Power Distribution Reforms in India – a Journey from Monopoly Towards Competition.

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Power Distribution Reforms in India – A journey from Monopoly towards Competition. Case Objective:
Power a basic human need is the critical infrastructure on which modern economic activity is fully dependent. Only 55% households in India have access to Electricity. Most of those who have access do not get uninterrupted reliable supply. In this era of globalization, it is essential that electricity of good qualities is provided at reasonable rates for economic activity so that competitiveness increases, which is essential for higher GDP growth per annum, employment generation and poverty alleviation. Legacy scenario prior to enactment of Electricity Act 2003:

Electricity distribution in India had been primarily a Regulated Monopolistic Market where Power in individual state were being supplied by State Electricity Boards (SEB’s), Licensed to operate by the respective state governments. There were a few exceptions of private players in states like West Bengal, Gujarat and Maharashtra. Thus essentially consumers have no other alternatives, but the option of purchasing electrical power from SEB’s / Single Licensees.

Electricity Transmission and Distribution losses in India during were extremely high and varied between 30 to 45%. Theft of electricity, common in most parts of urban India, amounted to 1.5% of India's GDP.

The financial health of SEB’s had become a matter of grave concern. The gap between Average Revenue Realization and Average Cost of Supply had been constantly increasing.

The major factors responsible for financial sickness of SEB’s were:

• Skewed tariff structure leading to Unsustainable Cross Subsidies by State Government. • Huge T&D losses, largely due to outright theft and un-metered supply. It has been estimated that theft alone caused loss of about Rs.20, 000 crores annually. • Lack of Accounting and Accountability in power distribution. • Large man power – 27 to 30% Revenue was used for establishment charges. • Outdated rules, regulations, management structure and practices. • Aging and poorly maintained system, low demand side management (DSM) initiative, corporate governance challenges and lack of skilled resources..

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Burning issues:

• Subsidies

SEB’s provided electricity at subsidised rates or even free to some sections of population. This included Agricultural usage and for consumption by Backward classes. The subsidies were mainly Cross-Subsidisation, where users such as Industries and Private Commercial Consumers were paying the deficit caused by the subsidised charges collected. Such measures have resulted in financial weakness of the SEB’s.

• Power Theft & Politics of Power

Power Pilferage & lack of Political will to carve it. Often Politicians regard laxness about revenue collection as a vote-winner. The political aspect is probably most blatant in rural areas. The powerful farmers' lobby is hard for politicians to ignore in a country where majority of the population still makes its living from agriculture. A key challenge for power companies was reducing theft by India's poor. The problem started likely to getting worse as rapid Economic Growth lead to Greater Energy Demand.

The Effect:

This approach to governance in the power sector led to Prices of Electricity being fixed on Political Considerations and not on Costs.

As a consequence, the SEB’s were unable to achieve the targeted Capacity Addition to take care of the Growing Demand. Further, the increase in dues from the SEB’s to the Central Power Sector Undertakings (CPSU’s) on account of Power Purchase Cost compounded the problem of capacity addition in the sector, as even the CPSU’s were stretched to meet the targets. This led to a situation where the Supply–Demand Gap of Electricity consistently widened over the years and most of the States in India started facing acute Electricity Shortage.

The Energy Deficit increased to 11.5% and peak deficit to 18%...
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