I N D I A ’S F I R S T POWER MAGAZINE Volume 5 •No.

6 March 2001

PowerLine

www.indiapoweronline.com

2001-03 Privatisation of Distribution

Mr. Vishvjeet Kanwarpal CEO GIS-ACG
Global InfraSys - Asia Consulting Group

TIME TO ACT
Published: March 2001 by PowerLine

MR PRABHU

10 Setting reforms on track

38 Interview with C.P. Jain
47 Profile: A.A. Khan
61 InFocus: Wind power
76 New column by S.L. Rao
 CONT ENT S

NEWS B R IE F S 5 SCORE BOARD Services’Shishir Joshipura

SPECIAL ST O R IE S
Setting reforms on track
Focus shifts from generation to
distribution
Package of initiatives
Budget continues the focus on power
sector reforms
Going onstream
Malana Power is being showcased
as a model private hydro project
Power-Gen India & Central Asia
The exhibition generates plenty of
interest but no real business
Flurry of global M&A activity
The US and Western Europe
witness maximum transactions
Another shot at reforms
Centre offers one-time settlement
of SEB dues at the chief minister’
s AND SERVICES
conference
Jaipur Vidyut Vitaran Nigam’s 54
Estimated energy requirement 32 Ashok Singhvi
According to the 16th EPS
APERC’sT.B. Narasimha Rao 54
10 Peak load at station busbars 33
According to the 16th EPS
GREEN POWER
Low costs, high savings 55
12 FORUM How to conserve energy and improve
Privatisation ol distribution 34 efficiency
A logical step in the reform process
Addendum/Corrigendum 59
14 Interview with C.P. Jain 38
InFOCUS 61
“Our priority is to make NTPC into a
world-class power utility”
Harnessing wind power
18 Wind turbine design
Global trends in wind power
India as a wind superpower
20 Wind energy potential
Economics of wind power generation
A word from our sponsor
22
DIRECTORY OF PRODUCTS
70

POWER DATA
COMPANIES Power generation statistics 71
What ails MSEB 40
Alstom 25 Guest column by P Abraham, former And latest fuel prices
Fragmented operations and restrictive chairman, MSEB and power secretary, Programme versus actual generation 72
policies have hampered growth Government of India In hydel plants
Suryachakra Power Corporation 29
Achieves financial closure without FINANCE
escrow cover BACK P A G E 76
REC pulls out a winner 42
Securitises receivables from
Transmission constraints in India
By S.L. Rao
AP Transco

Recent Financings 43
In India and overseas

CONTRACTS AND TENDERS 44 FORM IV

Publisher Ved Brara
Printer Ved Brara
PEOPLE Owner Ved Brara
Editor Alok Brara
PFC'S A.A. Khan 47
Desein-lndure 30 Printing P ress IPP Ltd, B-204-205, Okhla Ind. Area,
Rabo India’s Rana Kapoor 52 Ph. 1, N.D.-20
The engineering consultancy’ s services P la ce of D-4/5, Vasant Vihar,
EIL’s Keshav Saran 52
are sought after by the SEBs and IPPs Publication New Delhi 110 057
Voith India’s Guido Christ 53
Thermax Energy Performance 53

2 POWER LINE •March2001

 F ORUM
Privatisation of Distribution
A logical step in the reform process
S.K. Jen a V islivjeet Kanwarpal
Director (Tariff) Consultant
OREC Asia Consulting Group
Power generation has failed to attract the intended investment from private players. In the light o f this, several ques­
tions emerge: Did the government put the cart before the horse in privatising generation before distribution? Is private
participation in T&D the answer to the sector’s ills? What steps need to be taken to further privatisation o f the distribu­
tion sector? This Power Line forum focuses on these and other related issues...
Looking at the failure to attract investments in
generation, should the focus shift to the
transmission & distribution (T&D) sector?
S.K. Jena_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
The activities of generation and T&D are
not mutually exclusive. There can be no
generation without a proper facility of
evacuation and downstream utilisation
in distribution. The reverse is also true.
Lopsided planning in transmission,
coupled with poor econom ic growth, has
created bottled-up generation capacity
in the eastern region while the southern,
northern and western regions are
starved of power. In any case, the dis­
tribution sector has been totally
deprived of resources due to the poor
financial health of the SEBs.
A saving in capacity addition of 8,650
MW at a PLF of 68.49 per cent could have
been achieved if the estimated national
T&D loss level of 23.2 per cent for 1998-
99 was halved, that is, brought to the
international level. While steps for
reduction of T&D losses should be a pri­
ority area, loss reduction alone is not
34
S. Padm anaban V. Raghuram an
Senior Energy Advisor Senior Advisor (Energy)
USAID CII
adequate to meet the projected load
growth of the country. The immediate
emphasis has to be on eradication of
commercial losses in investment in T&D.
This has to be followed by a comprehen­
sive plan covering generation and T&D
coupled with prudent commercial prac­
tice. Unless the distribution sector is
made financially viable, private invest­
ment in T&D and generation will contin­
ue to be a nightmare.
Vishvjeet Kanwarpal
The government’ s demand forecasts of
100,000 MW additional power require­
ment in the next 10 years is unrealistic-
ally high. Our recent assessment
“Unless the distribution
sector is made finan­
cially viable, private
investment in T&D and
generation will continue
to be a nightmare.”
S.K.Jena
POWER LINE •March2001
Ravi Singhania
Lawyer
Singhania & Partners
suggests that India needs only about
55,000 MW in the coming decade. Even
given this lower figure of demand, the
actual capacity additions have hovered
around 3,000 MW per year. Captive
power has accounted for roughly
another 1,000 MW annually. Were
demand growth as high as the govern­
ment figures suggest, both our peak
and energy shortages should have sky­
rocketed in the past five years. Actually,
they have stayed fairly steady or even
come down in certain states.
At the onset, we placed the cart before
the horse by focusing on generation
alone. Distribution should have been
privatised first. This way, the cash flow of
the state electricity system determines
the total power that the state can pay for.
Capacity addition is then a logical
process. Today we have projects that
have all the clearances in place and can­
not be financed because they face
demand/offtake and payment risk
issues. Government demand figures
must be reduced to fall in line with reali­
ties. In the case of Maharashtra, where

even 740 MW could not be absorbed, the
government insists it needs about 1,300
MW of additional power on an annual
basis. This has resulted in a highly disori­
ented industry where IPP players feel
cheated of their years of effort to create
generation capacity.
It is clear that there is demand, however it
is one for distributed generation and not
for mega power. Nor does the solution lie
in mega transmission. Even a cursory
look at the power system reveals little
opportunity for massive interregional
transmission of power. India needs
extremely sophisticated system planning
that can deliver the results through right-
sized cost-effective power plants and
appropriate evacuation plans.
S. Padmanaban
Traditionally, the power sector accoun­
ted for 25-30 per cent of the central plan
outlay in its five-year plans. While it was
generally proposed that T&D would
account for about half of this, in reality, it
was hardly 10-20 per cent. This has led to
the progressive overloading of T&D lines,
poor upkeep of existing lines and a gen­
eral inability to smoothly evacuate
power from one region to another. The
impact of such resource misallocation
on the low tension distribution lines (11
kV and below) has been particularly
severe, leading to lack of meters, poor
design and installation of distribution
feeders, long lengths of undersized sec­
ondary lines characterised by high line
losses and large voltage drops, and the
alarmingly high rate of distribution trans­
former failures (in excess of 35 per cent in
most states; the average in a US utility by
comparison is less than 5 per cent).
V. Raghuraman,
Investments in generation have been log-
jammed due to the inability of the IPPs to
secure guaranteed payments from the
sole buyers of electricity - the SEBs.
Escape routes such as escrow offer lim­
ited scope for improving the bankability
of projects. In this scenario, the way out is
to ensure the flow of steady revenue
streams to power developers, which is
possible only when tariffs are rationalised
“If we can stop power
theft through privatisa­
tion of distribution, there
is enough money in the
power sector to not only
pay for, but to finance
additional capacity and
system requirements.”
Vishvjeet Kanwarpal
and realised. The other alternative will be
to let the IPPs sell electricity directly to the
consumers. Hence, in the present envi­
ronment, the challenge is to make the
distribution sector accountable for
receivables, that is, improved billing and
collection efficiency is urgently needed.
Transmission is less contentious, except
in areas where there are missing links,
which do not allow evacuation from
power-surplus to power-deficit areas.
In distribution, asset evaluation of the
distribution zones should be done by an
independent agency. A time-bound pro­
gramme to align tariffs with liquidated
liabilities and turning around the distri­
bution system is essential. Subsidies
need to be phased out.
Ravi Singhania
At present, the sector produces power
worth about Rs 1,000 billion but collects
only about Rs 550 billion. Any fresh
injection of installed capacity would
result in a loss at the rate of Rs 10 billion
“Privatisation of distribu­
tion is the only effective
means of addressing the
fundamental operational
and financial issues in
distribution, to restore the
system losses and
improve efficiency.”
S. Padmanaban
F ORUM
per year for every 1,000 MW added. This
situation has cropped up since power is
being treated as a social commodity. If
the planned targets continue to be dedi­
cated to the needs of those who don’ t
pay, any increase in capacity is rendered
unviable. However, if power is treated as
any other commercial commodity, plan­
ning would be commercially viable.
We do not need fresh capacity addition at
the moment. Money should be diverted
to fight T&D losses and for systems
improvements for at least the next five
years. Investments in this direction would
be relatively small. As a result, financial
recovery would be possible once T&D
losses fall. In other words, a loss reduction
of 5 billion units out of a total 200 billion
units last year is equal to a capacity addi­
tion of 1,000 MW and adds Rs 10 billion to
the power sector’ s kitty.
What steps should the government take to pro­
mote additional private participation in T&D?
S.K. Jena
The government should support the for­
mation of independent regulatory
authorities. It should ensure transitional
financial support for non-remunerative
schemes taken up by the SEBs. Private
players in T&D should not be denied
administrative support, which is avail­
able to the SEBs for fighting electricity
theft, billing and collection. The govern­
ment should also pay the electricity
charges due to the licensee.
Vishvjeet Kanwarpal
A little-known fact about the power sec­
tor is that almost all the historical data
regarding consum ption and revenue
realisation by category of consumer and
T&D loss figures have been doctored by
the SEBs since the early 1980s. This coin­
cides with the heavy induction of agri­
culture pumpsets. Consumption by
industry has been systematically re­
ported in the agriculture segment and
historical T&D losses of 18 per cent have
been arrived at by accounting jugglery.
The true T&D losses are in the range of
40-60 per cent. A quick calculation
assuming a 100,000 MW installed base,
 F ORUM
average 65 per cent PLF, 50 per centT&D
loss and average tariff of Rs 2.50 suggests
that the power system losses amount to
over $10 billion annually. Were India to
end theft of power, it could self-finance
all its future generation and investment
requirements in cash.
India must explore creative options of
privatisation of distribution based on
incentives and balanced revenue ­
sharing schemes. The recent telecom
policy in basic licences is a good model.
Where theft is a highly local issue, why
can’t billing and collections be created
into a small franchise opportunity?
S. Padmanaban
Privatisation of distribution is the only
effective means of addressing the funda­
mental operational and financial issues
in distribution, to restore system losses
and improve efficiency, and thereby
restore the sector’
s creditworthiness. The
rest will follow.
V. Raghuraman
There is no need to freeze the IPPs, as they
are already frozen. Enron has proved the
vulnerability of PPAs. Electricity regula­
tory commissions have the provision to
reopen PPAs. As any reforms programme
has to address the issue of affordable
power to the consumers, the PPAs are
going to be revisited. PPAs are thus
fraught with populist and regulatory risks.
Ravi Singhania_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Transmission and distribution have to
be looked at separately. In the case of
transmission, on the one hand we have
the Power Grid Corporation having
right of way and being a provider. On
the other hand is the transmission
regulatory authority. Unless there is
transparency in regulation about a
transmission company, without com ­
promising the interests of the private
parties and Power Grid, investment in
this sector is not likely to come. The gov­
ernment should attempt to make this
sector more attractive by adopting
thorough measures such as financial
discipline, doing away with inconsistent
policies, and simplifying cumbersome
36
procedures. Unless there is the political
will to allow privatisation of distribution
on sound commercial principles (such
as downsizing of the existing labour
force in distribution companies and
evaluation of assets), this sector will not
attract investment.
What are the three most critical issues that
need to be sorted out before distribution can
be privatised on a larger scale?
S.K. Jena
•There are very few private operators
with experience in distribution manage­
ment in the country today. This needs to
be sorted out.
•Investors need to appreciate that they
“Orissa was the first
state to privatise. The
public was sceptical, but
the benefits are slowly
coming in. One distribu­
tion zone is likely to
break even this year and
the other two zones by
next year.”
V. Raghuraman
will have to wait for some time to get
returns on their investment through
improved efficiency.
•Consumers should be told that invest­
ments for rundown systems need capital,
which has a cost and may have to be paid
for through higher tariffs, and the govern­
ment should provide transitional support
for uneconomic enterprises of the past.
Vishvjeet Kanwarpal
Privatising distribution on a very large
scale is simply not feasible. The govern­
ment should provide a high degree of
incentive to private players to enter this
sector. We need to develop hybrid solu­
tions to address the problem of lack of
large players willing to take massive
exposure to distribution risk. Metering,
POWER LINE •March2001
billing and collection could be fran­
chised to private entrepreneurs and
separated from distribution system
maintenance. We need to create new
solutions because waiting for players to
take over entire circles, as in Orissa, is a
non-starter strategy.
We often blame lack of political will for
the travails of the sector. The truth is that
it is Indian industry and not just the agri­
culture sector that has enjoyed sub­
sidised power for a long time. Off the
record, industrial users admit that they
pay only 60-70 per cent of their electri­
city bills. The rest is creatively adjusted
for. In a similar vein, farmers don’ t get
enough power for irrigation to justify the
official consumption figures in the agri­
culture sector.
If we can stop the theft through privati­
sation of distribution, there is enough
money in the sector to not only pay for,
but to finance additional capacity and
system requirements.
S. Padmanaban
•Focus on the consumer (social equity, .
poverty alleviation); implement local­
ised pilot efforts to improve the quality
of power. Begin to, blunt the impact of
the SEBs’power curtailment policies by
creative interventions to reduce demand
by incentivising customers to take
actions on their side of the meter.
•Rewrite the text-book on what effi­
cient metering, billing and collection
really mean. Redraft distribution engi­
neering standards and practices to con­
form to the North American practice of
high voltage distribution as against the
British copied practice of the high loss-
prone low voltage distribution.
•Expand the domain of power distribu­
tion reforms and planning beyond the
customer side of the meter to include
integrated water resources manage­
ment, including water conservation.
V. Raghuraman
Governments at the centre and states
have to announce transparent guide-

lines on transmission. The Central
Transmission Utility (CTU) and the State
Transmission Utility (STU) should indi­
cate the lines available for private parti­
cipation. They should allow open access
and be regulated by the CERC/SERCs.
Ravi Singhania
•Take a policy decision on adopting a
commercial principle as the guiding prin­
ciple rather than having a social, non­
profit motive as the guiding principle.
•Establish a revised efficient legal frame­
work and strict enforcement of the same
without undue interference from the
regulator as to the pricing norms, etc.
•Rethink our definition of distribution
so as to reduce the capital and technical
intensity of the business enlarging the
pool potential of domestic investors.
At the same time, it needs to be well
understood that privatisation by itself
will not bring efficiency into the system.
It will only pave the way for squeezing
profits from this infrastructure facility.
In your view, has privatisation of distribution
met with success in Orissa?S
.S.K. Jena
Privatisation of distribution in Orissa
should not be seen in isolation as it is a
part o f the reform process covering
distribution, transmission, generation
and regulation. In Orissa, generation,
transmission and distribution activities
are separated by a fully functional
regulator. The reform aimed at the
participation of the private sector,
improvement in the quality of power
supply, efficient consumer service and
affordable tariff.
The level of expectation of the reduction
of T&D losses and the load growth have
not been achieved, but the government
in the post-reform era has not provided
any subsidy to the sector, which was at
the level of Rs 2.50 billion per annum. In
addition, through disinvestment, the
government has earned resources that
are a direct benefit to the state exche­
quer. State generators have benefited
due to the revaluation of assets. The tar­
iff has been contained at a reasonable
level. To conclude, the financial losses
projected for Gridco and the Discos
taken together may, more or less, match
the gains of the generators and the sav­
ings due to the government.
Vishvjeel Kanwarpal
Privatisation has met with success in
Orissa. However, the Orissa model has
very little relevance for other states, pri­
marily due to the fact that Orissa had
neither the industrial demand (due to
high captive power) nor the requisite
agricultural demand that could be cre­
atively used to doctor the consumption
figures. The Orissa story is a clear-cut
case of lack of metering, billing and col­
lection systems. BSES and AES have had
“We do not need fresh
capacity addition at the
moment. Money should
be diverted to fight T&D
losses and for system
improvements for at
least the next five years.”
Ravi Singhania
to deal with the over 50 per cent real T&D
losses unlike other states with phantom
T&D losses.
Oddly, the four to five-year turnaround
projections by distribution players in
Orissa should be very heartening for
other states. Orissa had no upside while
other states have an enormous upside
potential. Once distribution is priva­
tised in other states, particularly ones
with higher industrial consumption, the
turnaround could com e in as quickly as
three years.
S. Padmanahan_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
It is incorrect to characterise the privati­
sation of distribution in Orissa as a fail­
ure. Privatisation of distribution in
Orissa has set forth a process of distribu­
tion reforms that has immense value as
POWER LINE •March2001
F ORUM
the country prepares itself to launch
similar initiatives. Competitive bidding,
transparent asset valuation and the
application of regulatory reforms to dis­
tribution are som e of the gains. Equally
important, the Orissa example shows
that the real priority should be given to
metering, billing and collection from all
customers. An automatic by-product of
getting the billing process working will
be a much more accurate knowledge of
losses. The effort of the private sector to
test, demonstrate and validate that this
is possible, is a valuable lesson in itself.
V. Raghuraman
Orissa was the first state to privatise. A
super cyclone devastated the state when
the privatisation was at a nascent stage.
The entrenched interest groups were
creating hurdles. The public was scep­
tical due to tariff increases. However, the
benefits are slowly coming in. One distri­
bution zone is likely to break even this
year and the other two zones by next
year. Thus, the fruits of privatisation are
becoming visible.
Ravi Singhania
Orissa has been a pioneer in embarking
on comprehensive reform. The objective
of making power supply more efficient
was sought to be achieved through a
three-pronged approach - restructuring,
unbundling and privatisation. Privati­
sation of distribution has met with lim­
ited success. The idea of functional
unbundling was sound, but in terms of
implementation, generation, transmis­
sion and distribution being managed by
separate companies has not proved to be
a success. We need to look into the prob­
lems that have come up here, such as
uneven distribution of zones by virtue of
which large rural areas have been left
out. The cyclone made things worse.
Although there has been a hue and cry
by trade unions against privatisation and
the tariff hike, it needs to be remem­
bered that there is always resistance to
change. Therefore, these protests should
be considered as part of the reaction to
change, which seem insignificant in
comparison to achieving a self-sustain­
ing power sector. ■
37