World Bank Orissa Model
Orissa was the first state in India and South Asia to restructure its state owned electricity industry and privatise distribution business. The Orissa government is essentially implementing the model of power sector restructuring conceived by the World Bank. Many other states such as Harayana, Rajasthan, and Andhra Pradesh are also accepting the same model. In fact, the reform bill of Harayana is a near photocopy of the Orissa Electricity Reform (OER) Act. Being the pioneer in initiating the reforms, Orissa obviously encountered several unforeseen challenges. Some of the outcomes of Orissa reforms did not turn out to be as envisaged. Even after three years of electricity distribution privatization, the efficiency improvements i.e. both operational and financial have not shown any tangible improvement. Distribution companies continue to suffer huge financial losses as a result of high transmission and distribution loss having a significant share of theft in it, and poor operational practices. It, however, provided an opportunity to the other reforming states to correct their recourse in terms of choice of restructuring model, approach to reduction in losses, methodology for asset valuation given the constraints, financial restructuring plans, personnel issues, preferred strategy for private sector participation, and minimizing regulatory uncertainties through policy announcements etc.
EIGHTEEN months into World Bank-administered shock therapy for Orissa’s electricity sector, the Grid Corporation of Orissa Limited (GRIDCO), the unbundled transmission and distribution company, has notched up a loss of over Rs.250 crores and is headed for financial ruin. It had a clean balance sheet as on April 1, 1996. A review of the unbundling process is particularly necessary at the present time because Haryana, Andhra Pradesh, Gujarat and Rajasthan, among other States, are embarking on similar exercises, and the Orissa experiment is being held up as a model.
The restructuring exercise has its origins in a $350-million World Bank power sector loan negotiated by the Government of Orissa and counter-guaranteed by the Government of India. The loan came with stringent conditions. These included splitting up of the Orissa State Electricity Board (OSEB) into units handling generation, transmission and distribution. Each of them was to undergo a process of corporatization, commercialization and eventual privatization.
The Orissa Electricity Reform Act took effect on April 1, 1996. Under this Act, the OSEB was divided into the Orissa Hydro Power Corporation (OHPC) and GRIDCO. The OHPC inherited the assets and liabilities of the hydel generation units of the erstwhile OSEB, while GRIDCO and the transmission enterprise inherited the transmission and distribution networks along with their liabilities. GRIDCO was initially to handle distribution functions as well until separate distribution companies were set up.
The Orissa Power Generation Corporation (OPGC), which was already independent of the OSEB, was to build and operate the two state sector thermal power projects – Ib Valley Phases I and II. Future thermal generation projects were to be entrusted with independent power producers (IPPs). An autonomous three-member regulatory commission was established with a mandate to issue licenses, set tariffs, aid and advise GRIDCO and plan for future power requirements. No budgetary support was envisaged for any of the enterprises except the regulatory body, whose expenses were to be charged to the State fund for the time being. However, to enable the enterprises to start on a clean slate, all losses were written off and their assets revalued and liabilities readjusted.
The Crisis Situation
In most Indian states, including Orissa, irrational tariffs and poor performance of SEBs in terms of large T&D losses (technical and commercial), inadequate investments, and high receivables have been the major problems faced by the power sector. These problems have led to poor power quality, power shortages, and worsening financial situation of the SEBs. Theft reduction, tariff rationalization, adequate investments in T&D, improved recoveries, and cost control are some of the urgent actions needed for improving the situation.
Main responsibility for creating such a crisis situation lies with the state governments. The state governments, being the owners and operators of the sector, had the responsibility of ensuring smooth, efficient, and viable functioning of the sector. The governments were also the regulators of the power sector and were expected to monitor and control (or oversee) the affairs of the power sector in order to ensure adherence to the legal and policy framework governing the sector. Thus, it was expected to act as a custodian of the public interest. Even in this role, the governments were expected to take actions to prevent state power sectors from drifting into crisis situation. The legal framework did contain clear instructions and bestowed sufficient powers to the state government to take appropriate actions in order to avoid such crisis situation. For example, the Indian Electricity Supply Act, 1948, clearly mentioned that SEBs are to be treated as semi-autonomous bodies and be run on quasi-commercial principles. It also required that SEBs should earn a 3% rate of return on net fixed assets. Further, it gave wider powers to the state governments, including power to make appointment of senior management positions in SEBs. If the state governments had followed these directions and had used these powers in a rational manner, they could have ensured efficient and professional operation of the SEBs. In such a situation, crisis conditions precipitate d by outside factors could have been handled without any radical structural or institutional changes. With measures such as tariff rationalization, theft control, and incentive to management / workers, the SEBs could have easily weathered any crisis and have earned the stipulated profits of 3% return. For such financially viable SEBs, it would have been feasible to meet the power demand by attracting the private capital (if needed) in the form of commercial loans and government guaranteed bonds. In short, the governments which were the owner, the policy maker and the regulator had the authority, autonomy, as well as responsibility to take needed actions to avert the crisis.
But the state governments did not act in a rational manner. Over the years, small sections of politicians, bureaucrats, SEB staff, and consumers have succeeded in taking control of the sector. This coalition of sections of vested interests exploited the sector to further their narrow individual goals at the cost of the long-term health of the sector and that of the larger public interest. For example, in states such as Maharashtra, a strong lobby of affluent farmers, having access to abundant water, succeeded in pressuring the government for keeping the agricultural power tariffs at ridiculously low levels and for continuing un-metered supply. The ruling politicians found that offering such populist concessions was an easy way to develop and protect their vote banks. Obviously, the victim was the long-term financial viability of the sector.
This abuse of powers by a coalition of the vested interests could continue for many years, and almost across the country, because the checks and balances in the system for avoiding such ”hijack„ proved ineffective. The legislative oversight proved ineffective because the charter of the accountability of legislature towards the people was non-specific, covering much more than power sector policies, and also because legislators behaved in a short -sighted manner. Contrary to the enormous authority possessed by the state governments, the other regulatory agencies such as Central Electricity Authority (CEA) did not have adequate authority to enforce rational tariff policies, complete metering, or energy audit for theft control. The courts often refused to evaluate the techno-economic rationale of government decisions, which they considered beyond their
Non-availability or denial of information to the public was also instrumental in allowing this drift into crisis situation. In none of the states, the government or the SEB disclosed information about implications of their decisions for the future of the sector, about the real beneficiaries of huge subsidies, or even about the fact that they are not sure as to exactly where half of the electricity produced goes. As a result, people had no avenues to make the SEB officials accountable for high T&D losses, theft, and the resultant high cost of power. The situation could never have come to such a sorry state if the public had right to have this information, right to ask questions, get answers (before the decisions were made), and had avenues to hold the decision-makers accountable. In sum the politicians or SEB management have not been accountable to the public for their decisions. Only accountability that was perceived by politician-rulers was to their respective vote-banks and the response was to keep the tariffs low.
In short, the real problem has been the lack of appropriate provisions to ensure accountability of the decision-makers to balance the enormous authority and complete autonomy they possessed in governing the affairs of the power sector. The consequent hijacking is nothing else but a form of regulatory sabotage that was possible because of the three distinct shortcomings in the accountability procedures. First, the procedures are aimed at accountability to public in the indirect manner i.e. through an institution within the executive (such as CEA or CAG) or the legislature, or through an independent agency (such as judiciary). Often the mediating agency is burdened with a variety of tasks and issues. These agencies had their own logic and procedures and individuals manning them have their own priorities and agendas. As a result, it has been possible to subvert the regulatory process by manipulating individuals working in these agencies and hence the agencies. This could be avoided by substituting or supplementing the indirect accountability procedures with procedures to ensure accountability directly to the public, which would allow any member of the public to invoke accountability procedures. The possibility of such invocation itself is a major deterrent to the regulatory sabotage. Second, most accountability provisions in the current design are discretionary in nature, instead of being mandatory. The coalition ruling the state government exploit this shortcomings and often compel the government to invoke discretionary powers to circumvent the accountability procedures when they are needed to expose the wrong doings. Thus the discretionary accountability is a negation of accountability in itself. Third, the accountability procedures are not coupled with appropriate procedures to ensure transparency and participation. Without transparency and participation it is impossible to effectively ensure accountability. This is because, if one does not have the necessary information and has no avenue to participate in the process, one cannot effectively expose any wrong-doing. The much talked about ’excessive government control / interference“ in the power sector affairs has been a tool that was used for the regulatory hijack. And the severe problems such as irrational tariffs and poor financial health of the SEBs are only symptoms of this hijack. We need to view the radical institutional and structural changes proposed by the WB in Orissa and other states in this light. It is essential to see whether the new system is more sabotage-proof than the present system.
The WB-Orissa Model
The Orissa model has three major components : un-bundling of the vertically integrated public utility, privatization of its components, and distancing the state government from the power sector.
(1) Un-bundling : The Orissa SEB has been split up in three companies looking after three major activities of the sector, viz. generation, transmission, and distribution (with proposed break -up of distribution functions among four distribution licensees).
(2) Privatization: These companies are being privatized.
(3) Erecting a barrier between the government and the power sector.
Formation of OERC
A separate body, consisting of three experts, called the regulatory commission (RC) has been created. Many of the responsibilities and powers vested earlier with the state government have been delegated to this body. As per section 11 of the Orissa Electricity Reforms Act (OER Act, 1995) these include:
- To issue licenses and stipulate license conditions for all power utilities,
- To regulate the working of the licensees and to promote their working in an efficient, economical, and equitable manner;
- To promote efficiency, economy, and safety;
- To regulate the purchase, distribution, supply, and utilization of electricity, the quality of service, the tariff and charges payable keeping in view both the interests of the consumer as well as the consideration that the supply and distribution cannot be maintained unless the charges for electricity supplied are reasonably levied and duly collected;
- To promote competitiveness and progressively involve the participation of the private sector, while ensuring a fare deal for the consumers.
Unbundling and Corporatizing of OSEB
Implementation of the reform blueprint started with the enactment of the Reform Bill. It was notified in January 1996 and came into force in April 1996. The OERC (Orissa Electricity Regulatory Commission) became functional in August 1996. The two new corporations, GRIDCO (Grid Corporation of Orissa) and OHPC (Orissa Hydro Power Corporation) into which the OSEB was initially unbundled had been incorporated in April 1995 under the Companies Act of 1956. On 1 April 1996, GRIDCO took over the transmission (all lines and sub-stations above 33 kV) and distribution (lines and sub-stations at 33 kV and below) assets of the OSEB. All hydro projects of the DoE (Department of Energy) and the OSEB were also transferred to the OHPC. GRIDCO was further unbundled into one transmission and four distribution companies. The distribution companies were
(1) CESCO (Central Electricity Supply Company of Orissa Limited),
(2) WESCO (Western Electricity Supply Company of Orissa Limited),
(3) NESCO (North Eastern Electricity Supply Company of Orissa Limited), and
(4) SOUTHCO (Southern Electricity Supply Company of Orissa Limited).
All these four companies began their activities as subsidiaries of GRIDCO from November 1998 and the 43 distribution divisions of GRIDCO were transferred to these respective subsidiary companies on 26 November 1998, pursuant to the Orissa Electricity Reforms (transfer of assets, liabilities, proceedings, and personnel of GRIDCO to distribution companies) Rules 1998. The balance sheet restructuring and transfer policies adopted in this regard are briefly discussed below.
Process of Disinvestment
After the premature termination of the management contract, the GoO (Government of Orissa) decided to go ahead with its plans to privatize the distribution system at one shot by offering 51% equity to private distribution companies in all the four zones. The ICB (international competitive bidding) route was taken to select private investors. Several factors contributed to this decision, which was different from the earlier one to go in for a sequential privatization. The most important reason was the continued deterioration of the distribution set-up. Another reason was that a period of prolonged uncertainty should be avoided since it would lead to demoralization of the staff and fall of productivity (Sinha 2002). The preparation of the documentation and the process of inviting bids and selecting the successful bidders would be very time consuming and expensive and would be best completed at one stroke. It was also hoped that offering all the four zones for privatization would stimulate investor interest, bring in better bids and wider participation (GRIDCO 2002).
Pre-Qualification of Bidders
The first step in implementing the privatization strategy was to find out private investors who were interested in and qualified for the job. Accordingly, a RFQ (request for qualification) was prepared and widely circulated. It was published in three leading Indian dailies in English, sent out to all the Indian Embassies and High Commissions, the World Bank, etc. Publicity was also given through some of the leading merchant bankers. The document contained background information about prospective business and stipulated that the bidders may either quote for the DISTCOs (distribution companies) individually or in a combination of two. The maximum number of bids, which any bidder was allowed to make, was ten. The main qualification criteria for these consortia or companies were as follows.
- Three years of operational experience in 33 kV distribution with over 100 000 customers.
- A turnover of 100 million dollars in the case of foreign companies and 350 million rupees in the case of Indian companies.
- Foreign firms should have at least one Indian partner (minimum five per cent stake) in the consortium.
The following companies or consortia were not eligible.
- Companies/consortia including companies generating electricity in the state of Orissa and which sell electricity to GRIDCO (Grid Corporation of Orissa).
- Companies/consortia including companies supplying power to GRIDCO. In response to the RFQ, GRIDCO received 51 bids for which the following 11 companies or consortia pre-qualified.
1 Reliance Industries Limited and Escom of South Africa
2 Enron Corporation, Portland General Electric (Enron subsidiary company based in Portland, Oregon), and Delhi-based EMCO Transformers Limited
3 BSES Limited
4 National Grid Company, Energy Australia, and Modicorp Private Limited
5 Grasim Industries, Singapore Power
6 United Utilities, UK, and AMP Life Limited, Australia and Indure Limited
7 Electricity de France, Infrastructure Leasing and Financial Services Limited
8 Cal Energy Company Inc., Northern Electric Plc. And Dishergarh Power Supply Company Limited
9 Hydro Quebec International, Canada and HEG Limited
10 Tata Electric Company, Northern Ireland Electricity of UK and Viridian Group (the holding company of Northern Ireland Electricity)
11 AES Corporation, Jyoti Structures Limited.
Request for Proposal
The RFP (request for proposal) documents were sent out to all the 11 pre-qualified bidders. The bids were submitted in two parts, technical and financial. The technical bid of the RFP contained a detailed questionnaire designed to ensure that the bidders had made a study of the distribution busi- ness in Orissa. The bids were to be awarded marks based on their responses. In the first category of questions, the bidders were expected to clarify the following matters: the investment structure and preferred route, proposed capital and R&M expenditure, reduction of technical and non-technical losses, improvement in billing and collection, human resources (training, safety, and management), consumer services, public relations, and regulatory issues. This carried a total of 500 marks. In another set, the bidders were required to develop a preliminary plan of short-, medium-, and long-term options and measures that would be implemented in Orissa. The bidders were specifically required to demonstrate their understanding of the distribution system and business as it currently operated. They were asked to show how they would apply their knowledge and understanding in operating and managing distribution business based on their own experi- ence elsewhere. This carried a total of 250 marks. The mini- mum qualifying marks were fixed at 450 out of the total 750. It was also stipulated that no bidder would be allowed to buy more than two DISTCOs or to attach any conditions along with their proposals. There was no proposal to rank the technical bids, but it was stipulated that GRIDCO would open the financial bids of only those bidders who got the minimum qualifying marks. The successful bidder was to be the one who offered the best price while satisfying the other conditions. Two committees, one technical and the other financial, were formed to evaluate the proposals. The committees had nominees from GRIDCO, GoO, as well as other experts from outside. Out of the 11 pre-qualified bidders, the companies at serial numbers 4, 6, and 91 dropped out after the due diligence exercise. Of the remaining seven, four did not participate in the bidding process for reasons such as the Asian Economic Crisis, Pokharan-II blast or because they were unviable and small businesses, and regulatory risks, etc (OERC 2002). Finally only the following three bidders met the technical requirements.
1 BSES Limited
2 Singapore Power and Grasim Industries
3 TEC and Viridian.
A competitive statement of the offers received from the three bidders is given in Table 1. In addition to the four individual DISTCOs, the BSES had also submitted two combination bids, one for WESCO and NESCO, and one for WESCO and SOUTHCO. If GRIDCO chose the latter combination, the BSES had offered 307.3 million rupees for SOUTHCO. There were no bids for CESCO. GRIDCO, therefore, went for a re-bid for this zone and solicited bids from all the seven pre-qualified bidders on the same terms and conditions as provided in the RFP except that bidders were allowed, if they considered it necessary, to stipulate conditions or reservations on a separate sheet attached to the financial bids.
In response to this, only the BSES and TEC-Viridian submitted bids and both these had several conditions attached. TEC’s offer was for 410 million rupees compared to 334.1 million rupees of the BSES. The GRIDCO Board deliberated at length on the different bids and decided to accept the offer of the BSES for WESCO, NESCO, and SOUTHCO. Looking at the ground realities, it also decided to relax the condition that no bidder could be given more than two DISTCOs. Further, it was decided that GRIDCO should not insist on the combination bid of the BSES for WESCO and SOUTHCO, although it was slightly more attractive. This was because if GRIDCO did so, the BSES might (relying on the RFP condition that it cannot be compelled to take more than two companies) refuse to take NESCO under the individual bid. On the other hand, the BSES had confirmed that if they had to take three companies, they would be willing to take WESCO and NESCO in combination and SOUTHCO under the individual bid. In case of CESCO, the Board decided to accept the offer of 410 million rupees subject to clarification from the bidder that the conditions included in their bid would not oblige GRIDCO to give financial support to CESCO to reduce shortfall in revenue. However, this could not be achieved and subsequently the bidder raised several issues in their meetings with GRIDCO making it clear that their offer was not unconditional. Sensing that the consortium was proposing long drawn negotiations, a letter was issued to them on 12 April 1999 explaining the whole position and requesting them to complete the share acquisition documentation and pay the consideration by 4 p.m. on 13 April 1999; if the consortium failed it would amount to a breach of the bid’s terms and conditions. The matter was reviewed at the meeting of the Board of GRIDCO on 13 April 1999 and further discussions were held with the consortium when a package of concessions was offered. In spite of these efforts, the deal did not materialize and TEC-Viridian finally admitted their inability to complete the transaction. GRIDCO once again approached all the prequalified bidders and only the AES consortium expressed interest in CESCO subject to some new terms and conditions, which included GRIDCO opening an escrow account in favour of AES Ib Valley Project (a subsidiary of AES) and GoO accepting an offer from another AES subsidiary for the purchase of two per cent more shares in OPGC. After further discussions, CESCO was offered to AES at a consideration of 420 million rupees with effect from 1 September 1999. While taking this decision, GRIDCO had noted that CESCO had been incurring losses of about 9 million rupees per day, totalling to 1200–1300 million rupees from April end to August 1999.
Post Privatization Scenario
Financial performance of DISTCOs
Based upon projections made by consultants intimated to prospective bidders through the IM, it was expected that WESCO and NESCO would achieve turn around by 1999/2000, SOUTHCO by 2000/01, and CESCO by 2001/02. However, none of the DISTCOs could achieve this and suffered losses even at the end of the third year (Table 1).
Prior to these reforms, the GoO was providing subventions to the OSEB under Section 59 of the Supply Act 1948. This practice was withdrawn immediately in the post-reform period. In the process, the GoO saved subsidy payments of about 27700 million rupees during the period 1995/96 to 2000/01 (GRIDCO 1999). However, this put an added strain on the newly-created entities. The net loss to GRIDCO and DISTCOs during this period was about 21040 million rupees. The OERC had observed that non-payment of subsidies
was in consonance with the spirit of the Reform Act, but the government’s financial back-up in the form of a subsidy during the transition period could have substantially eased the situation. In fact, a number of reforming states have made provisions for transitional funding; for example, Andhra Pradesh (Rs 15850 million), Gujarat (Rs 12600 million), Uttar Pradesh (Rs 7900 million), Haryana (Rs 7693 million for one year), Rajasthan (Rs 34966 million in four years), and Delhi (at the rate of Rs 5000 million per annum for five years) (GRIDCO 1999).
Quantum of Sales
Figure 1 shows the quantum of sales actually realized by DISTCOs alongside with those expected in the IM.
Billing and Collection
Figure 2 shows the collection efficiency in the post privatiztion period compared to what existed in the OSEB and GRIDCO regime.
Transmission and Distribution Losses
The audited statement of accounts of the OSEB had shown transmission and distribution losses in the state at 23.81% in 1994/95 and 46.94% in 1995/96. However, these losses had an element of estimate as the number of consumers was not metered (billed on flat-rate basis). Further, there were also
non-functional/defective meters. The World Bank consultants, therefore, took up some sample studies at the time of preparation of the SAR (staff appraisal report) in 1996. According to this, the losses were to be about 39.5% in 1996/97 and these were to be brought down to 21.7% in 2001/02. The IM also mentioned similar losses for 1996/97 and it was indicated that the technical losses at the distribution level were 15.7% (below EHT level) and about 5.8% at the EHT level. The rest, approximately 18%, were commercial losses. Figure 3 shows how the distribution losses varied in the four DISTCOs, corresponding values projected in the IM and those approved by the OERC are also shown alongside. Commercial losses (which arise from the unauthorized use of electricity through hooking, tampering of meters, etc.) constituted the bulk of these losses. The DISTCOs were making special efforts to bring them down. However, in doing so, they faced obstructions from anti-social elements including attacks on their officers and personnel engaged in enforcement. Support from law and order enforcing agencies of the government assumed importance in this context. Taking note of this and also to address the other concerns of consumers, the GoO constituted district-level advisory-cum-coordination committees (May 2001). The composition of these committees and the range of issues they were to address are given in Box 1. The committees were to meet every month and promptly submit the proceedings, duly approved by the Collector, to the Energy Department of the government. The Kanungo Committee while reviewing this set-up was of the opinion that the district-level committees may be substituted by two-tier forums, one at the district level and the other at the DISTCO level.
Impact of 1999 cyclones on DISTCOs
Orissa was ravaged by two consecutive cyclones—one on 17 October 1999 and the super-cyclone on 29–30 October 1999. In the first cyclone the lines and sub-stations of SOUTHCO were severely damaged. The super-cyclone resulted in severe damage to the lines and sub-stations of CESCO and NESCO. The damage covered 12 districts. The funds required to take up the barest minimum resto-
ration work were estimated at 1057.2 million rupees. It was expected that this sum would be available as a grant from the GoO and/or from GoI, but no such funds could be made available. A proposal to utilize the funds available from the unutilized portion of the existing World Bank loan amount earmarked for activities such as DSM (demand-side management), and procurement of meters from the existing World Bank loan could not also be implemented since the on-lending of the loan was not finalized. As a result, the three DISTCOs had to incur unexpected expenditures when they had just entered into the business. The OERC had authorized the DISTCOs to go ahead with the restoration work and divert stores from other schemes to procure 50% of materials as per their overall assessment. It was also monitoring the restoration works; the Commission had appointed an ex-chief electrical inspector to assess the damage. Based on this the allowable expenditure was decided. In the case of CESCO for example, the OERC authorized an expenditure of 527.19 million rupees as against an initial proposal of 1295.7 million rupees by DISTCO. While adding this amount to the asset base, the Commission also ensured that cost of the old replaced assets was netted out so as to ensure that the consumers were not charged for assets that were not in use. In the case of CESCO the net increase in asset base was 166.1 million rupees.
Changes in CESCO Management
The functioning of CESCO after it was taken over by the AES consortium in September 1999 was beset with problems right from the beginning. These were organizational, financial, and contractual by nature. Finally in August 2001, the OERC revoked the licence and vested the management of the DISTCO in a CEO (chief executive officer) deputed by the government. The status quo continues. The events leading to the exit of the AES consortium are presented in Annexe E.
Rural electrification is a socio-politically sensitive and relevant issue in the operation of any distribution company. However, these electrification schemes are normally not economically attractive in view of the capital investments, low load density, poor paying capacity of the consumers etc. According to a study by XIM (Xavier Institute of Management), Bhubanehswar (OERC 2002) typical economics for rural consumers in Orissa are characterized by a billing/input ratio of 35% and a collection/billing ratio of 25%. In other words, for every one hundred rupees worth of input the utility was collecting only Rs 8.75. In the erstwhile set-up, these programmes were being sup- ported by government subsidies and soft loans. The OSEB had a dedicated wing under one chief engineer to look after rural electrification programmes. When the OSEB was restructured and DISTCOs were privatized, the rural electrification wing was disbanded and the focus on rural electrification was lost, though the programme was not given up. The super cyclone and the non-payment of the assured capital subsidy to DISTCOs by the government also contributed to the slackening of interest in taking up new programmes. Table 6 presents some statistics on rural electrification during the past few years. The recent tariff filings before the OERC show that the DISTCOs have practically no schemes on hand related to rural electrification except those under the PMGY (Prime Minister’s Gramina Yojana).
The Kanungo Committee (2001) has noted that MPs and MLAs were willing to provide funds under local area development schemes for rural electrification works. However, this had not made headway due to disagreements on departmental charges payable to DISTCO. The Committee suggested that a REPO (Rural Electrification Planning Organization) be set up under the GoO to provide focus and direction to the rural electrification programme, have specific projects prepared for submission to funding agencies and oversee utilization of the funds procured. This organization should have under it four REPUs (rural electrification planning units), one for each DISTCO with which it would work in close coordination. These units should be responsible for drawing up detailed schemes of rural electrification, monitoring the execution of the schemes by the concerned DISTCO and reporting completion of the projects and the expenditure incurred thereon to the Collector of the District and the REPO. On the basis of the Collector’s certificate, the Government should promptly settle the subsidy payment admissible to a DISTCO. The scheme should be prepared not only to pro- vide domestic lighting but also to meet the requirements of agricultural pumping and agro-processing. They should also be prioritized in consultation with the collector of the concerned district. In the mean time, alternative forms of intervention had also been tried out to improve power supply to the rural areas. One such initiative was taken by the BSES though the formation of the VEC (village electricity committees ) or micro privatization. This was conceived by XIM, Bhubaneshwar (OERC 2002) and started as a pilot project in August 1999. It now spans over 4900 villages. The role of the VEC includes meter reading, distribution of bills, complaint handling, and collection camp co-ordination, resolving of disputes, agreements on instalments, dissemination of information, etc. Eventually it is proposed that independent franchisees be appointed on commercial terms who will handle all interaction with VECs. Reports till date show that with this set-up, billing and collection as well as quality of service has improved in the project areas. For example, records of WESCO as per its tariff filing before the OERC (GRIDCO 1999) show that micro privatization has provided the following benefits.
- Over 1100 long pending consumer’s complaints were resolved.
- Consumers were able to avail connections.
- Consumers no longer had to go out of the village for electricity-related problems.
- Bill distribution, meter reading, and cash collection have become more streamlined/improved.
- Large-scale metering has brought about reduction in input and an improvement in voltage. Distribution transformers are thereby less loaded and distribution transformer failures are reduced.
Views on the Outcome of Reforms
The outcome of reforms in Orissa’s power sector has been commented upon in a number of reports and
articles. While some view it as a failure, others do not totally subscribe to this. It is a fact, however, that GRIDCO and DISTCOs are continuing to incur losses and the sector has not been able to realize a turnaround. The quality of supply and service has also not gone up to the expected levels. There was a prolonged debate on this topic in the Orissa Legislative Assembly during early 2001, in which a large number of legislators participated. Following this, the GoO constituted a six-member committee of independent experts under Mr Sovan Kanungo. This committee, in its report submitted to the government in October 2001, has made some wide-ranging comments and recommendations (Kanungo Committee Report 2001). In addition, the Montek Singh Ahluwalia Committee, in its report on SEB reforms (MoP 2001) submitted to the GoI in May 2001, had made certain observations on the outcome of reforms. The OERC has commented on the performance of the sector in its tariff order for 2001/02. Some of the main issues brought out in these documents are mentioned below:
- Estimation of the initial T&D losses and the targets for reduction in the 1996 SAR of the World Bank were unrealistic. This has been acknowledged in the Bank’s Aid Memoir of 31 October 1998, which says ‘During project implementation, once much more detailed information became available from RIAP and related work, it turned out that the starting point, the 1996 base figure was much higher, of the order of about 52–53% for OSEB’s last year of operation in 1995/96 and about 50% for GRIDCO’s first year of operations. The latter figure is confirmed in GRIDCO’s audit report. Given that we so severely under estimated GRIDCO’s system losses in 1996 and on that basis set unachievable performance targets under Ln. 4014-IN in May 1996, the Regulatory Commission in its March 1997 Tariff Order (which required GRIDCO to achieve 35% system loss level for 1997/98, in line with the original 1996 Bank estimates quoted above), stated it is not surprising and in fact unavoidable that GRIDCO’s financial performance is well below agreed targets.
- The assumption in the SAR on the growth in demand for power in the state was highly ambitious, not only in terms of totals but also in the composition. The demand for industrial power (EHT), which subsidizes domestic demand (LT supply), was grossly under realized while do- mestic and commercial demand with high losses grew fast. The preference for captive generation on part of EHT consumers with rising tariffs was not anticipated.
- On the collection front, the assumption in the SAR was that 100% of the billings would be collected from the year 1997/98 onwards but this was hard to achieve.
- Services of local consultants as well as highly rated consulting firms of international repute were used extensively at a high cost (cover 3000 million rupees) to prepare the blueprint of reform. High-cost consulting services were also retained to assist the utilities in developing internal systems of operation management, financial control, technical services, contract management, project implementation, etc. However, judging by the fate of the reform and thepresent state of the utilities, this has belied the expectations.
- The private promoters of DISTCOs neither brought superior management skills nor did they arrange financial support even by way of working capital for the companies, which were in dire need of capital, working capital in particular.
- There is no evidence of introduction of any innovative practices in the management of DISTCOs except for the experiment of involving village communities in streamlining the power supply in rural areas.
- The power purchase model of the SBM (Single Buyer Model) had inherent limitations in promoting competition.
- The process of tariff fixation on a year-to-year basis using a cost-plus approach has excessive regulatory uncertainty. A multi-year framework is necessary.
- Many non-paying customers enjoy political patronage. Government agencies such as police stations, schools, public hospitals, etc. do not routinely pay their bills due to their own financial difficulties.
- Rural electrification has suffered as a result of reforms.
- The cyclones of 1999 were a set back to the efforts of the privatized DISTCOs in achieving turnaround.
- The assets were over-valued. This should have been kept in abeyance till the systems were brought to balance.
- The GoO should allow a moratorium on debt servicing to the state except for the amounts in respect of loans from the World Bank.