Nothing ultra about it!

Updated: Jan 5 2006, 05:30am hrs
State-owned Power Finance Corporations (PFC) plans to invite rate-based bids for ultra-mega power projects are based on a flimsy premise. That, by getting statutory clearances and securing domestic fuel supply, developers will flock to the power market. Far-fetched, since the crucial issue of payment security remains unresolved, thanks to the sluggish pace of reforms in state distribution utilities, where average losses are above 30%. More important, how will the developer quote a reasonable rate if not insulated from the the purchasing utilities fragile financial health

Moreover, any attempt by the Centre to provide financial comfort will only blunt reform initiatives, since the pressure on states to cut their losses and check theft will ease. On the other hand, the attempt to draw confidence from the new Electricity Act is misplaced. Agreed, it has enabling provisions that will stimulate competition, wedge open monopoly markets and enable the seller to escape the tyranny of the state-owned distribution utilities. But then, state regulators will have to drive this process. And past experience has not been very promising. Importantly, there is little rationale for a financial institution to oversee the tendering process.

Clearly, the government is not offering the single missing link that will help kick-start private capacity addition. If anything, it is adding flab to the market. Power Trading Corporation (PTC) has already initialed agreements with developers under which it will sell 3,000 mw of power to various states on a long-term basis. The developers derive comfort from PTCs short-term irrevocable letter of credit from purchasing states; its ability to trade power to alternative consumers if there is default; and balance sheet capacity to support payment security for 5,000 mw capacity.

The way to mitigate payment risk in such a fragile market is by trading power to alternative buyers or insisting the state allocates a dedicated distribution zone by privatising it. Rather than identifying project sites and hand-holding the private sector to little purpose, the government must catalyse state power reforms. The present programme is inadequate, with no safeguards against reversal of reform measures. And, the pace is inadequate as it is driven by power PSUs, whose core business is not management of distribution zones. The Centre must also nudge states to privatise distribution and severely penalise theft. This will break the back of the mafia in power theft and restore financial health of the power business. Anything less, and power policies will remain ineffective.