Restructuring India`s power sector

I. M. Sahai

International Consultant


Until recently, the power sector in India was almost the exclusive preserve of the government, operating through state-owned utilities, and regulated by federal and state agencies.

The utilities, or State Electricity Boards (SEBs), were created to allow the power sector to function on sound commercial and financial lines. They were also designed to have operational autonomy from the state government. However, over the years, these aims have become increasingly difficult to achieve, and the financial footing of the SEBs has deteriorated.

It is therefore clear that reforms are needed. The privatization of the power sector in India progressively from 1991 acted as a much-required catalyst. But with privately generated power sold mainly to the SEBs, the latter`s financial position and operational efficiency still requires drastic improvement.

The initial thrust towards sectoral reform came from the Power Finance Corporation (PFC), the prime funding agency for power projects in the country. PFC insisted that all its borrowing utilities should get diagnostic studies from professional consultants and draw up action plans for improvement in technical, financial and managerial areas.

This was undertaken from 1991 onwards, and while it yielded some good results, it became obvious that more radical reforms were required. By the mid-1990s, the federal government decided that the SEBs should be replaced by new entities for generation, transmission and distribution, with progressive privatization of these assets.

It was also decided that tariff setting should be distanced from the government and entrusted to an independent body also responsible for regulatory functions. A “national action plan on power”, evolved by the federal government in December 1996 after prolonged federal-state consultations, provided for these steps, and stated: “States will allow maximum possible autonomy to the State Electricity Boards` commercial lines”.

The first state to implement structural reforms was Orissa. It passed its reforms legislation in November 1995 and implemented them progressively from April 1996. The SEB was broken up and its responsibilities entrusted to different public sector utilities.

Thermal generation was given to Orissa Power Generation Corp. (OPGC), hydropower generation to a new entity, Orissa Hydro Power Corp. (OHPC), and transmission and distribution to another new utility, Grid Corp. of Orissa (Gridco). As a next step, the state government`s equity in OPGC and Gridco is to be diluted by offering up to 49 per cent to private companies.

Gridco has divided the state into several distribution areas and is considering private bids to operate some of these. Additionally, an independent regulatory commission has started functioning for tariff setting and licensing.

In the northern state of Haryana, the reform legislation currently being implemented provides for a regulatory commission, a new utility for taking over the existing state-owned generation projects, and privatization of distribution. Transmission will, for the time being, continue to be with the SEB.

The same pattern lies in the statute passed by the southern state of Andra Pradesh. Many other states are taking tentative steps towards similar reforms. Those states where regulatory commissions are being considered are Maharashtra in the west and Kerala and Karnataka in the south. In Maharashtra, where power distribution in metropolitan Bombay is already privatized, the SEB has decided to off load more distribution responsibility to private companies.

States like Rajastan and Madhya Pradesh are examining the reports of study groups recommending power reforms while West Bengal is awaiting a similar report. However, that still leaves some big and politically sensitive states like Punjab, Uttar Pradesh and Bihar where the state governments have been lacking in political will to undertake reforms.

A needed push to power sector reforms in India was given during the current fiscal year by the federal government through two measures. On April 25 1998, a federal Ordinance was issued (later converted into an Act of Parliament) providing for the creation of independent electricity regulation commissions (ERCs) at federal and state levels. These were to set tariffs and, at state level, to undertake licensing function.

Although cross-subsidization among various categories of consumers is permitted (in India, farmers are given power at very low rates; in two states, absolutely free), it was laid down in the Ordinance that for any subsidy that is above the level determined by ERC, the state government must compensate the distributing power utility in cash.

Following the statute, the federal ERC was set up on July 23, 1998, within the stipulated three month time limit. The second major step was the enacting by the Indian Parliament at the end of July, of the long awaited legislation to permit private power companies to invest in power transmission by building, maintaining, and making available new power lines. This legislation is expected to speed up privatization of this key area, in addition to power generation and distribution where private companies are already operating.

The process of power sector reforms in India has therefore gathered pace in recent months, after a long and uneventful period. However, much more is required at both federal and state levels, and that too with much greater speed if the objective of the Indian government to attract large private investment in the power sector is to be achieved to any significant degree.