LEFT PARTIES’ NOTE ON THE NATIONAL ELECTRICITY POLICY (NEP) ELECTRICITY POLICY (NEP)

In an earlier note on Review of the Electricity Act, 2003 several issues were raised by the Left Parties. The Minister for Power, based on an assurance of the Prime Minister, had initiated discussions with the National Co-ordination Committee of Electricity Employees and Engineers. Only one meeting was held and even before any of the issues under consideration could be discussed the Government of India has notified a National Electricity Policy (NEP).

The issues raised and the manner in which they have been disposed off in the National Electricity policy make it clear that there is no seriousness on the part of the Government of India to give any serious consideration to the issues.

1. The need for unbundling, corporatising and eventually privatizing were under consideration and a specific mention was made in the CMP. “The mandatory date of June 10, 2004 for unbundling and replacing the SEBs will be extended”.

The Ministry of Power has taken the extension of the SEBs as an end in itself, a one-time concession. The NEP presumes the unbundling of the SEBs and merely directs the states to ensure that the successor organiations are not burdened by past liabilities (Para 5,4,3)

There is a need to study the impact of unbundling, corporatisation and privatisation. Even in U.K., the model on which this model is based, foreign dominated, mainly integrated generation and retailer companies that have no incentive to compete, own have long term contracts for much of the 9.2 GW of plants. In France a vertical integrated power system exists. Ten vertically integrated regional companies control the Japanese electricity industry. There is nothing universal about the model. In fact the experiences both within and outside India is that private monopolies are replacing public monopolies with very undesirable effects. To argue that the Electricity Act mandates this defeats the very purpose of a review.

2. Provisions such as second distribution licensee, non-discriminating open access and captive generation would institutionalize cherry picking and jeoparadise universal access.

The NEP merely quotes from the Act and re-emphasizes the implementation of all the above. (para 5,4,7; 5,3,3; 5,2,24/25/25)

In any electrical power system, for that matter any infrastructure, there would be bulk users and small consumers. Infrastructure must ensure that the bulk users are not allowed to “succeed” from the macro system. Even simple common sense would suggest that all the above measures would ensure that a section of consumers would be able to take care of themselves at the cost of the others. Even in a highly industrialized nation like Japan, with 216 Giga Watts, there are about 2000 consumers who consume more than 2 MW. In India the number would be in two digits and upto 1MW would be just a few hundred consumers, whereas India has more than a 100 million consumers most of whom are small consumers,- 100 Kwh per month or less. Mere assertions or quoting the Act is not enough. Empirical evidence of the consequences of cherry picking on the cost and availability to the domestic and agricultural consumer needs to be convincingly established.

3. Despite reasonable restrictions on generation such as techno-economic clearance and several examinations of fuel policy (Energy Survey of India Committee, Fuel Policy Committee etc.), there have been serious problems like the Dhabol Power Plant, high cost IPPS with one sided contracts and serious balance of payments on account of import of fuel.

The investors, would not only enjoy legislative freedom without any checks and balances, but would also be allowed to enter into long-term contracts ( Para 5.2.2 and para 5.2.18).

The Indian Financial Institutions such as IDBI are facing serious problems on account of their exposure to the private power plants. Also the State Governments are unable to sustain the burden of one sided power purchase agreements and several state governments like Andhra are trying to renegotiate the contracts. Some IPPs refuse to reduce interest rates when market rates have gone down and the loans can be renegotiated with lenders. They do not want to reduce the POE or depreciation to be factored into tariff as per latest guidelines of CERC. Under these circumstances giving complete legislative freedom to investors needs to be examined.

There is no fuel policy or an assessment of the fuel-energy balance of the country. How will the need for hydrocarbons be planned and co-ordinated, since fossil fuels are required not only as primary fuels and for conversion into electrical energy but also as feedstock in fertilizers and petrochemicals? Since each investor would be concerned only with the viability of his particular project, which agency would be responsible for the cumulative impact on the nation – its foreign exchange and energy security? Suppose, most of the investors find imports fuels LNG or coal or any other commercially viable and enter into long term contracts, would it be unconcerned about the fate of the coalmines and millions of workers? What would happen to the energy security of the nation? The policy document is silent on these issues. In U.K. as a result of the power policy, the entire Coal industry was virtually destroyed. What would happen if the largest fossil fuel indigenously available – Indian Coal meets the same fate as in U.K.? Besides the economic consequences, are the Government of India and the concerned State Governments ready to bear the political consequences?

Hydropower site is a gift of nature. And there are only a finite number of sites. Privatizing hydropower implies that the state loses the right to commercially exploit the site. Hydropower is available in states that have very little industry and other revenue earning sources. The prosperity of Himachal Pradesh is largely due to state exploiting Hydropower.

On Nuclear power the NEP merely deals with Private sector partnership. (Para 5.2.19) Is the lack of private partnership the real problem? India has very poor quality Uranium ore, consequently both availability and cost effectiveness are problematic, accentuated further by the encirclement that USA has enforced on India making it almost impossible to import nuclear fuel. The policy is conspicuous in its silence on this critical aspect.

4. The NEP asserts that privatisation of distribution is necessary to meet the requisite reduction in losses and improve quality. (Para 5.4.4)

The experience of both Orissa and Delhi are contrary to this assertion. The comments of the Kanungo Committee and the CAG are given in the Annexure. Also there seems to be an oligopoly of India private firms that is seeking to take over the distribution systems. The experience of AES in Orissa is a disgraceful disaster, where the CEO demanded, even before the dead cold be buried, a three-fold increase in price to compensate for the losses suffered by AES due to the cyclone. Subsequently, AES just abandoned their distribution company and the regulator had to request the State Government to nominate an administrator to manage the power supply. Even though BSES had violated the shareholders agreement and not brought working capital, three-fourths of Delhi’s distribution was given to BSES. Against this evidence it is absolutely essential that there is first an enquiry into privatisation of distribution before it is extended to the whole country.

5. The NEP does not enumerate how the supply to the agriculture would be provided. It merely decries the subsidies and require: that these be reduced progressively (Para 5.5.3). In fact the document itself acknowledges “There is an urgent need to correct this imbalance (of cross-subsidies) without giving tariff shock to consumers”.

The extent of subsidies in the year 2002-03
Domestic sector Rs. 11,651.01 Crores
Agriculture sector Rs. 26,959.30 Crores
Subsidy on inter- state sales Rs. 225.89 Crores.
Gross subsidy Rs. 38,836.20 Crores.
Net subsidy Rs. 30,855.36 Crores.
(after subventions recieved from the State Governments

Merely enacting legislation or NEPs would not be sufficient. The problem is very serious and needs detailed examination. It is important to consider these contradictions.

• While all manner of concessions are given to the industrial consumers through instruments like captive generation, open access, trading etc. there is no seriousness regarding agriculture except to relegate it to the NGOs, Panchayats etc (para 5.1.6 of NEP). Agriculture contributed in FY 1999 35% and 28% share of the States’ Gross Domestic Product (GSDP) of Andhra Pradesh and Haryana. Agriculture employs the majority of the labor, about 60%, in both states. Over 70% of the population in Haryana and A.P. reside in the rural areas, which are also home to the majority of the poor – 70% in AP and 80% in Haryana as of FY 1994.
• While concessions, comforts and guarantees (including 16% rate of return on equity) given to investors in the private sector IPPs and distribution are labeled as incentives, concessions such as subsidies to Agriculture are considered a drain on the economy.
• Would the disparity between the cost of canal irrigation and ground water irrigation based on high power tariffs be sustainable? Would the cost of canal irrigation water be increased to match the cost of ground water? And finally what would happen to the viability of Indian agriculture?

These are critical issues that need to be addressed while drafting electricity policy or legislation.

6. The only indication in the document is that Rs. 9,00,000 Crores would be required. There is no analysis of where this money would come from.

There is a great expectation from the private sector but the experience in India is that most of the funds used by IPPS and private distribution have been public funds. As far FDI the World Bank itself has stated that private investments are drying up-having fallen substantially in recent years, from a peak of $50bn in 1997, investment in power projects with private participation in developing countries fell to around $7bn in 2002. The share of power sector in total outlay of both Central and State governments has been systematically brought down from 18.33 in 1991-92 to 13.09 in 2000-2001, and the share of the power sector in the total outlay of the States has come down more drastically from 26.09 in 1991-92 to 17.81 in 2000-01.

The policy document is full of assurances to private investors. But in respect of the Public Sector the only major role envisaged is:

“Public Services obligation like increasing access to electricity to rural households and small and marginal farmers have highest priority over public finance.”
7. The term competition is used in the NEP as if it were just a natural consequence of several privatisation, multiple players and concessions to investors. Competition is not free lunch and is very difficult to achieve in a wired system. The experience of the United Kingdom is that the power pool was a failure and had to be replaced by NETA, the consumer today is paying almost 30% as the price for competition. How and what shape would competition take in India endemic with shortages? This needs to be established. Promise of competition to justify concessions to private interests is an ideological position that needs to be analysed

8. While the NEP has explained the need for significant addition to generation capacity and expansion of transmission and distribution network in order to provide about 44% of the households who do not have access to electricity. (para 1.3) there is no clear roadmap on how the supply to those below BPL would be provided. If the affordable power supply to agriculture and domestic is itself in jeopardy to talk of providing one unit per day to those below BPL is an empty promise. The question of universal access needs to be examined in a holistic manner.

9. The Government of India has internalized the methodology of the World Bank of ‘output-based aid’. The policy documents states.

“The Central Government would also assist the States, which develop a clear road map for “turn around, in arranging transition finance from various sources which shall be linked to pre-determined improvements and efficiency gains aimed at financial viability and putting in place appropriate governance structures”.

The message to the State Governments is clear, if the state want any funds either from the Central Government or transition finance from various sources (read World Bank) unbundle the State Electricity Boards and create privatisation enabling conditions.

We therefore urge that before the New Energy Policy is given effect to, the ”Review of the Electricity Act-2003, should be undertaken as promised in the Common Minimum Programme (CMP).
Annexure

Extracts from the Kanuago Committee report (Orissa) and CAG report (Delhi)

On Orissa the Kanungo Committee recorded:

“The private sector partners of the DISTCOs, neither brought superior management skills into the companies nor did they arrange financial support by way of working capital for the companies. All that they gave was the fund they had brought for acquisition of shares at the time of privatization. When we pointedly asked about infusion of working capital, we were told that infusion of capital into the DISTCOS need to be viewed as joint responsibility of both the partners, not the private sector partner alone We find this attitude difficult to accept, particularly having regard to the clause 8.I in the Shareholders Agreement executed at the time of privatization ……

The DISTCOs are in dire need of capital, working capital in particular. Instead of using the good offices of BSES Ltd. to secure working capital in accordance with the Shareholders Agreements for the three DISTCOs under their control, they have persistently defaulted in the payment for power they purchased from GR1DCO and thereby have over exploited GRIDCO's misplaced generosity in permitting them to use as working capital’.

Instead of punishing BSES (Reliance) for violating the shareholders agreement, threeforth of Delhi’s distribution system was handed over to the same company. On Delhi the Controller and Auditor General (CAG) in its reports states.

• The Delhi Electricity Reforms Act which vests the authority to frame the scheme (for privatization and transfer of assets and manpower) in the Government. Section 2 (d) of the Act stipulates that “government” means the Lt. Governor of the NCT of Delhi. Hence, any substantial changes in the terms of transfer scheme should have been re-submitted to the Lt. Governor for his approval. The Audit report suggested that the Government might obtain post-facto approval of Lt. Governor to the modifications made in the Transfer Scheme.

• A scrutiny of the note (Government’s note on the valuation of assets) indicated that the general methodology had been explained, the basic figures adopted, the weightages given and assumptions made were not indicated and hence the basis of arriving at the final figure of Rs. 3,160 crores could not be verified.

• At the time of Request for Proposal (RFP), the total loss was to be reduced by 20.75 % for DISCOM 19.25 percent and I for DISCOM II and III. At the time of Share Acquisition Agreement, consideration of collection efficiency was included in the calculation of AT&C and requirement for reduction of AT&C losses was diluted to 17 percent over a period of five years. Audit scrutiny revealed that if we consider the collection efficiency along with technical losses as allowed by the Delhi Electricity Regulatory Commission and the technical consultants, the loss on these two factors viz., technical loss and collection efficiency was 18.63 per cent. Taking into account the acceptable technical loss of 7.3 per cent, the extra loss allowed to the DISCOMs on account of technical loss and collection efficiency was 11.20 per cent. The non technical loss viz. primarily theft reduction and misuse which was one of the primary objectives of privatisation was thus only 5.80 per cent in five years viz. 1.1.6 per cent per year as against 3 pre cent per year on an average envisaged in the RFP. This resulted in a significant dilution of the loss reduction targets as originally envisaged in the RFP.

• By reducing loss reduction level from 20.75 percent for DICOM I and 19.25 percent for DISCOM II and III to 17 per cent for all, TRANSCO is deprived of an accrual of Rs. 3,929 Crores…The support level envisaged was Rs. 2,600 Crores, but even a support of Rs. 3,450 Crores was not adequate to compensate for the loss that would be incurred by TRANSCO in view of the assumption made for increase in consumer tariff every years @ 10 per cent…Enhancement of moratorium period (for repayment by DISCOMs) will result in depriving the holding company of interest amount of Rs. 339.84 Crores which would have accrued after the third year. Moreover, it enables utilization of loan amount of Rs. 1,1416 Crores for an additional two years without interest…. There is a difference of Rs. 3,107.62 Crores between the figure of total receivables depicted in the Balance Sheet ending 31 March 2002 of DVB and that worked out by the consultants…

• The gross difference in the amounts paid to (the consultant) SBI CAPs and subsequently to ASCI was not justified given the work actually involved.

A study by Prayas indicates even old and well-established private distribution companies like Tata and BSES in Mumbai, CSES in Kolkata have not shown greater efficiency or reduction in losses etc. than the comparable Pune municipal area of MSEB. There is no evidence anywhere else in the World either; studies suggest that in transmission and distribution, there is "no significant difference in technical efficiency between the two ownership types"