The Thirteenth Finance Commission clearly highlighted the worsening financial position of the state power distribution companies even after reforms, leading to further deterioration in state finances. Earlier, the Planning Commission used to annually publish the performance of state electricity boards (SEBs), highlighting the performance parameters (T&D losses, rate of returns etc) but it, unfortunately, has been discontinued. Subsequently, CRISIL and ICRA have been mandated by the Power Finance Corporation at the instance of the ministry of power to carry out a performance rating of the state power utilities; the first report was put in the public domain in January 2003. The last such report was published in 2006, to the best of my knowledge. It is high time that the Planning Commission restarts the rating system.
One of the major reasons for introducing power sector reforms was to improve the finances of SEBs through efficient management of the sector. Unless the finances improve, the power utilities? finances can be adversely affected due to high power procurement costs. The Finance Commission report clearly highlights the financial losses, in spite of huge subsidies by the respective state governments. The financial losses including subsidies are progressively increasing from R18,400 crore in 2005-06. The losses of the state utilities even under reasonable assumptions of efficiency improvements are estimated to increase from R68,000 crore in 2010-11 to R1,16,000 crore in 2014-15.
Some of the key reasons for increasing losses are the inability of the state utilities to enhance operating efficiencies and reduce aggregate technical and commercial (AT&C) losses; high cost of short-term power purchases; absence of timely tariff increases etc. In some cases, states have not raised tariffs for the past 10 years in spite of increasing deficits and in spite of having State Electricity Regulatory Commissions (SERC). While the tariffs could be increased thrice in three years (without SERC, during 1990?s) while I was chairman of the Maharashtra State Electricity Board, I wonder how no tariffs could be revised for as many as 10 years in spite of having SERC. On account of this, the tariff increase requirements vary from 7% to 20% per annum, which is almost impossible to achieve. The regulatory commissions have not been able to carry out even the routine tariff increases in many states. Tariff reforms, including multi-year tariff implementation as required by the Act, are no longer even talked of.
Also, a new problem has been added to the state power utilities because of a sharp rise in the price of power purchased in the open market, due to chronic power shortages. While the distribution companies complain about high prices, private sector entrepreneurs complain about poor rates. In addition to direct subsidies and subventions, states have been extending substantial guarantees to the state utilities. The overall outstanding guarantees extended by the states to the power sector utilities is about R88,000 crore as on March 2008. It must have gone up further.
The development and operations of the T&D network is mostly in the hands of state-owned utilities and is expected to continue putting considerable strain on state finances, even after a large component of the generation is being developed by the the private sector.
It?s clear that a vast majority of the state-owned power distribution utilities are once again in a precarious financial position. AT&C losses reduction, revision of tariffs and collection efficiency remain key concerns for the sector. In general, the achievements have fallen far too short of the needs and the targets established, even after R-APDRP (Restructured-Accelerated Power Development & Reforms Programme).
Further, distribution franchising for efficiency improvement needs to be considered by the utilities. Some states have started implementing franchising in urban pockets and the initial results are encouraging. Mahavitaran (MSEDCL) in Maharashtra had experimented franchisees for the first time in 2006. Torrent Power was made the franchisee for Bhiwandi town, which was a chronic defaulter of power bills, as the bill delivery and collection staff could not even visit many areas of Bhiwandi. Under the arrangement, the franchisee acted as an entity empowered by the state to operate an existing utility and distribute electricity within an identified area for 15 years. The experiment was a huge success. AT&C losses were brought down from 50% to below 25%; monthly recovery went up from R30 crore to R40 crore; there was no staff cost, no day to day O&M cost and, above all, no management headaches. Because of this success, Mahavitaran recently selected franchisees in Nagpur and Aurangabad urban areas. Such measures need to be scaled up significantly.
In spite of the several measures initiated by the distribution companies, the AT&C losses continues to remain high. There is no respite from the subsidy regime. Some states continue to announce free and/or subsidised power for various segments including agriculture. The overall increase in tariff has not kept pace with the cost of supply, leaving a huge gap between the cost of supply and tariff.
One of the primary objectives for establishing SERCs was to delink the state government?s interference in the functioning of SEBs and entrust functions, most importantly the fixation of tariffs in a transparent manner, to SERCs. Most of the utilities have not issued multi-year tariff orders and even if they were issued, they are not being followed. It is necessary for SERCs to discharge the mandated functions independently and fearlessly as the legal provisions in the Electricity Act, 2003, specifically provide for fixed tenures for the SERC heads?5 years or 65 years of age (whichever is earlier). Such a provision was specifically provided after considerable thought, when the first Electricity Regulatory Commission was created in Orissa in 1996, when I was the Union power secretary. It is necessary for the government to revisit the various provisions in the Electricity Regulation Commissions Acts and make changes for their effective functioning.
The real challenge to the power sector is to develop the arduous process of tariff reforms and to fix-up cost-related tariffs. A unanimous and resolute commitment by the state government alone can transfer the sector from its current state of affairs. Time is of the essence for speedy implementation of tariff reforms.
The author is a former Union power secretary and chairman of the Maharashtra State Electricity Board