India Energy

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ASCI JOURNAL OF MANAGEMENT 29(2)

ASCI Journal of ManagementVol 29 2000

T.L. Sankar, Usha Ramachandra

Regulation of the Indian power sector

This paper explores the changing contours of the regulatory framework at different phases of the growth ofthe power sector in India while critically examining the new regulation that is in place today. It alsoanalyzes the contentious issues of regulation that have emerged as the new form of regulation takes rootacross the country.

There have been three distinct phases in the growth of the power sector in India. Phase-I covers

the early years from the time electricity was first introduced in the country till 1948, when

production and distribution of electricity was largely in the private sector and concentrated in major

towns and cities. Phase-II covers the five decades after independence. The development of power

sector was a subject belonging to the Concurrent List of the Constitution of India. Each state had avertically integrated state-owned monopoly to distribute electricity in an assigned service area

(normally the whole state).

The beginning of Phase-III, the reforms phase can be traced to 1991, but actual implementation

started in 1995. This period is marked by increasing commercialization, attempts to attract private

investment and participation, restructuring of utilities in several states and establishment of

independent regulatory commissions (at the centre and in states). The need for reform arose out of

the urgency to tackle several problems that beset the Indian power sector, especially during the late1970s and early 1980s. These include:

Bridging the huge demand-supply gap for universal service to become a reality.

The alarming financial crisis in state electricity boards and the inability of state governments to extend financialsupport from budgetary resources.

Increasing transmission and distribution losses and the inability of state electricity boards to contain theselosses.

In consonance with the structure and objectives of the industry of that time, each of the three

phases in the Indian power sector had a characteristically different regulatory framework. Much

confusion has emerged as a result of not having a clear understanding between old and new style

regulation.1 Old style regulation (see Figure-1 as it applies to India) is government coordination,

review and oversight and prevails in countries where government-owned entities dominate the

power sector. This form involves extensive control (often bordering on micro-management) over

operations and investments of the utility.

Figure-1

http://journal.asci.org.in/Vol.29(2000)/292_contents.htm



Figure-2

1: Policy issues. 2: Interaction on national power plan and policy. 3: Interaction on state power plan and policy issues. 4: Regulatory control oninvestment, licensing and price cap/tariff. 5: Contracts for power supply. 6: Transmission facility. 7: Regional grid control. 8: Interaction onguidelines on tariff and other connected issues. 9: Grid standards and principles of regional electricity boards functioning.

------Direct regulation; ------Commercial contracts; ------Administration/policies.

On the other hand, new-style regulation permits and nurtures competition for orderly functioning of

the market (see Figure-2 as it applies to India). Direct regulation is restricted to transactions and

operations that continue to have monopoly elements. The biggest distinction is the attempt in new

style regulation to arrive at optimal regulatory arrangements for the utilities (public or private) in a

transparent and accountable manner by allowing for public participation. The other important point

is that the scope of regulation has to be dynamic and responsive to the changes in the structure of

the regulated industry.

Phase-I: The early years and minimal regulation

The power industry in India had its beginnings at the turn of the century. The first thermal station

established by the Calcutta Electricity Supply Company started generating electricity in 1899. In1902, the longest transmission line in the world from Shivasamudram to the Kolar Gold Fields in

Karnataka was constructed. However, even after several decades, electricity was available only inselect urban pockets of the country.

At that stage, power generation technology had developed to support only small coal plants of 30

MW capacity and diesel generation sets of much lower capacity. The total installed capacity inIndia at the time of independence was 1361 MW. Much of the power sector in the country till

1947 was in private hands. The electricity supply companies were called distribution licensees andwere privately owned. These often doubled up as transport companies in several major townsrunning electric tramcars or trolley buses.

The industry was governed/regulated by provisions of the Indian Electricity Act (1910). The supplyof electricity to any area or individual could be done by a company after obtaining a license underSection 3 of the Indian Electricity Act. The licensee had the exclusive right to supply power to all

consumers within the specified area. Licensees could not sell assets of their companies withoutobtaining government permission. However, the grant of a license would not hinder or restrict the

right of the government to grant license to another entity within the same area of supply for a likepurpose.

Licensees had to maintain accounts in a prescribed format and make these records available for

inspection. Though there was no regulation of tariff that could be charged to consumers, themaintenance of accounts and its inspection provided a check against misuse of monopoly market

power by distribution licensees. Licensees had to supply power to all persons needing electricity inthe area without discrimination. In return for this, licensees were given rights for executing works

connected with the production and distribution of electricity by road cutting after obtaining



necessary permission and paying compensation.

The legislation also provided for the establishment of the Central Electricity Board for the whole

country. Members were to be drawn from all states to uniformly regulate the business and enablethe flow of electricity from one place to another. Safety aspects were fully covered. Electrical

inspectors had to be appointed in each state. There were provisions for punishments for theft ofpower. There was only one regulatory agency - the state/central government. In effect, the Indian

Electricity Act provided for a regulatory framework that was in harmony with the structure of theindustry at that time.

Phase-II: State dominated industry and old style regulation

Electricity supply is a core industry, given its strategic importance in industrial development, its

social and environmental impacts as well as its high sunk costs. Soon after independence, theIndustrial Policy Resolutions (1948 and1956) as well as subsequent policy statements of the

Government of India sought state participation to accelerate the process of industrialization in the

country.2 The Industries (Development and Regulation) Act (1951) provided legislative backing forstate ownership and regulation of key industries.

The Industrial Policy Resolution (1956) categorized the generation and distribution of electricity in

Schedule A. As such, the Constitution of India had listed power as a Concurrent List subject, onwhich both the Government of India and state governments could make laws. Designated a basic

and capital intensive sector, its future became the exclusive responsibility of the state. Therefore,the growth of the power sector in India has been predominantly in the public sector - either through

state electricity boards or central government owned generating and transmission companies. TheElectricity Supply Act provided the framework for governance of the power sector. As on 31

March 1999, the relative share of different agencies generating power was as follows (Table-1):

Table - 1

Relative share of different agencies in the power sector

Sector Contribution (MW) Percentage of Total

State 57,777 61.96

Central 28,371 30.42

Private 7,103 7.62

Total 93,251 100.00

Under the Electric Supply Act, important aspects of power regulation were placed under the

Central Electricity Authority. It was expected to advise governments or any other electricity

company on all aspects of operation and maintenance of the power system. It was charged with

the responsibility of developing a sound and adequate national policy. It was also designated as the



approving authority for power projects. The Electric Supply Act has now been given a wider

interpretation. The techno-economic clearance issued under this section by the Central Electricity

Authority is a prerequisite for approval of any scheme by state governments.

The Electric Supply Act provided a detailed methodology for framing tariffs that could be charged

by licensees. It ensured that excess profit was equitably shared between the stakeholders. State

electricity boards were mandated to secure a minimum surplus of 3% of the value of fixed assetsafter meeting all legitimate expenses. But over the years, several forms of government intrusiveness

that beset the public sector in India quite naturally enveloped electric utilities. Utilities increasingly

became financially non-viable and incapable of meeting demand - qualitatively and quantitatively.

It was at this juncture that the Government of India decided to attract private sector participation.

In early 1992, the two Electricity Acts were amended to create a new legal, administrative and

financial environment for attracting private investment in the power sector. Clearly offered was aninvitation to build build-own-operate plants of any size. The inducements were attractive - up to

100% foreign equity investment; a debt-equity ratio of up to 4:1; a return on equity of 16%

recoverable at a plant load factor of 68.5%; repatriation of the entire dividend in U.S. Dollar terms

(which would be a pass-through on the tariff); capitalization of interest during construction; etc.

The system of government regulation that prevailed during this time had two interesting

consequences. First, government owned generating companies were allowed to charge tariffs that

recovered costs as well as a return on equity (though it is another story that a significant potion ofthis remained as state electricity board dues). Second, state electricity boards, while even being

protected from competition, were discouraged from recovering their costs through tariffs. With the

advent of reforms and private sector participation (especially in distribution), the need for a well-

designed regulatory mechanism became urgent.

Phase-III: Commercialization and new style regulation

With the trend towards commercialization of the power sector, the traditional structure of verticallyintegrated state-owned monopolies needed changes. Policy pronouncements talked about

increasing competition beginning with competition emerging from newly established private

generation capacity.

With private participation and wholesale power trade, transmission remained a monopoly and

distribution a localized monopoly, albeit with smaller areas, to enable yardstick competition to

emerge. As a consequence, monopoly elements in the restructured power sector were to beregulated. As more players emerged - especially private - there was a need to introduce a high

degree of independence in the regulatory mechanism so that it could weigh the interests of all the

stakeholders in a transparent fashion.

To ensure accountability and transparency in industry transactions in the short run, the regulator

was expected to induce a semblance of managerial responsibility in the regulated utilities (state or

privately owned) and contain the burden of the sector on the government. The regulator would

work towards achieving this objective through rationalizing tariffs, restricting subsidy to the bearingcapacity of government, forcing utilities to turn efficient by decreasing transmission and distribution

losses and cutting costs.



There were two distinct options of regulation available - the U.S. model and the U.K. model.3 Themodel adopted for India is largely based on the U.S. model of regulation for three principal

reasons:

Unless regulation was independent, distinctly different from what existed earlier and is perceived to be so bythe public and consumers, it would be difficult to create a new credible regulatory framework.

The system of regulatory decisions after public hearings is attractive in a democracy. Public participationthrough an established democratic process would be an acceptable way of bringing about transparency inIndia.

The traditional rate of return model of regulation which has served the U.S. so well for decades was closer tothe prevailing methodology of regulating tariffs for private electricity distribution licenses and laid down in theSixth Schedule of Electricity Supply Act.

In the U.S., while regulators do need to take directives from the government and comply withlegislative decisions, regulatory commissions are powerful quasi-judicial bodies and, above all, are

not treated as part of the government machinery. In most states, municipalities and rural

cooperatives dealing with supply of electricity do not come under regulatory supervision except for

complaints regarding standards of service. The assumption is that these institutions are self-regulatory bodies and public utility commissions step in only if requested to do so.

The legal foundation of new regulation

Orissa pioneered power sector reforms in the country. The Orissa Power Reform Act was passed

by the state legislature in 1995. In 1996 it unbundled its state electricity board and established an

independent electricity regulatory commission, based on this legislation. It was in July 1998 that

Parliament enacted the Electricity Regulatory Commissions Act to bring the Indian power sector

under regulatory regime,4 three years after Orissa. It provided for:

The establishment of a regulatory commission at the centre called the Central Electricity RegulatoryCommission.

The establishment of one regulatory commission for each of the states (state electricity regulatorycommissions). The states could establish regulatory commissions either under the Electricity RegulatoryCommissions Act or by enacting their own legislation.

After Orissa, which had already enacted its Electricity Reform Act in 1995, Haryana followed suitin 1997. Andhra Pradesh, Karnataka, Uttar Pradesh and Rajasthan did so a year later. Typically,

state legislation provides for, among others, the establishment of state electricity regulatory

commissions and the restructuring of electric utilities in the state. The Electricity Regulatory

Commissions Act also provides for additional powers/functions that can be separately notified bystate governments to their regulatory commissions. There are three distinct roles that electricity

regulatory commissions have to play:

Core role: Includes tariff regulation, monitoring quality of service, adjudicating disputes, enforcing licensing

conditions, monitoring compliance and redressing grievances.

Recommendatory role: If approval (of licenses, for example) does not come under its jurisdiction, the electricity

regulatory commission can give its recommendations to the concerned authorities.



Advisory role: Where it provides to the government, on request, information and advice on matters of

importance to the sector.

Functions of regulatory commissions

The Central Electricity Regulatory Commission has the responsibility of:

Regulating the tariff of generating companies owned or controlled by the Government of India.

Regulating the tariff of generating companies other than those owned or controlled by the Government of India,if such generating companies enter into or otherwise have a composite scheme for generation and sale ofelectricity to more than one state.

Regulating the interstate transmission of energy including tariff of transmission utilities.

Promoting competition, efficiency and economy in activities of the electricity industry.

Aiding and advising the Government of India in the formulation of tariff policy.

Arbitrating or adjudicating upon disputes involving generating companies or transmission utilities.5

Section 22 of the Electricity Regulatory Commissions Act enables state governments to set up state

electricity regulatory commissions to perform the tasks of:

Determining power tariff - wholesale, bulk, grid or retail - in the manner provided under Section 29.

Determining the tariff payable for the use of transmission facilities in the manner provided under Section 29.

Regulating power purchase and procurement procedures of transmission and distribution utilities including theprice at which power shall be procured from generating companies, generating stations or from other sourcesfor transmission, sale, distribution and supply in the state.

Promoting competition, efficiency and economy in the activities of the electricity industry to achieve theobjectives and purposes of this legislation.

The above functions are mandatory for all state electricity regulatory commissions. However,

several other functions stated under Section 22 (2) of the Electricity Regulatory Commissions Act

enable state governments, at a later date, to notify in their official gazettes, any of the following

functions upon the state electricity regulatory commissions:

Regulating investment approval for generation, transmission, distribution and supply of electricity to theentities operating within the state.

Aiding and advising the state government in matters concerning electricity generation, transmission,distribution and supply in the state.

Regulating the operation of the power system within the state.

Issuing licenses for transmission, bulk supply, distribution or supply of electricity and determining theconditions to be included in the licenses.

Regulating the working of licensees and other persons authorized or permitted to engage in the electricityindustry in the state and promoting their working in an efficient, economical and equitable manner.

Requiring licensees to formulate perspective plans and schemes in coordination with others for the promotionof generation, transmission, distribution, supply and utilization of electricity, quality of service and devisingproper power purchase and procurement processes.



Setting standards for the electricity industry in the state including standards relating to quality, continuity andreliability of service.

Promoting competitiveness and creating avenues for participation of private sector in the electricity industry inthe state and also ensuring a fair deal to the consumers.

Laying down and enforcing safety standards.

Aiding and advising the state government in the formulation of the state power policy.

Collecting and recording information concerning generation, transmission, distribution and utilization ofelectricity.

Collecting and publishing data and forecasts on the demand for and use of electricity in the state and requiringlicensees to collect and publish such data.

Regulating assets, properties and interest in properties related to the electricity industry in the state includingthe conditions governing entry into and exit from the electricity industry to safeguard public interest.

Adjudicating disputes and differences between licensees and utilities and referring these matters for arbitration.

Coordinating with environmental regulatory agencies and evolving policies and procedures for appropriateenvironmental regulation of the electricity sector and utilities in the state.

Aiding and advising the state government on any other matter referred to the commission by the government.

Electricity regulatory commissions: The current status

The Central Electricity Regulatory Commission was established in August 1998. Subsequently, anumber of states have set up electricity regulatory commissions. States such as Andhra Pradesh,

Karnataka, Rajasthan, Haryana and Uttar Pradesh set up electricity regulatory commissions based

on their own power reform legislation. Other states like West Bengal, Tamil Nadu, Maharashtra,

Gujarat, Madhya Pradesh and Delhi have established their electricity regulatory commissions under

the central legislation.

The Electricity Regulatory Commissions Act provides for a five-member commission at the central

level and a three-member commission at the state level. The state legislation also provides forthree-member commissions at the state level. Smaller states like Delhi and Himachal Pradesh have

opted for a one-member commission and a few states in the northeast have indicated that they will

share a regulatory commission between themselves.6

The functions of the electricity regulatory commissions set up under separate state acts ofteninclude a wide range of regulatory powers, whereas those established under central legislation have

a limited set of compulsory functions pertaining to tariff setting. However, a state government,

through a simple notification could entrust other functions to these electricity regulatory

commissions as and when it deems fit.

Regulatory practice

The key characteristics of an effective regulatory commission include:

Independence from the political process.

Independence from regulated entities.



A broad mandate to protect public interest.

Technical expertise of the functions and business of regulated enterprises.

Continuous monitoring and enforcement of rules and orders.7

To what extent have provisions been made in regulatory laws to take care of the effectiveness of

electricity regulatory commissions? A cursory examination of the government-electricity regulatory

commission interface in many states provides ample clues to the status of electricity regulatory

commissions.

The first point of interaction between the government and the electricity regulatory commissions is

when the regulatory authority is established. The legislation is explicit about the formation of a

selection committee to select commissioners as the first step. It is also clear about who the

members of the selection committee should be and the procedure by which the selection of

commissioners should take place. As the appointment is only for one term of five years and there is

a ban on commissioners accepting any appointment in the sector, generally senior civil servants

nearing superannuation are offered the position of commissioner and accept it.

Allegations that the entire exercise of creating plum positions for former bureaucrats in the new

regulatory regime do not appear misplaced. A feeble rebuttal to the allegations is that the process

and procedures of regulation require administrative skills. While it is partly true, commissioners

must ideally possess abundant managerial, technical and social skills to scrutinize evidence and

issues emerging out of public consultation. The essence of new style regulation is to ensure a

significant level of independent and transparent decision-making.

According to law, the electricity regulatory commission is to be funded through a provision made in

the consolidated fund of the budget. While commissioners have been appointed through a selection

process, electricity regulatory commissions in a number of states have experienced problems with

the appointment of staff. State governments have generally displayed reluctance to extend the

requisite financial and administrative support to set up the regulatory commission's office in befitting

style and staff the commission adequately.

The second point of interaction is that both central and state commissions have to be guided bygovernment directives (central and state) in matters of policy involving public interest. If there is any

dispute on whether a directive relates to a matter of public interest, the legislation is clear about the

decisions of governments being final.8 Very often, it is only when commissions start functioning and

are in the process of regulating tariffs for the first time do utilities and state governments begin to

realize the extent of powers that commissions actually have under the law.

The first tariff order of the Andhra Pradesh Electricity Regulatory Commission spurred a violent

and prolonged agitation as the tariff for domestic consumers had increased sharply. When the

Government of Andhra Pradesh wanted the tariff to be decreased, it had to promise an additional

subsidy of Rs.280 crores to the utility. In Maharashtra, the government made a statement that it

would waive the power dues of a section of powerloom units in the state. The Maharashtra

Electricity Regulatory Commission pointed out it would cost the state exchequer dearly if the order

were implemented.



Although the government took an early lead in establishing the Madhya Pradesh Electricity

Regulatory Commission, it went ahead and revised tariffs of the Madhya Pradesh State Electricity

Board. When the regulatory commission challenged this decision, the state government took the

matter to court. The stand-off between the Madhya Pradesh Electricity Regulatory Commission on

the one hand and the Madhya Pradesh State Electricity Board/Government of Madhya Pradesh on

the other, continues to the detriment of the power sector in the state.

Interestingly, in Tamil Nadu, the regulatory commission was established to meet conditions laiddown by the Power Finance Corporation for obtaining a loan for its power utility. When it became

operational, the government pointedly declared that no decision should be taken by the Tamil

Nadu Electricity Regulatory Commission unless its chairman was appointed and conveniently

delayed the appointment.

The independence debate

The question often asked is how independent are regulators? The Electricity RegulatoryCommissions Act lays down procedures that are expected to ensure the autonomy of regulators

through a selection process characterized by independence. The selection and disqualification of

commissioners and process transparency are designed to give full assurance to the public that the

regulators would be independent. The criteria mandating public hearings prior to decision-making

communicated through an order supported by reasoning, among others, further reinforces the belief

of the commission's independence.

That a commissioner could only serve for one term of five years and thereafter cannot accept any

post under the government is a further safety devise in public interest. Some NGOs have argued

that no one connected with the government should be on the selection committee. But similar

arguments can be advanced about motives of the government while considering nomination of

certain NGOs or industry leaders to the selection committee.

The U.S. model of regulation on which the Indian regulatory framework is based has no

qualification criteria for its commissioners. Whether nominated or elected, there is a stringentscrutiny of interests and integrity that aspirants should pass through before the selection is finalized.

But given the Indian democratic tradition, the real fear was that political appointees, who may not

be right for the job, might be appointed. As a result, the Electricity Regulatory Commissions Act

itself lays down the qualifications for the appointment of the chairperson and members of the

Central Electricity Regulatory Commission as well as the state electricity regulatory commissions.9

However, it must be conceded that the public perception of the independence of power

regulators has been affected by the fact that a vast majority of the regulators appointed so far

happen to be retired civil servants and ex-employees of state electricity boards and the Central

Electricity Authority. That apart, the independence of regulators is not absolute. They are

subjected to the laws of the land and the policy directives of the government. Regulators have to be

also sensitive to the socio-economic environment in which the commission has to function.

Public interest, transparency and accountability

All decisions of regulatory commissions have to be taken after the widely advertised public



hearings are conducted. The orders of the commission have to be in writing (speaking order). The

new regulatory process mandates utilities to make available their data on costs and expenditure to

the public. Unfortunately, most of the regulatory commissions have adopted the judicial court

proceedings model. This has distanced the general public from regulatory commissions.

Interestingly, in states where the status of the commissioners has not been equated with that of high

court judges, eminent persons have displayed an unwillingness to accept their selection.

The regulatory framework should proactively encourage the empowerment of consumers andensure their active participation in the regulatory process as a means of protecting public interest.

Consumers groups have now, for the first time, been given an opportunity to participate in the

regulatory process and make their voices heard. But this requires a system of disseminating

information to the public and support to consumer groups to step up the level of participation. So

far, no electricity regulatory commission has undertaken such an exercise with a seriousness of

purpose.

The voluminous documents filed by power sector companies and the highly legal/technical language

in which the data is presented has hindered purposeful consumer participation. There is need for all

commissions to appoint a consumer counsel in their organization. It is also difficult for regulatory

commissions in India to address individual grievances. While regulatory commissions are ideal

forums for individual consumer grievance redressal, they are likely, as Indian courts are, drowned

in dispute resolution.

Compliance with commission orders

Most electricity regulatory commissions have given a number of directives to utilities to improve

their operations and finances. In fact, many of the directives are part of the internal management of

any well-run commercial organization. These, among others, include:

Metering of non-metered consumers (especially agricultural consumers).

Improved metering, meter reading, billing and revenue realization.

Improving consumer services.

Improving data collection and monitoring.

Although the legislation and rules mention penalties for non-compliance, this appears to be the

weakest link in the regulatory procedures. It is becoming clearer that it is far more difficult for a

regulator to wield a stick against government owned utilities compared with privately owned

utilities. Loss of profit, through a penalty, has no meaning in a government owned enterprise.

Therefore, regulatory commissions must undertake frequent and sustained review of action taken

on their directives.

This leads to the charge that the commissions are undertaking micro management of enterprises.The regulator, to establish credibility, has to show an improvement in the quality of service or

establish that the utility is performing more efficiently under independent regulation. On the other

hand, the internal working of the utility is not geared up to achieving these targets and regulatory

commission directives are even perceived as impractical.



Nowhere have directives of the commission to a utility become as controversial as in Karnataka. In

the Karnataka Electricity Regulatory Commission Tariff Order 2000, a number of specific

directives and general orders aimed at streamlining operations and improving the fiscal position of

the Karnataka Power Trading Corporation were issued. The utility has taken the order to court

pleading that the regulatory authority had no jurisdiction to pass such directives. Consequently, the

court passed an ex-parte stay order. The commission then had to file an appeal in the Karnataka

High Court against the stay order.

Regulating tariffs

The Orissa Electricity Regulatory Commission issued the first tariff order for the retail supply of

electricity for the year 1997-98 to Gridco in March 1997.10 The second one was issued in August

1998 for the year 1998-99 - one for bulk and the other for retail supply. The bulk rate was forsupply of power by Gridco to the four distribution companies and the retail supply rate for the four

distribution companies (even though all distribution companies were still with Gridco). The third

tariff order was issued in December 1999 for the year 1999-2000 one for bulk supply tariff to

Gridco and four orders for retail supply (as Gridco and the four distribution companies filed

separate proposals).

In May 2000, the Maharashtra Electricity Regulatory Commission issued tariff orders for retail

supply to the Maharashtra State Electricity Board, a vertically integrated utility for the year 2000-01. Subsequently, regulatory commissions of Andhra Pradesh, Uttar Pradesh, Gujarat, Haryana

and Rajasthan also issued tariff orders. The Central Electricity Regulatory Commission issued

orders on generation tariff for the National Thermal Power Corporation and for a project being set

up by an independent power producer for selling power to more than one state. It also issued an

order on transmission charges for interstate transmission system of the Power Grid Corporation of

India.

All state electricity regulatory commissions have followed the historic cost approach for arriving at

the revenue requirement with the rate of return regulation in conformity with central and state

legislation. In non-restructured states, state electricity boards have claimed a return of 3% on the

net fixed assets and the licensees have claimed costs and return in accordance with provisions

under Schedule VI of the Electricity Supply Act.11

Commissions other than the Andhra Pradesh Electricity Regulatory Commission set targets for

reduction of transmission and distribution losses for determining tariffs. The Maharashtra Electricity

Regulatory Commission considered the fact that if energy is saved by reduction in transmission and

distribution losses, it would be available for sale and thereby generate revenue. Some state

commissions considered the energy saved by reduction of transmission and distribution losses

would reduce the energy required and thereby cost of purchase. The Andhra Pradesh Electricity

Regulatory Commission directed the utility to increase metered energy from 41% to at least 48%.

Critical issues

Tariff structure: The existing retail tariff structure of state electricity boards is not based on

economic principles. Regulatory commissions have tried to rationalize the tariff structure by bringing



rates for different categories of consumers nearer to the average cost of supply. Only in Andhra

Pradesh was the cost of service approach attempted. This approach is difficult to implement due

to lack of adequate data and the likelihood of steep increase in tariff rates for domestic and

agricultural consumers. However, the cost of supply approach in the initial years would be a

pragmatic one.

Transmission and distribution losses: These losses (technical and commercial) in Indian power

sector systems are in the order of 30-40% of available energy. By any standard, it is very high. Allregulatory commissions have taken a very serious note of these losses and issued directives for

reduction of such losses in a phased manner through target setting.

Generation and power purchase costs: All regulatory commissions have considered merit orderpurchase of power and reduced the cost of purchase of power considerably. Since the cost of

generation and purchase of power constitutes 75-80% of the total expenditure, regulatorycommissions have paid serious attention while regulating these costs.

Managing subsidy: The governments of Gujarat and Uttar Pradesh provided lumpsum subsidy totheir utilities even before the official tariff filing was done. This was done to avoid linking it with

tariffs that would be fixed by their regulatory commissions to avoid steep increases in rates toconsumers in their states. Apart from lumpsum subsidy, the government of Gujarat providedfinancial support to the Gujarat Electricity Board by conversion of some amount of loan into equity.

The Andhra Pradesh Electricity Regulatory Commission determined tariffs to meet the revenuerequirements of AP Transco. It then sought a directive from the state government whether it

proposes to provide any subsidy and if so, to which categories of consumers before the notificationof rates. The government provided Rs. 1,345 crores as subsidy. Taking that into consideration, thecommission revised the rates and notified tariffs. Subsequently, the government offered increased

the subsidy to further reduce rates for certain class of domestic consumers. Regulatorycommissions in Maharashtra and Orissa have not sought any subsidy from state governments.

The challenges ahead

The practice of new style regulation in the Indian power sector poses challenges to all stakeholders

as they struggle to carve out their rightful participatory role in the regulatory process. The biggestchallenge before regulators is that of integrating several issues into a comprehensive regulatoryscheme. Regulation of the power sector in India has to serve public interest despite demand and

supply side constraints.

On the supply side, utilities are financially weak, non-commercially orientated and ill equipped to

meet the rapidly growing needs of consumers for quality and quantity of electricity. On the demandside, while tariffs are extremely skewed, the unmet demand is enormous. The challenge of building

credible regulatory institutions in the quicksand of weak governance, fiscal crisis and an absence ofpolitical consensus about the role of independent regulation is truly daunting.

Authors



T.L. Sankar is Principal and Usha Ramachandra is Member of Faculty, Centre for Infrastructure Management,

Administrative Staff College of India and Editor of this special issue.

Notes

The distinction between old and new style regulation must be clearly understood in the Indian context. SeeTenenbaum (1995) for an exposition.

Interestingly enough, the private sector at that time too favored a strong public sector. In 1944, a group ofleading Indian industrialists brought out a plan for the economic development of India commonly known as theBombay Plan. It stated that state ownership should be necessarily involved in areas that were important topublic welfare or security. The Bombay Plan also stated that enterprises owned wholly or partially by the state(public utilities, basic industries, monopolies and industries using scarce natural resources) should besubjected to state control. This was probably to prevent foreign capital occupying a dominant position in theindustrial structure.

These two models are discussed in the paper on Regulatory reforms: An overview in this issue of the Journal.

The Act was an outcome of an assignment that the Administrative Staff College of India (ASCI) did for theMinistry of Power on restructuring the regulatory system for the power sector in India. The ASCI reportstrongly recommended the creation of independent electricity regulatory commissions both at the centre andthe states. This has been acknowledged in the preamble to the Electricity Regulatory Commissions Act (1998).

See Section 13, Electricity Regulatory Commissions Act (1998).

Some of the smaller states in the northeast have been planning a single electricity regulatory commissioncollectively. The Electricity Regulatory Commissions Act (1998) has made no provision for a commission toregulate utilities in more than one state. The Electricity Bill (2000) has this provision.

See Best practices guide: Implementing power sector reform (2000) prepared by the Regulatory AssistanceProject, Gardiner, Maine.

See Section 38 and 39, Electricity Regulatory Commissions Act (1998).

Electricity Regulatory Commissions Act 1998, Section 4 on qualification for appointment of chairperson andother members of central commission states: The chairperson and the members of the central commission shallbe persons having adequate knowledge, experience or shown capacity in dealing with problems relating toengineering, law, economics, commerce, finance or management and shall be appointed in the following manner:

One person having qualifications and experience in the field of engineering with specialization in generation,transmission or distribution of electricity.

One person having qualifications and experience in the field of finance.

Two persons having qualifications and experience in the field of economics, commerce, law or management:

Provided that not more than one member shall be appointed under the same category under clause (c). Section17 (5) on the qualification of members for the state electricity regulatory commission states: The chairpersonand the members of the state commission shall be persons of ability, integrity and standing who have adequateknowledge of, and have shown capacity in dealing with problems relating to engineering, finance, commerce,economics, law or management.

As discussed earlier, Orissa was the first state to introduce reforms in the power sector. The Orissa ElectricityRegulatory Commission was established in August 1996 under the Orissa Electricity Reform Act 1995. Thepower sector was also restructured on a functional basis into two generating Companies (thermal and hydro),one transmission company known as the Grid Corporation of Orissa (Gridco) and four distribution companies.The distribution companies were privatized as joint venture companies with 51% shareholding and managementcontrol with the strategic partner and balance 49% shareholding retained with Gridco. BSES Ltd., is the strategic



partner for three-year companies (Wesco, Southco and Nesco) whereas AES is the strategic partner for Cesco.Gridco was managing the distribution up to March 1999 and the four distribution companies took over fromApril 1999.

Distribution licensees are regulated under Section 57, 57A and the Sixth Schedule of Electricity Supply Act(1948). The provision under Sixth Schedule reads: The licensee shall so adjust the charges that his clear profit inany year shall not as for as possible, exceed the amount of reasonable return. The Sixth Schedule clearlydefines: (a) Capital base (b) Reasonable return on capital base and (c) Clear profit. Vertically integrated stateelectricity boards are however regulated under Section 59 and Section 63 of Electricity Supply Act (1948).

References

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Borgstorm, B., Hindley, P., & Gupta, P. (1996). The role of planning in India’s restructured power sector.Report prepred by Hagler Bailley Consulting for the United States Agency for International Development.

Byrne, J., & Govindarajulu, C. (1997). Power sector reforms: Key elements of a regulatory framework. Economic& Political Weekly, 32(29 ), 1946-47.

Central Electricity Regulatory Commission. (2000). Tariff order on avaiability based tariffs for centralgenerating stations (www.cercin.org). New Delhi: CERC.

Carstairs, J., & Ehrhardt, D. (1995). Financial structure in the Indian power sector. Energy Policy, 23(11), 981-90.

Dixit, S., Sant, G., & Wagle, S. (1998), WB-Orissa model of power sector reforms: Cure worse than disease.Economic & Political Weekly, 33(17), 944-49.

Express News Service. (1995, July 24-30). Everything you wanted to know about Enron. Express InvestmentWeek , 12-31.

Frontier Economics. (2000, July). State power sector reform: A review of the Orissa experience. Reportsubmitted to The World Bank.

Godbole, M. (1997). Future of state electricity boards. Economic & Political Weekly, 32(35), 2222-24.

Godbole, M. (1998). Private sector power generation: Unresolved issues. Economic & Political Weekly, 33(5),255-56.

Godbole, M. (1998). What is right in economics is wrong in politics. Economic & Political Weekly, 33(38), 2696-97.

Godbole, M. (1999). Enron revisited. Economic & Political Weekly, 34(12), 661-63.

Government of India (1996, December). Common minimum national action plan for power (Result of the ChiefMinisters Conference).

Gujarat Electricity Regulatory Commission (2000). Gandhinagar: GERC.

Kodwani, D.G. (2000). Economic regulation of utility industries. Economic & Political Weekly, 35(30), 2657-61.

Maharasthra Electricity Regulatory Commission. (1999). Case No.1 of 1999: Retail tariff of Maharasthra StateElectricity Board for 2000-2001. Mumbai: MERC.

Orissa Electricity Regulatory Commission. Tariff Orders (a) Case No.7 of 1997, Transmission and retail supplytariff of Gridco for 1997-1998; (b) Case No.19 of 1998, Distribution and retail supply tariff of Gridco for

http://www.ercap.org%29/

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1998-99; Case No.12 of 1999, Tariff for bulk supply and transmission of Gridco for 1998-99 (d) Case No.22 of1999, Tariff for retail supply of Southco for 1999-2000; Case No.23 of 1999, Tariff for retail supply of Nescofor 1999-2000; Case No.24 of 1999, Tariff for retail supply of Wesco for 1999-2000; Case No.25 of 1999,Tariff for retail supply of Cesco for 1999-2000; (e) Case No 33 of 2000, Revenue requirement anddetermination of tariff for retail supply for Southco; Case No 32 of 2000, Revenue requirement anddetermination of tariff for retail supply for Nesco; Case No 17 of 2000, Revenue requirement anddetermination of tariff for retail supply for Wesco; Case No 28 of 2000, Revenue requirement anddetermination of tariff for retail supply for Cesco; (f) Case No 27 of 2000, Revenue requirement anddetermination of tariff for bulk supply tariff & transmission charges for Gridco. (All these orders are availableon the OERC website – www.orierc.org). Bhubaneswar: OERC

Rajagopalan, M., & Demaine, H. (1994). Issues in energy subsidies for irrigation pumping: A case study fromMahbubnagar District, Andhra Pradesh. Energy Policy, 22(1), 89-95.

Ranganathan, V. (1993). Rural electrification revisited. Energy Policy, 21(2), 142-51.

Ranganathan, V. (1993). Electricity privatisation: The case of India. Energy Policy, 21(8), 875-80

Ranganathan, V. (1996). Electricity privatisation revisited: A commentary on the case for new initiatives in India.Energy Policy, 24(9), 821-25

Reddy, B.S. (1995). Electricity pricing and load management for Maharashtra. Energy Management, 19(1), 23-36.

Reddy, K.N., & D’Sa. A. (1995), Enron and other similar deals vs. new energy paradigm, Economic & PoliticalWeekly, 30(24) 1441-55.

Sankar, T.L. (1998). Innovative models of power generation: The captive-collective experience of consumerparticipation in power development in India. Natural Resource Forum, 22(2), 141-45

Sankar, T.L., & Ramachandra, U. (2000). Electricity tariffs regulators: The Orissa experience. Economic &Political Weekly, 35(20 & 21), 1825-33.

Sant, G., & Dixit, S. (1996). Beneficiaries of IPS subsidy and impact of tariff hike. Economic & Political Weekly,31(51), 3315-21.

Sant, G., Dixit, S., & Wagle, S. (1998). Power sector restructuring: Challenges, lessons, and suggestions.Presentation made to the Ministry of Power, Government of India, New Delhi.

Srinivasan, K. (1996). LNG policy for power: More questions than answers, Economic & Political Weekly,31(51), 3284-86.

Subramanian, D.K. & Vyasulu, V. (1999). Karnataka electricity reform ordinance: Much ado about nothing.Economic & Political Weekly, August, 34(33), 2300-03.

Tenenbaum, B (1995) The real world of power sector regulation. Viewpoint (The World Bank Note No.50).

Uttar Pradesh Electricity Regulatory Commission (2000). Tariff Order. Lucknow: UPERC

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