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BW Businessworld

Three Is Better Than One

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Nine years and several extensions later, Jharkhand is set to unbundle its electricity board by the end of this year. The Jharkhand State Electricity Board (JSEB) has appointed the Power Finance Corporation (PFC) as its consultant to take it through the complex process of unbundling the board into separate utilities for generation, transmission and distribution. "PFC has already made two presentations on the process. A third (presentation) would be made in July on the employee benefits and liabilities among other things," says S.N. Verma, chairman of JSEB.

"The principal reason for unbundling SEBs is to separate the function of transmission from distribution to avoid possible conflicts that might arise when somebody has to use Open Access. It is the first step towards the implementation of Open Access and introduction of competition in the energy sector," says Vivek Sharma, director of rating agency Crisil. The unbundling process involves fixing liabilities and dividing them into three sections, which are then transferred to the state government  and converted into state bonds. The new companies start with zero liabilities.

Before the Electricity Act (2003), the functions of generation, transmission and distribution were executed by one board. It meant electricity was produced, bought, transmitted and distributed to the end consumer by a single entity.  It led to large inefficiencies in the system and large outstanding debts. And it was impossible to introduce competitive mechanism like Open Access into the system without delinking transmission from distribution.

But only 12 states managed to unbundle their boards by 2007; six more completed the process during the 11th Plan. The ministry informs there is no date by which the remaining states have to unbundle. The matter is more or less in the hands of the states.

States that have unbundled utilities have seen mixed results and the examples of bad performing states are often cited by employees who oppose it. While Gujarat, Andhra Pradesh and Karnataka have unbundled and bettered their finances, Uttar Pradesh, Tamil Nadu, Rajasthan and Haryana have belied the expectations of the Electricity Act.

Can the failure of a few states be held against unbundling? "It is only the first step towards increasing efficiency. These states failed to take other initiatives such as regular filing of tariffs and progressive reduction of AT&C (aggregate technical and commercial) losses.  For instance, mere separation into a distinct utility is not going to improve the distribution business, and unless reforms are initiated, no distribution utility can pick up," says Sharma.

What lessons has Jharkhand learnt from other states? "We have looked at both the success stories and the states which have not been doing well even after unbundling We would ensure we learn from the mistakes of others and benefit from the examples of successful states," says Verma.

(This story was published in Businessworld Issue Dated 02-07-2012)