Power sector in India before independence, institutional developments, Power sector reforms, restructuring of SEBs, Electricity regulation

1. Power Sector Developments in India
Industry Information Insights 2014
EnergySector.in

2. Table of Contents
ExecutiveSummary
PowerSector Before Independence
ElectricitySupply Act, 1948
InstitutionalDevelopments
Power Sector Reforms
World Bank and Reforms
Restructuring of SEBs
Electricity Regulation
ElectricityAct, 2003
Power Sector AfterEA2003

3. Executive Summary
Post 1991 Era
Inthe1990s,aseriesofpowersectorreformsmadethesectormoreopenandcompetitivethroughderegulationandencouragementofprivateinvestment.In1991,privateinvestmentwasallowedintopowergenerationanddistribution,whilsttransmissionremainedclosedtoprivateparticipationuntil1998.MegaPowerPolicy(MPP)1995wasintroducedtoaccelerateinvestmentinpowergenerationbygivingplantswithabove1,000MWcapacityadditionalincentives.PowerTradingCompany(PTC)wasformedtoactasanintermediarybetweentheprivatemegapowerplantsandtheSEBs.
ElectricityRegulatoryCommissionAct,1998constitutedtheCentralElectricityRegulatoryCommission(CERC)andencouragedthestatestoestablishtheirownStateElectricityRegulatoryCommissions(SERCs)toregulateandrationalizethetariffs.Theconsiderablepolicyeffortsinthepowersectorduringthe1990s,however,hadlimitedachievements.Thepowersectorremainedcommerciallyunviablewithlittleprivateinvestmentuntilanumberofnewpoliciesfollowedinthe2000s.
Pre1991Era
ThepowersectorinIndiahasundergonesignificantprogressafterIndependence.WhenIndiabecameindependentin1947,thecountryhadapowergeneratingcapacityof1,362MWonly.Hydropowerandcoalbasedthermalpowerhavebeenthemainsourcesofgeneratingelectricity.Generationanddistributionofelectricalpowerwascarriedoutprimarilybyprivateutilitycompanies.After1947,allnewpowergeneration,transmissionanddistributionintheruralsectorandtheurbancenterscameunderthepurviewofStateandCentralgovernmentagencies.StateElectricityBoards(SEBs) wereformedinallthestates.
India’spowersectorhadbeenamonolithicsystemthatwastightlyregulatedanddominatedbyvertically-integratedStateElectricityBoardsuntileconomicreformsbeganin1991.TheSEBscontrolledtheentireelectricitysupplychainfromgeneration,transmissiontodistributionwithinagivenstate. However,distortedtariffstructure,politicalintervention,hightransmission&commerciallossesresultedinnearbankruptcyoftheSEBsandinsufficientandunreliableelectricitysupply.

4. ThefirstmajorpolicythrustfromCentralGovernmentcameonlyin1998whenitenactedtheElectricityRegulatoryCommissionAct,1998topavewayforformationofCentralandStateElectricityRegulatoryCommissionsanddistancingofGovernmentfromtariffdetermination.Themostsignificantandwide-rangingchangeinlegislationwasthepromulgationofthe2003Act,whichsupersededallthepreviouselectricityrelatedlegislationsandcreatedamoreopenenvironmentforinvestmentandcompetitioninthesector.The2003ActalsorequiredstatutoryrestructuringofintegratedSEBsandseparationoftradingfunctionfromtransmissionandsystemoperation.
TheamendmentofSupplyAct(1948)in1991,followedbytheenactmentofElectricityAct(2003)andnotificationofMegaPowerPolicy(1995),NationalTariffPolicy(2005),NationalElectricityPolicyandIntegratedEnergyPolicyhaveallledtoamuchliberalpowersector,whichthensawactiveinvestmentsfromprivatesectoracrossthevaluechain.
TheNationalTariffPolicywasnotifiedin2005,whichmandatedallfutureprocurementofpowerbythedistributionutilitiesandallfutureinvestmentsininter-statepowertransmissionthroughcompetitivebiddingroutefromJanuary, 2011.
Restructuring of SEB
TheprocessofreformsandrestructuringinIndianPowerSectorbegunintheearly1990’swithafewStateGovernmentsenactingstatelevellegislationstoreformandrestructureintegratedStateElectricityBoards(SEBs)priortoenactmentoftheElectricityAct,2003.Odisha,Haryana, AndhraPradesh,Rajasthan,UttarPradesh,Karnataka,DelhiandMadhyaPradeshhaverestructuredtheirSEBsunderstatelevellegislations.ThefirststatetorestructureitsintegratedSEBunderastatelevellegislationwasOdishain1995.

5. Pre-Independence
Todealwiththesedifficulties,theIndianElectricityBillwasintroducedintheCentrallegislationtoamendthelawrelatingtothesupplyanduseofelectricalenergy.
ThedraftingoftheIndianElectricityBill1909finallyledtotheenactmentoftheIndianElectricityAct1910.Inthislegislation,thepoweroflicensingwaslefttothelocalgovernment,thusgettingridoftheproblemofdualcontrol.
Further,theconceptofissuinglicenseforbulksupplywasintroduced.Bulksupplymeantthatacompanycouldgenerateandselltootherdistributorsinlargequantitieswhowould,inturn,retailitunderadifferentlicensetosmallconsumers.
ThefirstlegislationintheelectricitysectorinIndiawastheIndianElectricityActof1887.ThisActprovidedfortheprotectionofpersonandpropertyfrominjuryandrisks, attendanttothesupplyanduserofelectricityforlightingandotherpurposes.
ThisActwasrepealedandreplacedbytheIndianElectricityAct1903.Manypractical,electro-technicalandcommercialdifficultieswererealizedduringtheperiodfrom1903to1909.
Indian Electricity Act
1887
1903
Indian Electricity Act
Indian Electricity Bill
1909
1910
Indian Electricity Act

6. Electricity Supply Act, 1948
Intheinitialyears,theseprovisionsensuredthattheSEBswerefinanciallyhealthy.However,thefinancialpositionoftheSEBsdeteriorated.
Duringtheperiod1948to1956,theSEBstookovermostprivatelicenseesuponexpiryoftheirlicenseagreements.
WhilethegrowthoftheIndianpowersectorprimarilybeganintheprivatesector,theIndustrialPolicyResolutionof1956reservedgenerationanddistributionofelectricityexclusivelyforthepublicsectorwhileallowingexistingprivateutilitiestocontinue.However,nonewprivatelicensesweregranted.
TheElectricitySupplyAct(ESA),1948wasenactedbytheGovernmentasitwasfeltthatthepaceofelectrificationwasveryslowandthatelectricitywasonlyavailableinmajortownsandcities.
TheElectricitySupplyAct,1948pavedthewayforsettingupofStateElectricityBoards(SEBs)andenvisagedconstitutionoftheCentralElectricityAuthority(CEA).
ItalsolaiddowntheprinciplesforcalculatingthereturnswhichtheElectricityBoardsweretoearn.AthreepercentreturnonnetcapitalatthebeginningofeachyearwastheoverallguidingprinciplefortariffschargedbytheSEBs.
Indian Electricity Act
1910
1948
Electricity Supply Act
Formation of CEA Under ESA
1948
1956
Industrial Policy Resolution

7. Institutional Developments
Rural Electrification Corporation (REC)
RuralElectrificationCorporation(REC)wassetupin1969afterthefaminesofthe1960swithamissiontofacilitateavailabilityofelectricityforacceleratedgrowthandforenrichmentofqualityoflifeofruralandsemi-urbanpopulation.
NHPCandNTPC
Inordertogiveaboosttopowergeneration,theGovernmentofIndiacreatedtheNationalHydroelectricPowerCorporation(NHPC)andtheNationalThermalPowerCorporation(NTPC) in1975.
Regional Electricity Boards
In1964,theRegionalElectricityBoardswereestablishedindifferentregionsinIndiaforfacilitatingintegratedoperationandforencouragingexchangeofpoweramongdifferentstates.
Toencouragethestatestobuildinfrastructureforexchangeofsuchpower,inter-statelinesweretreatedascentrallysponsoredschemesandthestateswereprovidedinterestfreeloans.
ThereasonfordevelopmentonthelinesofregionswasthatthegenerationresourcesinIndiaareunevenlyspread.ThehydroresourcesareprimarilylocatedintheHimalayanfoothillsandtheNorthEasternregionwhereascoalislocatedintheBihar-Jharkhand-WestBengalareawithsomereservesinAndhraPradeshandMadhyaPradesh.LigniteisavailableinTamilNaduandRajasthan.

8. Power Finance Corporation (PFC) and PGCIL
ThePowerFinanceCorporation(PFC)wassetupin1986toassistbuildingofnewcapacitiesandin1989,theGovernmentofIndiasetupthePowerGridCorporationofIndiaLtd.
(PGCIL)bycarvingouttransmissionlinesfromthevariouscentralgeneratingstations.Tillthattime,thegenerationandtransmissionsystemsinIndiawereplannedanddevelopedonthebasisofregionalself-sufficiencyandtheinitialsetofinterregionallinkswasdevelopedunderthecentrallysponsoredprogramme.
NHPCandNTPCestablishedlargeregionalgeneratingstations, thebenefitsofwhichweresharedbythestatesoftheregion.
TheWorldBankplayedacrucialroleinthegrowthofNTPC’sinstalledcapacityasmorethanhalfoftheUS$7billionloanthatitawardedwenttoNTPC.
Regional Electricity Boards
1964
1969
Rural Electrification Corporation
NTPC and NHPC
1975
1986
Power Finance Corporation
PGCIL
1989

9. Power Sector Reforms
In1989,theWorldBankhadstatedthatrequestfromtheelectricitysectorfromdevelopingcountriesaddedupto$100billionandonlyabout$20billionwasavailablefrommultilateralsources.
ThemessagemeantthatnotmuchoffundingwouldbeavailablefromtheWorldBank.Furthermore,therewerenosurplusesleftwithinthesectorforinvestmentpurposes.
However,nothingreallyhappenedtill1991whentheexistingelectricitylawswereamendedtoprovideforprivateparticipationingeneration.
TheElectricityLaws(Amendment)Actof1991wasenactedtoencouragetheentryofprivatelyownedgenerators.Furtheramendmentswerecarriedoutin1998whenthetransmissionsectorwasalsoopenedforprivateinvestmentssubjecttotheapprovaloftheCentralTransmissionUtility(CTU).
NeedForPowerSectorReforms
TheIndianpowersectorhadreachedtheabsolutedead-endbythe1980s.ThetotallossesoftheSEBswithoutsubsidyhadcrossedINR3000crores.ThesectorwasfacingpeakingshortagesinvariouspartsofIndiaandseverefinancialburdenwasimposedonthestategovernmentsbecauseoftheperformanceoftheSEBs.
High Financial Losses
of SEBs
Peaking Electricity
Shortages
Conditional Funding From World Bank
No New Investments in Power Sector

10. The World Bank & Reforms
TheWorldBankhadassistedvariouspowersectorprojects, especiallyatthetimetheNTPCwassetupin1974.TheWorldBankwasinterestedinthecreationoftheNTPCbecausetheBankfeltthattheirloanswerebetterassuredastheNTPCprojectswereexpectedtobebettermanagedascomparedtoSEBprojects.
Overtime,theWorldBankwasdesirousofmovingawayfromgenerationbecauseofenvironmentalissues.Sincecoalwastheprimaryfuelforpowergenerationwhichgaverisetoenvironmentaldegradation,theBankwantedtosupportprojectswhichenvisagedrestructuringofthesector.
Inordertoencourageprivatesectorparticipation,severalotherpolicymeasureswerealsoundertaken.
•Theprivateinvestorswereofferedaguaranteed16% returninequitywithafullfiveyeartaxholiday.
•Therequireddebt-equityratiowaskeptat4:1.
•TheprojectswerealsogivensovereignguaranteesandescrowbenefitsincasethereweredefaultsonpartoftheSEBs.
However,escrowcouldnotbegrantedtoallprojectsastherewasalimit,giventherevenuestreamoftheSEBs. IndependentPowerProducers(IPPs)facedmanyproblems, fromsecuringcoalcontractstogettingwagonsfromtherailwaysformovementoftheircoal.
Duringthe1980sandearly1990s,theWorldBanklendinghadbeeninfluencedbyWashingtonconsensuses.Accordingtothis,thedevelopmentprocesseswerehinderedlessbycapitalshortages,andmorebyeconomicpoliciesthathinderedmarketforces.Therefore,TheWorldBankbeganapproachingprivatizationasoneofthepolicyoption.

11. Restructuring of SEBs
ThedistributionsegmentoftheOrissaStateElectricityBoard(OESB)wasdividedintofourregionalutilitiesandlateronprivatized.ThetransmissionassetsremainedunderpublicownershipwiththeGridCorporationofOrissa(GRIDCO).TheexistinghydrogenerationassetswerevestedwiththeOrissaHydroPowerCorporation(OHPC)andthethermalcapacityoftheOSEBhadtobetransferredtotheNTPCtosettletheduesoftheOSEBwiththeNTPC.ThisrestructuringwasmadepossiblethroughtheOrissaElectricityReformsAct,1995.
WhileOrissawasthefirststatetoenactitsownreformsact,itwasfollowedbyotherstateslikeHaryana(1997),AndhraPradesh(1998),UttarPradesh(1999),Karnataka(1999), Rajasthan(1999),Delhi(2000),MadhyaPradesh(2000)andGujarat(2003).
Orissa(NowOdisha)wasthefirststatetogetassistancefromtheWorldBankforrestructuring.Inthestate,thegeneratingplantswererunningat36%PLFin1993-94,transmissionanddistributionlosseswereat43%andtheproportionofbillscollectedwasonly17%.TheentireOrissaprojectwasinthreepartsandthetotalcostoftheprojectwasUS$997.2million. TheWorldBankprovided$350millionandtheOverseasDevelopmentAgencyoftheUKprovided$110million.
TheOrissaModelinvolvedrestructuringofthemonolithicSEBintoseparategeneration,transmissionanddistributionsub- sectors.
Private Investment in Generation
1991
1995
Orissa Electricity Reforms Act
Private Investment in Transmission
1998
1998
Electricity Regulatory Commission
APDP
2000

12. Electricity Regulation
WhiletheCERCwasresponsibleforallcentrallyownedstationsandotherstationshavinganinter-staterole,theSERCswereresponsibleforstationswithintheirownstateonly.
Theprimaryintentionforsettingupofregulatorycommissionswastoensurethattariffsweredeterminedaccordingtoeconomicprinciplesandthattheentireprocessbefreefromanypoliticalinterference.TheroleoftheGovernmentwasonlythatofafacilitatorandcatalystwhichwouldlaydownbroadprinciplesofpolicy.
Aroundthemid1990s,theGovernmentofIndiarealizedthatthedistributionsectorwouldhavetobeaddressedfirstandiftheproblemsinthedistributionsectorcanbeaddressed, investmentsinthegenerationsectorwillautomaticallyflow.
TheGovernmentofIndiathereforepassedanOrdinancewhichlaterculminatedastheElectricityRegulatoryCommissionsAct1998.
ItwassimilartotheOrissaReformsActanditpavedthewayforsettingupoftheCentralElectricityRegulatoryCommission.
ThestatescouldalsorelyonthisActtosetuptheirownstateelectricityregulatorycommissionsorenacttheirownlegislationsforthispurpose.ThefunctionsoftheCERCandtheSERCswereclearlydemarcated.

13. Other Reform Measures
Thecommitteesuggestedtowaiveoff50%ofthesurcharge/interestondelayedpaymentsandrestoftheduesalongwithfullprincipalamountaggregatingtoaboutINR33,600croreswastobesecuredbytax-freeinterestbearingbondsissuedbytherespectivestategovernmentsthroughReserveBankofIndia.
WiththeenactmentoftheElectricityAct2003andimplementationofopenaccess,themarketstructureinthepowersectorchangedfromtheoldsinglebuyerstructuretoamulti-buyermodel.Thegeneratorcouldsellpowertoanybuyerusingtheopenaccessprovisionintransmissionandusershadthechoicetochoosetheirsupplier.
Thereisincreasedcompetitionamonggeneratorsandsuppliers,whichimprovesthesector’sperformance.
Manystates,thathaveunbundledtheSEBs,havereportedimprovementsintheiroperationalefficiencyandareabletoensurereliablepowersupplytoconsumers.
EnactmentofElectricityRegulatoryCommissionActwasthefirstmajorsteptoinitiatepowersectorreformsinIndia.ThiswasfollowedbyfewotherstepslikeintroductionofAcceleratedPowerDevelopmentProgramme(APDP)in2000- 01,whichsanctionedacompositeloan/grantforimprovingtheinfrastructureofelectricityutilities.
Later,undertherecommendationsofDeepakParikhCommittee,APDPschemewasrestructuredandrenamedasAcceleratedPowerDevelopmentandReformsProgramme(APDRP).
NextmajorstepwastheconstitutionofanExpertCommitteechairedbyMr.MontekSinghAhluwalia,thenMember(Energy),PlanningCommission,tosuggestwaysforone-timesettlementofoutstandingduesofallSEBstowardscentralutilitiesandalsotoworkoutthemethodforcapitalrestructuringofSEBs.

14. Electricity Act, 2003
TheEA2003alsorecognizedtheexistenceoftwoormoredistributionlicenseesinthesamegeographicalarea(Section14).
Thejobofpricedeterminationhasbeenhandedovertotheregulatorycommissions.Theconstitutionofthestateregulatorycommissionswasmandatory(Section82).Powertradinghasbeenrecognizedasadistinctactivitywiththesafeguardthatregulatorycommissionsareauthorizedtofixceilingsontradingmargins,ifnecessary(Sections12,79and86).Forthebenefitofconsumers,certaininstitutionsliketheconsumer’sredressalforumandtheirappellatebodyhasbeenenvisaged(Section42).
Thereareothersafeguardsasfarastheconsumerisconcernedwithspecialemphasisonperformancestandards(Sections57to59).Atthesametime,inordertoplugrevenueleaks,100%meteringhasbeenmadecompulsory(Section55)andprovisionsrelatingtotheftofenergyhavebeenmadeverystringent(Sections135to150).
TheElectricityAct(EA)2003cameintobeinginJune,2003. ThisActrepealedalltheexistingelectricitylawssuchastheIndianElectricityAct1910,theElectricitySupplyAct1948, etc.
TheprimaryobjectiveoftheEA2003istopromotecompetitioninordertoenabletheconsumerstohavethebestpossiblepriceandqualityofsupply.
TheEA2003mentionsthatallSEBshavetobeunbundledintoseparateentitiesofgeneration,transmissionanddistribution(Section131and172).
Inordertoenhancegeneration,licensinghasbeendoneawaywithcompletelyexceptthattechno-economicclearancewouldberequiredforhydroprojects(Sections7and8).
Captivegenerationhasbeenpromoted(section9).Openaccessindistribution,tobeintroducedinaphasedmanner, hasbeenrecognizedwhereinabulkconsumercanaccesspowerfromanyothersourceprovidedcertaintechnicalconstraintsaremet(Section42).

15. New Developments
NationalTariffPolicy
Tariffbybiddingprocess:Newprojectsareselectedonthebasisofcompetitivebiddingbutexpansionprojectsareanexceptionastheyalreadyhavetieupsfortheirsupply.
Returnstoattractnewinvestment:Attractivereturnssothatinvestmentinpowersectorishigherthanothersectors.
Peakandoff-peakhour’stariff:Tariffofpeakhoursandoff- peakhoursisthefunctionofABT,whichisimplementedinallregions.
NationalElectricityPolicy
Thispolicy,whichwasintroducedinFebruary2005,aimsatlayingguidelinesforaccelerateddevelopmentofthepowersector,providingelectricitytoallareasandprotectinginterestsofconsumerskeepinginviewtheavailabilityofenergyresources,technologyavailabletoexploittheseresources,economicsofgenerationusingdifferentresources, andenergysecurityissues.
Energy Conservation Act
2001
2003
Electricity Act
National Electricity Policy
2005
2006
Integrated Energy Policy
National Tariff Policy
2006

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