Tuesday, September 27, 2005

Differing Viewpoints: India's Electricity Reforms

This is what Frontline wrote about the Delhi power strike in its Sep 10-23rd issue. A wonderful analysis..
* A major issue highlighted in the protests over the tariff hike was that while tariffs had risen significantly, the power situation in the capital was yet to improve. Another important issue was "meter terrorism". Over the past three years, the Tata-owned NDPL and the Reliance Group-owned BSES companies had changed electricity meters across the city. While the DISCOMs claimed that the new meters reduced power leakage and loss, residents alleged that the meters were faulty and the electricity bills shot up after they were installed. The prospect of being forced to pay an additional 10 per cent galvanised the middle class into action.

*The protest against the tariff hike was noteworthy for several reasons, including its methods, strategies and participants. Unlike most protests, it was not led by any political party.

*The fires of protest were kindled by a number of prominent Resident Welfare Associations (RWAs), which asked its members to refuse to pay the additional 10 per cent and urged other citizens of Delhi to follow suit. While effectively deploying the ideas of "civil disobedience" and "people's power", the RWAs used the media as the primary means of exerting pressure on the Government. After a protracted struggle, the government relented.

*It is important to note that the protest was a middle-class and upper-middle-class movement and not a "mass movement" as described by certain sections of the media. Most of the RWAs represented regions inhabited by the wealthy, such as Defence Colony, Greater Kailash and Panchsheel Park, and had well-defined and narrow interests.

* People's Action is a lobby group for middle-class interests and feels that "vote-bank politics" has ensured that the middle class has been marginalised. The middle-class background of the participants is a major reason why the protest received the media support that it did. Another important point is that the RWAs are not calling for an end to privatised power distribution. They are asking for enhanced competition through open access and better results.

Ok, here are the good numbers..
1. Aggregate Technical and Commercial (AT&C) losses in the NDPL sectors are down from 48.1 per cent in 2002 to 33.79 per cent in 2004-05.
2. BSES Yamuna, the worst-performing DISCOM, has reduced losses from 57.2 per cent to 50.12 per cent
3. The percentage of required power shedding has come down to 0.85 per cent - the lowest since 1991.

Bad numbers..
1. An examination of the Aggregate Revenue Requirements (ARR) filed by BSES Radhani and Yamuna show that the Reliance Group filed for an ARR of Rs.1,400 crores and Rs.1,165 crores respectively, against NDPL's ARR of Rs.361.11 crores. In its response, the Delhi Electricity Regulatory Authority (DERA) sanctioned only Rs.477 crores and Rs.446 crores for the two companies. While this is not evidence of corruption per se, it illustrates that the DISCOMs are a far cry from the efficient, thrifty corporates that the government imagined them to be. (The ARR is a detailed account of a DISCOM's proposed expenses for a year. It includes the money required for power purchase from the transmission company, administrative and general expenses, capital investment and a 16 per cent return on equity. Given the revenue requirement of the DISCOM, and taking into account the subsidy provided by the government for a given year, the DERA sets the tariff for the year.)

* It may be true that less power is lost and load shedding has been reduced significantly. However, privatisation was sold as the silver bullet to Delhi's power woes. Predictably, performance has failed to meet expectations. This, coupled with faulty meters and rising tariffs, could be why the public reacted the way it did.

* While the RWAs and the DISCOMs continue their public blood feud, the real story has been buried under a heap of performance targets. The essential problem with the public discourse on power sector reforms is that it has adopted the language of the DISCOMs. An evaluation of reforms purely on the basis of systemic parameters such as loss reduction, load shedding percentage, and transformer failure frequency glosses over some harsh truths.

* In their paper, "Impact of power sector reform on poor: A case study of South and South East Asia" (TERI Project Report No. 2002 RT 45), A.R. Sihag, Neha Misra and Vivek Sharma illustrate how privatisation of power distribution in Orissa, Karnataka and Himachal Pradesh has caused a dramatic reduction in the poorer sections' access to and consumption of power. The study says, "[In Orissa] it is observed that the electrification levels for the non-poor have increased, whereas electrification levels for the poor have gone down in the post-reform period. The electrification levels for the non-poor have increased from 47.60% in 1999-2000 to 56.06 in 2001-02, whereas electrification levels for the poor have decreased from 3.67% to 3.31% in the same period." Similar trends were observed in Karnataka and Himachal Pradesh.

* To understand why the reform process reduces access to electricity, one must examine how the poor gain access to it in the first place. In Delhi, power can only be supplied to residential areas deemed "authorised" by the local municipal council; "un-authorised colonies" exist outside the formal power supply network. These colonies cannot get access to power even if they are willing to pay for it. Thus, a poor person who cannot afford to live in an authorised colony is expected to forfeit any claim to water, electricity or any other state-sponsored service. Such a system would be untenable if it were not for quasi-legal interactions between the residents of an unauthorised settlement and the local municipal machinery. Under a state-owned network, a certain grey area of legality is established whereby the poor are offered minimal access. However, once the network is privatised, these informal arrangements are not recognised and access is immediately denied. Another reason for reduced access is that post-reform tariff hikes force many existing customers to terminate their connections. The third possible reason is that private companies are reluctant to invest in areas where the return on investment is low.

* This does not mean that the only means to supply power to low-income groups is through illegal networks of tapping and theft. Instead, the message is that reform in such essential sectors is meaningless unless supported by a parallel system of entitlements. A good example is documented by the TERI report. In the Philippines, private participation in the power sector was accompanied by legislation that mandated the expansion of power services to the rural areas and compulsory levying of a universal charge for meeting the subsidy requirement for the electrification of homes of the poor. Unfortunately, the Indian Electricity Act, 2003, while imposing strict penalties on power theft, contains no specific provisions dealing with the economically weak sections.

* In a lecture titled "The Three Rs of Reform", the Nobel Prize-winning economist Amartya Sen suggests that every reform process be evaluated on the basis of three parameters - reach, range and reason. He explains that each process should be assessed on the basis of the sections of society it would affect, the ways and means by which it would affect change, and the reason for such a change. Not only must the end result of a reform process be "person-related", but the means also must be so. If these parameters were to be applied to the power sector reforms in Delhi, the results are rather disturbing.

The Economist magazine (article here, subscription required) has an article about India's poor electricity generation.
"Last month, Delhi's middle class made a huge fuss about paying a 10% increase in residential electricity, because they say they should not have to pay first world electricity prices for third-world service. Only 56% of India's households have a connection to the grid, and even less in rural areas. Over the past 10 years, electricity generation in India has grown at an annual rate of 5.5%, but peak demand exceeded supply by 11.3% in 1998 and by 12.1% last year. When electricity is available, it is not reliable (in some locations it is only available a couple of hours a day) and it is unusable for industry. Industry has survived by building its own generating capabilities. Despite this, India's economy has been growing at an average of more than 6% for the last 15 years. The government realizes that they need to improve their electricity generation and have set goals of reaching every village by 2008 and every household by 2012. The problem is that India's state electricity boards poured too much money (90% of investment) into generation and transmission instead of distribution. The price of making electricity more reliable is pegged at $10-15 billion per year, and India has not been successful at attracting outside investment (a 2200MW power plant built by Enron which lasted for only 3 years was their largest failure). India has so far planned to build up their nuclear power by 1 new reactor every year until 2020."

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