The decision of the government of India to review the Electricity Act 2003 is welcome. The act made it mandatory for all state electricity boards (SEBs) to unbundle into separate generation, transmission and distribution entities. While the SEBs in some of the large states must unbundle to streamline their operations, it placed huge burden on smaller states. The underlying belief that unbundled electricity utilities are more efficient than vertically integrated utilities is a debatable concept sold to bureaucracies in several countries by the consulting community. Some of the best run electricity utilities in the world are still vertically integrated. Examples are: Electricity de France (EdF), Eskom (South Africa), Southern Company (US), RWE (Germany), etc. These are very large vertically integrated utilities serving millions of customers. Price Waterhouse Cooper’s Movers & Shapers Survey 2002 (published in May 2003) which examined the results of top 50 electricity utilities in Europe and North America concluded that "during times of turbulence, vertically integrated utilities performed better to meet the needs of their customers and reported better financial results".

Smaller SEBs when unbundled will face a severe strain on their resources both in terms of finance and manpower. Today if they are not in a position to run as one efficient organisation, how will they run as three or more companies with the same resources? In any enterprise ‘management’ is more important than ‘ownership’ and in every country, there are several well managed state-owned companies and hundreds of poorly managed private companies. Particularly in India in most sectors some of the best run organisations are publicly owned, not private.

Unbundling and privatisation are not the panacea for all the ills of the power sector. None of the privatised distribution companies in India has shown significantly better performance till date – Orissa and Delhi being glaring examples. Before it is too late we must realise that privatisation of distribution networks alone cannot guarantee improvement in performance.

This is not an attempt to justify the views of leftist parties against divestment and privatisation. But the bitter truth is that there are not many resourceful organisations in the private sector in India which can take over and manage electricity distribution business efficiently. BSES (now Reliance Energy) has done a relatively good job in Mumbai as they were traditionally managing the power distribution there for decades. BSES could not replicate the same level of success in Orissa or Delhi due to inadequacy of resources, mainly trained manpower. When the power sector in India opened up for private investment during the last decade, BSES jumped at every opportunity but without adequate resources, the results of which are evident. Other front-runners in the race to take over the distribution business from SEBs are Tata Power, CESC and NTPC. Even these organisations are yet to prove that they can turnaround and efficiently manage the distribution network in a large urban area. Not many foreign companies are expected to jump at the opportunities in the power distribution sector in India due to the requirement of huge investments and volatilities in policies. All these new players together may not be able to handle even a small fraction of the work being presently carried out by the SEBs. So, if all SEBs are to be privatised who will take over and run these distribution companies? When the aviation sector was opened up we saw the emergence of several private airlines, but a few years later only two or three remained in business. A similar scenario we witnessed in almost every sector that was liberalised. Fortunately in all those sectors including telecom, a consumer could exercise his choice. Can we afford to go through such experiments in the electricity sector where an ordinary consumer cannot choose his power provider?

Management contracts for operation and maintenance is an emerging trend in utility reforms. Instead of selling-off the equity in distribution companies, a preferred alternative is to offer management contracts to private agencies. Management contracts to run power plants and power distribution networks are being given to private parties with specific clauses in the agreement for bringing in investments for plant modernisation or network improvements. There are good examples of this model working well in several developing countries. This route attracts more players as the investment they have to bring in is much less (compared to buying 51 per cent or more of the equity) and targets are more specific and controlled through enforceable commercial agreements. The period of such management contracts may vary from 5 to 10 years. Other problems associated with outright sale of distribution companies is the controversy that usually arises from the valuation of assets. In the present situation, all distribution units in most of the states, when unbundled, will emerge with a negative net-worth because of the accumulated losses and will not attract a reasonable price despite the fact that the real estate holdings alone, if valued independently, might far outweigh their liabilities.

The development of short-term energy markets is an area that requires detailed examination. It is acknowledged by all that the initial route tried for private participation in power generation through long-term power purchase agreements (PPAs) has failed. A better route being followed in many emerging markets of late is that of short-term PPAs covering short-run marginal cost. Short-term agreements (generally two to five years duration) between buyers and sellers of electricity can be executed faster and operated efficiently. This scenario will lead to the emergence of wholesale energy market or a ‘power exchange’ that operates more on the equitable transaction equilibrium principle. The legal and regulatory regime may encourage the emergence of a short-term energy market which can boost private investment in the sector. Major hurdles in the development of short term energy markets are: (i) inadequacy of infrastructure to conduct transparent market operations; (ii) lack of transparent norms for determination of wheeling charges and transmission congestion pricing. Transmission operators need to improve infrastructure to facilitate operation of short-term energy markets where day-ahead or hour-ahead trading can take place. Unless the market matures to a transparent wholesale energy trading place where short-term deals can be conducted competitively, the open access to transmission will not have any major impact and the efforts of power trading companies will be more ornamental than of any significance to influence or improve the efficiency in the sector. Though it is debatable whether competition in the marketplace can ensure energy security, the present sector structure in India demands this be the next logical step forward.

Distributed generation is gaining increased acceptance everywhere. The world is about to witness a paradigm shift in the energy sector – the shift from a hydro-carbon economy to hydrogen economy. Fuel cells and micro turbines are going to revolutionise the power sector and the option to choose between micro power and grid power is going to be a reality sooner than later. The power sector in India need to keenly watch these developments in distributed generation technologies and initiate measures to adopt them as it becomes competitive for different applications. The Electricity Act may facilitate this by liberalising all types of power generation and distribution up to a certain value (say 2 MW or 5 MW) from the purview of licensing. The act may also encourage the penetration of information technology in the power sector which is very poor in India.

In the context of management contract, it is worth mentioning the Ivorian Model. Amongst the several electricity utilities studied, that of Cote d’Ivoire (in west Africa) stands out for several reasons. The state-owned Energy Electrique d’ Cote d’Ivoire (EECI) was responsible for electricity generation, transmission and distribution in Cote D’Ivoire until 1990. Due to an abysmally poor performance, this vertically integrated monopoly was restructured and the entire operation and maintenance functions of the complete power system including the load dispatch centre were given on a 15 years licence to a private agency called Compagnie Ivoirienne d’Electricite (CIE) in 1990. All employees of EECI, who were working in the respective departments were transferred to CIE. However, EECI remained a government body and retained the ownership of all facilities and was responsible for system planning and creation of new facilities. In 1998, EECI was further unbundled into the following companies: (i) SOPIE – responsible for overall power system planning, investment planning and execution of new projects; supervision of plans and programmes of CIE for energy production, transmission and distribution, (ii) SOGEPE – an asset management company responsible for ownership of all the assets and financial management, and (iii) ANARE – responsible for regulatory functions in the electricity sector.

CIE (owned by SAUR Group of France) continues to be responsible for day-to-day operation and maintenance of all generation, transmission and distribution functions. The total installed capacity in 2003 was 1,203 mw and total energy production was 5,307 GWh of which about 30 per cent was exported to neighbouring countries (Ghana, Benin, Togo and Burkina Faso). Although only one-third of the 18 million people in the country have access to electricity, the operational statistics of CIE are very impressive as detailed below:

T and D losses estimated at 14 per cent (including technical and non-technical losses) compared well with that in the developed world. The payment collection efficiency was above 98 per cent (before the onset of civil war in 2002). Annual customer growth rate during the past decade was about 8 per cent and the average time taken by CIE for providing new connections to customers was only two-three days. All customers were metered and all meters were read in every billing cycle. CIE operates a state-of-the-art control centre with SCADA and EMS. The distribution network in the capital city of Abidjan is fully automated and they carry out live line maintenance on all high voltage and distribution network. The 3,700 employees of CIE carry out all functions in-house: from operation of power plants (except the two IPPs) to providing new connections, meter reading, billing, bill distribution and cash collection. Above all the cost of electricity is considered affordable – despite the fact that the 15-year concession to CIE was given arbitrarily by the then military dictator.

One major factor contributing to the good performance of this organisation is their highly skilled and motivated employees. Surprisingly more than 95 per cent of them are the same old EECI employees! Today there are less than 10 expatriates in CIE from the owner’s side. The efforts made by the CIE management in training and skill upgradation of the EECI employees whom they inherited are commendable. This is what is missing in most of the privatised institutions in India.

The ministry of power (MoP) in India is now pursuing a very ambitious programme called "Power for all by 2012". During the past 50 years about 1,10,000 mw of power generation capacity was built up in the country. Under this new programme MoP is planning to add another 1,00,000 mw by 2012, which reminds us of the optimism in the power sector during the early 1990s, when memorandums of understanding (MoUs) were signed with 125-odd prospective IPPs to set-up power stations all over India. The cumulative capacity of those IPPs for which initial MoUs were signed exceeded 68,000 mw, but even 10 per cent of that has not materialise till date. While adding 1,00,000 mw of generation capacity, a corresponding augmentation of transmission, sub-transmission and distribution infrastructure to transport and distribute that additional power requires comprehensive planning – otherwise new power plants will suffer from poor plant load factors. The estimated investment for this programme exceeds Rs 9,00,000 crore or $ 200 billion. The programme to nearly double the power sector in 10 years places a large requirement of trained manpower. The dearth of competent manpower in the power sector is a major impediment in the development of this sector in India. Private power companies are poaching executives from the public sector. Not many organisations in the power sector have made serious efforts for training and development of human capital to manage the electricity business. Concerted efforts in this direction are yet to be seen from the government side or from the industry.

A world population totalling 6.3 billion in 268 nations together consumed 13.94 trillion kwh of electricity in the year 2002, representing a per capita consumption of 2,211 kWh. The corresponding figures for India were 1,050 million people and 497 billion kWh representing a per capita consumption of 473 kWh. While a state like Kerala, which was declared fully electrified two decades ago reported per capita consumption below 300 kWh due to poor industrialisation, certain states where nearly half the population with no access to grid power accounted more than the national average in per capita consumption. It is estimated that about 87 per cent of electricity consumption in the country is concentrated in 83 urban centres. Assuming that the installed capacity goes to 2,10,000 MW by 2012 and the Plant Load Factor (PLF) improves (from the present level of 71 per cent) to 75 per cent, the per capita consumption of electricity in India will still stand below half of today’s world average! Large number of Indians live in areas far from electricity grids and a huge section of semi-urban and rural population, though living in electrified areas, are not connected to the grid as they cannot afford it.

Apart from unbundling there are many other sections in the Electricity Act 2003 which require rationalisation. The act guarantees a licence period of 25 years for power generators and distributors, which is a very long period. Ideally the licence may be granted for 12-15 years for power generators and 10 years for distributors, with provisions to review and extend it subject to satisfactory performance.

Provisions under sections 19 and 20 of the act for revocation of licence and taking over the management of a licensee need to be reviewed as these are not practical. Section 19 of the act specifies conditions under which a licence can be revoked and the section 20 prescribes conditions for resale of the assets/business of the licensee to other agencies. These are time-consuming procedures that can get entangled in the cobweb of litigation. Instead the act may provide provision for appointing an administrator for the day-to-day management of the licensee’s business under the guidance of the concerned regulatory commission in the event of continued poor performance of a licensee.

Sections 29 (6) and 33 (5) of the act specifies certain penalties for non-compliance of the load dispatcher’s instructions. It is suggested that instead of fixing the amount of penalties in the act it may be left to the discretion of the concerned regulatory commissions or may be specified in the Grid Code, which can be amended from time to time.

Sections 38 (1) and 39 (1) of the act restrain the central transmission utility and state transmission utilities from engaging in trading of electricity. Similarly section 41 prevents all transmission licensees from trading in electricity. Rather than putting limitations on the activities of these entities, the act should pave the way for transparent policies for determination of wheeling charges and transmission congestion pricing. Presently all transmission operators (power grid and state transmission companies) are allowed to fix wheeling charges that guarantee a minimum return on their investment. This may be changed to competitive and transparent pricing norms based on actual power-flows, transmission losses, line availability, fixed and variable operation and maintenance expenses, etc. The act may make it mandatory to include models for determination of wheeling charges, congestion revenue rights and transmission loading relief in the Grid Code.

Section 51 of the act authorises distribution licensees to engage in other businesses for optimisation of their asset utilisation. This is an open permit to do just about anything as the range of activities they can enter into is not specified. Considering the fact that all electricity distribution networks in urban areas have vast landholdings, a licensee under the protection of this section (and a bit of blessings from the concerned authorities) can engage in real estate business. This section needs to be elaborated to protect the assets of the utility and the interest of the consumers.

Section 52 of the act may be amended to protect the rights of the electricity traders with regard to access to information relating to economic dispatches by concerned transmission operators.

Section 69 of the act dealing with the clearances to be obtained from the telegraph authorities is a hangover from the old era. The Electricity Act 1910 and the Electricity Supply Act 1948 could not ignore the provisions of the Telegraph Act 1885 as telegraph and telephone lines were the backbone of the communication system in the country those days. Whereas today we have multiple channels of more reliable and faster communication network throughout India. In any case sections 160 and 164 protect the interest of the existing telegraph and telephone network; hence section 69 may be deleted.

Section 83 of the present act gives an option for two or more states to institute joint regulatory commissions. Instead this may be made mandatory for all states that do not have a certain amount of installed capacity (or certain number of consumers) to go in for joint commissions, which will not only reduce the administrative expenses, but also improve the quality of regulation.

Section 126 (6) (b) defines unauthorised usage of electricity as "use for any purpose other than for which the usage of electricity was authorised". This section together with section 145 which denies jurisdiction of civil courts for the decisions of the assessing officers of a licensee (as specified under sections 126 and 127) makes the present act draconian. It is left to the discretion of the assessing officer of a licensee to decide whether a study room with a computer in a residential building or apartment can be brought under commercial category or not – and if it is decided by the assessing officer that it is a commercial use and the consumer has only domestic connection, he stands to face all penalties (including imprisonment) if one goes strictly as per the provisions of the act.

Section 65 of the Electricity Act 2003 empowers state governments to grant subsidies to any class of customers and also prescribes that the amount of such subsidies must be compensated to the utility/licensee by the state government. Though many states continue to provide subsidies to agricultural and domestic consumers, they are repeatedly failing to pay up the promised subsidies to the utilities. In the 16 states where power sector reform process have been initiated, the total state subsidies during the year 2002-03 stood at Rs 12,719 crore whereas the states could pay up only Rs 5,919 crore, which leaves an unpaid dues of Rs 6,800 crore. This is in addition to the total unpaid dues of over Rs 5,300 crore during 2001-02 to the same utilities. Some of the states have resorted to pay the utilities for the subsidised power at the rate of 50 paise per unit, which was the minimum tariff set by the last government for agricultural consumption. This situation compels the utilities to charge higher rates from non-subsidised customers to the extent that many timely-paying customers may opt for captive generation, which will inter alia erode the finances of these utilities further.

Few realise that only a very small portion of the country’s agricultural production depends on electrically-operated pump-sets. Several studies have indicated that the benefits from free or subsidised electricity went to richer sections of the farmers. In water scarce regions of Gujarat, rich farmers running tube wells on subsidised electricity were selling water to poor farmers at very high prices. Similar incidents are reported from other states also. Depletion of groundwater due to excessive pumping where power is free is another common complaint. As mentioned earlier, the poorest of poor in rural and urban areas are still not connected to the electricity grid. Those are the classes of society which deserve the state resources for their uplifting. Hence subsidising electricity may not be the ideal vehicle to bring about social justice or boost agricultural production. Agriculture no doubt deserves special considerations and subsidies – but free electricity may not be the most appropriate means. These issues need exhaustive studies before policy decisions are taken in haste by central and state governments. Unless the financial health of the SEBs improves, no reform programme can improve their performance.