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BW Businessworld

Where Did We Go Wrong?

Photo Credit :

the way telecom and power were
restructured in developed countries”
B.K. Chaturvedi, member, energy and
infrastructure in the Planning
(Pic by Tribhuwan Sharma)

Just what is the solution to our power problems? At the Planning Commission, two men have spent a lot of time and energy to try and find the answer. B.K. Chaturvedi, former cabinet secretary, is the member of the Planning Commission charged with the entire energy and infrastructure related matters of the commission. Gajendra Haldea is the advisor (infrastructure) to the deputy chairman of the Planning Commission. He also drafted the Electricity Act of 2003 for the power ministry.

While the two men have substantially similar views on the solution to the power mess, they differ in their opinion on crucial issues. Haldea, who spoke to BW’s Anjuli Bhargava, thinks that the government should adopt the telecom privatisation model to power as well. Chaturvedi, who had a conversation with BW’s Kandula Subramaniam, thinks the telecom model may not be entirely suitable. Haldea thinks the Delhi privatisation experiment was an unmitigated failure. Chaturvedi thinks it was a success of sorts, even though it did not go all the way. Here are their views.

How bad is the country’s power situation?
Chaturvedi: At the beginning of the current Plan, we had a power shortfall of around 10 per cent and peak load shortfall of around 14 per cent. However, the situation has improved. The peak demand shortfall is around 12 per cent now. By the end of the 11th Plan, we plan to add about 80,000 MW capacity. Last year, around 13,000 MW was added and another 5,000 MW is expected by August this year. We are hoping to add a total of 14,000 MW this year. Thereafter, we plan to step it up by 25,000 MW next year. The following year, we should add between 25,000 MW and 30,000 MW.

But from February to May this year, the situation was bad. Andhra, Karnataka, UP have faced severe shortages forcing them to stop power from leaving the state (for open access).
Chaturvedi: There is a reason for this. Generation from hydro stations had gone down by 10 per cent because the reservoirs were not full. And this position continues this year as well. However, our thermal power stations are doing well. For the period you are referring to, there were elections. Every state government would like to provide good power to consumers and that is why the demand had suddenly increased quite substantially.

Does that mean that state governments will care about power cuts only once in five years?
Chaturvedi: Not really. Elections these days are held quite often. The real problem is that demand from rural areas these days is quite large, and it is not being met.

“Power is more complicated than telecom... you cannot have five-six power networks at the same time”
B.K. Chaturvedi

It seems states do not want open access. You have headed a task force to look into the issue…
Chaturvedi: Open access has been one of the major planks of the Electricity Act of 2003. It gives consumers the right to choose. As per the (existing) policy, initially big consumers (with a demand of over 1 MW), and later small consumers, will be allowed to choose their suppliers. It appears at present states are not very keen on open access. But the Centre is. I headed a task force on open access, which has given its recommendations to the Prime Minister. However, one has to appreciate that states have power shortages. And quite often, they are prone to adopt shortcuts (to meet demand within the state) rather than implement the Act in its full spirit, and allow power generators within the state to sell to consumer in other states.

So, as long as there are power shortages, open access is not possible?
Chaturvedi: Increasingly, states have to abide by the law. I’m hopeful that in the next couple of years, as states get more power (from new capacities), open access will come…

What’s the Centre doing to initiate open access?
Chaturvedi: We (the task force) have made recommendations that of the 15 per cent of the power available to the Centre (from companies such as NTPC), at least 25 per cent should be made available for open access. This should be given to those states that have good policies on open access. Basically, the concept is to incentivise states.

Why do we need to incentivise reforms? Why can’t we do a telecom reform in power as well?
Chaturvedi: Power is much more compli-cated than telecom. In telecom, because of techno-logy, there could be many players and competition could be brought in. However, in power, because electricity flows through wires and not through air, you cannot have five or six power networks at the same time.

…because ‘wires’ in power is a natural monopoly?
Chaturvedi: It’s a natural monopoly as far as networks are concerned. It is this limitation in power that has given rise to the problem. Also, power generation involves a lot of fuel (like coal, gas)… this kind of interplay is not involved in telecom. There is a difference in quality of the two sectors. However, like telecom, the basic principle is that we must bring in competition by bringing in private investment.

“Delhi model is very good... There is reluctance on the part of other states to privatise distribution”

B.K. Chaturvedi

You spoke of competition. The Delhi model (distribution reforms) of replacing public sector with private sector has had its share of criticism. What are your views on that?
Chaturvedi: The Delhi model is very good. The only thing is that you must have strong regulators. Private sector monopoly without effective regulations is pretty useless.

Delhi is a small state. What about UP, Andhra Pradesh and Rajasthan, they have unbundled and corporatised, but they still don’t have private investments in distribution.
Chaturvedi: That’s true. There is reluctance on the part of states to privatise distribution. There is a question of free power to farmers, question of power to certain consumers at concessional rates… these are highly political issues. Because of these, states are not very keen to give it to the private sector.

Delhi is one off… no other state will do this?
Chaturvedi: Delhi is a wholesale privatisa-tion. However, more recently, others are going in for what is called the franchisee model. UP has done this in two areas. Other states are also going into franchisee model for collections. They (states) are increasingly realising the need to bring in the private sector vigour. This model is like partial privatisation — a public-private partnership. That said, from the Planning Commission, we would like to recommend that they should go in for privatisation of distribution.

But why are some states still reluctant to even split or corporatise their SEBs? Punjab, Tamil Nadu, Kerala, the list goes on…
Chaturvedi: When you corporatise, state governments tend to lose their power on the utility. But there are some genuine concerns also. States such as Tamil Nadu and Kerala say they are doing well without corporatisation. Some argue that “even if you corporatise but don’t follow the norms of corporatision by giving full autonomy…then it is only corporatisation in name and not in spirit...”

I feel if boards have to be corporatised, it has to go the whole hog. It has to be done in spirit also.

Are you OK with states such as Tamil Nadu taking a position that they will not move forward on reorganisation of SEBs and not corporatise as required by the Act?
Chaturvedi: No, I’m not OK with that. The Planning Commission has been saying from the beginning that these states must restructure their boards.

What time frame are you looking at?
Chaturvedi: We were looking for this to happen as of yesterday. It is not happening because states keep on getting extensions to corporatise from the power ministry. Our (Planning Commission’s) policy is to continue to insist that states corporatise.

Sometime back, the Prime Minister in a meeting said we could have a VAT-like panel of power ministers to ensure reforms are implemented in states. The suggestion did not take off because it was felt that the quality of state power ministers are not that good...
Chaturvedi: The idea has not been implemented so far. The finance ministries are probably more well structured and power ministries are not. Maybe, that’s why the suggestion has not taken off effectively… though there have been some meetings on certain issues.

Is such a panel still considered necessary?
Chaturvedi: Yes, absolutely. There have been efforts in that direction. One should remember that the panel of finance ministers was focused on one specific area — that of implementing VAT. And this panel was chaired by a finance minister who has been there for a long time. In a way, it is he who drove it. However, in the case of power, this has not happened so far.

“There are many similarities
between the way telecom and power
were restructured in developed

Gajendra Haldea, principal advisor
(infrastructure) in the Planning

We Are Yet To Discover Such (state) Power Ministers.

Where did the privatisation of the power sector begin to go wrong?
Haldea: We have to look at the international experience. There are quite a few similarities between the way telecommunications and po-wer were restructured in developed countries.
In telecommunications, all service providers have access to consumers. Open access to networks based on payment of regulated charges allows an Airtel user to talk to an MTNL user and so on. Based on that market principle, you got the telecom revolution.

Last mile access is necessary for the power sector too. In the UK, open access to electricity was introduced through a law in 1989. A cons-umer there can choose between 12 competing suppliers and vice versa. This is the kind of competition that came first in telecommuni-cations and then in the power sector in the developed world. This was also the underlying rationale for restructuring the power sector.

To achieve this, generation, distribution and transmission have to be unbundled. It happe-ned in Orissa first, and over 12 states have since done it. But that is only the means to the end, not the end in itself. The end is introd-ucing competition in the supply of electricity to consumers — bulk consumers to begin with.

The Electricity Act 2003 — which I had drafted for the Ministry of Power — is primarily about introduction of competition. As and when competition happens, consumers can look forward to better services and competitive tariffs. In telecommunications, we got a huge capacity addition because there is a market. There are consumers creating the demand and the suppliers can access those consumers, so service providers are happy to invest. As a result, 63 per cent of the total investment in the telecom sector during the 10th Plan (2002-07) was by private players.

But in power, private sector investment will not come unless access to consumer is opened to all suppliers. Unfortunately, in the past six years, after the Electricity Act was passed, not a single consumer — no matter how large — has got this open access to networks.

Haldea: Because all the state distribution companies are monopolies, and they control the last mile access. They control all the electricity systems and networks and they have a stranglehold of all consumers in their areas and they do not want to let go.

So, how will this ever be resolved and if it is not, where will that leave us?
Haldea: The power shortage has grown in the past six years. From 12 per cent peak deficit at the beginning of the 10th Plan, we had hit 16 per cent at the end of the 10th Plan. So, the power situation has not improved, in fact it has deteriorated. During the 10th Plan, the target was to add 42,000 MW. We added 22,000 MW. So, there was a 48 per cent shortfall. Pathetic. The 11th Plan target is 78,000 MW and we are two years into it. So far we have added about 13,000 MW, which is actually much better than the past performance.

“People who defend the Delhi model compare it with the DVB...but that is setting a low benchmark”

Gajendra Haldea

What happened to the MoUs signed in the mid-1990s to produce close to 50,000 MW of power, many of which were counter-guaranteed?
Haldea: In all, there were over 200 MoUs signed, but most did not fructify. These companies did not want to sell their electricity to the state electricity boards without sovereign guarantees as the boards are all broke. Investors and lenders would not invest in such a situation because promoters can produce power but they cannot get paid for their sales. That is the barrier we have been unable to cross in the power sector.

Clearly, the policy then had not been well thought out. That is why you have very little private investment in power — only 12-13 per cent of the total investment during the 10th Plan. But if you add transmission and distribution (T&D), the private investment would come down to 7-8 per cent of the total investment. So whatever investment has come is mainly in generation. Compare that with 63 per cent of the total investment in telecomm-unications coming from private players.

How would you rate the Delhi privatisation?
Haldea: I am a critic of the Delhi model. The bottom line in the Delhi case is that they have substituted state monopolies by private monopolies. Now, anyone with any understanding of economic theory will tell you that monopolies are bad, so state monopolies are bad. But private monopolies are worse.

People who defend the Delhi model compare the performance with Delhi Vidyut Board (DVB), but we should not compare ourselves with such low benchmarks. Compare their performance with Mumbai, Surat or Ahemdabad, where T&D losses are around 10 per cent; Delhi is still over 30 per cent.

But that is still about half of what it used to be. It may not be the ideal model for every state to replicate, but one cannot deny that Delhi citizens are better off than, say, Gurgaon as far as power goes...
Haldea: That is because they have increased tariffs and the government has given very large cash subsidies. If DVB had raised tariffs and received similar cash support, they may not have made losses. I am making two basic points: why do you create a private monopoly for distribution; the world over this is not done. Secondly, if the Delhi model is so successful, have you heard of any state trying to replicate it? After all, six years have passed.

The process of bidding was also flawed. Bid terms were altered after the bidding. The CAG has brought out a scathing report that says the public exchequer has lost over Rs 5,000 crore. The Public Accounts Committee looked into it and suggested investigations, but that has not been done. If you ask me whether Delhi or any other distribution company should be privatised or not, my answer is yes, it should be. But if you ask me, if I am happy with the way Delhi was done, I am not. I totally support privatisation, but not in this form.

But choice between DVB or a private monopoly is like choosing between the devil and the deep sea… I’d take the devil.
Haldea: Why should I have to choose between the devil and the deep sea? If people like you start setting such low benchmarks, where will we be?

Do ultra-mega power projects offer a ray of hope?
Haldea: I personally think the sizes of the projects (4,000 MW each) are too large, so financing them will be a challenge. There are not many examples of this kind in the world. If the size had been kept at around 2,000 MW, the projects would have been more manageable. Year 2012 is the earliest you are likely to see some of their power becoming available. Major supply comes only in the 12th Plan. The fundamental problem is that for every unit of power produced, the sector loses Rs 1, mainly due to huge T&D losses (in a lighter vein it is called “theft and dacoity” losses), irrational tariffs and high cost of production. Unless you change the way it functions, I don’t see much hope.

How do the states hope to continue to offer power to their citizens?
Haldea: There is a lot of wishful thinking going on. If you see their 50-year records, losses of state electricity boards (SEBs) have risen and shortages have remained, and at times worsened. The SEBs just about have the money to pay off NTPC and Power Grid. They sometimes do not pay off other loans or they borrow more to repay loans, they don’t provide for any fresh investments, they don’t provide for depreciation, whatever depreci-ation reserve is there goes into paying for cash expenditure. They are depleting their financial worth and resources. I think this is going to be a very serious problem.

In the 1990s, manufacturing and services were opened up. The licence raj was removed. Telecommunications was also opened up. Then, private investment was allowed in ports and highways. This was extended to airports, but power is way way, behind. In the matter of electricity, India is still lagging behind.

(Businessworld Issue Dated 30 June-06 July 2009)