India needs huge investments not only to bridge the supply-demand gap in generation, but also to see us through in transmission and distribution. However, in view of the current state of affairs, few private sector players are willing to enter this industry because of the huge risk perceived.

Reforms began on the generation front. Several foreign players entered the Indian market. The approach of generation reforms, however, was found to be unsuccessful. Reforms need to begin with the distribution business, which is now being undertaken by the government. Many foreign companies which entered the power generation sector have left; some are about to leave.

In the current scenario, benchmarked competition is the way out. The Delhi model, having learnt from the failure in Orissa, now provides a conceptual framework for other states to reform the distribution sector. The benchmarking of competition is based on the principles of golf; the regulator ensures an ‘appropriate handicap’. If the distribution company fails to perform as per the regulator’s standards, the distribution company accounts for the losses. Performances above the set standard are appropriately shared by consumers and the distribution company. Now that several companies have entered the distribution business, there could be an opportunity for market-based competition between distribution companies.

An important lesson to be learnt from international experience is that the sequencing of events is an important success element for the reform process to be successful.

State electricity boards (SEBs) in India have bundled these three elements of the value chain as one entity. The current reform process recommends the segregation of these three elements. Internationally, the unbundling has moved into five elements.

Transmission is not seen as one business, but as two. One of these consists of grid management and the other is the ownership of transmission lines. Similarly, distribution is seen as a three-element business:

• Wires business — ownership and maintenance of the wires.
• Power market business — supplying power to consumers, either from your own source or from a third party.
• Services business — monitoring, billing, collections, etc.

The structure to be adopted depends to a large extent on the economic and political scenario. The Mumbai licensee’s performance is testimony to the success of the existing structure. Mumbai consumers have enjoyed reliable and quality power.

The capital approach
The problem in Orissa was that the database on transmission and distribution (T&D) losses was unrealistic. The information in Delhi, in spite of not being very accurate, was better than that available in Orissa. Also, in the Delhi model, it is expected that in the next five years the distribution losses [aggregate technical and commercial (AT&C) losses] will be brought down to a particular level, for which market players were asked to quote.

The assets were valued rather than auctioned. For instance, Tata Power, which was awarded the contract under the condition that it would reduce the AT&C losses to about 31 per cent in five years, had paid about Rs1.88 billion for acquiring a 51 per cent stake. The Delhi business is a joint venture, with the Delhi government holding 49 per cent equity and management control with Tata Power.

For these five years, the Delhi government will subsidise the input power tariff. Transco, under the government of Delhi, will provide the bulk supply to the distribution company at subsidised bulk tariffs, which will stop after five years. The tariffs are based in such a way that the company gets adequate returns.

The difference between Delhi and Mumbai is that the distribution network is denser in Mumbai and the number of units consumed per square kilometre is also higher. The density of consumers is much lesser in Delhi than in Mumbai. Conditions are, therefore, more difficult in Delhi. Besides, the network is in poor condition, the LT/HT ratio is far too high, and the manner in which the equipment is maintained needs to be improved.

What has been done in Delhi is beginning to make distributors like Tata Power feel pressured. If the company fails to meet the benchmark performance level, it will have to account for the losses. The regulator will not make any allowances for non-performance or under-performance. This is the key message that needs to be spread in this sector.

Power politics versus the economics of power
The basics must be in place before there can be any reform in terms of unbundling the SEBs. Today the average price of electricity is 70 per cent of the cost. The concept of reform cannot work unless a governance system ensures that customers pay. What is needed is the realisation that electricity is a marketable commodity, not a political one. If this reform comes in, others will follow.

The government is talking about privatisation and reforms. If it decides that a section of consumers must be assured minimum electricity, there should be separate budgetary support. The utility that provided the subsidy is being victimised by having to bear the brunt of that subsidy. This support does not show in the budgets.

The basic premise is that electricity should be paid for. The deterrent to crime is not the severity of the punishment, but the certainty of it. While the government is pushing the anti-theft legislation through, it will have to ensure that the customer pays for the electricity.

This is the reason why there is minimal private investment in T&D. Most companies are wary about entering a business where they have to supply the product, but are not sure about receiving payment. While there is a compulsion on the input side, it is only a probability on the recovery side. Until there is confidence that the payment mechanism is secure, investors will stay away.

State governments have a very high off-balance sheet liability. They are burdened with high guarantees, liabilities and losses. The failure to contain large T&D losses has seriously undermined the financial position of the SEBs and made it difficult for them to buy privately generated power.

While the government has tried to revive the SEBs through direct and indirect budgetary support, little progress has been made. The financial health of the SEBs is deteriorating. The tragedy is that an SEB can be a cash cow for its state government. Poor governance has turned it into a ‘dog’, demanding more resources for maintenance than its worth justifies.

Privatisation alone cannot reform the sector. It is the basic realisation and awareness that electricity is not a political commodity that will help India realise its dream of ‘Power to all by 2012’.

*Mr Vandrevala, managing director, Tata Power