Government of Maharashtra

Maharashtra Power Sector Reforms

White Paper

˜

Industries, Energy & Labour Department

Mantralaya, Mumbai 400 032.

28^th August, 2002

TABLE OF CONTENTS

1. Introduction Page 3

2. Performance of Power Sector in Maharashtra Page 3

3. The Need for Reform Page 6

4. Participatory process leading to preparation of White Paper Page 7

5. Lessons from reform in other States Page 8

6. Elements of Reform Page 9

7. Key milestones Page 14

8. Conclusion Page 15
1. Introduction

Maharashtra is the second-most populous State in India. The State has succeeded in achieving high levels of industrialization and has been identified as the country’s industrial powerhouse. With less than 10 percent of population of the country, the State accounts for one-fourth of the gross value added by India’s industrial sector. Upto the 1990s, the State experienced a high growth rate. However, the State has seen a decline in growth rates in recent years. The average annual economic growth has declined sharply from 7.8% between 1985-86 and 1994-95 to 5.3% between 1995-96 to 1999-00.

The development of infrastructure is an important factor to sustain economic growth in all sectors of the economy. The power sector is the most important constituent of infrastructure. The performance of the power sector directly impacts the overall economy of the State. Economic liberalization in the early 1990s has required industry to be competitive by interalia reducing costs. Since power cost comprises a reasonable part of the total cost, the quality and cost of power is an important factor for industries to be competitive, and for the welfare of all citizens of the State.

2. Performance of Power Sector in Maharashtra

The power sector in Maharashtra, excluding Mumbai, is served by Maharashtra State Electricity Board (MSEB). The Mumbai area is served by three power utilities – Tata Power Company Ltd., BSES Ltd. and BEST. MSEB has an installed capacity of 9771 MW, while Tata Power Company Ltd. and BSES have an installed capacity of 1774 MW and 500 MW respectively. Maharashtra has a share of 2375 MW from Central generating sources. In addition, captive generating capacity in the State is currently 641 MW. In terms of fuel mix (excluding captive), thermal, hydro and nuclear capacities in the State account for 78%, 19% and 3% respectively.

MSEB was set up in 1960 to generate, transmit and distribute power to all consumers in Maharashtra excluding Mumbai. MSEB is the largest SEB in the country. The generation capacity of MSEB has grown from 760 MW in 1960-61 to 9771 MW in 2001-02. The customer base has grown from 1,07,833 in 1960-61 to 1,40,09,089 in 2001-02.

MSEB has a strong generation capacity base. Its generation plants have been receiving awards for achieving high PLFs and other efficiency parameters. In spite of poor quality coal, its thermal power stations achieved an all time high by increasing its power availability to 86.49% and plant load factor to 74.34% in 2001-02. MSEB has developed expertise in project management, planning and in commissioning projects in reasonable time and cost estimates. It was one of the first SEBs to have achieved 100% village electrification. It has the largest Transmission & Distribution (T&D) network in the country with 6.67 lakh ckt kms. The energy sale has grown from 346 MU in 1960-61 to an estimated 37,067 MU in 2001-02. MSEB has been able to meet the base demand through improvement in generation efficiencies and procurement of power. However, the State faces a shortage in meeting peaking requirements.

About 48% of MSEB’s thermal generation capacity is between 15-25 years old and 15% is over 25 years old. This would necessitate significant investments in renovation and modernization of these plants. The LT to HT ratio of transmission lines is about 2 leading to high technical losses. There is need for investing funds estimated at Rs. 18,570 crores over the next 10 years to reduce technical losses, increase coverage of the T&D network, meter all consumers, strengthen rural electrification, expand the HT network coverage and strengthen internal systems.

The predominance of social objectives has led to a lack of commercial orientation in the power sector. Tariffs for domestic, power looms and agricultural segments are lower than the average cost of supply of power, and are subsidized by industrial and commercial consumers. The difference between average cost of supply of power and realization for different consumer segments for the year 2000-01 is shown in the table below:

The gap between average cost of supply and average revenue realization for the years 1999-00 and 2000-01 is shown in the table below.

The distorted tariff structure has led to an increase in high-paying industrial consumers setting up their own captive generating stations which currently have generating capacity of about 641 MW. In addition, NOCs for an additional 1181 MW captive capacity have been given. While consumption of power from the MSEB grid by high-paying industrial consumers has been on the decline, consumption by subsidized consumer categories has grown over the past few years. Further, the low tariff for subsidized consumers has not only led to lower revenues, but also to sub-optimal consumption from these consumers.

The revenue of MSEB increased from Rs. 323 crores in 1960-61 to an estimated Rs. 12,030 crores in 2001-02. However, MSEB has been incurring losses in the past few years. It managed to reduce the loss from Rs. 2842 crores in 2000-01 to an estimated Rs. 308 crores in 2001-02. The reduction in loss was primarily due to reduction in cost of purchase of power amounting to Rs. 1278 crores (for nearly the same quantity of power purchase) and increase in revenues of Rs. 733 crores. The table below shows the trend in MSEB’s worsening financial position over the past five years.

The T&D losses are high at about 39.4%. The loss levels are currently not accurately measurable since only about 85% of consumers are metered. The T&D losses can be categorized as technical losses and commercial losses. Technical losses are due to energy loss in the conductors and equipments used in the system for transmission and distribution of power. The commercial losses are mainly due to theft and defective meters. Guidelines issued by Government of India (GoI) stipulate that T&D losses in each State should not be more than 16%. Every 1% reduction in the T&D loss levels is equivalent to additional revenues of about Rs. 120 crores.

The level of receivables currently is Rs. 7114 crores which is 7 months of sales, the average sales being Rs. 1000 crores per month. An aggregate amount of Rs. 5226 crores (excluding Mula Pravara, Tata & Inter State) has been outstanding for more than 1 year. GoM has been providing loans to MSEB to meet its plan outlay. The loans from GoM have reduced from 38% in 1992-93 to 13% in 2001-02 as a percentage of MSEB’s annual plan outlay. These factors have affected the cash available to MSEB to pay its creditors / suppliers and to make investments in generation, transmission and distribution projects.

To address the aforesaid problems MSEB/GoM have taken several measures. GoM has ensured payment of subsidies to MSEB for targeted consumer segments. MSEB is in the process of securitising the outstanding dues of CPSUs. It is carrying out studies for R&M and life extension programs for some of its existing old thermal plants. It is preparing a capacity addition program. It has identified critical transmission links and transformer capacity requirements. In order to get a better estimate of the T&D losses, MSEB has started energy audit upto division levels and for MIDC areas and express feeders. Of the 7128 feeders of 11 kv and above, 5829 have been metered and the balance 1299 feeders are to be metered by December 2002. It has installed Time of Day meters on all HT consumers and meters on all powerlooms.

3. Need for Reform

The economic liberalization since the early 1990s has required domestic industry to be globally competitive. Competitively priced and good quality power is essential for industries to be competitive and the economy to prosper. The past 5 years have witnessed a significant growth in captive power plants since the rising cost of power and declining reliability has compelled industry to move away from the MSEB grid. Moreover, technological advances have led to reduced capital costs of setting up smaller captive plants. In addition, there is a need for addressing consumer grievances and resolving complaints within a reasonable time frame.

Despite the efforts of MSEB, there is unmet demand for new connections as well as shortage of power to existing consumers mainly during peak hours. MSEB has estimated that the energy requirement will increase from 59295 MU in 2001-02 to 87262 MU in 2011-12 and peak demand from 9893 MW in 2001-02 to 14104 MW in 2011-12. This would necessitate further investments in generation sector estimated at Rs. 11,905 crores over the next 10 years. In addition, it is essential to modernize and expand the transmission and distribution system. The sector also needs to keep up with technological developments. The total requirement of funds for investments in generation, transmission and distribution is estimated to be Rs. 30,475 crores in the next 10 years.

In view of the financial position of the power sector and to meet the aforesaid investment requirements, GoM and MSEB will have to approach GoI and financial institutions for making available the required funds. Both the GoI and financial institutions have categorically stated that it would not be possible for them to provide substantial funds unless GoM first initiates the reforms necessary for the power sector.

The Government of India has taken several initiatives to evolve a national consensus for reforms in the power sector, especially the transmission and distribution side of the business. Two Chief Ministers’ conferences have been convened in the past few years (latest in March 2001) to urge the States to reform. GoI has come up with the Electricity Bill 2001 which encourages competition in generation and distribution and gives emphasis to reforms. The ongoing APDRP program is an indication that the Government of India is willing to support those States that are serious to undertake reform.

If the current situation is allowed to continue, the investment requirements will increase further leading to declining quality of supply and reluctance on the part of GoI and financial institutions to provide funding to the State. Investments required in generation, transmission and distribution cannot be delayed. Without these investments the power sector will not be able to meet the needs of a competitive economy and will undermine the creation of jobs in the State. While reform can be a difficult path initially, it is necessary in order to enable and accelerate investments, move towards a commercially oriented sector, and improve the quality of service to consumers.

The self sustaining growth of the power sector and its financial viability is essential for the speedy and sustained socio economic development of the State. A healthy power sector would pave the way for further industrialization, growth in agricultural production and economic growth. This would free up resources for the State Government and enable it to focus on addressing the critical social sectors such as education, healthcare and poverty alleviation.

The main objectives of reform are:

Ø To promote the development of an efficient, commercially viable and competitive power sector.

Ø To provide reliable quality and uninterrupted supply, at reasonable prices, to all consumer categories.

Ø To ensure that the social and environmental aspects are fully taken into consideration.

4. Participatory process leading to preparation of White Paper

As a matter of prudent governance, the GoM has found it necessary to evolve a course of action that is in the larger public interest of the State. In this connection, GoM had constituted the State Electricity Restructuring Committee. GoM also constituted an Energy Review Committee (ERC) in February 2001, to review the power situation in Maharashtra and suggest the broad future course of reforms for the power sector in Maharashtra.

GoM has taken the approach of building consensus for reforms of MSEB, by widely discussing it amongst all stakeholders. As part of this process, GoM has decided to publish this White Paper on the proposed reform in the power sector. For preparation of the White Paper, GoM brought out advertisements in the major newspapers in April 2002 inviting responses on three documents viz. the ERC report, Maharashtra Electricity Reform draft report and the Electricity Bill 2001 (of the GoI) from all the stakeholders comprising industry, employees, consumers and the Maharashtra Electricity Regulatory Commission (MERC). In addition, meetings and presentations were organized in Pune, Nagpur, Nasik, Aurangabad, Amravati and Mumbai by divisional commissioners to present the key features of the above documents and elicit the views from the participants on the reform strategy that should be adopted for the state. In addition to these organized meetings, written responses were received from individuals, agricultural consumers, NGOs and employee unions. Officials of MSEB visited various States which have undertaken reform to study the reform process and have given suggestions. In addition, Minister-Energy has held wide ranging discussions with the officials and unions of MSEB.

Employees and unions of MSEB were opposed to unbundling and/or privatization and stated that full operational autonomy must be given to MSEB and internal reforms should be carried out first. They felt that MSEB’s operations have been adversely affected by political interference in day to day working. The reform model presented by the employees retained the existing identity of MSEB and used the concept of three profit centers of generation, transmission and distribution.

Responses from the industry representation primarily indicated that the competitively priced and good quality power was essential for being globally competitive. It was suggested that MSEB’s monopoly needs to be broken and competition introduced to improve service levels. A majority of responses indicated that unbundling and subsequent privatization of MSEB was essential and should be expedited. It was also suggested that tariff rationalization and transparent subsidy allocation was of utmost importance.

Responses from other consumer organizations, individuals and NGOs broadly indicated that there was a need for reforms and improvement of consumer service standards. Several of the respondents felt that while unbundling, internal reform and granting autonomy to MSEB may be necessary, privatization may not be the solution to the problems of the power sector and should be carried out carefully. Other responses indicated that legal provisions to prevent theft of energy should be strengthened and MIS/billing systems should be improved to be more consumer friendly.

The different options of reform which were suggested are broadly summarized as follows:

Ø MSEB to retain its existing identity. The three functions of MSEB viz. generation, transmission and distribution to be run as profit centers.

Ø Corporatisation of MSEB without unbundling.

Ø Unbundling and corporatization of unbundled entities of MSEB.

Ø Unbundling, corporatization of unbundled entities of MSEB followed by privatisation of distribution entity(s).

4.1 Objectives of the White Paper

The White Paper spells out GoM’s strategy for reform in the power sector after taking into account the various options. The reform strategy has been aimed to meet consumer interests while addressing the concerns of the employees. GoM does not intend to totally withdraw from the power sector but aims to bring in efficiencies into the sector to enable it to become self sustaining.