven- when investors have confide-ice in the general ient form of energy is available to support the viability of a project, they must build in substan- process of economic growth. Few countries can tial allowances for the risk of poor adminis- afford the waste and the resulting environmental tration of the agreements. damages of today's inefficient systems: One means of offsetting these risks is for the Yet reform is unlikely to come from within the government to guarantee the flow of income for enterprises themselves. These institution are the some fixed period of time rather than the debt of result of the political compromises and under- the project. If, for example, the income from a standings of the past decades. Change will project is expected to be US$2.5 million a quar- require a new set of compromises and a new ter, than an escrow account of US$20 million, to understanding between the enterprises, govem- be drawn on if the national utility or the central ment, and the consumer; it will require a coor- bank are unable to meet their obligations on dinated effort on the part of all parties to deal time, would cover two years of income. This with the interrelated issues of markets, institu- escrow account could be held externally if tions, regulation, and finance. No one party has foreign exchange has been an issue. The guaran- the ability to undertake significant changes tee of a predictable income stream for at least without the agreement of all. two years would provide investors and their This makes reform a political process. It is not creditors with time to sort out problems without simply a matter of changing the legal structure endangering the cash flow. To the extent these of the enterprises (corporatization), or coming up funds are used or not used, it would provide with new financial engineering techniques (BOTs both investors and the government with a strong and BOOTs), or elaborate pricing rules (cost signal on the effectiveness of the system. minus). It is about changing the way society regards this business. Is it to be an instrument The multilateral development banks: These of high state policy or is it to be just another institutions are not likely to provide much more industry, albeit an important one? The industry money for this sector than they have in the has matured: growth and changes in technology past-in aggregate, about 7 or 8 percent of total make it possible to treat this industry within a needs. They have indicated a willingness to more normal commercial structure. enter into a partnership with their customers to The political process will have to define the assist in the process of reform in this sector.15 pace and content of reform.'7 This paper has The existence of a well-articulated and agreed- raised some of the issues that will have to be upon program of reforms, supported by these considered in these discussions. Some of the institutions can be an important element in contents of the process are: attracting additional capital and laying the foundation for future capital market develop- 1. The need to move from markets dominated ments. Channeling tiese resources through by monopoly to ones where a greater role is financial intermediaries rather than direct loans given to competition. can assist the financial sector in developing a worldng relationship with the power enterprises. 16 The Word Bank's Role in the Electri Power Seor: Polkiesfor Effctim Instiution, Regujatoq, and FinciaRform, A World Bank Policy Paper, The World Banks Washington, D.C, January 1993. Few governments have much experience in managing the process of reform. I have attempted to draw up some ules based on experience in Implementing Refo,n: Stratg and Tactics, paper for the Ministers, Confemece, Overcoming the Crisis of the Electric Power Se i Latin America and the Caribbean Counries, Meco, Septmber 1991. The failure of most reform efforts is almost always the resut of the failure to establish the necesy poltical base. Thus the first rule is communicate care must be taken to explain the reasons for reform in terms that can be undentood and appreciated by the general public. ENERGY FINANC AN INSMFUrIONAL CUiEJNGE 221 2. The need for government to step back and The pace of reform is critical. A slow and become a regulator rather than ani owner or stately pace may produce few beneflts and much operator. opposition. Managing a gradual process of 3. The need to consider institutional develop- reform may be more institutionally challenging ment within a broader context that governs than undertaking bolder and more deliberate the way in which individuals, business, and changes. The availability of financial resources governments, interact with each other. from the private sector will be linked to the pace 4. The need to develop domestic capital mar- of reform. Under the best of circumstances, kets to support the financial needs of the private savings will be slow to materialize until sector. confidence and experience is gained. If these resources are to be made available for next decades massive requirements, a start will have to be made today. Financing private sector participation in the Indian power industry by The World Bank' The private power development initiative involve an investment of around U.S. $7 billion launched two years ago by the Govemment of giving rise to a financing requirement of around India (GOI) has no doubt aroused significant U.S. $1.4 billion per year during the next 5 years. interest among potential private developers and It is likely that 60 percent of such outlays will be investors, both domestic and foreign. A large in foreign exchange and the balance would be number of project proposals are under considera- raised domestically. Though the current govem- tion and a few of these have now reached or are ment guidelines pemit a debt-equity ratio of moving towards the conclusion of power pur- 80 percent/20 percent for such projects, it is chase agreements (PPAs). While the selection of likely that potential lenders will insist on a lesser project sponsors has, in most cases, not been on reliance on debt. A ratio of 70 percent/30 per- a competitive basis, and while some key policy cent would, thus, seem more realistic (and in issues-such as foreign exchange cover for keeping with the proposals made by some poten- return on capital equity, or the provision of tial project sponsors). On this basis and keeping government guarantees for backstopping the in view the GOI guidelines which limit foreign obligations of State Electricity Boards (SEBs) or debt to twice the foreign equity, the financing in respect of sovereign risks-are not fully structure of the annual requirements could be as resolved, project sponsors having concluded shown in Table 1. PPAs are commencing to arrange the financing Under the current government guidelines, the of their projects. level of foreign equity cain of course go up to Frum the pace of progress to date, it may be 100 percent. It may be noted, however, that reasonable to envisage private power projects of Development Financial Institutions (DFIs), for a total capacity of approximately 5,000 MW to be extending term loans to the projects, would undertaken in the coming five years. This will require the company's securities to be listed This paper has been prepared by a World Bank team, led by Mrs. J. Chassard, Senior Financial Analyst and consisting of Ms. F. Mazhar, Financial Officer, and Messrs. M. Gulati, Financial Analyst, W.S. Tambe and J. de Vera, consultants. FiNANCING PRIVATE SECTOR PARITCIPATION IN THE INDIAN POWER INDUSTRY 223 224 FINANCING PRIVATE SECtOR PAlRICIPATION IN THE INDIAN POWER INDUSTRY Table I ones having direct bearing on the financing are Structure of the annual financdng requtrements discussed below. There are, however, two U.S. mdlWon Rs. crores important general issues which can also affect U.S.$ m-ilion Rs. crms the viability and financibility of such investment. Equity These are: o Foreipn 280 840 e Domestic 140 420 Subtotal (30%) 420 20 The process of selection of promoters and Subtotal (30%) 420 1,260 the appraisal of their proposals. Many of * Foreign 5.0 the Memoranda of Understanding (MOUs) * Foreigc 560 260 issued in the initial batch of projects have * Domestic 420 1,260 Subtotal (70%) 980 2,940 been issued to promoters without adopting any competitive or screening process. In Total 140O0 4,200 several cases, the MOUs were not based on Memo item: well-developed project proposals. Investors and lenders to these projects would find it Financing requirements difficult to support projects of promoters * ForeIgn (60) 80 2,520 lacking in financial, technical, and man- o Domestic (40%) 560 1,680 agerial capabilities or to fund projects w:dch Total 1400 4,200 have not been properly appraised. e Limitations imposed by government guide- lines on project design. The government on the stock rnarket. One of the listing require- guidelines assume that all private power ments of the stock exchanges, viz., at a minimum projects will operate as base-load stations 25 percent of the capital issued should be offered and the tariff structure has been designed to to the public, would necessitate issue of domestic help ensure project viability in such circum- capital by the project companies. stances. There may be circumstances in There is no doubt that the generally poor which private power investment would be financial health of the SEBs, in most cases the of greater economic benefit to the SEBs, if prime purchasers of the energy to be produced such investment were made in power plants by the private power projects, is a source of which could be best used for peaking or at major concern for both the project sponsors and intermediate load factors. This would be their prospective financiers. Accommodating possible only if the govemment guidelines such concerns by guaranteeing SEB power on the tariff are made flexible enough to purchase payments cannot provide the basis for accommodate such operational regimes. sustaining the momentum of the private power initiative in the long run, even though this may be required for bringing to fruition of the first 1. Issues related to few private power projects. Given the SEBs' F] poor track record of meeting their commercial external financing: obligations and their fast deteriorating financial foreign equity performance, there is a risk that these guarantees may be invoked, creating an unbearable burden on the already constrained financial resources of Foreign investors are likely to tie up with foreign the states and the central government. :t is equipment suppliers for part of the equity therefore imperative that the risk of non-pay- requirement. To some extent, it may be possible ment by the SEBs be met by transforming them to mobilize foreign equity from bilateral and into financially viable entities rather than under- multilateral sources such as the Canadian writing their obligations by way of state govern- Development Corporation, the Asian Develop- ment guarantees and GOI counter-guarantees. ment Bank (ADB), and the International Finance Demonstrating its commitment to reform, the Corporation (IFC). Other potential sources of SEB is of paramount importance for the suc- foreign equity, such as non-resident Indians as cessful implementation of the initiative already well as offshore institutional investors, may also taken by the GOI to encourage private invest- need to be explored. However, the interest of ment in the power sector. foreign developers in any project and the level of There is a wide range of issues relating to the foreign equity input would ultimately depend on financing of private power projects. The key the extent to which their concerns are addressed. FINANCING PRIVATE SECTOR PARTICIPATION IN THE INDIAN POWER INDUSRY 225 Some of these concerns relate to foreign In addition, indications are that the Indian exchange risk protection in terms of their equity DFIs' and commercial banks' balance sheet investment2 as well as the nature of convertibility capacity would be considerably stretched if these assurances provided relating to dividend institutions were required to provide guarantees repatriation. A clear statement of GOI policy on to ECAs as well as fund the bulk of the domestic this matter would be necessary to enable the financing requirements of power projects, par- developers, lenders, and utilities to evaluate the ticularly as prospects of mobilizing debt in the project risks. domestic capital markets would seem fairly limited. Many ECAs in the past have been reluctant to 2. Issues related to consider lending on a "project security" basis, [1 -. . and instead have relied on guarantees from extemal inancig: public sector institutions such as the State Bank L_ foreign debt finance of India (SBI) and the Industrial Development Bank of India (IDBI). However, recently, in some developing countries, export credits have 2.1 Export credit been mobilized on the basis of "project security".4 Therefore, project sponsors should be The balance of the foreign currency financing encouraged to approach ECAs on this basis requirements would be in the form of debt rather than on the basis of "unconditional" finance, the major portion of which is likely to be public sector guarantees in order for project risks mobilized from Export Credit Agencies (ECAs). to be shared between the public sector, lenders, The extent of the availability of export credits and investors. ECAs may not be prepared to would vary with the country from where equip- accept the project completion risks, but this ment is expected to be sourced. These countries could be addressed through risk sharing with could conceivably be the U.S., Germany, U.K., commercial bankers and contractors. France, Japan, Italy, Korea, Sweden, and Switzer- land. The extent of ECA support would depend 2.2 Commercial finance on the specific agency's overall country limit, the supplier in question, the project, and calls on the Indications are, that under current market condi- ECA's support for other projects. Foreign equip- tions, it would be difficult to access the inter- ment suppliers would thus play an important national markets for medium-term finance, both role in this financing effort. The mobilization of for the amounts and the maturities required by this foreign debt finance, estimated at around the private power program without some form US$560 million, with ECA support, may not be of credit enhancement from multilateral institu- impossible in itself for India. However, clearly tions. Credit enhancements could take the form there will be competing demands from other of the IFC 'B' Loan program,S the ADB comple- power projects in the public sector as well as for mentary finance scheme, or the ADB's and the projects in other sectors, which is likely to limit World Bank's Loan Guarantee Program.6 Com- the amount available for private power.3 mercial banks may, however, be prepared to consider shorter-term construction finance but on the basis of firm "take out" assurance from acceptab.e parties such as ECAs. 2 Foreign exchange protection of the return on equity through the payment of higher dividend only on "foreign equlty" are not permitted by Indian law. It appears that differential treatment between domestic and foreign eulty, even if allowed by law, is ILkely to affect capital market support for such projects. 3 Based on World Bank consultations with the Beme Union, indications are that about US$750 milion could be available annualy for the power sector, for both private and public investments. 4 Project Security: The financing of a particular project on a "stand alone" basis where lenders primarily look to the future cash flows of the project for debt service and where the security of the loan is supported through a security package which provides for the apportionment of project risks between the Sponsor/Borrower/Guarantor and various other third parties such as power purchaser of the product through a series of contractual undertakings and support agreements. 5 IFC "B" Loans: Complementary financing from commercial banks within the framework of a specfic "umbrellat protection in terms of IPC being the "lender of record". 6 ADB and World Bank "ECO" Guarantee Schemes: Both ADB and the World Bank have Guarantee Schemes in place which can provide support for medium- and long-term commercial bank loans, or other forms of borrowing from private lenders in the capital markets. 226 FiNANCwG PRiVATE SECTOR PARTICIPATION IN THE INDIAN POWER INDUSTRY providing liquidity. In the absence of liquidity in the secondary market, the issuers have to 3. Issues related to provide liquidity through buy-back arrange- _ domestic financing ments or by providing a put-option. The normal tenor of the debt instruments is 7 to 10 years with redemption from the 7th Given the various constraints noted earlier on through the 10th year. Private power projects, the availability of external finance, it is clear that whose tariffs would allow depreciation of only the developers would need to raise a significant 5 percent per annum, may not be able to service part of their capital requirements from the the debts of this tenor and would need to issue domestic capital and credit markets. longer-term debt. The size of the market can be marginally expanded by permitting charitable trusts, public trusts, pension, and provident funds to invest in power project debentures but the individual investors, whether through the mutual funds or on an individual basis, may be 4. Domestic capital market attracted to the debt market if there is sufficient liquidity provided by the market. It is therefore important that, in the absence of active second- 4.1 Equity ary market for debt, some mechanism is put in place to provide liquidity to the debt issued by Of the estimated gross domestic savings of the power projects which can be achieved in a Rs. 130,000 crores (U.S. $43 billion) in FY92/93, variety of ways like support to the market the corporate sector raised, through the primary makers, providing larger number of call and put capital market, Rs. 18,000 crores (U.S. $5 billion) options on the debt instruments, and funding the while the Unit Trust Corporation (UTI) and required back-stopping arrangements. others raised Rs. 7,000 crores (U.S. $2 billion)7. Of this, 88 percent was by way of equity or convertible debentures while 12 percent was as bonds or non-convertibles. Even the latter were issued with an equity "sweetener" since straight non-convertibles had no takers. There is a clear 5. Domestic credit market investor preference for equity as it has an upside, has provided speculative gains in the past, and is considered as a hedge against infla- In so far as the private power projects are con- tion. Thus, it does not appear difficult to raise cerned, the credit market is limited to four the domestic equity for a private power program Indian financial institutions (IFIs): IDBI, Indus- of the size envisaged. trial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India, 4.2 Debt and SCICI (started by ICICI for financing ship- ping industry but has expanded its mandate to At present, there is little liquidity in the finance infrastructure projects); for very limited secondary debt market because all the debt is amounts LIC, and commercial banks (CBs). held by institutions such as UTI, Life Insurance Corporation of India (UC), General Insurance 5.1 IFIs Corporation (GIC), and mutual funds.8 How- ever, with the inflation scaling down, and equity IFIs limit their exposure (which indudes term market stabilizing to more reasonable price loans, guarantees, and underwriting commit- earning levels, the investors' interest in the debt ments) to no more than 25 percent of their net could revive if there was a secondary market worth, to a single project and to 10 percent ' Ur. invests approximately 40 percent of its resources L. equity and 50 percent in debt of 3 to7years, and 10 percent in short- term liquid debt. In FY92/93 it invested Rs.10,000 crores 'TTS$3 billion) which induded the fresh capital raised in the market and accruals from past investments. Of the annual accrion, UIC and GIC are permitted to ivest no more than 15 percent in corporate sector loans, debentures, and equity. In FY 1992-93 these institutions raised about Rs.8,000 crores (US$23 billion). FDCNINVG PRtVATE SECTOR PARTICIPATION IN THE INDIN POWER INDUSTRY 227 (maximum permissible limit being 15 percent) of foreign lenders accept only SBI and IDBI guaran- their total liabilities to any sector. In FY92/93, tees. SBI, in turn, syndicates counter-guarantees IPIs provided loans of Ps.16,000 crores from other CBs. However, inter-bank guarantees (US$5 billion) to the corporate sector; and their are not excluded for determining exposure and lending is expected to grow at an ainual rate of capital adequacy requirements of the banks, 20 percent. IFIs are therefore not expected to which further constrains their already limited provide more than Rs.1,000 crores per year capacity to issue gua c-tees and also increases (US$300 million) to private power projects. the cost to the customer. However, after the first few projects, as the IFIs reach their sector exposure limits, the additional headroom would be available only to the extent of annual growth and repayments by the already financed power projects. 6. Issues related to The rates of interest on term loans of IFIs are security arrangements in the range of 15 percent to 17 percent, more than prevailing market rates, but are expected to be reduced. The maximum tenor of their loans 6.1 SEB risk is 10 years including grace for construction. In addition to extending loans, IFIs may be As stated earlier, the SEBs' ability to pay the called upon to provide guarantees to foreign private projects regularly in terms of the PPAs, lenders, which would increase their exposure is a major source of concem for the promoters, and further limit the availability of domestic other equity investors, as also the prospective finance to the projects. Altematively, if foreign lenders, both domestic and foreign. The sugges- lenders are to be encouraged to consider tion that these payments be secured by making providing support on a "project security" basis, "escrow" arrangements on collection from by the IFI practice to lend against security of a "designated" industrial customers is seen as charge on physical assets could adversely impact causing problems for other domestic creditors in on foreign lenders' project security arrange- providing finance for other SEB activities, such ments.9 Therefore, the possibility of IFI partici- as working capital requirements, which are met pation in the "project security" on a pan passu by CBs on the basis of a floating charge on basis with the foreign lenders needs to be current assets, including receivables from the explored further. This may obviate the need for same industrial customers, who provide 60- the IFIs to extend guarantees and can thereby 70 percent of the SEBs' revenues. By the same expand their funding capacity for power token, this may not prove acceptable to foreign projects. lenders who may not necessarily have the wherewithal to assess the nsks of individual 5.2 Commercial banks industrial consumers or even the guarantees of state governments. Currently, foreign lenders, CBs will be called upon to meet the very large both ECAs and CBs, are prepared to accept working capital requirements of the projects, guarantees of certain public sector financial provide guarantees in support of the foreign institutions such as SBI or IDBI. However, as lenders, and underwrite public issues of capital noted earlier, this requirement would place a by the projects. CBs would seem to have suf- further burden on these institutions, in addition ficient capacity to meet the working capital to the role that they would be expected to play requirements of the private power projects. in the provision of local finance to power proj- Their underwriting capacity, however, is not ects. Unconditional guarantees of public sector expected to be significant (US$200 million for the financial institutions provided for ECA support entire corporate qector).'0 Therefore, the IPIs would run counter to the objectives of the may have to meet the bulk of the underwriting private power program, which calls for a sharing needs of the projects. As regards guarantees, of projec: development risks between the public 9 IFIs lend against security of charge on assets, and do not accept "project security" with "negative lien" on assets since such lending is considered as "unsecurd" and affects their balance sheet. 10 The CBs are permitted to extend underwriting to the extent of 1.5 percent of incremental demand and time liabilities [which in FY/93 was Rs.36,389 crores (US$12 billion)]. 228 FINANCNG PRIVATE SECrOR PARICWATIOJN THE INDIN POWER INDUSTRY sector and the private sector; thereby reducing assurances by the GOI as the owner of these the financial obligations of the public sector. undertakings. Current indications are that foreign lenders, in the absence of the above guarantees, would expect GOI counter-guarantees in support of the PPAs for them to consider power projects as "bankable propositions". Of course, the nature of GOI counter-guarantees under a PPA would 7. Conclusion differ from normal GOI unconditional sovereign guarantees of debt in support of public sector projects, as the obligation of GOI would be It would appear that the private power program limited and could only be invoked if the calls for large investments that may not be developer delivers in compliance with the terms adequately met by existing market sources or the of the PPA, and if both the SEB and the state equity sources of the project developers alone. government in question default on their obliga- While the question of adequacy of the domestic tions. In this case, the project developer would equity and debt nmrkets will need to be assume the construction and operational risks of addressed for the whole program, in the initial the project and GOI the payment obligations of phase, the availability of foreign currency finance the SEBs. could become the critical factor in determining In order to ensure consistency of policy on the the success of the program. security issue, the form of these guarantees The repayment periods of the debt which such would need to be carefully assessed in the light projects can expect to raise from various sources of balance sheet constraints of the respective (both domestic and foreign) are also likely to public sector financial institutions, the scale of pose problems for their viability. Assuming the proposed private power initiative, and the tariffs are set per GOI guidelines and the plant exact nature of the undertakings required from operates at a normative plant load factor of GOI and its likely impact on GOI's external debt. 68.5 percent, the private power projects will The key question of "security undertakings" experience cash flow deficits for the first 5 years. would need to bq carefully reviewed as any ad This condition will create additional difficulties hoc decision on this issue may set a precedent in obtaining financing for the projects. It would which could prejudice future efforts for financing be unrealistic to assume that this could be the private power projects. In any event, funda- addressed by allowing the tariffs to be increased mentally, SEB risk would best be mitigated by an to significantly higher levels. Thus, it is essential improved, robustly profitable performance of the to seek ways by which the debt profile of these SEBs and this would need to be given a con- projects could be improved and their viability tinued high priority. Therefore, it will be desir- ensured in the initial critical years of the project. able to ensure that any underfinancing of SEB Several financial institutions interested in risk does not weaken the incentive for SEBs to financing private power projects in India have improve their financial performance. indicated a need for multilateral institutional support in the form of either ADB, IFC, or 62 Fuel supply nisk World Bank intervention, both to assist in cataly- zing the resource mobilization effort in the The assurance of steady fuel supply of the financial markets and in providing the necessary agreed quality (and adequate compensation in long-term funds to supplement existing funding case of failure) is another concern for the inves- sources. World Bank support (ie., access to tors as also lenders. The current supply con- World Bank resources with far longer maturities tracts offered by the Gas Authority of India, Ltd. than any alternative sources currently available and Coal India are seen to be one-sided and to India) could also be important in terms of unsatisfactory in this regard. Lenders would ensuring that the external debt service burden on expect that the fuel supply term coincide, at a the country does not become too onerous for a minimum, with the term of the debt finance. program that will not generate any direct foreign In case of coal, assurances of satisfactory currency earnings. This can also serve as a transport arrangements by Indian Railways will means of providing potential cofinanciers with also be necessary. Here again, foreign investors the necessary comfort with respect to projects and lenders, are likely to seek some contractual which have been appraised by the World Bank FINANCING PRIVArE SECTOR PAR77CIPATION IN TNE INDWN POWER INDUSrRY 229 and which may be implemented with World individual private sector projects while keeping Bank support. The World Bank is currently in line with the governrent's priority of mobili- exploring the best possible options for providing zing private financing resources. such assistance and supporting the financing of Closing statement by Heinz Vergin, Director India Department The World Bank Mr. Minister, Honorable Chairman of the Fin- four address the need for bold structural changes ance Commission, Professor Chelliah, Ladies and and two relate to symptoms of structural prob- Gentlemen: lems that need to be addressed before any new structure can be made to work. The various contributions to this conference Broadly, the emerging reform agenda seems to and the high-quality dialogue that has taken comprise: place have shown that there is now a widely shared diagnosis that, after making mabor contri- 1. Establishment of a policy framework butions to India's national development, the which, through reinterpretation and amend- power sector has not kept up with the needs of ment of existing legislation, provides the economy. The conference has also identified increased operational autonomy, commer- various options for improving. the sector's per- cial, corporate-type management of all formance. In this regard, we have taken special generation, transmission, and distribution of note of Mr. Pawar's presentation on "SEB Issues electric power. and Options" which was further enhanced by his 2. Implementation of tariff reform to set rates forceful answers to the searching questions based on long-run marginal cost with trans- posed to him in his capacity of Chairman of the parent provision for all subsidies via the NDC Subcommittee on Power Sector Issues. budget and gradually reduced reliance on Overall, I am taking away from this conference cross-subsidization of power users within a considerable measure of encouragement and the balance sheets of the utilities. hope that India's policy makers at the Center 3. Establishment of a regulatory framework and in several states will sooner rather than later consistent with the refonns under (1) and address themselves to the urgently needed (2) above and designed to induce efficient structural reforms. What I have heard would resource use in the context of cost-based point to an emnerging structural reform agenda tariff setting. The door would be left wide that seems to come under six major headings: open however to achieve efficiency through growing competition rather than regulation. CLOSING STATEMENT 231 232 CLOSnVG STATEMEWT 4. Design and implementation of bold state- In the medium-term, we would also be prepared level power sector reform with due regard to offer. to the fact that electric power is a concur- rent subject under the Constitution. The 6. Technical and financial support for demand- design of these state-level structural reforms side management. would however be guided by the reform 7. Technical and financial support for the framework set under (1), (2), and (3) above. environmentally more sustainable operation 5. A start needs to be made by all units on of India's existing and new generating financial workouts regarding payables and capacity. receivables. This would be needed to facili- 8. Imaginative use of the World Bank's guar- tate commercial management of power antee powers to catalyze improved access to sector assets based on meaningful balance capital market funds from inside and out- shee: and income statements. It is also side Indca the stronger, more solvent sector prerequisite to gaining access to market- units. based funding. 6. Forceful reduction of distribution losses hi money terms, this support could, subject to which are undermining the payments availability of quality projects and programs and morale of the paying customers. subject to improved performance of the existing IBRD power portfolio, gradually result in annual This near- and medium-term structural reform IBRD lending to India's power sector of up to agenda which now seems to be gaining wider $800 million. Moreover, we are confident that acceptance could, when translated by your the government's pursuit of bold sector reforms government into a specific, time-bound action would unlock considerable co-financing and plan, provide the basis for continued and other bilateral support which could be expected stepped up World Bank support for India's to match the projected volume of IBRD lending. power sector. Mr. Minister, with the policy analyses and Specifically, the support which we would offer sector analyses already performed by many of could take the following form: the highly qualified, forward-loolkng participants in this conference, the World Bank's assistance 1. Continuation of time-slice lending for the program which I have outlined is entirely feas- priority investment programs of National ible if your government embarks on a bold Thermal Power Corporation and Powergrid. structural sector reform program which resets 2. Continued support for Power Finance the national policy framework in the manner Corporation. already contemplated by your governraent, and 3. Continued support for your governmnent's enlists the participation of a few forward-looking renewable energy program. and courageous state governments which are prepared to set an example for the rest of the and, as the new centerpiece of our assistance country. program: Mr. Minister, as only friends could and would dare, we in the World Bank urge you to bring 4. Start of structural adjustment lending to the power sector into the broader national struc- support the boldest and, in the national tural reform program. The stakes are admittedly context, most deserving state-level power very high, but so are the benefits to your nation. sector reforms fast-disbursing IBRD funds. We are prepared to be a resourceful, unobtru- 5. Expert assistance in design and implementa- sive partner in this undertakdng. tion of the government's medium-term reform agenda and in the exploration of India's longer-term options. In this context, we would see merit in supporting periodic conferences and semnmars like this one to enlist st'pport for the government's reform program. Conference Agenda Friday, October 29 Opening Session 14:00 - 14.05 Welcome A. Dua, Conference Director, Ministry of Power 14:05 - 14:10 Opening Remnarks H. Vergin, Director, India Department, World Bank 14:10 - 14:25 Inaugual Address N.K.P. Salve, Union Minister of Power 1425 - 14:40 Presidential Address B.R. Bhagat, Governor of Rajasthan Session 1: Background for Power Chainran: N.K.P Salve, Sector Reform Union Minister of Power Moderator: R. Vasudevan, Union Secretary of Power 14:40 - 15:10 The Situation of the Power Sector: T.L. Sankar, Principal, The Need for Reforms Administrative Staff College of India 15:10 - 15:40 How does the Indian Power Sector D. Butcher, Managing Compare Interationally? Director, Butcher & Assocates, former New Zealand Minister 15:40 - 16:15 Discussion 16:15 - 16:30 Break 16:30 - 17.00 Conceptual Framework for Power A. Churchill, Principal Sector Reforn Advisor, World Bank 17.00 - 17.45 Discussion 17:45 End of Session AMNEX 1: CONFJENGCS AGENDA 233 234 ANNEX 1: CONfERENCE ACENDA Saturday, October 30 Session 2: Challenges Chairman: Mohd. Qureshi Governor of MP Moderator: R. Vasudevan 09:00 - 09:45 SEB Issues and Options Addressed by S. Pawar, Chairman of the Committee on Power, NDC 09:45 - 10:15 Discussion 10:15 End of Session and Break Session 3: International Experience Chairman: Mohd. Qureshi Moderator: R. Vasudevan 10:30 - 11:30 China Experience Y. Rongsi, Vice President China Electricity Council 11:30 -12:00 Discussion 12:00 - 12:15 Break 12:15 - 13:15 Argentina Experience M. Zagini, General Director for Financial Aid and Cooperation, Secretariat of Energy 13:15 - 14:30 Lunch 1430 - 15:30 United States Experience B. Tenenbaum, former Associate Director, FERC 15:30 - 16:00 Discussion 16.00 - 16:15 Break 16:15 - 17:15 United Kingdom Experience R. Witcomb, Director of Corporate Planning, National Power 17:15 - 17:45 Discussion 17:45 End of Session ANNEX 1: CONFMMENCE AGENDA 235 Sunday, October 31 Session 4: Commerciality, Chainnan: R. Chelliah, Competition and Sector Reform Fiscal Adviser to the Union Minister of Finance 09:00 - 09:20 Commerciality of SEBs T.L. Sankar 09:20 - 09:40 Design of the Reform Process A. Churchill 09:40 - 11.00 Panel Discussion:Principal Issues and Reform Options of the Indian Power Sector 11:00 End of Session and Break Session 5: Where do we go from here? Chairman: N.K.P. Salve 11:15 - 12:45 Next Steps R. Vasudevan The World Bank's Role H. Vergin Valedictory Address K.C. Pant, Chainnan, Finance Commission Closing Remarks N.K.P. Salve 12:45 Word of Thanks A. Dua List of participants MINISTERS AND GOVERNORS Mr. S. Pawar Chief Minister Mr. N.K.P. Salve Government of Maharashtra Union Minister of Power Bombay, Maharashtra Ministry of Power Shram Shakti Bhavan Mr. Mohd. Shafi Qureshi Rafi Marg Governor New Delhi 110001 Government of Madhya Pradesh Bhopal, M.P. Mr. Kalandi Charan Behera Minister of Energy Mr. B.P. Yadav Govermment of Orissa Minister of State for Power Orissa Secretariat Govermnent of Bihar Bhunabeswar 751001 Patna, Bihar Mr. Bali Ram Bhagat Governor MINISTRY OF POWER Government of Rajasthan Shram Shakti Bhawan 11, Uniara Bagh Rafi Marg Jaipur 302004 New Delhi 110001 Mr. Devanand N. Konwar Mr. R. Vasudevan Minister of Law, Power and Urban Union Secretary (Power) Development Govermment of Assam Mr. S.S. Bhatia Dispur, Guwahati 781006 P.S. to the Minister of Power Mr. C.V. Padmarajan Mr. V.K. Dewan Minister of Electricity Joint Secretary Government of Kerala Thiruvananthapuran, Kerala Mr. Ajay Dua Joint Secretary Dr. Padam Singh Patil Minister of Energy Mr. A.H. Jung Goverunent of Maharashtra Joint Secretary Bombay, Maharashtra Mr. Anand B. KuLarni P.S. to the Minister of Power AmE 2: LwsoFPAricAS 237 238 ANNEX 2: LIST OF PARTMPANTS Mr. S.M. Kummnar Mr. RK. Narayan Information Officer Chairnan & Managing Director Powergrid Corporation of India, Ltd. Mr. Goutam Sanyal Hemkunt Chambers, 10th Floor Under Secretary 89 Nehru Place New Delhi 110019 Mr. T. Sethumadhavan Joint Secretary Mrs. S. Pajwani P.S. to the Fiscal Adviser Ms. S. Suryanarayanan Ministry of Finance Deputy Secretary Government of India North Block New Delhi 110001 OTHER CENTRAL INSTITUTIONS Mr. K.C. Pant Mr. M.A. Azeez Chairman, Finance Commission Technical Director Government of India Rural Electrification Corporation New Delhi D.D.A. Building Mr. I.M. Sahai Nehru Place MrMan New Delhi 110019 Chairrnan Power Finance Corporation Mr. A.L. Bunet "Chandra Lok" Director 36 janpath National Hydroelectric Power Corp. New Delhi 110001 98 Hemkunt'iower Nehru Place Mr. J.A. Shahmiri New Delhi 110109 Executive Director National Hydroelectric Power Corp. Mr. Amulya Charan 98 Hemkunt Tower General Manager Nehru Place Powergrid Corporation of India, Ltd. New Delhi 110109 Hemkunt Chambers, 10th Floor 89 Nehru Place Mr. Rajendra Singh New Delhi 110019 Chairman & Managing Director National Thermal Power Corporation Dr. Raja T. Chelliah NTPC Bhavan, Scope Complex Fiscal Adviser to the Minister of Finance 7 Institutional Area, Lodi Road Ministry of Finance New Delhi 110003 Government of India North Block New Delhi 110001 STATE GOVERNMENTS AND SEBs Mr. Y.P. Gambhir Mr. H.S. Baweja Chairman Chairman Central Electricity Authority Punjab State Electricity Board Sewa Bhawan, R.K. Puram The Mall New Delhi 110066 Patiala, Punjab Mr. P.V. Jayakrishnan Mr. B.K. Chaturvedi Secretary Principal Secretary Urban Inprovements and Electricity Government of Uttar Pradesh Government National Capital Territory Lucknow, U.P. New Delhi ANNEX 2: LiSt OF PAgTWANTS 239 Mr. R.S.S. Chauhan Mr. RL Jamuda Chaiman Additional Secretary, Departm?ent of Energy Himachal Pradesh State Electricity Board Govermnent of Orissa Vidyut Bhavan Orissa Secretariat Shimla 171004 Bhunabeswar 751001 Mr. V.P. Chawla Mr. BS. Jha Chairman Chief Engineer, Operation and Maintenance Madhya Pradesh Electricity Board Rajasthan State Electricity Board 45 Nayagaon Housing Society Vidyut Bhawan, Vidyut Marg P.O. Vidyut Nagar Jyoti Nagar Jabalpur, M.P. Jaipur 302005 Mr. S.K. Das Gupta Mr. A. Kumar Chairman Power Secretary West Bengal State Electricity Board Government of Kerala Vidyut Bhawan, 7th Floor Thiruvananthapuram, Kerala Block DJ, Sect. II Calcutta 700091 Mr. Y.S. Malik Member, Finance, Accounting and Mr. R.C. Dave Commercial Chairman Haryana State Electricity Board Rajasthan State Electricity Board Shakti Bhawan Vidyut Bhawan, Vidyut Marg Sector - 6 Jyoti Nagar Panchkula, Haryana Jaipur 302005 Mr. M.L. Mathur Mr. J.K. Duggal Advisor to the Governor Secretary Government of Rajasthan Government of Haryana 11, Uniara Bagh Chandigarh, Haryana Jaipur 302004 Mr. B.K. Goswami Mr. S. Balakrishna Menon Advisor Chief Engineer Govermnent of Madhya Pradesh Kerala State Electricity Board Bhopal, M.P. Vydyuthi Bhavanam Pattom Mr. M.L. Gupta Trivandrum 695004 P.S. to Chief Minister of Maharashtra Government of Maharashtra Mr. G.J. Mishra Bombay Chief Secretary Government of Rajasthan Mr. Rakesh Hooja 11, Uniara Bagh Energy Secretary Jaipur 302004 Government of Rajasthan 11, Uniara Bagh Mr. R.C Mishra Jaipur 302004 Power Secretary Government of Manipur Mr. KV. Irniraya Manipur Secretariat Chainnan Imbhal 795001 Karnataka Electricity Board Cauvery Bhavan Bangalore 560009 240 ANNEX 2: LISr OF PARTICIPANTS Mr. Rakesh Mohan Mr. D.C. Samant Power and Electricity Secretay Industry Secretary Government of Mizoram Government of Rajasthan Department of Power Electricity 11, Uniara Bagh Raj Bhawan Jaipur 302004 Aizawl, Mizoram Mr. A.K. Saxena Mr. G. Muniyappa Finance Secretary Energy Secretary Government of Rajasthan Government of Karnataka 11, Uniara Bagh Sachivalaya II Jaipur 302004 Multistoried Building Bangalore 560001 Mr. Damodar Sharma Secretary Mr. M.K. Parameswaran Nair Rajasthan State Electricity Board Member, Civil Engineering Vidyut Bhawan, Vidyut Marg Kerala State Electricity Board Jyoti Nagar Vydyuthi Bhavanam Jaipur 302005 Pattom Trivandrum 695004 Mr. G.P. Singh Chairman Mr. P.L. Nene Uttar Pradesh State Electricity Board Officer on Special Duty (Power Planning) Shakti Bhawan Government of Madhya Pradesh 14, Ashok Marg D-22 Swami Dayanand Nagar Lucknow 226001 74 Bunglows, T.T. Nagar Bhopal 462003 Mr. K.K. Sinha Chief Secretary Mr. Ajit M. Nimbalkar Government of Meghalaya Chairman Civil Secretariat Maharashtra State Electricity Board Shillong 793001 "Prakashgad" Bandra East Mr. K.V. Solanki Bombay 400051 Chief Engineer, Transmission and Construction Mr. Brahmadeo Prasad Rajasthan State Electricity Board Chairman Vidyut Bhawan, Vidyut Marg Bihar State Electricity Board Jyoti Nagar Jawaharlal Nehru Jaipur 302005 Marg, Patna 1 Mr. P.V. Swaminathan Mr. K.P. Ray Additional Chief Secretary Chief Engineer cum Secretary Energy and Petrochemicals Department Meghalaya State Electricity Board Government of Gujarat Integrated Office Complex Gandhinagar, Gujarat 382010 Shillong 793001 Mr. B.B. Tandon Mr. S. Ray Secretary, Department of Power Principal Secretary, Energy, Environment and Government of Himachal Pradesh Forest Shimla 171002 Government of Andhra Pradesh Secretariat Hyderabad 500022 ANNEX 2: IJSr OF PARTICIPANTS 241 Mr. A. Kumar Thakur POWER SECrOR PERSONALITIES Commissioner and Secretary of Power Department of Power, Mines & Minerals Mr. D.V. Kapur Government of Assam Former Secretary of Power, and Chairman & Assam Sachivalaya Managing Director of National Thermal Dispur, Guwahati 781006 Power Corporaton Mr. Waghdhare Mr. AK. Sah Technical Director Executive Chairman Gujarat State Electricity Board Premier Energy Technologies, Ltd. Gujarat Nehru House 4 Bahadur Shah Zafar Marg New Delhi 110002 PRIVATE POWER UTILITIES Mr. T.L. Sankar Mr. C. Das Gupta Principal Deputy Managing Director Administrative Staff College of India Calcutta Electric Supply Company, Ltd. Bella Vista Victoria House Hyderabad 500007 Chowringhee Square Calcutta 700001 Mr. D. Sanrkaraguruswamy Expert Mr. Rajat Nandi 6-3-864/2C Senior Director Hyderabad Confederation of Indian Industry 23, 26, Institutional Area, Lodi Road New Delhi 110003 INTERNATIONAL SPEAKERS AND G.UESTS Dr. Jyoti Parikh Serior Professor Mr. Vladimir Bhun Indira Gandhi Institute of Development Manager Research Power Division (West) G.,en. Vaidya Marg Asian Development Bank Goregaon (E) 6 ADB Avenue Bombay 400065 Mandaluyong, Metro-Manila Mr. P.G. Ramrakhiani l'p Managing Director Mr. David Butcher Ahmedabad Electricity Company, Ltd. Managing Director Electricity House Butcher and Associates Lal Darwaja ICL House Ahmedabad 380001 126 The Terrace Mr. A.M. Sahrd Box 17-114 Vice President and Director Wewlington Tata Electric Companies New Zealand Support Services Centre Mr. Terry A. Ferrar Trombay Thermal Power Station Senior Vice President Chembur AUS Consultants Bombay 400074 1300 I Street, N.W., Suite 1230 West Washington, D.C 20005 Mrs. Rita Teaotia US.A. Managing Director Gujarat Industries Power Company, Ltd. P.O. Petrofils Vadodara, Gujarat 242 ANNEx 2: LIsr OF PARTICIPANTS Mr. John Kuiper WORLD BANK' Asian Development Bank 6 ADB Avenue Mr. Heinz Vergin Mandaluyong, Metro-Manila Director Philippines India Department Mr. Fernando Mirotti Mr. Anthony A. Churchill Economic Advisor Principal Advisor Secretariat of Energy Office of the Vice President Government of Argentina Finance and Private Sector Development Av. Paseo Colon 171 Piso 6, Of. 607 Mr. Jean-Francois Bauer 1063 Buenos Aires Division Chief Argentina Energy Operations Division India Department Dr. Yochen Noll Project Manager Mr. Karl Jechoutek Power Sector Projects, India Division Chief KfW - Kreditanstalt fuer Wiederaufban Power Development, Efficiency and House- Pahmengarten Str. 5-9 hold Energy Division 600 Frankfurt Industry and Energy Department Germany Ms. Mary Denise Leonard Mr. Ye Rongsi Chief, South Asia Regional Mission Vice President International Finance Corporation China Electricity Council No. 1 Panchsheel Marg 1, Lane Two Chanakyapuri Baiguang Road New Delhi 110021 Beijing 100761 India China Mr. James Bond Mr. Roger Witcomb Principal Energy Specialist Director of Corporate Planning Power Development, Efficiency and House- National Power PLC hold Energy Division Windmill Hill Business Park Industry and Energy Department Whitehill Way Swindon Witlshire SN5 9NX Mrs. Joelle Chassard U.K. Senior Financial Analyst Energy Operations Division Ms. Marta Zaghini India Department General Director of Financing Aid and Coor- dination Mr. Ernesto Cordova Secretariat of Energy Consultant Government of Argentina Energy Operations Division Av. Paseo Colon 171 India Department Piso 8, Of. 812 1063 Buenos Aires Mr. Mohinder Gulati Argentina Financial Analyst The World Bank 70 Lodi Estate New Delhi 110003 India IHeadquarters staff, wtless otherwise specified. AmNEx 2: LIsT OF PARTICIPANTS 243 Mr. Luis E. Gutierrez Mr. Mandev Singh Senior Energy Economist Senior Counsel Power Development, Efficiency and South Asia Division Household Energy Division Legal Department Industry and Energy Department Mr. Bernard Tenenbaum Ms. Manju Malik Consultant Consultant Power Development, Efficiency and Economic Development Institute Household Energy Division Industry and Energy Department Mr. Alfonso Mejia Principal Financial Analyst Mr. Sameer Usgaonkar The World Bank Consultant 7C Lodi Estate The World Bank New Delhi 110003 70 Lodi Estate India New Delhi 110003 India Mr. Djamal Mostefai Senior Energy Specialist Mr. Kazuhiro Yoshida Energy Operations Division Economist India Department Energy Operations Division India Department Mr. Karl Nymian Senior Energy Economist Energy Operations Division India Department LSMAPI c/o Indclstry and I!ne rgy DepaAi'melit The World Bank 1818 14 Street, N. W. WVashington, L). C. 204,33 U. S. A. II3e > M -6 - *-.*7 . 77-7.v - . i [ I m ! 1. 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