THE STATE OF ELECTRICITY IN INDIA (2003) :

The Indian electricity sector is facing one of its most difficult periods since Independence.
The demand for power is accelerating at a high rate while supply has been unable to keep
pace resulting in high levels of energy shortage both at the peak and base levels. This is
happening in spite of the Union Government’s efforts as evident from major policy
decisions taken by it.
Foreign investments have virtually dried up with most foreign investors withdrawing their
commitments and quitting. A deteriorating liquidity position is being faced by State
Electricity Boards while the State Governments are facing a resource crunch. The quantum
of investment has not kept pace with the requirement. Even within the industry,
investment in the distribution sector has not matched investments in the generation and
transmission areas resulting in the inefficient operations and major system failures. The
process of liberalisation and privatisation has been very slow due to the cold response of
private investment in the power sector.
Capacity additions in recent plan periods have been way behind the projected figures
leading to a further widening of the gap between the demand and supply. Besides, the
existing generating plants, especially those owned by SEBs are more than 25 years old.
They are likely to operate with lower availability, lower reliability and at low efficiency
levels. Rampant power theft in the name of distribution loss is making the matter worse.
Customers who pay have to pay for others also indirectly because of the inefficiency of
SEBs. The subsidies announced by some Governments reduce further the revenues of
SEBs. All this ultimately ends with the SEBs seeking increase in power tariff, which further
burdens the paying customer. In short, the power sector is currently in a complete mess
with annual financial loss to the tune of Rs. 25,000 Crore. The silver lining, however, is that
things can only improve and this is slowly getting evident from some of the steps taken by
the Government. But still it may have a long way to go.
Adding over 1,00,000 MW in ten years planned by the Govt. is a Herculean task. This rate
of capacity addition was never achieved during the best of times in the past. Besides,
neither the central Govt. nor the State Govts. Have adequate resources for such a
mammoth task. Foreign investment is not likely in the near future considering what has
happened to the one already pumped in to the country. The private sector alone cannot
imagine providing huge investments, as there is no certainty for realising revenues from
ailing SEBs. The outlook for the power industry is really bleak.
[Taken from the Article “Reviving the Reforms” published in The Hindu Survey of Indian
Industry-2003, written by Mr S S Dua, Chairman & MD of BSES Ltd.]
Since the privatisation initiatives of 1992 allowed private IPPs (Independent Power
Producers) to generate electricity and sell it to the State Electricity Boards (SEBs), there
have been several hesitant steps taken by the Central and a few State Govt.s to reform
the electricity sector. However there has been no perceptible change in the working of the
sector. Meanwhile, the magnitude of the problems has simply increased and they have
become more complex.
The Ministry of Power (MoP) estimates that there is peak shortage of capacity at 13% and
energy shortage of 7%. Not only shortages have persisted over the years, the estimates of
the shortage mean little to consumers in certain parts of the country who had to live
without electricity for more than 8 to 10 hours every day last summer. The quality of
electricity supplied remains poor with unscheduled outages and poor voltage profile.

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Transmission and distribution (T&D) losses, which used to be reported as slightly less than
25% till a few years ago, are now widely acknowledged in reality to be of the order of 50%.
In fact, earlier T&D losses were under reported by the SEBs by hiding them as agricultural
consumption, but now they have an incentive to over report them wherever the tariffs are
fixed by the independent state electricity regulatory commissions (SERCs). While under
reporting T&D losses by SEBs earlier get the high incidence of theft (most likely, in
connivance with SEB employees) out of public gaze and allowed them to claim higher
subsidy for agricultural consumption, over reporting now would allow them to get tariffs
fixed at higher levels.
With annual aggregate losses (without subsidy) of more than Rs.20,500 Crore in 2000 –
2001 (up from Rs. 4,500 Crore in 1992 – 93) and dues of more than Rs. 4,000 Crore to
Central generating and transmission companies such as NTPC, NHPC, Power Grid
Corporation Of India, the SEBs are almost bankrupt and are not bankable to attract private
investments in generation. Inadequate investments by the public sector and lack of
investments by the private sector due to policy instability and the bankruptcy of SEBs
have meant that only 21,000 MW of capacity was added during the 9th plan against the
target of 47,000 MW. The tendency of the planners to over estimate demand and captive
capacity additions by the bulk users has saved the situation as the shortfall in the capacity
addition would have resulted in a much higher demand – supply gap otherwise. Captive
generation by the large industrial consumers itself has been a sub-optimal (from the point
of the Economy) response to the distortions created by the policy of cross-subsidisation. It
has also resulted in a situation that the large industrial consumers have gone off the grid
reducing the revenues from such high-tariff consumers for SEBs.

THE ORISSA SCENARIO :

On restructuring the ailing SEBs, the World Bank supported reforms were carried out in
Orissa, the first State to do so. It was based on the recognition that vertical monopolies
like SEBs need to be restructured and unbundled (to separate potentially competitive
generation and distribution business from “Natural Monopoly” wires business of
transmission) to promote competition and privatisation. The SEB was unbundled and
distribution was handed over to 5 distribution companies with private sector in control of
management.
The Orissa experience has not been very satisfactory as the privatised distribution
companies ran in to losses and have failed to pay large sums to the transmission
companies, which in turn has defaulted on the generating companies. The T&D losses
allowed by the state regulator (OERC) were inadequate, and the losses on the eve of
privatisation were much higher (46% as against 35% allowed). The privatised distribution
companies were constrained by their inability to control the employees they inherited from
the SEB, as they were required to protect their service conditions as a pre-condition of
privatisation. Despite trying out village committees to improve collection and reduce theft,
the experience of the Orissa model has not been good on account of lack of support from
the Govt. (to facilitate enforcement of disconnection and payment), lack of regulatory
certainty (years-to-year review of tariff rather than multi-year tariff framework), lack of
freedom to control one’s own employees and lack of prior experience of the private
consumption of electricity, another difficult issue faced by the sector.
The two key issues facing the sector from the point of viability today are tariff reforms
including elimination of cross-subsidies and reduction of T&D losses (mainly theft) and
non-payment. Of these, the later is a pre-requisite to the former. The vexed issue in the

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sector, that is high T&D losses, is an outcome of politicisation of the sector, the tariffs and
well-trenched nexus of defaulting consumers and SEB employees over a period. One of the
major reasons for the failure of the privatisation attempt in Orissa was grossly under-
estimated T&D loss. However, only if the SEBs can reduce the losses on a sustained basis
on their own, there can be a trade – off between privatisation and Govt. ownership with
former bringing in operating efficiency while the later reduces theft. It is difficult to see as
to how and why SEBs can reduce these losses. In the case of the private sector, at least it
has the incentive to try and enforce the tariffs (rather than accept side payments) from
the consumers. But any reduction in high T&D losses is possible only when the state
actively supports enforcement of metering, collection and disconnection by the private
sector or the SEB.
Even after privatisation, the private player would require this active support and
manifestation of political will to enforce. The least a state can do, post-reforms or
privatisation is to ensure that payments are made by its own agencies. All these steps
require initially high investment in time and effort and are politically and financially costly.
The road map of the reforms in the electricity sector is less clear today than what it looked
like till the mid 90s. Unless the issues related to the high commercial T&D losses, cross –
subsidies, metering and direct subsidisation of agricultural consumption and tariff reforms
(cost reflective tariffs) are sorted out, no credible competition or privatisation can be
thought of. Since this requires active state Govt. support and political will and co-
ordination across the states, only the Union Govt. can pressurise them to move in this
direction. Some of the steps taken by the MoP such as the draft Electricity Act, APDRP and
MoUs are rightly predicated on this belief. These steps need to go further to be more
effective. The states need to face a tighter budget constraint in case they default on their
obligations and create obstacles in the reforms process. The states need to pay for the
power as well as their policies, should they decide to subsidise.
[Taken from the Article “A Long Road Ahead” published in The Hindu Survey of Indian
Industry-2003, written by Mr Ajay Pandey Professor of Economics, Indian Institute of
Management, Ahmedabad.]

Power Supply Position in the State of Orissa :

For over 10 months, the public of Orissa is experiencing load shedding, break downs, shut
downs of electric power and even closure of power generating units in the power plants on
account of political and bureaucratic rivalry. Ever since the procurement and distribution
of power have been separated and vested in the different controlling agencies, the quality
of service in the power supply system is going down and the cost is going up. In addition
to this the loss, wastage, pilferage are also going up. Further, the fact that some section of
the society are not very keen on the payment for the service rendered, which include even
the affluent and enlightened members, makes the matter still worse. More recently we had
the problem of not paying to NTPC, as a result of which it closed two of its units. The
matter was temporarily sorted out, but soon some more tussles are expected, as GRIDCO
has not kept its assurance of timely payment till now.
Let us examine how the views expressed, albeit privately, by the Chairman and two of the
Members of Orissa Electricity Regulatory Commission (OERC) vindicate the above-
mentioned facts. The abridged summary of the Report is produced below:

POWER SECTOR REFORMS IN ORISSA, & ITS CONSEQUENCES

RELATED TO GOVERNMENT, OPERATORS & CONSUMERS :

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The antagonists of reforms in the power sector advocate that “reforms in the power sector
has failed miserably”, ‘reforms is an aberration’ and ‘reforms should be rolled back as it
has gone back on the wrong track’. Does this view mirror the public will? An in-depth
analysis is required to find the truth.
In the electricity industry distribution is the interface point with the majority of the
consumers. At present the distribution system, not only in Orissa but also in the national
level, is categorised as inefficient due to unplanned growth and lack of investment as a
result of which there is a large-scale interruption of power. Consumers are deprived of
better quality of supply. It may be worthwhile to explain the picture of the industry at the
national level, that of the total power generated, 60% of it is only billed (Rs. 62,000 Crore)
and only 41% (Rs. 46,000 Crore) is realised. Of the total energy generated 20% accounts
for theft, which amounts to about Rs. 22,500 Crore.
The power sector reforms was launched in Orissa in different phases between 1993 and
1996, to achieve the following objectives as enunciated in the OER Act 1995.
1. Restructuring the electricity industry for rationalisation of the generation, transmission,
distribution and supply of electricity.
2. Development of the industry in an efficient, economic and competitive manner.
3. To provide for avenues for participation in the industry of private entrepreneurs,
attract private investment and reduce the need for government funding of the
electricity sector.
4. To improve the quality of service to the consumer.
5. Establishment of an independent authority for power sector regulation.
6. Cost-related electricity tariff regime.
All the structural needs have been fulfilled as envisaged under the reforms scheme:
1. OSEB was restructured and corporatised into Grid Corporation of Orissa (GRIDCO) and
Orissa Hydro Power Corporation (OHPC) in April 1996.
2. The Orissa Electricity Regulatory Commission (OERC) was established in August 1996.
3. Orissa Power Generation Corporation (OPGC) was privatised with divestment of 49
percent stake and transfer of management control to a private operator, AES in
January 1999.
4. Four distribution companies, incorporated as wholly owned subsidiaries of GRIDCO,
were privatised with transfer of 51 % stake to private operators in 1999.
However, the financial performance of these utilities have taken a nose-dive in as much as
their accumulated losses have registered an increase from Rs 1197 Crore (pre-
privatisation period) to Rs 2382.86 Crore on 2000-2001, causing good measure of concern
and misgivings in the minds of the people.
Poor performance of these utilities is attributable to the following factors:-
1. The level of growth anticipation in the HT and EHT categories did not come into fruition
as against an estimated forecast of 11,442 MU (Million Units = 1,000,000 KWH), sale
for 2000-2001 aggregated 6,201 MU.
2. The initial estimate of transmission and distribution loss of 39.5 % went berserk and
became 49.47% and 49.24% in 1996-97 and 1997-98, respectively.

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3. The assets of OHPC were up-valued three times and two times for GRIDCO leading to
unwanted and unwarranted enhancement in tariff.
4. The devastating impact of super cyclone (October 1999) and other natural calamities
gave a severe jolt to the power sector.
5. To cap it all, the sudden withdrawal of subsidy by the government to the tune of Rs
250 Crore per year was the last nail in the coffin.
It is evident that some of the factors causing severe illness of the power sector are
extraneous and the government should come forward with a liberal offer to mitigate these
maladies.
Orissa is not an exception to this malady. Recently, distribution has been the focal point
for the improvement for the overall viability of power sector. As we know the consumer
bills are collected at the distribution level and the money flows upwards to the
transmission companies and the generating companies. Therefore, unless distribution
system is financially robust the entire industry cannot be viable. In a power system the
technical loss should be around 15-20% taking into account the large rural network in our
state as well as in our country.
The losses of transmission and distribution can be further subdivided as: -
1. Losses in the EHT system up to 33KV side of the transformers – 5%
2. 33KV line, 11KV line 33/11 substation and up to LT side of a transformer – 5-6%
3. In the LT distribution system – 5-6%
Maximum distribution is taking place in the sub-transmission and distribution system i.e.
11KV and LT lines. These are mostly because of theft and pilferage of power by the
consumers.
The distribution loss has been hovering between 46.4 to 42.4%. To improve the situation,
the distribution loss should be reduced at least to the extent of 5% every year. A target in
this regard should be fixed and distribution utilities instructed to follow it up. Further,
significant amount of money may be invested for installation of substations and meters to
cut down the loss. It is commonplace knowledge that performance of distribution
companies hold the key to all round improvement of other segments of the sector as they
are the paymasters to keep up their financial health.
The chronic maladies besetting these utilities are :
1. Inefficiency in raising the bills and collection there against, and
2. Large scale theft of power.
Privatisation of electricity industry in India especially of the distribution system poses a
formidable challenge as seen from the experience in Orissa. The ideal condition for the
process is to ensure that neither the private investors nor the consumers are adversely
affected in the new environment.
Pre-reforms tariff was kept below cost of supply. It was skewed in favour of majority of the
LT consumers and was driven by subsidies, cross-subsidies and political considerations
while reforms envisaged a cost based tariff free from political consideration, withdrawal of
subsidy and progressive reduction of cross subsidy. Where Government wants some
consumer categories to enjoy a lower tariff, it can do so only when it compensates the loss
sustained by the utility on this account. While setting tariff the regulatory authorities have
to do a balancing act to secure viability of the investor on one hand and protect the

5
interest of the consumers on the other. Thus the strategies adopted after reforms of the
sector in setting of tariff experienced a total paradigm shift.
As of Orissa, reforms saw an abrupt withdrawal of Government subsidy to the sector and
sharp rise of cost of hydropower due to up-valuation of assets at the time of transfer. Thus
hike in tariff was inevitable. Next came the inflow of large investments into the system for
its modernisation and strengthening. Their impact on cost of power is natural. The investor
is entitled to recover the cost of power together with the service charge at reasonable
efficiency level. The regulator has to ensure that the utilities do not exploit their monopoly
power at the expense of the consumers.
The privatisation process in initial years of operation would, therefore, adversely affect the
majority of the consumers till progressive ‘efficiency gain’ is achieved to offset the tariff
hikes. Efficiency gain from a battered system with a long legacy of inefficiency,
unaccountability and indifference is an uphill task and it may be too much to expect a
dramatic improvement. The challenge for the private operator is how to rein in the
commercial losses arising out of rampant theft, pilferage and improve the level of
collection efficiency.
The Governments role under reforms scenario is to create a conducive environment for the
corporate entities / private operators to enable them to operate in commercial manner.
Beside it has to provide need-based support as and when necessary. A clear signal must
emanate from Government about its commitment to reforms. Recently, the Government of
India has conceptualised a scheme for converting each feeder as a profit centre through
the process of metering at all points. For this particular work, Government of India has
earmarked 10–15 Crore per circle for procurement of meter, equipment and switchgear
etc. It is necessary that distribution utilities avail the opportunity to revamp the existing
distribution system to bring down the losses, otherwise viability of electricity industry will
be a distant dream.
Thus a time has arrived where effective concerted and energetic measures are imperative
on the part of distribution companies to arrest such widespread theft and improve
commercial performances. A happy situation for a regulated entity is attained when its
annual revenue matches the annual collection. When there is a revenue gap, i.e. collection
falls short of requirement, necessity of tariff revision arises. But a tariff hike beyond a
reasonable limit is neither fair nor implementable especially in a state where majority of
the consumers are not in a position to bear the cost of supply. On the other hand, a private
investor cannot survive and continue if it is denied a reasonable return as per its
entitlement.
This is exactly the situation Orissa faces today, after six years from the date of its venture
into the power sector reforms and after three years of operation by private distribution
companies. Consistent annual tariff hikes have not been able to address the problems of
viability. On the other hand, consumers have not found any tangible improvement of the
system with tariff hikes. Reasons for such an unhappy situation can undoubtedly be
attributed partly to private operators’ failure to control rampant commercial loss and
improvement collection efficiency.
Lastly, it remains a fact that Orissa being a pioneering state to have ventured into the
uncharted territory of power sector reforms, has to negotiate complex situations during
the process. If things have not moved along desired lines, corrections / amendments can
always be applied, but the question of roll back should not arise because reforms of power
sector is irreversible not only for the state of Orissa, but for the entire Country.

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[Condensed from three separate articles written by Mr D C Sahoo, Chairman – OERC; Mr H
S Sahu, Member – OERC; and Mr B C Jena, Member OERC; and published by the Express
group of Newspapers in May 2002 as an Advertising Supplement Booklet.]

INFERENCE :
It is not within the scope of this Report to fix the responsibilities and faults of the
concerned agencies, but to corroborate the fact that in any circumstances the general
public or the bona fide consumers – small or big, domestic or commercial - are at the
receiving end. So much so that it can cripple the Industry as a whole and the Power
Intensive Ones in particular, making them unviable or even sick, for no fault of the
consumers. The cases cited above are not isolated ones (one wishes they were!), rather
one can infer from the past experiences, that there will be something happening
irritatingly regularly to be sufficient reason for power interruption.
Therefore, it is a prudent and sound decision to have a Captive Power Plant (CPP), for
industries where the manufacturing process involves a power intensive one and where
sufficient amount of waste products which can be recycled to the benefit of cost and
environment.

NOTES :
1. This Article was written in June, 2003 about the then state of Electrical Power in the
country in general & Orissa in particular.
2. This Article was written as a part of a Project Report in support of a Captive Power
Plant to be set up in Orissa, during that time.
3. This Article is published now ( as of October, 2009 ), because it’s still relevant & things
haven’t changed much.
4. This Article can be read as a prelude to the recent Article “Power Situation in Orissa”
by the same Author.

[ End ]

© Himansu S M / Written : 9 June 2003, Published : 31 October

2009
Divine Light ( Dibyajyoti ) Consultants ( DILICONS ), Bhubaneswar, Orissa Sate, India.