Battle of the utilities: India vs USA
India`s State Electricity Boards (SEBs) have come in for much criticism for their lack of efficiency and financial management. A benchmark comparison with a major US utility offers some clues as to where things are going wrong.
Dr. Shashank S. Nadgauda
Staten Island, New York, USA
Government owned State Electricity Boards (SEBs) dominate the generation and delivery of electricity in India. By contrast, government regulated investor-owned utilities (IOUs) play a similar role in the USA. When India liberalized its rigid policies in 1991 with great fanfare, there was excitement that India could finally attract much needed large scale private investment. However, to date India has failed in its efforts to promote private power mainly because of the poor performance of SEBs. The government has already lost $20-$30 billion during the past ten years by subsidizing power sold by SEBs to agricultural and residential customers. The subsidy for this year is expected to reach an all-time record of about $6 billion.
The only viable solution for India is to reform the SEBs in all aspects. In order to illustrate the nature of reforms required, the 1996/97 performance of Maharashtra State Electricity Board (MSEB) in India has been compared with the domestic electric operations of PacifiCorp, a US-based IOU. The comparison is based on five benchmark issues: system output and sales; transmission and distribution (T&D) system; number of employees; electric revenue and financial returns. The comparison is based on published data, and a 1996/97 average exchange rate of Rupees36.0 = $1.
MSEB, a leading utility in India, serves the state of Maharashtra which occupies an area of approximately 307 690 km2 (~120 000 sq. miles). PacifiCorp, a diversified utility with low production costs, serves customers in seven western US states – California, Idaho, Montana, Oregon, Utah, Washington and Wyoming. More than 70 per cent of its customers are in Oregon and Utah which occupy a combined area of approximately 460 800 km2 (180 000 sq. miles).
System output and sales
Figure 1 shows the installed system capacity of the two utilities. They are predominantly coal-based systems with a total installed capacity of about 8000 MW each. MSEB`s coal-based capacity of 5505 MW (71 per cent of the total) consisted of 29 units with an average size of 190 MW. Its individual units varied in size from 30 MW to 500 MW. PacifiCorp`s coal-based capacity of 7041 MW (85 per cent of the total) consisted of 21 units with an average size of 340 MW. Its units varied in size from 70 to 730 MW.
Table 1 summarizes data on coal-based generation for the two utilities. It shows that the performance of MSEB`s coal-based fleet was inferior to that of PacifiCorp`s fleet in three areas – lower capacity factor (62 per cent versus 77 per cent), higher oil fired heat input (1.4 per cent versus 0.2 per cent of the total), and higher system heat rate (3080 kCal/kWh versus 2680 kCal/kWh). MSEB`s poor performance can be attributed partially to three unique issues which it and other Indian SEBs share in common:
(a) Load regimen: More than 30 per cent of MSEB`s load results from agricultural customers who operate individual and central irrigation system pumps during eight to nine months of the year for eight to ten hours per day. As a result, MSEB has to operate several of its coal-based units at low loads during night time.
(b) Fuel supply: PacifiCorp receives about 50 per cent of its coal supply from its own mines, whereas MSEB is dependent entirely on mines and railroads operated by the government of India.
(c) Coal quality: Unlike PacifiCorp which uses sub-bituminous and bituminous coal with five to 14 per cent ash content, the quality of MSEB`s coal is much worse with an ash content of 30 – 35 per cent.
These issues explain only partially the poorer performance of MSEB`s coal-based fleet. Other reports indicate that by upgrading O&M practices, and by adopting plant renovation and modernization measures Indian SEBs can improve their fleet performance significantly.
Table 2 summarizes data on total system output and sales for the two utilities. While PacifiCorp enjoyed a 12 per cent system reserve margin, MSEB had a capacity shortfall of 17 per cent at peak demand.
Compared to the PacifiCorp`s system, MSEB had a lower system capacity factor (56 per cent versus 74 per cent) and its T&D losses were substantially higher (16 per cent versus six per cent).
Figure 2 shows the breakdown of customer classes served by the two utilities. Of the 11.42 million customers of MSEB, 18 per cent were agricultural customers while 70 per cent were residential customers, for a combined total of 88 per cent. PacifiCorp did not report agricultural customers as a separate category. Residential consumers constituted 86 per cent of its total customer base of 1.39 million.
Figure 3 shows the breakdown of energy sales by customer groups. PacifiCorp`s sales were somewhat evenly distributed among three groups – bulk power, industries and residential/commercial customers. In the case of MSEB, industrial and agricultural sectors were the dominant consumers.
MSEB operated approximately 206 400 km of transmission lines of which about 70 per cent (145 600 km) were rated at 11 kV. This was in sharp contrast to 23 840 km of transmission lines operated by Pacifi- Corp, all of them rated at greater than 34.5 kV. Thus, compared to PacifiCorp, MSEB`s transmission system was not only inefficient because of its lower voltage rating, but also because of its excessive length per MW of generating capacity (27.2 km versus 3.2 km/MW for PacifiCorp). A meaningful comparison between the two utilities` distribution system is not possible since MSEB reported its data as 396 800 circuit-kilometres while PacifiCorp reported its data as 87 360 km.
MSEB reported a total connected load of 7000 MW in the agricultural sector. Of this total, only about 15 per cent was actually met- ered. MSEB also indicated that it sold about 2000 kWh of energy per kW of connected load in the agricultural sector. Historical data does not support such a high energy consumption. Indian observers believe that SEB`s inflate agricultural consumption to mask the large power thefts in their systems. Thus, it is likely that all-inclusive T&D losses for the MSEB system could be significantly higher than 16 per cent which it reported, compared to about six per cent reported by PacifiCorp.
Number of employees
MSEB employed about 110 000 persons or about 14 employees per MW of capacity. On the other hand, PacifiCorp employed about 8800 persons or about one person/MW of capacity. Stated another way, one employee of MSEB served 100 customers while that of PacifiCorp served 155 customers. Thus, it is apparent that MSEB`s staffing level was substantially higher than that of PacifiCorp.
Figure 4 shows the breakdown of electric revenue earned by the two utilities from each customer group. MSEB had a revenue of about $2.4 billion or about 5.6 ¢/kWh sold. The corresponding numbers for PacifiCorp were about $3.0 billion or 4.0 ¢/kWh sold.
Both MSEB and PacifiCorp earned a similar portion of their revenue from bulk power sales (19 and 25 per cent, respectively). However, the revenue contribution of their retail customers differed substantially. PacifiCorp`s retail revenue was evenly divided between its residential, commercial and industrial customers. By contrast, agricultural customers contributed only four per cent towards MSEB`s revenue while consuming 33 per cent of its energy. Its residential customers were responsible for seven per cent of the revenue while consuming 12 per cent of the energy. On the other hand, its industrial customers subsidized the agricultural and residential customers by contributing 58 per cent MSEB`s revenue while consuming only 35 per cent of the energy sold by MSEB.
Figure 5 shows the average proxy tariff paid by the retail customer groups of the two utilities. Industrial customers of PacifiCorp paid on average 3.5 ¢/kWh while its residential customers paid 6.1 ¢/kWh. MSEB`s tariff policies were quite the opposite. While its residential customers paid on average only 3.6 ¢/kWh, industrial customers paid 9.3 ¢/kWh to MSEB. The agricultural customers had the best bargain in that they paid only 0.6 ¢/kWh to MSEB on average.
Since farmers represent a large voting block, it is unlikely that MSEB will be able to increase agricultural tariffs to any great extent in the foreseeable future. This could make matters worse for MSEB from another perspective, namely the impact of privately-owned new capacity which is scheduled to come on line in Maharashtra. There is now a major concern that private power will be much more expensive since the Indian Rupee has depreciated by about 17 per cent during the last year. As a result, in the absence of any tariff policy revisions, industrial tariffs may sky-rocket which in turn could force MSEB`s large industrial customers to install captive generation plants.
MSEB had a net income of $96 million including a $72 million subsidy which it claimed from the state to achieve a rate of return of 4.5 per cent on its capital base. With the state-provided subsidy, MSEB`s net income amounted to only about four per cent of its electric revenue. By contrast, PacifiCorp reported a net income of $371 million from its domestic electric operations or about 3.8 per cent return on its capital base. Its net income amounted to about 12.5 per cent of its electric revenue.
Historically, MSEB and other Indian SEBs have relied on concessional loans from the World Bank for major projects. In order to qualify for these loans, World Bank requires that SEBs earn a minimum rate of return of 4.5 per cent on the capital base and maintain accounts receivable to a level of 75 days of revenue. While the state subsidy allowed MSEB to comply with the World Bank`s norm on rate of return, it did not meet the accounts receivable criteria since its arrears stood at about $616 million or equivalent to 94 days of revenue.
Customers in the agricultural sector owed MSEB $165 million or about two years worth of revenue reported by MSEB in 1996/97 from that sector. Since then, the situation has become worse with the receivable accounts rising to 115 days worth of revenue. As a result, MSEB may have to forego World bank loans for any new major projects in the future.
MSEB needs to improve its performance in all aspects to attain world class standards. Since other Indian SEB`s are much worse off than MSEB, they will face an even greater challenge. During the past few years, there has been much talk in the Indian press about the importance of reforming SEBs. However, to date Indian politicians and bureaucrats have not adopted any concrete measures. It is apparent that they must act urgently to stem the current losses in the Indian power sector and attract much needed private power in the country.
Figure 1. Installed capacity in MW
Figure 2. Category of customers (MSEB – 11.42 m; PacifiCorp – 1.39 m)
Figure 3. Sales by customer groups (SEB -42.7 m/kWh; PacifiCorp – 75 m/kWh)
Figure 4. Electric revenue by customers (MSEB – $2382 m; PacifiCorp – $2961 m)
Figure 5. Tariff paid by retail customers (average based on gross revenue and sales data)