Too early to write off Orissa power reforms

Restructuring will be incomplete without privatisation of distribution

P Abraham

Orissa power reforms go from euphoria to despair” read a headline in a national daily recently. Obituaries are already being written, even though Orissa is the first state to embark on path-breaking reforms, and they have just begun. One felt that privatisation of distribution in Orissa will be easier, as it is comparatively a small state, a small electricity board in terms of its assets, transmission and distribution (T&D) network, number of consumers, revenue, low agriculture consumption (6 per cent compared to nearly 30 per cent average of the country, hardly any agriculture subsidy is involved) and above all, it has the luxury of having surplus power.

In spite of all this, there is apparently considerable backlash against the reforms. In Orissa, power reforms appear to be facing the worst ever criticism from all political parties, including the ruling party, who has called for review.

The possibility of the premature death of reforms is already being predicted, without much justification seen especially in the context that the problems of the sector have been accumulated over a period of 50 years. The consumers can accept a higher tariff provided power delivered is reliable. This, in turn, calls for a well-managed and stable T&D network. It is in this context that privatisation of distribution is required to be analysed and prerequisites for privatisation identified.

Most of the state electricity boards (SEBs) have become unwieldy, due to increase in generation capacity, massive T&D network, and ever-increasing clientele. The management of such huge essential public utilities involving technical, commercial, financial, inventory, managerial, personnel, and industrial relations has become increasingly difficult. This has contributed to lack of proper supervision and control, leading to inefficiencies, T8D losses, theft, poor billing and revenue realisation. This unwieldy monolith is unable to fulfill its obligation to provide qualitative and quantitative power to the consumers. Massive dose of funds are required to be invested in T&D systems, which the present financial position of SEBs will not permit. Further, a qualitative improvement has to be brought about in the management of these assets and the delivery systems. Under the circumstances, reforms and restructuring of the power sector would remain totally incomplete without privatisation of distribution.

However, privatisation of distribution is a complicated and complex problem. We should remember that our experience in encouraging private sector in generation, which is by any reckoning much less complicated, has been none too happy, as the policy was faulted on several grounds. There are many, who argue that distribution should have been privatised first, without recognising the ground realities and complexities involved in the management of distribution system

Distribution involves several major activities, each one of them could be an independent project by itself. These activities, inter alia, include creation of a wide extra high voltage (EHV) of 400 kv to 132 kv sub-stations and transmission lines, which by itself is no easy task; distribution network of 33 kv substations and sub-transmission lines and associated substations; extension of new connections; commercial operations covering meter installation, meter reading, billing and bill collection; mobilisation of funds; maintaining accounts; inventory management; controlling T&D losses and theft of energy and above all management and control of large work force. Knowing the SEBs as I do, as I spent about 15 years in this sector, there are several grey areas, which require serious attention before the privatisation of distribution.

SEBs are creations of the state governments and are being used as instruments of state policies in furthering the interests of the ruling governments. The state governments are used to exercising considerable control over their functioning and are subjected to the jurisdiction of the state legislatures. Their interference in fixation of tariffs and recovery of revenues will not be possible once privatisation takes place.

One of the unsaid reasons for advocating the roll back of reforms in Orissa appears to emanate from the fact that scope for interference is getting restricted in private companies. The change of mindset, perceptions and attitudes of the employees, bureaucracy, public, consumers, elected representatives and the government, is an essential prerequisite to make a success of privatisation.

A monolithic, vertically integrated and massive SEB is a difficult task to manage resulting in poor performance of power stations, huge T&D losses, large-scale pilferage and theft. These conditions make a perfect case for unbundling and corporatising SEBs. One of the pre-requisites for privatisation is to establish an Electricity Regulatory Commission (ERC) to fix viable tariffs and unbundle and corporatise SEBs and create smaller vertically integrated regional utilities. Though the reforms were initiated in 1996, only six SEBs have been restructured so far and all the states are still to establish ERCs, due to general reluctance from the state governments concerned.

The SEBs hold substantial fixed assets and inventory in the state. The valuation of the assets and inventory has to be done meticulously, accurately, and transparently, to avoid under pricing of assets and to prevent the private sector from reaping unintended benefits. There is considerable dearth of experts with experience in evaluating massive power utilities in the country. The valuation should be done under transparent guidelines to establish credibility and avoid controversies in privatisation.The problems faced in the privatisation of Bharat Aluminium Co. (Balco) should not be ignored.

There is a general perception that once the distribution is entrusted to a private company, there would be dramatic improvements in quantitative and qualitative supply, substantial reduction in T&D losses, theft of energy will be totally controlled and there will be no need for any tariff revisions. The tariff increases effected in Orissa on yearly basis have given some misgivings in the minds of the consumers about the efficacy of the reforms. It needs to be appreciated that dramatic improvements in performance parameters will take time and the consumers need to psychologically accept that the multi-year performance-based tariff revisions are not wholly unavoidable in a near short term. Indeed, the state governments are required to subsidise private companies during their turn-around time.

There is also a view gaining currency that privatisation be initially restricted to town and cities and gradually extended to rural areas, primarily as compact urban areas with high load density are easier to manage. However, it is essential that the distribution companies should be incorporated for contiguous geographical area comprising both urban and rural areas to ensure balanced and orderly development of the entire state. There would, otherwise, be a great urban and rural divide in the power distribution system causing socio-economic-political problems and the backward areas would continue to languish without proper development. The rural distribution utilities, would continue to be with the government, and supply power for non-remunerative segments and continue to incur heavy losses.

Under these circumstances, what is needed is a cautious, careful and well thought-out approach in creating smaller vertically integrated regional corporate utilities comprising urban and rural areas initially as government corporations and privatised subsequently.

Another major factor that should be given due weightage is that there are only five private distribution companies in the country with distribution experience limited only to urban areas. The distribution in semi-urban and rural areas is a totally different ball game. Even in Orissa, privatisation of distribution was done through a joint venture route and not total privatisation as generally construed. There is need for formulation of transparent guidelines in selecting the private entrepreneurs and, the selection should be done on the competitive bidding route.

The new players, inter alia, should be capable of investing substantial funds of their own. It seems, private companies in Orissa do not seem to have brought any funds for working capital and are, at present, unable to pay for the power purchased from Gridco. Consequently, they are defaulting in payments and are issuing bonds to Gridco, compelling it to issue similar bonds to generation companies from whom it buys power. It would, therefore, be desirable due to lack of sufficient number of experienced entrepreneurs, for each state to experiment with one or two geographic areas, instead of privatising the entire state.

As the policy of privatisation assures security of employment to the employees, there is also a need to initiate massive human resource development efforts for changing the mindset of employees to improve managerial skills and adapt to the new work culture, aimed at commercial orientation, efficiency, productivity and quality of service to make privatisation a success.

(The writer is former power secretary, Government of India, and Chairman, Maharashtra State Electricity board)