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Home News Power Sector News The Crisis of the Power Sector Reforms

The Crisis of the Power Sector Reforms

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Power Sector Reforms

 Prabir Purkayastha The crisis of the power sector reforms, carried out over the last three decades, particularly after enacting the 2003 Electricity Act, is now becoming worse. It is estimated that 25,000 MW of capacity today is lying idle, as the distribution companies are not able to pay for electricity. Under pressure from the finance ministry, banks have lent money to the private power companies. As a consequence, Indian banks' exposure to the power sector stand at Rs. 5.83 lakh crore (September 20015) , which is 22% of all outstanding banking loans to industries. Crisil, the credit rating agency estimates (October, 2016) that Rs. 1.34 lakh crore, given to private power companies is at "high risk". These loans are to Adani, Vedanta, Jaypee, Jindals, Ambanis, GVK, Tatas -- the big names among Indian capitalists – and are now in the danger of becoming bad loans; or in banking language, Non-Performing Assets (NPA's).

Meanwhile, the distribution companies (Distcoms), almost entirely owned by the state governments, have accumulated losses of approximately Rs. 3.8 lakh crore, and outstanding debts of Rs. 4.3 lakh crore (as on March, 2015) . While the UDAY scheme has transferred a large part of this debt to the state governments, and reduced the interest burden on the Distcoms, the problem of the losses of the distribution companies still remain. It is embedded in the so-called reforms that were introduced in the 90's, that gathered force with the Electricity Act 2003, and continuing under the Modi government.

Unbundling the electricity sector

The vision of the Indian political leadership of the role of electricity in the development of the country has undergone a sea change. We had started with an understanding that electricity is the backbone of a modern nation, and the state had the duty to develop this sector to meet the needs of development, as well as provide electricity to the people at a reasonable cost . This was the vision of the 1948 Electricity Act, piloted in the Indian Constituent Assembly by Babasaheb Ambedkar that led to setting up of the State Electricity Boards (SEB's). The current vision – if it can be called a vision – is that the gods of the markets, helped by a hefty dose of crony capitalism, will solve the problems of supplying people with electricity and developing this sector. Instead, we have high cost of electricity, and ideep financial crisis of the sector.

Before the 90's, the electricity sector was organised through utilities. In a given geographical area, there were electricity utilities that had all three functions – generation, transmission and distribution of electricity. In the 90's, the World Bank and various international agencies promoted the concept of "unbundling" of the electricity sector, that generation, distribution and transmission could all be separated. This, we were told, would lead to competition between generators and bring down the prices; or so the neoliberal economic theory ran. The purpose was of course different – it was to privatise the more lucrative parts of the electricity sector, leaving the loss making sections with the state.

The unbundling of the electricity sector in India saw a large number private players enter generation. Transmission remained almost entirely in the hands of the state, while only two states -- Orissa and Delhi – privatised their distribution.

What is the experience of this unbundling? After unbundling, have the utilities become more efficient as was originally claimed would happen?

Instead, with unbundling of the sector, the losses have increased dramatically. For example, the losses of the SEB's in 1992-1993 were of the order of Rs. 2,725 crore (Planning Commission: 2002 ). After 10 year of reforms, it had increased to Rs. 24,837 crore or by about 9 times. Today, the accumulated losses of the Distcoms stand at about Rs. 3.8 lakh crore or 140 times from the losses they had in 1992-93!

If the unbundling of the electricity sector was for the purpose of improving its financial efficiency, this certainly has not happened. Neither has it bothered the neoliberal establishment that the policy mix that was supposed to have addressed this issue of losses of the sector has only lead to much bigger losses. The astonishing part of this story is that no one today even talks about the reforms and why unbundling has not worked. A review of the prescription is not only not in order, the arguments that competition is the only way to improve efficiency is repeated almost as an article of religious faith, without bothering about the evidence.

If we discount this myth of competition and electricity markets, what was the objective of reforms and unbundling of the electricity sector? There were three drivers of the so-called reforms of the electricity sector, all of which used the losses of the sector as the excuse. One is that Indian big capital felt that it had come of age, and no longer needed the Indian state to build infrastructure for its use. The second was that global capital was running out of investment opportunities in the advanced countries, and looked at the infrastructure of developed countries as a new market. The third was big equipment manufacturers such as Siemens, GE, Westinghouse, ABB, Hitachi etc., who looked to open up the developed countries markets.

However, most of these companies were not interested in taking over distribution. They wanted the easier route – build power stations – and sell electricity through assured purchases (Power Purchase Agreements or PPA's) to the State Electricity Boards. This is how we entered the era of reforms through PPA's, the most notorious being of course Enron. But we should not also forget a whole range of other PPA's that had been signed and would have led the entire electricity sector in a much bigger crisis, if the people had not resisted Enron and defeated its backers. Lest we forget, the backers were the Manmohan Singh government that signed the agreement, and also the 13-day Vajpayee government in 1996 that gave Enron a sovereign guarantee that was to prove very costly for India.

The Enron debacle not only put paid to the PPA route for setting up of power stations, it also led finally to abandoning the costly and foolish LNG/Gas based power stations that we adopted in the 90's. About 14,000 MW of gas based stations are idling in the country today, as it is cheaper to pay their capital or fixed costs, and not draw power from them. The Dabhol plant, taken over by NTPC is one of them.

Electricity has once characteristic – its supply and consumption must balance at all times. It is because of the need to keep supply and demand in balance, that we also have the possibility of gaming the system: the suppliers can withhold supplies, create a short term imbalance and drive up the price of electricity in the market. This is what Enron did in the California , when it tried to introduce power markets. Not surprisingly, the US stopped its market reforms after the California debacle and is still persisting with the utility model, while pressing the developing countries to reform their electricity sector and introduce "market" reforms.

We appear not to have learned anything from the double Enron fiascos – the one in Maharashtra and the other in California. The World Bank ideologues, who have taken over the top policy positions in India, continued with their goals of dismantling the state owned electricity sector. The Electricity Act 2003 virtually mandated trifurcation of the State Electricity Boards (SEB's) into a number of companies – for generation, transmission, and distribution – was pushed by the NDA government with the complete support of the Congress. Only the Left opposed it in Parliament in 2003. And only Kerala still retains its stand of not trifurcating the SEB.

Continuing Enron economics through private power companies

The 90's also saw the centre cut back on its support to to the states in adding to their generation. India, who was then adding about 40% per each Five-year plan, lowered its investment to less than a 20% increase of generation in the 8th, 9th and 10th Five Year plans, creating large shortages of electricity. Prices of electricity were consequently high.

High prices of electricity provided an incentive to the private sector to invest in generation. The government also promising easy finance from the public sector banks, captive coal mines to the private companies. This combined with the availability of cheap equipment that could be sourced from Chinese manufacturers on easy financial terms.

Manmohan Singh, who himself headed the coal ministry in the first UPA government, gave away coal mines to private generators at throw away prices. As we discovered later through the CAG Report (Coalgate), these companies did exactly what the companies securing 2G spectrum did; they either sold their licenses at whopping prices, or sold the coal in the open market, making huge profits.

Priority sector lending from nationalised banks was made available to these private players under the then Finance Minister, PC Chidambaram. As we know from the Enron case , private capital brings in only fictitious capital. It takes loans, "overpays" to equipment vendors or turn-key contractors, and recycles this money through some fancy book-keeping, as "their share" of capital. Most of "their" capital has come from the recycled funds borrowed from the banks through over invoicing for equipment, the time honoured dodge of Indian capital. Therefore, the private players are not bothered about the crisis of their companies. They have already taken their money out of the companies. The ones left holding the bag are the big public sector banks.

Who are these companies? They are the Ambanis, the Tatas, the Adanis, and so on. These are the same players who benefited from the Coalgate under Manmohan Singh, and are now the favoured ones for Modi. Indian Express in October 2012 had identified , "The projects facing potential stress include Adani (4 projects with a debt of Rs 24,100 crore), Lanco (five projects with a debt of Rs 22,100 crore), Reliance ADAG (three projects involving a debt of Rs 32,600 crore), Tata Power (one project with a loan of 14,400 crore), IndiaBulls (four projects with a debt of Rs 21,200 crore) and Essar (seven projects with Rs 21,900 crore debt)". To this list, we can add, Vedanta, Jindals, GMR, and Hindujas, who have also borrowed heavily from the banks. According to the Express predictions then, all these would need "debt restructuring" or government bailouts in 2015. And this is exactly what we see under way – the government "writing off" the bad loans of Indian capitalists of more than a lakh crore (Rs. 1.14 lakh crore) in the last three years (2013-2015) and about Rs. 60,000 crore the last financial year (2016) . A significant part of these waivers are in the electricity sector.

THE story of the failure of the reforms will not be complete unless we also take into account the failure of the privatisation of distribution. This is what we will examine in the second part of our examination of the power sector reforms.

DISTRIBUTION PRIVATISATION – THE STORY OF RELIANCE IN ORISSA & DELHI

The distribution sector reforms are more difficult than inducting private sector in generation. The reasons are obvious. The distribution utilities are spread over much larger areas, they have to deal directly with the consumers, and have to distribute electricity to rural areas. The reason for choosing Orissa and Delhi for distribution reforms were that both had low agricultural loads. Delhi has very little agriculture. Orissa had done poorly in extending electricity to rural areas and had an agricultural demand of less than 5percent of the total demand for electricity.

The Orissa distribution reforms started with the Orissa government unbundling the electricity board and privatising distribution. It came a cropper soon after, when AES, the US multinational, walked out of its commitments to restore power to Orissa's cyclone-hit areas. It had successfully bid for one of the four distribution companies that had been spun out of the Orissa State Electricity Board. The other three, which had been taken over by Anil Ambani Reliance, continued for another 15 years – till 2015 – before Orissa Electricity Regulatory Commission finally lost its patience.
The draft CAG report on Delhi's distcoms described the Rs 8,000 crore loot of consumers by Reliance and Tata.

Though the final CAG report was withheld based on the High Court order that CAG cannot audit the distcoms, the fact remains that CAG audit laid out in detail the extent of the loot of the consumers by the private distcoms. It is the BJP backing the private parties and the tussle between Lieutenant Governor Najib Jung and the AAP government in Delhi that is preventing the cancellation of the licenses of the Delhi distcoms.

With this, we have come a full circle on the electricity reforms introduced by the Electricity Act 2003, whose primary goal was to privatise the sector. The two examples of privatising distribution have both failed – Orissa and Delhi. All that remains is formal winding up of these private distribution companies and handing them back to public hands, as Orissa has already done.

While the privatising of distcoms may have failed, there is another part of distribution privatisation which continues. This is to force the state owned distribution companies to provide "open access" to private power producers to supply power to big consumers. The industry and big commercial consumers have higher tariff. That is how we subsidise small consumers and agriculture. If the big industrial consumers can "buy" power directly and force the distribution companies to carry such power, with some nominal charge for the use of its wires, it will automatically push up the cost of electricity to the rest of the consumers; or increase the loss of distribution companies. This is indeed one of the reasons for increased losses of the distribution companies after the so-called reforms under the Electricity Act.

Open access of allowing any large consumer to draw power from any generator on the grid is also treating the grid as a market, which it is not. It is a pure accounting myth that treats such supply and consumption, as if it is an actual transaction that is using the grid as a delivery vehicle for goods. In practice, the grid does not transfer electricity from the supplier to the buyers, but increases the transfers that have to take place from one region to another. The electricity grid was not designed to handle such transfers. The grid was originally designed to handle only regional shortfalls, and transfer of surplus to deficit regions. If it is to be used as a market, it has to be strengthened much more to handle much larger intra-region transfers. Otherwise, the grid becomes unstable. One of the reasons for the grid collapse of two years back, was such large transfers in the grid, reached not for meeting regional shortfalls, but for treating the grid as a market.

Failing to address the underlying crisis of the sector, the BJP government is now proposing an amendment to the Electricity Act, the Electricity (Amendment) Bill 2014. This Amendment, is to take privatisation even further, delinking electricity supply to the consumer entirely from the electricity infrastructure. It will separate the wires of the distribution companies from the distribution of electricity. Distribution companies can then be privatised even further, becoming in effect traders, while the state governments underwrite all their operations by providing the wires, the transformers, the substations and high tension lines; or in other words, all the underlying electrical infrastructure. The state governments would have to put in all the investments, handle all the outages, while private "distributors" would use this infrastructure and essentially trade electricity.

Why is this absurd step being taken? What the BJP government wants is to bail out private generating companies, who can take over "distribution" in lucrative urban areas. This will serve the dual purpose of providing a lucrative captive market for the excess capacity that the private generating companies have built, while leaving the loss making areas to be handled by the state government owned utilities. The rich, urban areas are insulated from the problems of the sector, get assured supply; the private players generating companies get an assured market; while the rest of the sector gets even deeper into crisis.
Such a harebrained scheme has never been tried in any country. Hopefully, the Indian parliament will see sense and shoot down this utterly brainless scheme.

INCREASED COST OF ELECTRICITY TO THE CONSUMER

When these reforms were introduced via the 2003 Electricity Act, most state governments did not understand the deeper game plan. This was large scale induction of private power into the grid which needed that private power tariffs be removed from political control of the states. The so-called independent regulator would create a "market" and would also remove all the subsidies for the poor and the farmers, so hated by the neoliberal establishment. The removal of the subsidies and that the state governments would have no role in setting the tariffs are all a part of the 2003 Electricity Act. From electricity being fundamental the country's development, we have now come to the point that it is just another set of goods, like soap or vegetable oil, to be bought and sold like any other commodity.

What these set of reforms did, even where distribution was not privatised as in Orissa or Delhi, was that the share of power provided by NTPC and private power companies became increasingly more important in the grid. The state governments had now little control over generation prices, as more and more generation passed into the hands of the centre and private generators. Increasingly, the interests of the central government and the private players became aligned – both of them were essentially what are called Independent Power Producers (IPPs), companies that produce power but do not distribute it.


The consequences of this unbundling and induction of private generators are now clear. Currently, the private sector has an installed capacity of 41.5 percent (including renewables) in the grid. The centre has about 25 percent, while the states have now only about 33.5 percent of the generation, a fraction that is bound to come down even further with time. The state governments now have to distribute electricity at prices that are reasonable for the consumer, but have no control over its cost. If they increase prices, they suffer a political backlash from the people. If they don't, their losses increase.

A simple look at the gap between the cost of electricity and the revenue realised per unit makes the direction in which the power sector is travelling clear. In 2006-07, this gap was about Rs. 0.26; today, it is roughly about four times or about a rupee. Not surprisingly, more the state government owned distribution companies sell electricity to the consumers, deeper they are going to go into the red. This is why the cumulative losses of the distcoms stand today at Rs 3.8 lakh crore.

CHALLENGES BEFORE THE UNIONS

We are now at the crossroads of the electricity sector reforms. Either we realise that the underlying policies of unbundling and privatisation have failed completely; or we believe in the neoliberal mythology of the markets being gods. It is time to accept that the market gods have failed and go back to the understanding that the electricity sector is vital to the country's development and its cost has to be within the reach of the people.
The electricity unions have played a very important role in the past. They were the ones that warned the country about the disastrous Enron model of electricity sector reforms in the country. They were the ones who had resisted the so-called reforms of unbundling of the sector. It was an expert committee set up by the electricity unions that had discussed these "reforms" and warned the parliament and the country that this was a recipe for disaster, and that the losses would only increase with this model.

The time has come again for the workers in the electricity sector to align with the people – the consumers – and bring about an alliance of the employees of the sector and the people. They need to explain why the electricity prices are rising and what needs to be done to bring down the cost of electricity. They need to combine with the bank employees union to argue that the so-called private generators should not own the generating assets, that have been built on loans which are nonperforming assets. Instead of writing off such loans, the banks should take over such assets. They rightfully belong to the banks. They should jointly oppose the schemes of parking such non-performing assets in a "bad bank", which is meant to shield these private generators from the consequences of their loans. Mallya is not the only one with bad loans from the banks.

It is time for the electricity employees to show the way out for the sector as it did earlier on Enron. It is not simply fighting the management of the sector, as is its "normal" trade union task. These are abnormal times for the sector and calls for extraordinary responses. This is the challenge before the employees, the unions and the people. This is our challenge.


(This two-part article is from an address given to the All India Federation of Electricity Employees on November 13 in Trivandrum)

 

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