Frontline Volume 18 - Issue 17, Aug. 18 - 31, 2001
India's National Magazine
from the publishers of THE HINDU


Table of Contents

POWER SECTOR

Power as a commodity

Orissa's experience in implementing power reforms provides a significant commentary on the problems involved in the reform and restructuring process that has been under way in the sector during the 1990s.

SUDHA MAHALINGAM

MANY of the power sector reform initiatives undertaken during the last decade have come unstuck primarily because there has been no consensus on whether electricity should be treated as a commodity to be traded commercially or as a merit good. The unravelling is also a reflection of the compulsions of elected governments which have chosen the reform path not out of conviction, but owing to external pressures.

EASTERN PRESS AGENCY
The offices of the Orissa Electricity Regulatory Commission.

The first decade of the new millennium seems to have set in motion the process of rapid unravelling of many reforms undertaken during the 1990s. While the Enron denouement may be a scene stealer, the rebound in other spheres is no less stark. The political and popular resistance to privatisation of power distribution in Haryana is on the verge of driving out the World Bank which is funding and supervising the restructuring process in the State. The Electricity Bill 2000 has been through a number of avatars, still in draft form and still eluding consensus. The Central Electricity Regulatory Commission's Availability Based Tariff order - its very first - is tied up in knots in numerous court cases in various States. Moreover, a U.S.-based multinational company, AES, has recently pulled out of distribution in Orissa - the State that was held up as a pioneer in successful power reforms.

Of all these developments, Orissa's experience provides perhaps the most significant commentary on the reform and restructuring under way during the last decade (Frontline, March 17, 2000). News reports even claim that AES is ready to forgo its $10 million investment in Orissa's central distribution company CESCO if only it can exit from the messy business of power distribution in the State. The decision of AES is seen as a terrible letdown for all the reformists who put their faith in the ability of the private sector to deliver the goods in the tricky business of power supply.

THE privatisation of power distribution in Orissa was premised on three factors which, it was believed, constituted a recipe for sure success. First, private distribution companies would be free from political interference in dealing with a thriving practice of large-scale power pilferage. Second, the private sector would bring with it superior management skills which will help it tone up efficiency and prune wasteful expenditure. Third, private enterprise would invest the necessary capital to install meters and equipment to check pilferage and technical losses. It was thought that the State Electricity Board (SEB) will not be able to achieve these ends. Hence, it was considered desirable to unbundle the vertically-integrated SEB into distinct and manageable functional units and privatise them. Yet, in less than two years AES threw up its hands and wanted to walk out.

What went wrong? AES was a reluctant entrant into the distribution business right from the start. The global utility major owns 48 gigawatts of generation capacity in 146 facilities spanning 19 countries, and distributes power to 17 million customers. But the Indian subsidiary's core competence is in generation. It was one of the first Independent Power Producers (IPPs) to commission a thermal power plant in India - the 500 MW Ib Valley Project in Orissa. Subsequently, when the State-owned generation company Orissa Power Generation Corporation (OPGC) was disinvested, AES picked up 49 per cent stake in the company. Thus, AES became a prominent private player in Orissa's power generation scene. Until 1999 it was quite happy doing what it was good at - generate and supply power to Gridco, the State-owned transmission company.

When the Orissa government, acting on the reform course charted out by the World Bank, called for bids from private investors to take over the four distribution companies unbundled from Gridco, it faced an awkward situation. BSES was the only eligible bidder for all the four companies. At least a modicum of variety was needed if the government was not to be blamed for handing over all the four distribution areas to a monopoly. With a little persuasion, AES agreed to take over CESCO, handling distribution for the districts of Bhubaneshwar, Cuttack and Dhenkanal. However, it did so only after conducting detailed studies.

Even as the company was getting its act together, the supercyclone broke over the central zone and devastated everything in its path including the distribution networks. Rebuilding the mangled networks took priority over plugging power pilferage. Gridco displayed considerable understanding and indulgence and agreed to stagger its receivables from CESCO for the power it had supplied - a decision that was prompted by social and political considerations rather than commercial prudence.

However, even after several months, long after the cyclone had come and gone, CESCO did not settle its bills with Gridco and the bills were mounting. Currently CESCO is reported to owe Rs.421 crores to Gridco for power supplied by the latter. Worse, CESCO broke the escrow in order to pay the salaries of its employees. Gridco in turn could not pay its supplier OPGC, to which it currently owes Rs.160 crores.

CESCO was not able to make a significant dent on the technical and commercial losses of the zone. Gridco officials were quoted as saying that AES never made any investments in strengthening the distribution network or plugging the pilferage in the zone. AES, on the other hand, blames the mindset of the employees it has inherited from Gridco for its lacklustre performance. However, BSES, the counterpart of AES that runs the other three distribution companies in the State, does not seem to have such problems.

While the jury is still out on who is to blame for the crisis, what is clear is that mere privatisation will not ensure restoration of distribution viability. Insulation of the company from political interference and superior management skills are necessary but not sufficient conditions for turning around the loss-making distribution company. Privatisation cannot ensure that sufficient investments will be made to improve the system and to bring down technical and commercial losses. It takes will, determination, staying power and investments to make an impact - attributes that seem to be in short supply in any form of ownership.

CESCO maintains that retail tariffs are too low to recover the cost of supply, but what is being ignored is that existing tariffs would adequately cover the cost of supply if only all the electricity that is consumed is metered, billed and paid for. (Currently, only a little over half of the electricity supplied is paid for.) Private enterprise was brought in precisely to do that since government-owned enterprises had signally failed in the endeavour. However, CESCO wants the easy way out - raise the rates for paying customers to cover the cost of supply.

CESCO's failure to settle its dues to Gridco has resulted in the latter reneging on its payments to the OPGC. In May, when Grayson Harvell, the managing director of the OPGC and an AES nominee, ordered the shutdown of OPGC supplies to Gridco for non-payment of dues, the State government even contemplated the invocation of the Essential Services Maintenance Act (ESMA) to restore supply to Gridco. The State government and Gridco officials expressed the view that since it was an AES subsidiary which had reneged on its payments to Gridco, the OPGC should be as indulgent with Gridco as the latter was with CESCO. AES argued that the two companies were separate businesses and that there was no question of common ownership interfering with prudent commercial decisions. Although what transpired between Gridco and CESCO is not known, power supply has since been restored. AES(generation) has since moved for arbitration, but Gridco is reported to be unwilling to go along. Dennis Bakke, president and chief executive officer of AES, came to India to broker a settlement, but it did not seem to have worked. Now AES wants to withdraw from distribution although it is still reportedly willing to manage the company under a management contract - an experiment which had been tried with the BSES and found to be unworkable.

While there is merit in AES' argument that the two companies should be treated as separate commercial ventures and therefore CESCO's default cannot justify Gridco's non-payment to the OPGC, the face-off poses more fundamental issues - should electricity be treated as a commodity like any other to be supplied on strictly commercial terms or is it a merit-good whose supply needs to be maintained regardless of commercial considerations? Although the proponents of reform would want one to believe that the issue is settled indisputably and that electricity is a commodity like any other, governments dependent on popular mandate seem to have a different view. The dilemma mirrors the stark reality of the day - that reforms are being undertaken by elected governments not out of conviction, but under pressure from external forces.

Sudha Mahalingam is with the Tata Energy Research Institute, New Delhi. The views expressed here are her personal views.


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