Conference on power sector reforms in India

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