India - Private Power Utilities : (Tata Electric Companies TEC)

%,Document of The World Bank FOR OFFICIAL USE ONLY Repot No. 8610-IN STAFF APPRAISAL REPORT MNDIA PRIVATE POWER UTILITIES (TEC) PROJECT FOR |THE TATA ELECTRIC COMPANIES JUNE 6, 1990 The World Bank Asia Country Department rV (India) Transport and Energy Operations Di'viqion International Finance Corporation Department of Investments, Asia II Division I M &i documenlt hs a resuRIctd diIbm and may be sed by recpient ady In hde d o twpfiI dtes iJts contents may not othoise be wIlsdosedd B=k e \ '. \.~~~~~~~~  CURRENCY EQUIVALENTS Currency Unit-Rupees (Rs) Rs 1.00-Paise 100 US$1.00 Rs 17.0 Rs 1.OOUS$0.0588 Rs 1,000,OOQUS$58,823 US$ 1.OoYen 153 MEASURES AND EQUIVALENTS 1 Metr (i) a 89.8? inchoa (in) 1 Kilometer (km) 3 1,000 matoro (a) a 0.0214 mlsca (ml) 1 Cubla Motor (m1) a 1-81 cubic yord (eu ydA a 8.86 cubic feet (eu ft) 1 Thousand Cubic Motor (1CM) a 1,000 cubie c eoro 1 Berrol (Bbl) a 0.159 cubic mater 1 Normal Cubic Rotor a 87.82 Standord Cubic Foot (SCF) of intrsl Gae am8) 1 Mebric Ton of 01 I (89 API) = 7.60 barrolo 1 MIlligram a 0.001 gram (a) a 0.05 ounce 1 Ton (t) a 1,000 Itlogramo (kg) a 2,200 pounds (Ibs) 1 Kiloeolorlo (kcal) a 8.07 British Thermal Unito (DM1) 1 Ton of Oil Equivalont (too) 10 millon kilocalorios 1 Kilovolt (kV) 1,000 volts (V) 1 Kilovolt amporo (kVA) a 1,000 voit-ampores (VA) 1 Meyaatt (MW) a 1,000 kilowatto (kV) = 1 million attes I Kilowatt-hour (kWh) 1,000 watt-hours 1 Mbgawatt-hour (UWh) 14000 ki owatt-hours 1 Glgmaatt-hour (=W) a 1,000,000 kilowatt-hours 1 Gigaealorio (Gcal) * 1,000,000 colories ABBREVIATIONS AND ACRONYNS AA4R - Avorago Annual Growth Rato KM - Kilomiteoro ACSR - Alumlnum Conductor Stool Roinforcod KV - Kilovolts Act - Tho Eloctricity (Supply) Act, 1948 as amended LF - Load Factor AEC - Ahmadabad Eloctriclty Company LSHS - Low Sulphur Heavy Stock Andhra - Tho Andhra Valley Pomer Supply Company Ltd. MPC8 - Maharashtra Polution Control Board ASTU - American Society for Testing and Matorials UPSEB - Madbyn Pradoeh Stato Electricity Board BEST - Bombay Electric Supply and Transport MSEB - Mahorashtra Stato Eloctricity Board Undertakink MU - UMoeatt iOOT - Build, Oen, Operato and Transfer NELCO - National Radio and Electronics Company BiES - Bombay Suburban Electric Supply Company NHPC - National Hydroelectric Power Corporation CC - Combined-Cycle NO - Nitrogn Oxides CCI - Controller of Capttal Iesues NPTC - National Povwr Trsnsamlsion Corporation CEA - Central Electricity Authority NTPC - Natlonal Thermal Power Corporation CESC - The Calcutta Electric Supply Corporation 0 a U - Operotion and Maintenance COP - Doepartment of Power am4c - Oil and Natural ans Corporation DSC - Debt Service Cover p.o, per annum ERR - Economic Rate of Return PCD - Partly Convertiblo Debentures FAC - Fuel Adjustment Chargo PCR - Projet Completion Report FOD - Fluo Gas Dosulphurixation PFC - Poer Finance Corporation GIs - Gas-Insulatod Swltchgar Powe - Tho Tate Power Comany Ltd. 001 - Government of India PS - Pumpd Storage Gm - Govornment of Maharsshtre SEB - Stato Electriclty Board COUID - Irrlgation Department of the Cowernment SEC - Surot Electricity Company of Maharashtra SO> - Sulphur Dloxide GSEt - GujarataState Eloectricity Board 0 - Steam Turbino Generator CT - Cas Turbine Tap - Transmission and Distribution HPP - Hydro Powor Plant TEC The Tata Electric Companies HRSN - Mast Recovory Steam Gnerator TEDS - Tate Electronic Data Systema \HV - High Voltago PP - Thermal Power Plant Hydro - The Tata Hydro-Eloctric Power Supply Company IrI - Westinghouso-tata-Indus Ltd. Ltd. MRsB - Westorn Region Eloctrility Board IPR - Industrial Policy Roolution me - Western Reglonol Grid IRR - Internal Rate of Return 6uarantor's and Borrower's Financial Year: Aprl 1 - March 31 (In this report FY.. would mean the Guarantor's and the Borrower's fiscal year beginning April 1 of the previous year and ending March 31 of the indicated year; e.g. FY90 would mean the \fiscal year from April 1, 1989 to March 31, 1990) \  lFO OFFICAL USE O1JLY INDIA PRIVATE POWER UTILITIES (TEC) PROJECT Loan and Project Summary Borrower s Tata Electric Companies (The Tata Hycdro-Electric Power Supply Company Limited, The Andhra Valley Power Supply Company Limited, and The Tata Power Company Limited, referred to collectively as the Tata Electric Companies -- TEC). The three companies have generated and supplied power in the Bombay area since the 1910s. They pool their resources, share their assets, costs and revenues in the same proportion 20:30:50, and are operated as. one company under the same 'anagement. A majority of their shares (51.71, 50.81 and,52.72) is held by the public. The Tata interests hold only about 32 of the shares. Guarantor s IBRD Loant India, acting by its President. The Government of India (GOI) would charge a guarantee fee of 2.75 S p.a. on the principal amount of the IBRD Loan withdrawn and outstanding. |IBRD Loan s US$ 98 million equivalent. Terms s RepSyment over 20 years, including 5 years grace, at the IBRD's standard variable interest rate. IFC Investment\ , First loan of US$ 30 million and se loan of Yen 4,600 million. Terms s Rep\syment on a 15-year balloon schedule, including 4 years grace. Interest rates fixed at 10 718 X p.a. for the first loan and 8 114 2 p.a. for the second loan. Front-end fee 1Z. Commitment fee 12 p.a. on the undisbursed balance. ForeiRn ExSchane and Interest Risks s The interest rate risk op the IBRD loan, a*d the foreign exchange risk on IBRD and IFC loans will be borne by the Borrower. Mortgage and Security s IBRD and IFC loans aill be secured against first charge on all of -TM's assets, subject to certain charges on current assets in favor of working capital lenders. pari passu with other senior lenders. This docuX en_ has a\restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ' ~~~~~~~~~is Project Oblectives s The Project's objectives are to increase TEC's peak generating capacity, reduce their dependence on the Maharashtra State Electricity Board, reduce the average cost of generation and improve system reliability and quality of supply to consumers In the Bombay area. Project Description t The Project copprises four componentes a) a pumped storage unit at the existing Bhira hydroelectric station, to generate 150 Mg of additional peak power by consuming off-peak thermal power; b) a 220 kV transmission line to carry this power to the license area; c) a gas based combined-cycle unit of 180 MH at the Trombay thermal power plant; d) a second flue gas desulphurization unit to control the sulphur dioxide emissions from the coal and oil burning Unit No. 5 at Trombay; and (e) review of design and technical specifications and supervision of construction of the Bhira pumped storage scheme and acquisition of know-how for the extension of the FGD facility at Trombay. Estimated Costs: Project Components Local Foreign Total --_-------------------------- ---- SS million-------- I. 150 MV Pumped Storage Scheme at Bbira 30.8 22.2 53.0 II. Bhira-Dharavi 220 kV Transmission System 16.2 17.2 33.4 III. 180 MV Gas Based Combined Cycle Scheme at Trombay 43.9 47.1 91.0 IV. Flue Gas Desulphurization Stream at Trombay Unit 5 5.6 5.2 10.8 Total Base Costs 96.5 91.7 188.2 - Physical Contingencies 6.8 6.0 12.8 - Price Contingencies 16.7 13.0 29.7 _______ ____ _ ---- _____- Total Contingencies 23.5 19.0 42.5 Total Project Cost 120.0 110.7 230.7 Interest During Construction (IDC) - IBRD and IFC Loans 0.0 33.5 33.5 - Other 9.5 0.0 9.5 Total - IDC 9.5 33.5 43.0 ______;_ ___*__ --- _____- Total Financing Required 129.5 144.2 273.7 1/ Including taxes and duties of about USS 18.8 million.  ~~~~~~~~~~~~~ii ?inancing *Ian:s Local Foreign Total . --- US$million Internal Accruals; 61.5 - 61.5 Debenture Issues - Convertible part 26.5 - 26.5 - Non-convertible part 15.9 - 15.9 Long ?erm Loans, IFC aJ - 60.0 60.0 IB2D - 98.0 98.0 Local Fin. Ist. 11.8 - 11.8 Total 115.7 158.0 273.7 Estimated Disbursements: IBRDIIPC Fiscal Year FY91 FY92 FY93 FY94 PY95 ------------- (US$ million) ---------- IBRD Loans AnnuaI 1.0 18.6 37.9 32.9. 7.6 Cumulative 1.0 19.6 57.5 90.4 98.0 IFC Loan: Annual 3.0 6.0. 24.0 18.0 9.0 Cumulative 3.0 9.0 33.0 51.0 60.0 Rates of leturn s Financials 24S Economic s 251 (1990-2000 time-slice of the Western Region Development Program). Benefits s (a) Technical: The project will incregse TEC's peak generating capacity and capacity utilization of the existing thersm generating stations, and reduce the tran mi*uon losses and the average cost of generation and improve system reliability. It will also limit sulphur dioxide 'emissions from coal and oil burning at Trombay Unit 5. (b) institutioumlS Tariff adjustments and load management initiatives will bring the level and structure of T@C's tariffs more closely in line. Witi supply costs. The support by the Bank Group for increased participation of She private sector in the development of the power\sector in India, would free equivalent public resources which would be used for investmnts in other sectors that cannot attract private funds.  iv Risks ( (a) Technicalt The physical project components, which are based on conventional technology, do not present unusual technical risks. The Mulshi Dam, upstream of the Bbira Hydro Power Project will continue to be monitored and inspected periodically by the Irrigation Department of the Government of Maharashtra (GOM). (b) Financial: Under the Electricity (Supply) Act regulating power utilities in India, TEC set their tariffs to recover their full costs, including depreciation at 3.62 p.a., interest and a predetermined return on the capital base. Additional special reserves are allowed by the GOM to fully cover the debt service and raise internal funds for future investments. Continuation of these appropriations is essential for TEC to attain comfortable debt servicing. (c) Relationship with Maharashtra State Electricity Board (MSEB): TEC's system and operations are closely interlinked with the State grid operated by the MSEB. TEC purchase power from MSEB during peak hours, and share the backdown during off peak hours. Maintaining the present working balance is critical for TEC's long-term viability. N N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ N  INDIA PRIVATE POWER UTILITIES (TEC) PROJECT Table of Contents i.1. SECTORAL CONTEXT . . . . . . . . . . . . . . .... 01 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 01 Organization of the Power Sector ... . . . . . . . . ........ 03 Private Utilities ...... . . . . . . . . . . . . . . . . . . . 03 Regulatory Framework . . . . . . . . . . . . . .. . . . . 04 Tariffs ... .. .. . . . . . . . . . . . . . . . 05 GOI Strategy in the Power Sector . . . . . . . . . . 05 Private Utilitiess Prospective Policy Adjustments . . . . . . . . . 06 Bank Group Strategy in the Power Sector . . . . . . . . . . . . . . 07 Bank Group Participation . . .... ... . .... . 08 II. THE BORROQ R. . . . . . . .. . . . . . . . . . 09 Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . 09 Licenses . . .. . . . . .... . 09 Shareholding .. . . . . . . 10 Management, Organization and Training .. . . . . . . . . . 11 Maintenamce . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Accounting and Audit . . . . . . . . . . . 12 Billing and Collections . . . . . . . . . . . . . . . . . . . . . . 13 nsurAne Tae . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 tacome Tax . . . . . .. . . . . . . . . . . . . . . . . . . . 13 Existing Operations and Facilities .. . . . . . . . .. . . . . .. 13 Clients . . . . . . . . . . . . .. . . . .. . 14 Wheeling . . . . . . .................. 14 sales Growth . . . ... . . . . . . . . . . . . . . . . . . . . . . 15 Dependence on MSEB ....... . .. .... ........ 15 Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . 16 This report is based *n the findings of a joint Bank and IFC appraisal mission to India in January 1990. Mission members from IFC were Messrs. D. Damianos (Sr. Investment Officer), O.' Roche (Investment Officer), D. Fenton (Sr. Engineer) and M. Riddle (Sr. Environmental Adviser) and from the Bank, Messrs. A. Ceyhan (Sr. Power Engineer), M. Tomlinson (Energy Economist), R. Bentjerodt (Sr. Operations Officer), C.K. Teng (Financial Analyst), B. Baratz (Sr.\Environmental Engineer), R. Lopez- Rivera (Power Engineer-Consultant), R.K. MaLhotra (Irrigation Engineer) and Ms. N. Pa? had (Operations Officer).  III. THE ROJECT . . . ... . . . . . . . . . 17 Project Setting . * * * * . . . . . .\. . . . . . 17 Project Objectives . .... . . . . . . . . . . . 17 Project Description . . . . . . . ... . . . ... . . . . 18 Cost Estimates .4. . 4 . . . . 4. . . . 44 . . . . . 19 BasisfortheEste ..tes -....... ... * .2..... 19 Project Financing . ' . . . .. . . . . . . *. . * . 19 Status of Engineering and Project MInageme*t . . . . . . . . . . 20 Project Schedule . . . , . . . . . . ... . 21 Procurement ::: : : ::: 21 Disbursements 23 Security Aragement .... . . .. .. ... .. . . 23 Fuel Supply for the Trambay Thermal Power Plant . . . o o . . . o 24 Water Rights for the Bhira Pumped Storage Scheme . . . . . . . . . 25 Land Acquisition . . . . . . . . . ... . . . . . 2 *5 EnvironmettAspetspt a.. .................... 26 Benefits . . . . . . . . ...... . * 26 Risks . . . 26 Project Monitoring and Supervision ....... ......... 27 ,IV. IMNCIAL ANALYSIS . ......... . * * * * * . * . 28 Past and Projected Financial Performance . . . . . . . . . . . 28 \ ~~'fSeasitivrity Aunlysis . . . . . . . . . ............... '. . 29 V. ECROMIC AXALYSIS . . . . . . . . . . . .0 * * .. . . 30 - Elctricity Demand In the Western Region and Supply Capacity . . . 10 -=- . Least-Cost Analysis . ... ... . . . . . . 31 ProgramAnalysis . . . . . . . . . . . . . . . . . . . . . . . 32 -Program Rates of Retum. * * * * * . * * * . *. . * * . . * * * 33 Project Analyses . - * * . - * 4 * . * * * * . . .. . . . 34 VI. AGREEUMiS AND 144.4.... 4 ** *... \ . 35 Agreements . . . . . . . . . . . . 35 Recommendation . . . . . . . . . . . . . . . . . 36 - \ V  ANHEES, 1.0 All-India: Electricity Supply and Demand 1.1 Comparison of 141B's and INC's Tariffs 1.2 Previous Loans and Credits to India's Power Sector 2.0 Tata Electric Companies" Organization Structure 3.0 Western Region interconnected Power Systems 3.1 Project Description 3.2 Project Cost Summary 3.3 Tata Electric Companies' Project Management Structure 3.4 Project Implementation Schedule 3.5 Procurement Arrangements 3.6 Procurement Schedule 3.7 Schedule of Disbursements for IIRD and IFC Loans 3.8 Statement of Separate and Joint Secured Borrowings 3.9 Environmental Issues 4.0 Financial Analysis: Table 1: TIC's Income Statement Table 2s TEC's Balance Sheet Table 3: TEC's Cashflow Statement Table 4s Sensitivity Tests 5.0 Economic Analysis Table Is Western Regions Actual and Projected Power and Energy Demands Table 2s Western Regions Electricity Consumption by Consumer Category Table 3: Least-Cost Analysis: Comparative Analysis of System Cost with Bhira and Alternatives Table 4s Least-Cost Analysis: Comparison of Generation Cost From Trombay With Alternative Base Load Options Table 5: Program Analysis: Program costs and Benefits Table 6S estimation of Consumer Surplus Table 7s Program Returns Table 8s Sumnary of Analysis Assumptions 6.0 Documents in Project File IBRD No. 22293  INDIA PRIVATE POWER UTILITIES (TEC) PROJECT I. SECTORAL CONTEXT Overview 1.01 The principal challenge facing the Government of India (GOI) as India's power sector enters the 19908 is to improve the balance in sector development between expansion and efficiency improvement. This will require GOI to ensure that the sector's institutional development keeps pace with the physical expansion of power supplies. Electricity demand is projected to grow at approximately 92 p. a. through 2000 and to continue to be supply constrained, though less so than at present. To meet a higher proportion of demand and improve supply quality, GOI plans to install an additional 80,000 MW of capacity by 2000. At a cost of about US$150 billion, (equivalent to between 251 and 302 of expected allocations under the Eighth and Ninth Plans) this would exert strong pressures on GOI's finances and pose considerable managerial and technical challenges for GOI and State utilities. To meet these enormous investment requirements, GOI recognizes that it must realize more of the private sector's potential to mobilize additional resources. Similarly, GOI is keen to exploit more of the private sector's ability to implement major projects efficiently. 1.02 At present, India's power systems have an installed capacity of over 59,000 MW, comparable to the power system of France or of the United Kingdom or to all the power systems in Sub-Saharan Africa combinedli. In FY89, India's systems generated 206,000 GVh - about 702 from coal stations, 252 from hydro stations and 52 from gas, oil and nuclear stations (Annex 1.0). Public supply has expanded quickly: since FY82, installed capacity has increased from 32,000 MW and generation from 114,000 GWh. Even so, India faces a shortage of generating capacity of 27X and approximately 102 of total demand is left unserved. The quality of electricity supplies also remains mostly unsatisfactory- interruptions to supply and voltage reductions are common, and technical and commercial losses have increased to 222 of net generation. 1.03 In parallel with expanding supply, the sector has made encouraging efficiency gains. Key amongst these is that plant load factor averaged 552 in FY90, compared with only 442 in FY81. Each 1 kW of capacity now provides 1,031 kWh (272) more electricity annually than in FY81. In addition, the rate of coal consumption by power stations has been cut 1O0 since FY80. It now requires 720 tons of coal to generate 1 GWh, compared with 802 tons in FY80. This saves approximately 12 million tons of coal annually - about 82 of the sector's total consumption. These improvements reflect a strengthening of plant Maintenance and operations and are commendable in view of the deteriorating quality of coal the sector is receiving. A significant institutional gain has been a 34Z cut-in - staffing ratios: from 29 per thousand consumers in FY81 to 19 at present. l1 Excluding the Republic of South Africa.  2 kfficiency has also improved, though more modestly, through increases in tariffs relative to supply costs. Between FY82 and FY89, the average tariff rate doubled to Rs. 0.671kWh through real increases averaging 3.5S p.a.. Rates to industrial and commercial consumers (over 601 of total coneumption) are now about 80X of marginal cost. The lowest rates are those to agriculture - on average Rs. 0.16/kWh - which are heavily subsidized. These low rates inflate demand and are a principal cause of the poor financial performance of the sector. 1.04 Notwithstanding the efficiency gains secured in recent years. considerable scope remains for further improvements. Key remaining constraints are weaknesses in the structure of the sector. inadequate financial autonomy of GOI and state-owned utilities and weak financial discipline. Physically, the impact of these constraints is that India's power systems provide less power and of a poorer quality than they should be able to, and at higher cost. Economic costs of shortages and poor quality supplies are exacerbated by inefficient end-use of power - the result mostly of a lack of conuercial incentives in many markets and subsidized power prices. 1.05 Pinancially, the effects of remaining constraints are to undermine sector financial performance and hold down resource mobilization. Although GOI-owned and private utilities financially are much stronger than the State Electricity Boards (SEBs), it is the latter which dominate the finances of the sector. In FY89, SEEs incurred a combined loss after interest and depreciation of Rs. 17.7 billion (about US$ 1 billion). This corresponded to a return on net assets at historic cost of -9.8Z. In FY90, SEBs' losses are expected to reach Rs. 21.6 billion (about US$ 1.28 billion) and the Boards, combined internal resource is expected to fall to Rs. -7.7 billion (about US$ -460 million). The Maharashtra State Electricity Board (MSEB) - TEC's licensor - is the most ,efficient and financially the strongest of the SEBs. Recently, MSEB increased its tariffs 20X. As a result, MSEB expects to be the first SEB able to meet GOI's minimum requirement for a 32 return on net assets at historic cost after depreciation,and interest. 1.06 GOI is aware of these constraints and how they threaten future sector development. Under the Seventh Plan, GOI strengthened its resolve to address these constrlaints in a substantive way. Of particular note are GOt's initiatives to strengthen financial discipline in the sector and improve resource mobilization, both through direct negotiation with States and through creating the Power Finance Corporation (PFC). The latter will provide project financing to SEBs willing to make needed institutional reforms. GOI has also accelerated development of the efficient central utilities, (particularly the National Thermal Power Corporation -- NTPC) to improve cost recovery and ensure that priority projects are implemented on schedule. to tap private sector potential for additional resource mobilization, GOI also aims to ease financial and regulatory disincentives to private investment in the sector.' To this end, GO0 has under review a White Paper proposing, inter alia, to increase to 15? the return private utilities are permitted to earn on their capital base (para. 1.17). Finally, GOI is also reviewing its fuel use policy for the sector. As well as considering fuel imports, GOI has decided to sanction wiore domestic natural gas for power generations 8,000 KW of gas-fired plant Is to be added under the Eighth Plan.  i~~~~~~~~~~~~~~~ Organization of the Power Sector 1.07 Responsibility for electricity supply is shared between SOI and the States. COX controls the Central Electricity Authority (CEA), NTPC and its hydropower counterpart, the National Hydro Power Corporation (NHPC). All report to the Department of dower (DOP) within the Z4inistry of Energy. DOP also controls PFC and will take responsibility for the newly-created National Power Transmission Corporation (NPTC). CEA's task is to develop national power policy and coordinate sector development. Its effectiveness, however, is limited severely by shortages of skilled staff and resources. NTPC and NHPC are bulk supply utilities which sell power to the SEBs. NTPC provides about 13X of India's total power supplies, and has a track record of efficiency and financial strength. NHPC, on the other hand, has not yet enjoyed the same success and is developing relatively slowly. PFC will mobilize additional resources for the SEBs and pursue institutional strengthening of its borrowers through conditionality linked to its financ,g. NPTC will coordinate development and operation of transmission systems, initially systems associated with NTPC's and NHPC's power stations and later systems owned by the SEBs. 1.08 The States control the SEBs, which generate about 752 of total supplies and provide most distribution to final consumers. Although supposedly autonomous, SEBs in practice are under state control as regards their investments, tariffs, borrbwings, and salary and personnel policiis. SEBs are grouped into five regional systems. Activities coordinated regionally include generation schedules, overhaul and maintenance programs, power transfers and concomitant tariffs. SEBs also license India's private power utilities. Only five private utilities remain: TEC, Bombay Suburban Electric Supply (BSES), Ahmedabad Blectricity Company (ABC), Surat Electric Company (SEC) and the Calcutta lectric Supply Corporation (CESC). The Bombay Electric Supply and Transport Ltd. (BEST) is a municipal corporation. All but BSES and BEST generate at least some of the power they distribute. However, BSES is embarking upon a 500 Mg thermal power station, for which a second joint IBRD/IpC operation is Ieing considered. Private Utilities 1.09 At inoependence. private utilities and licensed local authorities together provided 'about 801 of public electricity supply. The Electricity (Supply) Act of 1948 created the SEBs and entrusted the Boards with primary responsibility for public power supply. The Act also made SEBs responsible for regulating private utilities. The Industrial Policy Resolution (IPR) of 1956 subsequently defined aspects of generation and distribution which were to be the exclusive responsibility of the State. All but the few remaining licensees cosequently were taken over on the expiry of their licenses. go new licenses have been granted since 1956. However, the IPR did not rule out expansion of remaining licensees, or;the possibility of joint ventures with the private sector when these could be showh to be in the national interest. Private utilities provide less than 51 of public supplies, though private captive generation in industry is extensive'- equivalent to about 151 of public supplies. The latter has ,developed in responte to poor quality and unreliability of public supplies. " .. ..~~~~~~~' I'~~~~~~~~~~~~~~~~.  ^ ~~~~~~~~~4 Re&ulatory Framework 1.10 Private power utilities in India are regulated by the Electricity tSupp.y) Act of 1948 as amended (the Act). The Act allows them to charge through their'tariffs to consumers their full cost, including depreciation (at 3.6Z p.a.) and interest; plus special reserves as allowed by the State Government; plus profit equal to a 12Z return on their remunerable capital base. The special reserves, like depreciation, are charged on the tariffs, thus increasing the revenues, b4t unlike cash costs, are not paid out. Hence they help increase the cashflow while the clear profit (after the special reserves) remains within the reasonable return limits. The capital base comprises share-capital and free reserves, but excludes the special reserves. The rate of return is 'currently set at 12X p.a. (still the pre-1966 part of the capital base earns only 72 p.a.). If a utility makes higher profits, it can retain only 20X of the excess and roll-overs against future losses are not permitt6d. The private utilities are arguing that the 122 p.a. rate of return is inadequate. Their cost of borrowing is now 142 p.a. for long term loans and 172 p.a. for working capital. 1.11 In TEC's case, the special reserves allowed by the GOM include a Debt Redemption Reserve, to cover the difference between depreoiation and principal repayments; a Foreign Exchange Liabilities Reserve, to cover exchange losses on thie foreign durrency loans; a Project Cost Res4rve, to raise funds for future investments; id a Deferred Tax Liability Reserve, to cover an eventual tax' liability of shareholders for unrealised capital gains (arising from different depreciation rates under the Income Tax Act and the Electricity Act) in the event a utility is taken overt These reserves were allowed by the state at a time that they did not result in an increase of the tariffs (other than the fuel adjustment charge, which is not subject to any restriction). 'when the fifth Trombay unit2' came into operation in 1984 and natural gas from the nearby Bombay High Oilfields was made available at a promotional price (for taking interruptible supplies), the average cost of generation declined. Rather than rebate the savings to consumiers throu*h tariff reductions, TEC were able to retain them through these reserves, to raise funds towards subsequent investments. This allows them to finance their future projects with more internal accruals and less debt, which in turn reduces the interest burden and therefore the future tariffs. Thus the savings come full circle back to the consumer. 1.12 GOI has been considering in\the last 2-3 years a set of amendments in the Act, including increased depreciation allowance and return on capital, to improve the incentives for private sector investment in power generation (para. 1.17). While there is widespread recognition that present allowances are too low to attract new private investment, the proposed changes are unpopular with the States and the SEBs -- which face stiff oppos.tion to higher rates for public electricity supplies. Because of the difficulty of building the \necessary ,consensvs with the States, progress on improving private sector incentives will probably materialize only at a\comparatively modest pace, with the le4dership 2/ Financed under IBRD Loan 1549-IN -- The Third Trombay Project, which co^ered the' construction of a 500 MW triple-fired (coal, low sulphur hea:4 stock fuel oil and gas) Trombay bth unit. '\ \  conzinuing to be taken by States such as Maharashtra and 0ujarat that already have a private sector presence. Tariffs 1.13 Tariff adjustments by private utilities are permitted annually and do not, require state approval, only 60 days notice by the licensee. The tariffs comprise a demand charge, a fixed component designed to recover the utility's fixed costs, and an energy charge for actual consumption, reflecting the utility's variable cost of generation. The latter comprises a basic energy charge and a fuel adjustment charge (FAC), reflecting the increases in the cost of fuel between two successive tariff revisions. In deciding the actual amount and especiaily the timing of their increases, the util1ties also take into account economic and political f4ctors, including the state of the economy in their area and the attitude of consumers and of the authorities. Petitions by consumers requesting stays of the increases are common as is their rejectP;n by the courts. TEC normally follow the M4SEB in raising tariffs. TEC's tariffs are lower than MSEB's for the same category of high voltage consumers and also are lower than the rate TEC pay for power purchased from MSEB, i.e. purchases-raise TEC's average supply cost and hence its ta riffs. TEC's cost of generation is lower because: (a) their newer thermal units are very efficient; (b) they use low-cost natural gas as fuel; (c) about a fifth of their generation is hydro; and (d) they do not have the costs associated with low voltage distribution. The evolution of TEC's and MSEB's tariffs since 1975 is shown in Annex 1.1. During project preparation, IBRD and lFC have reviewed with TEC the possibilities for improving the structure of TEC's retail tariffs to encourage further consumer load management. TEC confirmed that they will plan to restructure the3r tariffs to include, inter alia, options for time-of-day energy pricing and toad' management. TEC further agreed that, after consultation with the GOM, they will commence implementation of the restructured tariffs in their 1991 round of tariff adjustments. GOI Strategy In the\Power Sector 1.14 The Five-Year Plan constitutes the only formal statement of India's energy and power policies. While the Eighth P.an has yet'\to be finalized, preliminary indications suggest little change in objectives from those reflected in the Seventh Plan. Principal energy objectives are likely to remain tot (a) develop supplies at rates which will facilitate growth in other sectors and 'meet particular econom*c and social objectives assigned to the energy sector (e.g. extending irrigation pumping and meeting basic e4ergy needs of the rural poor); (b) substitute indigenous energy for imported fuels wherever economically feasible; and (c) promote rational and more efficient energy use. Power sector objectives are broadly s'imilar, though within GOI there is a growing recognition for the economic role of imported coal (and possibly imported gas) could play to fuel supply to the p*wer sector. Over the short term, objectives are likely to focus on easing the persistent supply shortages and improving financial di'scipline in the sector. 1.15 Over the longer term, the organ4zational, institutional and financial objectives are less clearly defined. Although GOI is heavily constrained in its abibity to act unilaterally, key initi~tives it is likely to pursue will be to: l A  6 (a) accelerate development of the relatively efficient GOI-owned utilities; and (b) promote,more extensive private sector participation in power supply. 1.16 GOI's recent initiative in forming PFC is expected to begin yielding results under the Eighth Plan. In addition, GOI's minimum 3? return requirement for SEBs, and its appropriations from States' budgets, provide strong incentives for States to work more concertedly to improve SEBs' resource mobilization. Private Utilities: Prospective Policy Adjustments 1.17 As mentioned in paragraph 1.05, SEBs' combined losses in FY90 amounted to Rs. 17.7 billion, a return on net assets at historic cost of -9.8X. In FY90, their combinud resource mobilization is expected to fall to Rs. -7.7 billion. These serious financial problems (para. 1.05) have left GOI deeply concerned about the difficulty it faces in financing sector investments through the Eighth Plan. It is primarily this concern that has prompted GOI to re-assess financial conditions under which the private sector can invest in public power supply. Key reform included in the White Paper GOI is considering are: Ci) an increase in returns private utilities are permitted to earn --to five percentage points above the Reserve Bank of India (RBI) rate from two points at present (i.e. an increase to 15? from 12X); (ii) an obligation for state governments to permit private utilities a special appropriation for repayment of loans; Ciii) a standard license period of 30 years with extensions, where granted, of 20 years -- currently, licenses may not exceed 20 years and extensions my not exceed 10 years; Uiv) release from the highly constraining Monopolies and Restrictive Trade Practices Act, under which private utilities presently are required to obtain clearances for new business ventures and major projects; and, (v) streamlining of licensing procedures for new private utilities. 1.18 India's newly formed Cabinet is expected to diseuss the proposals in the near future. However, the progress through the Government of these reforms has been interrupted -- in our assessment only temporarily -- by the change of administration and by the preoccupation of the concerned authorities with revision of the Eighth Plan. It is not yet clear whether the Cabinet will also propose increases in depreciation rates for private utilities. SEBs are keen to secure similar concessions. Without commensurate increases in tariffs, this would deepen SEBs' losses, possibly substantially. It is probable, however, that the Cabinet will require at least 60? of new investment by private utilities to come from sources other than the main financial institutions. This will help ensure that private investment resulting frow the concessions does not draw heavily upon resources that otherwise would have been available to the SEBs. 1.19 In an interim initiative prior to policy changes being announced, GOI has approached selected private investment houses to present proposals for Build, A  7 Own, Operate and Transfer (BOOT) generation projects. Such projects fall within the provisions of the IPR (para. 1.09), under which SEBs may enter into joint ventures with the private sector for projects in the national interest. Results so far have been disappointing -- no new joint ventures have yet been launched - since the groups approached are wary of the same financial restrictions troubling existing private utilities. 1.20 While most in government recognize the need to extend private sector participation in power supply, some continue to view private utilities as profiteering at the expense of SEBs. These views are deeply held and will continue to slow the pace of reform. New incentives therefore are likely to be incremental in nature and are likely to be sponsored by states unevenly. The more progressive state governments, such as in Mabarashtra, undoubtedly will take the lead. Overall, it is difficult to predict how quickly private participation could increase. If GO decides to allocate additional natural gas to private sector combined-cycle projects, private participation could develop relatively quickly -- some projects could be completed within the Eighth Plan. However, at present, the outcome is uncertain. Bank Group Strategy in the Power Sector 1.21 GOI's sector strategy is sound in its broad objectives and direction. As regards public utilities, however, additional efforts are needed in institutional development, planning, finance, pricing and load management. As regards the ptivate sector, GOI's objectives need to be defined more clearly and its strategy needs expression through a first round of reforms. The nature of constraints afflicting public utilities recommends the IBRD adopt a sector-wide lending strategy. Consequently, the IBRD is extending its inpvolvement with central entities and in parallel is pursuing direct involvement with selected SEBs which, together with their state government, are committed to reform. The IBRD and IFC strategy towards private utilities is to accelerate development of the existing suppliers and to advance thinking on lowering entry barriers for new investors. In dealing with public and private utilities alike, the IBRD and IFC are also promoting more comprehensive and vigorous analyses of environmental inputs in project design and improved implementation of environmental project components (para. 1.23). 1.22 The IBRD's support for central entities provides further institutional strengthening these entities require to manage their rapid development. It also helps promote efficiency in those SEBs with which the IBRD does not have a direct relationship. PFC's lending operations, for example, will be linked closely to institutional strengthening of its borrowers. The IBRD's support for particular SEBs aims to organize the Boards to operate more along commercial lines -- invariably a long process fraught with difficulty, but essential to improve overall sector efficiency. Recurring objectives in these operations are to: (a) tighten financial discipline and improve financial planning; (b) reorganize management to facilitate decision making; (c) improve the quality and timeliness of management information; and (d) strengthen technical abilities, particularly as regards project management. The IBRD's involvement throughout the sector also facilitates a dialogue with GOI on broader issues facing the sector - for example, on utilities' need for improved financial autonomy, ways to improve SEBEs' financial performance and options to improve  ; ~~~~~~~~~~~~8 incentives for private investment in power supply. These and other issues are to be explored in detail in forthcoming IBRD econqmic sector Work, which aims to identify and appraise feasible reform options3' . 1.23 In addition to addressing areas where GOI's strategy requires support, the IBRD also attempts to catalyze progress in remaining areas. Key objectives the IBRD has adopted in this regard are to: (a) assist with development of a strategy to address in a uniform and co-ordinated way the environmental and sociological aspects of power development; and (b) support developments requiring coordinated actions within and outside the power sector -- improving coal quality and transport are priority areas. 1.24 Joint preparation of the p:oposed project by IBRD and IFC underscores the commitment of the World Bank Group to the development of private sector power supply in India. The association has proved key in advancing the Group's dialogue with GOI on the regulatory and other constraints presently deterring extended private sector participation in public power supply (para. 1.12). Under the forthcoming Private Power Utilities Project II, IBRD and IFC are seeking that GOI will take the first concrete steps to lowering the existing barriers to extended private participation in the sector. Bank Group Participation 1.25 The Bank Group has made 29 IBRD loans (USS 5,719 million) and 18 IDA credits (US$ 2,307 million) for power projects in India (Annex 1.2). In addition, a loan of US$ 485 equivalent for the Northern Region Transmission Project is being considered by the Executive Directors of IBRD. Twenty-seven projects have been completed: 20 generation; 4 transmission; and 3 rural electrification. Projects currently under implementation include 9 generation (3 of which are hydro); 2 transmission; and 6 which include a mix of generation, transmission and distribution. Four of the IBRD loans have been to TEC, in 1954, 1957, 1979 and 1984. With the exception of a few notable trouble spots, implementation of Bank power projects has proceeded broadly according to expectations. Loan and credit disbursements, however, continue to show large outstanding balances (USS 3,753 million, as of March 31, 1990). These are due primarily to the very long construction periods of generation projects compounded by frequent delays in procurement and foreign exchange and import licence clearances by the various ministries and the rising number of projects under implementation. Balances have been increased further by frequent cost under-runs on major equipment contracts - the result of a recent softening of international markets and rapid real devaluation of the Rupee. 1.26 IFC has made 2 loans for power projects in India to AEC and TEC in FY89 and is considering a loan to CESC in FY90. Although disbursements from the FY89 loans have not yet commenced, both projects are progressing satisfactorily. Including this proposed project, IFC cumulative commitments in the Indian power sector would be about USS 140 million equivalent; including about US$ 100 million to TEC. St An economic sector work study entitled "Long Term Issues Facing The Power Sector, is expected to be completed by the end of 1990. .,.  9 1.27 The Bank Group participation in these projects has strengthened the financial performance of these borrowers, not only by bringing in additional financing but more critically by encouraging regulatory improvements, e.g. the special reserves. Also, by protecting the borrowers from adverse state intervention it bolstered their private ownership as it enhanced their contribution to the public. 1.28 The Project Completion Report (PCR) for the Bank's Third Trombay Project (Loan 1549-IN; para. 1.11) notes that costs at project completion were 34X higher than at appraisal and completion was one year behind schedule. Despite this, the PCR rates the project a success: cost increases were largely beyond TEC's control and the replacement of an unsatisfactory contractor was handled expeditiously. TEC's financial performance throughout project implementation exceeded appraisal estimates and the PCR estimated the project rate of return to be 312, compared with 142 estimated at appraisal. Implementation of the Fourth Trombay Project (Loan 2452-IN) which covers the construction of the 500 MW Trombay 6th unit, proceeded satisfactorily after a slow start due to GOI's delay in establishing a fund to secure the IBRD loan. The 500 MW unit was synchronized with the interconnected system on March 23, 1990. TEC's financial performance during project implementation again exceeded appraisal estimates. II. THE BORROWER CoErorate Structure 2.01 TEC consist of three companiess (a) The Tata Hydro-Electric Power Supply Company Limited (Hydro), formed in'1910; (b) The Andhra Valley Power Supply Company Limited (Andhra), formed in 1916; and, Cc) The Tata Power Company Limited (Power), formed in 1919. In the 1950s the three companies pooled their facilities and their staff to form a single integrated grid. Although they have not actually merged, they are operated as one company under the same management. They share their assets and liabilities, revenues a*td costs in the same proportion (20? Hydro; 30? Andhra; 50S Power) and are collectively referrid to as the Tata Electric Companies. Licenses 2.02 The three hydro-electric power stations at Khopoli, Bhivpuri and Bhira (para. 2.18) are still separately owned by the three companiep under the original licenses issued in 1907, 1919 and 1921. The Trombay Thermal Power Station, the receiving stations and the transmission and subtransmission network are owned jointly in the ratio of 20:30:50 by Hydro, Audhra and Power respectively. The three companies operate Trombay under the jointly owned -~~ ~ \  Trombas Thermal Rover Electric License issued In 1953 and amended in 1978, when the fifth Trombay unit was apprbved. 2.03 The HSUB has the option to acquire, with appropriate compensation. the assets of the undertakings covered by the licenses. This option is exercisable every 10 years, but not before August 15, 2004, the maturity date of TIC's last loan from the IBRD. GOl agreed to cause the State of Maharashtra to extend, not later than June 30, 1991, the validity of TEC's licenses at least up to September 15, 2010, the maturity date,of the proposed IBRD loan (para. 6.01.b.i). 2.04 The licenses are not exclusive, i.e. other utilities may also be licensed to distribute power in the same area. There are two such distribution utilities in TEC's area (para. 2.20), who are supplied by TIC and retail power to 9 million consumers through their own distribution networks. In addition, TEC supply directly about 90 large industrial consumers. About 70 more of these direct consumers located in TEC's area were taken over by KSEB in 1980, because TEC did not have adequate capacity to supply them (para. 2.22). At that time TEC were importing about two thirds of their requirements from MSEB, an excessive dependence that has since decreased. TEC is still in a deficit position, but the probability that their distribution rights may be truncated again is considered very low. Under the terms of the License, T@C Owill be allowed to retain such distribution rights and loads in the licensed area as may be warranted by their surplus generating capacity". 1sE1 has no financial incentive to take over more direct custaomrs. GOI agreed to cause 00M not to take gay actions, including delimiting TEC's area of supply, that would adversely affect TEC's operational performance and financial position (para. 6.0l.b.ii). Shareholding 2.05 TEC were founded by the two sons of Jamshetji Tata, who were granted the initial licenses. Today the Tata group's hoJ'ding company 'Tata So0is Inc." holds less than 2.5s of TIC's shares. The Tata family members own lesi than 102 of Tata Sons. More than 753 of Tata Sons' shares are held by Tata Trust, a charitable institution governed by a board of trustees independent from the Tata family. The essence of the 'Tata Group' is effectively a network of professional mapagers, bred thro gh a long tenure in the group companies. 2.06 The three companies are private sector entities, whose coumon shares are held as given in Table 2.li  Table 2.1: Shareholders of the Tata Electric Companies (As of March 31, 1989) Hydro Andha Power _------- Percent (2) --------- Individuals 51.7 50.8 52.7 Other Private 4.3 4.1 4.1 Life Insurance Corporation 9.6 9.2 7.4 Other Insurance Companies 12.9 17.7 10.2 Unit Trust of India 14.8 13.5 12.1 Financial Institutions 5.6 3.6 12.5 Nationalized Banks 1.1 1.0 1.1 100.0 100.0 100.0 Number of Private Shareholders Individuals 30,568 27,713 55,302 Other Private 173 187 268 2.07 TEC's last share issue, by all three companies simultaneously, was in 1981 on a rights basis and was oversubscribed four times. Debentures are also issued individually but simultaneously. Each new loan agrc ,ment is signed by all three companies. 2.08 As part of the financing for this project TEC are planning a large issue of 5.3 million partly convertible debentures (PCD) in FY91 (para. 3.07). Subject to approval by the Controller of Capital Issues (CCI), TEC plan to distribute these as follows: (a) 3.9 million (74.1* of the PCD issue) to existing shareholders on a ll rights basis; (b) 0.2 million (3.7Z) to employees; (c) 0.7 million (13.2X) to other Tata group companies; and, (d) 0.5 million (9.4?) to a private financial institution. After the compulsory conversion on the basis of one share per PCD% the number of shares outstanding will increase to 9.2 million, and the private sector shareholding of TEC will increase to over 60X. Management, Organization and Training 2.09 The three companies are managed as one, sharing their assets and liabilities, revenues and costs in the proportions 20X Hydro; 301 4ndhra; 502 Power. Each has a Board of ten directors of which four, i.e. the Chairman, Vice Chairman, Managing Director and Joint Managing Director, are on all three boards. Each board Includes a representative of the Indian Financial Institutions. One GOI and one GOM representatives serve on the Board of Andhra. The other directors are representatives of leading industrial and banking institutions in i_ __ --  12 India. The three companies hold joint board meetings and share the same management and staff (Annex 2.0). 2.10 TEC are proessionally managed a"d have an excellent record ,of efficient operation and technical innovation. They were the first to introduce in India 220 kV high voltage transmission lines, and in 1984 they successfully commissioned the first 500 MV generating unit. They have successfully implemented the Third and Fourth Trombay Power Projects (Loans 1549-IN and 2452-IN), partly financed by the Bank. As of January 1, 1990, TEC's human resources strength numbered about 3450, comprising about 122 senior managers, 953 engineers and technicians, 1987 skilled and semi-skilled workers, and the balance administrative personnel. The staffing is commensurate with the size and scope of activities of TEC and is adequate to carry out the proposed project. 2.11 TEC provide extensive in-house and external training, primarily for power plant operation personnel.' Their training cenIter at Vashi, about 10 km from Trombay provide specialized training on power system managementa Their other key in-house training includes using computerized simulators to replicate the responses and operating sequences of the 500 MW Unit 5 at Trombay. TEC also offer training for SEBs' staff. Maintenance 2.12 The maintenance of TIEC's facilities is carried out by TEC's own staff. Well established preventive maintenance norms are applied for the electrical and mechanical equipment. Overhaul