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Total pages 30

CONTENTS

1. SECTION I

Vision, Mission, Objectives, Functions and Stakeholders 5

2. SECTION II

Assessment of the Situation 7

3.SECTION III

SWOT Analysis 18

4. SECTION IV 19

Outline of the Strategy

5. Section V 23

Implementation Plan

6. SECTION VI 25

Linkages with RFD

7. SECTION VII 26

Cross Departmental and Cross Functional Issues

8. SECTION VIII 29

Monitoring and Review Arrangements

9. Annexure A 30

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List of acronyms and abbreviations usedAPTEL-Appellate Tribunal for Electricity

APDP-Accelerated Power Development Programme

APDRP- Accelerated Power Reforms and Development Programme

ATC loss-Aggregate Technical and Commercial loss

BBMB-Bhakra Beas Management Board

BEE-Bureau of Energy Efficiency

BPL-Below Poverty Line

CEA-Central Electricity Authority

CERC-Central Electricity Regulatory Commission

CPSU-Central Public Sector UndertakingCSGS-Central Sector Generating Station

DVC-Damodar Valley Corporation

DFI-Development Finance Institution

DSM-Demand Side Management

DTR-Distribution Transformer

EA- Electricity Act

ECA-Energy Conservation Act

EPA-Environment Protection Act

EPW-Economic and Political Weekly

E&F-Environment and ForestsFCA-Forests ( Conservation) Act

FYP-Five Year Plan

GIS-Geographical Information System

HVDS-High Voltage Direct Supply

HEP-Hydro Electric Project

IT-Information Technology

JV-Joint Venture

LT-Low Tension

MOP-Ministry of Power

MIS-Management Information SystemNTPC- National Thermal Power Corporation

NHPC- National Hydro-electric Power Corporation

NEEPCO-North Eastern Power Corporation

NLDC-National Load Despatch Centre

NEWRA-North Eastern Water Resources Authority

PGCIL-Power Grid Corporation

PFC-Power Finance Corporation

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PAP-Project Affected Person

PAF- Project Affected Project Affected Family

QOS-Quality of Supply

REC-Rural Electrification Corporation

REC-Rural Electrification Corporation

R-APDRP-Restructured-APDRPR&R-Resettlement and Rehabilitation

RGGVY-Rajiv Gandhi Grameen Vidyutikaran Yojana

SERC-State Electricity Regulatory Commission

SJVNL-Satluj Jal Vidyut Nigam

SCADA-Supervisory Control and Data Acquisition

THDC-Tehri Hydro Development Corporation

T&D-Transmission and Distribution

UMPP-Ultra Mega Power Project

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STRATEGY FOR THE MINISTRY OF POWER

SECTION I

Vision, Mission, Objectives, Functions and Stakeholders

1.1 VISION:

Create an efficient and vibrant power sector geared to the needs of inclusive and rapid

growth of the economy.

Mon}

1.2 MISSION:

Position itself as the key reform driver and ensure that market forces are able to

optimise efficient generation, transmission and distribution arrangements and areas of

market failure are addressed through appropriate policy and financial interventions

based on a constructive engagement with the state governments and other

stakeholders.

1.3 OBJECTIVES:

The Ministry of Powers primary objective is to achieve the vision enunciated above

through the mechanism contained in the mission statement. In the immediate context

the objectives are:

1. Perspective planning for the sector including matters related to overall demand

and supply forecasting, generation capacity addition through various sources,

transmission network, universal access and appropriate human resource

requirement.

2. Plan for taking forward the goals of perspective planning by identifying the

key constraints and policy and schemes to overcome them.

3. Create and forcefully drive an agenda to reform the power sector to achieve

the vision of the Ministry

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4. Elucidate the key elements of the reform agenda and secure consensus to take

this forward.

5. Formulate and implement appropriate policies and schemes at the central level

to achieve goals in the centres own domain and secure state support in those

areas for which the states are responsible.

6. Strengthen the institutional framework for national level functions and inter

state co-ordination.

1.4 FUNCTIONS:

i) Policy formulation in furtherance of the objectives outlined above.

ii) Implementation of the policy formulated.

iii) Legislative action to further the policy and administration of existingstatutes such as the EA 2003, ECA 2001, DVC Act 1948 and BBMB.

iv) Administer and guide the national level institutional framework for the

power sector including the CEA, NLDC, CERC and the APTEL and

evolve new framework for inter state co-operation like NEWRA.

v) Oversee the functioning of CPSUs like NTPC, NHPC, REC, PFC,

NEEPCO, SJVNL, THDC, PGCIL and other organizations like the BEE.

vi) Implement specific transfer schemes to further distribution reforms and

promote universal access.

1.5 STAKEHOLDERS:

Central government-responsible for legal and regulatory framework; power sector

reforms; statutory clearances; fuel linkages; inter-state coordination; coordination

regarding renewable deployment;

State governments-responsible for the actual operation of the sector; key role in issues

related to tariffs and subsidies; rural electrification; facilitating LA, R&R and

expediting proposals for E&F clearances in connection with generation and

transmission projects;

CPSUs- NTPC, NHPC, PGCIL, THDC, SJVNL, DVC, NEEPCO etc.-responsible for

the actual implementation of generation and transmission projects; induction of new

technologies; linkages with renewable;

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Development finance institutions in the power sector-PFC, REC-provision of funds

for power projects; distribution sector finance; nodal points for reforms;

Regulators, including CERC, SERCS and APTEL-tariff setting, QOS, supply code,

ABT; capital cost approvals;

Private sector-promoters of UMPPs, JVs in Transmission; distribution franchisees;

Outsourcing agents for consumer services, fault repairs, IT deployment etc;

Consumers-all BPL, domestic, agricultural, industrial, commercial and other

consumers and theirorganisations

Project affected persons

SECTION II

Assessment of the Situation

2.1 The current annual per capita consumption of electricity in India is estimated at

less than 600 units, far lower than the world average of 2800 units. Raising this to an

acceptable level requires that the current installed capacity of 1,56,000 mw rise five

fold over the next two decades. Sustainable development requires that this capacity be

a judicious mix of thermal and renewable / non polluting modes. Equity requires that

every household is connected to a reliable and affordable source of supply.

These objectives are not new. They have been voiced in different policy documents

issued over the years and underlie targets set in successive plans. The achievement

has, of course, never matched these targets. In the recent past, the targets of installed

capacity in the ninth plan was 40,000 mw and achievement was 19,119 mw ( 48 %),

in the tenth plan the target was about 44000 mw and achievement was about 21000

mw (48%). In the eleventh plan, against the original target of 78000 mw, the

achievement is being projected as 62000 mw. This is unlikely to be achieved. As of

January, 2010, only 19500 mw had been added. A more realistic figure will be in the

range of 45000 mw (58%). In terms of the thermal: renewable mix, the goal has been

specified as a 60:40 ratio. In actual practice, thermal has always been a higher

proportion and has been growing over the years. At last count, it is estimated that 44%

of households in the country were still to be electrified. Most parts of the country live

under a regime of regular load shedding and poor quality of supply.

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2.2 In order to strategise for the power ministry, it is important to consider the factors

that are responsible for the failure to achieve targets and provide universal and

reliable access. The requisite investment has obviously not been forthcoming. At the

core has been the inability of the sector to raise resources from its activities. The

finances of utilities have always been parlous and the situation has not changed

despite various initiatives over the years.

The story of public policy for power in India has been one of trying to identify a silver

bullet to ensure investment in the sector in the face of political economy constraints

that have continued to debilitate the health of the sector over the decades. The state

electricity boards early on began exhibiting problems of operational inefficiency and

poor tariff policies leaving little surplus for capacity addition. Even the meagre

mandate for 3% return on assets under the Electricity Supply Act, reiterated in the

recommendations of many Finance Commissions was seldom realized. The CPSUs

created in the power sector in the 1970s, were the first major central attempt to tackle

this issue. The advent of liberalization presented the next opportunity to make a

significant inroad on the problem. The idea of the market as the key to an efficient

power sector with the states role primarily one of regulating areas of market failure,

could now be pursued.

The initial silver bullet was to secure private sector entry into generation with

guaranteed returns, skirting in the main the complexities bedevilling the revenue end

of the chain- distribution. While the critical role of distribution in securing the

financial health of the sector was always recognized, the difficulty was how to move

forward in this direction.

The unbundling recipe of the 1990s first adopted in Orissa was the second silver

bullet. Thereafter, the creation of electricity regulatory commissions for tariff setting

under the 1998 act, the 2003 act to hasten unbundling, ensure open access and create

the conditions for the success of competitive possibilities in the sector, the central

schemes of APDP, APDRP and now the R-APDRP have all been efforts aimed at

creating the framework and incentives for an efficient power sector that is able to

attract investment for growth of the sector. The statutory framework for the growth of

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an efficient, competitive power sector has been laid but the political economy has

exhibited a familiar ability to sidestep taking the hard decisions that are seen as

detrimental to short term political interests.

There were clearly limits to a course that sought to guarantee excessive returns to

investment in generation and fortunately Enron brought an early end to this phase.

Unbundling in Orissa brought up the shortcomings of attempting reform at the state

level without seeing through the ramifications of the design. The experiment of

private sector entry in distribution in Orissa was a disaster and the immediate remedy

was an insistence on unbundling without necessarily a change of ownership. The

promise of multilateral funding saw some compliance in the creation of a redundant

set of state owned institutions while the system of poor tariff and subsidy policies

continued with little incentive for even operational efficiencies being realized.

The electricity regulator was another panacea that quickly demonstrated its

limitations. A perspective that continues to guide some observers and policy makers is

rooted in seeing an independent regulator taking the decisions that the states find too

difficult to take at their level. As state ability to influence regulatory decisions or

sidestep them when these do not suit them is increasingly exhibited, the solution is

seen as one of somehow curtailing this ability of state governments to influence

regulation. This perspective can only end up ignoring the imperative of making the

states address the ills that dog their distribution sector.

2.3 MoP has sought to influence distribution reforms at the state level through three

schemes of specific purpose transfers in the last decade or so- the APDP, the APDRP

and R-APDRP.

The APDP (Accelerated Power Development Programme), introduced in 2000-01 was

the first attempt by the MOP to drive reforms in the distribution sector. The APDP

was to finance specific projects relating to renovation and modernization of old

generating plants and more importantly the upgrading and strengthening of sub

transmission and distribution networks including energy accounting and metering.

States that signed MoUs with the power ministry for implementing power sector

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reforms were to get access to these funds. Actual disbursal was linked to appropriate

investment plans to be vetted and co funded by financial institutions.

Against the allocation of Rs. 1000 crore in the first year only Rs. 163 crore could be

disbursed under the APDP and in the second year only Rs. 426 crore were spent out

of Rs. 1,500 crore. It was a short-lived programme, quickly supplanted in 2001 by a

bigger, more ambitious programme , the APDRP (Accelerated Power Reforms and

Development Programme), that was closely tied to the implementation of the

recommendations of the Montek Singh Ahluwalia Committee on the securitization of

CPSU dues.

The change in nomenclature was to show the desire of the MOP to effect sorely

needed reforms in the distribution segment. The APDRP was accessible only to states

agreeing to undertake reforms as per agreed milestones. It had a specific focus of

progressively narrowing and within a set time period eliminating the gap between unit

cost of supply and revenue realisation. The allocation was enhanced to Rs. 3500 crore

annually and the programme now had one entitlement based investment window for

distribution circle level improvement and a second incentive window that provided a

matching grant for achieving agreed reform milestones measured through the single

indicator of the distance between average cost of service and revenue realized.

Under the entitlement window of the APDRP, the MOP provided funds directly to the

Discoms to improve their technical and commercial performance, including energy

accounting, input metering, billing, revenue realization, raising the realization per unit

input purchased, etc. down to the circle level ( mostly equivalent to a revenue

district). Independent agencies were assigned to monitor progress. The scheme also

provided for the conversion of a certain proportion of these DFI loans to grants

depending upon the achievement of agreed milestones.

Several states responded quite whole-heartedly, the long-neglected distribution sector

at last got an infusion of funds and substantial loss reductions were reported. The all-

India losses, after accounting for state govt subsidies, fell sharply from Rs 17794 cr in

2000-2001 to 2268 cr in 2003-04 with major contributions from AP, Gujarat,

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Karnataka and West Bengal. Subsidy payments from the state governments became

regular, as states actively competed for the incentives.

All seemed well, but it soon became apparent that technical improvements , though

needed sorely, would not serve to address the core issues of free power, unmetered

supplies to agriculture and the basic mismatch between costs and tariffs. The focus on

audited statements led inevitably to shifting baselines and creative loss accounting by

the utilities and a lot of time was spent in filing and cross-checking loss reduction

data. In fact, losses started slowly creeping upwards. Paradoxically, system

improvements actually increased cash losses as the technical savings from small,

well-defined, urban areas were subsumed and lost in the much bigger segment of

unmetered and unbilled supplies.

The desire of certain states to better identify power flows to agriculture and other

unmetered sectors, led to ambitious feeder separation programmes that physically

separated the distribution lines at the village level to cater exclusively to the

agricultural load during off-peak hours. In turn, the separation allowed the domestic

consumers and small village industries to avail uninterrupted quality power. In

Gujarat, for example, over 48000 kms of high tension lines, 7000 kms of low-tension

wires, 12000 transformers and 1.2 million electric poles were installed at a cost of

more than Rs 1000 cr ( Tushaar Shah, EPW Feb 16-22, 2008).

Not many states had such a volume of resources. Many did not have the requisite

technical wherewithal. APDRP did cut ATC losses by 5-15% ( Morris and Pandey)

across states, These were low-hanging fruits, easily harvested with minimal efforts,

but the inattention to the core mismatch between revenues and costs did not permit a

sustained growth path and the programme began to lose steam. Matters were not

helped by inexplicable delays on the part of the MOP to actually release the incentive

grants, possibly driven by a need to contain cash outflows from GOI. To quote the

Integrated Energy Policy document:

To encourage distribution reforms, the Accelerated Power Development and

Reforms Programme (APDRP) was launched. APDRP supports distribution reforms

in the states through investment support and incentives for lowering AT&C losses.

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APDRP set out to bring down AT&C losses to 15% by 2007 from an estimated level

of 45% in 2002 and restore the financial health of SEBs. However, the performance of

APDRP has fallen well short of the promise. Investment in the distribution sector

remains low and the overall AT&C loss level continues to remain high.

The APDRP, in separating entitlement based investment funding from incentive

grants, represented an improvement on the APDP. However, the continued emphasis

on minute process milestones in the investment support amounted to micro

management at the central level and detracted from ownership of reform at the state

level. The single monitorable indicator was in principle a fine idea but contained the

possibility of slipping in explicit subsidies to shore up revenues by showing reduced

losses and greater supply to unmetered sectors like agriculture. Moreover, the

emphasis on financial loss reduction meant that incentives for increasing access to

reliable power for the underserved were perverse. Overall the incentives to reform in

the power sector were inadequate. The message of a credible hard budget constraint

and no further bailouts, could not be driven home given the recent settlement of the

over dues of the SEBs to central power sector PSUs, which included a waiver of

surcharge amounts and bond issues to ensure there was no immediate cash outgo from

the SEBs/States (following the Ahluwalia Committee report).

Enter then the R-APDRP ( Restructured APDRP), a fresh initiative by the MOP in the

XI FYP. The focus was changed to actual, demonstrable performance in ATC losses

in selected towns with populations in excess of 30,000. Part A of the project in such a

town will establish firm base-line data through Customer indexing and GIS mapping,

DTR metering, SCADA and MIS. The scheme will also set up a comprehensive Asset

Map of the entire distribution system , covering poles, distribution transformers, LT

lines etc, in addition to the grounding of IT-based applications for meter reading,

billing, collection, energy accounting-verifiable by an independent agency. Part B will

involve the actual strengthening of the distribution infrastructure, 11 kV substations,

lines, HVDS, capacitors banks for VAR compensation etc. Likely resource flows in

the two parts will respectively be of the order of Rs10000 and Rs 30000 cr. As in its

precursor, funds under R-APDRP too will initially flow as DFI loans, to be

subsequently converted to grants under what is at first sight, a fairly complex formula.

( p to 50% of the project cost of Part B projects will be converted to a grant , payable

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in 5 equal tranches on achieving the 15% ATC loss target for the town for 5 yrs.

Utility level ATC loss reductions exceeding 3% per annum , for those with more than

30% baseline losses will now be incentivized ( 1.5% for those with lower baselines).

So far, Rs 4859 cr have been provided to 1344 Part A projects in 22 states. Results are

awaited.

R-APDRP has given up the incentive window created under the APDRP possibly

because it was essentially flawed and was resulting in outgo without yielding the

desired results. At another level, it needs to be seen as part of a phase in which the

emphasis on distribution reform actually waned.

2.4 The MoP focused on enhanced addition to generation capacity virtually on a stand

alone basis. The UMPPs represented one element of this strategy. The private sector

has also shown considerable appetite for cherry picking projects through captive coal

block linkage on the thermal side and by securing hydro power project allotments

from states with the relevant potential. With the economy booming, resources in states

buttressed both by the generosity of Finance Commission recommendations as well as

the buoyancy in central revenues, distribution woes were pushed into the background.

But with the full impact of the Pay Commission and other commitments eating into

state resources, the failure to take the tough decisions on distribution is beginning to

tell once again. States are falling behind on subsidy payments and distribution losses

are growing. A concomitant casualty is a deceleration in the growth of consumption,

as distribution utilities resort to load shedding rather than buying expensive power.

Electricity prices on the spot market have dropped and the days of windfall profits for

merchant power seem all but over.

2.5 A review of the status of UMPP does not present a very encouraging picture. The

only one likely to come on stream (partly) in the near future is the Mundhra UMPP of

Tata Power. Sasan handed over to Reliance Power in August 2007 is still mired in an

uncertainty about completion dates. Krishnapatnam (also with Reliance) handed over

in January, 2008, is yet to complete land acquisition. Tilaiya (also Reiance) handed

over in August, 2009, awaits forest clearance. The impression that coal resources have

been handed over without sufficient safeguards to achieve projected outcomes would

not be entirely misplaced. Under these circumstances it is difficult to share the

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optimism of the MoP regarding the pre-eminent role of the private sector in the years

to come.

2.6 It is only a matter of time before the MoP will have to face up to the fact that

private sector investment in fresh generation, the main pillar of its current capacity

addition strategy, will dry up, unless distribution reform is brought back into focus

immediately. However, given their past experience, it is important to rethink the

manner in which the intervention is designed so that the principal agency relationship

that micro management endangers and the shortcomings of focusing on loss reduction

as the key indicator, are not repeated. States have to be involved in a manner that

respects their autonomy and focuses on outcomes while leaving the roadmap of tariff

subsidy reform, encouraging open access, private sector involvement and other

measures to be tackled by them as they deem appropriate, given their specific

constraints and political economy considerations.

2.7 There are a number of other areas in which policy intervention is necessary to

expedite capacity addition in generation apart from measures to enhance the financial

viability of the distribution sector.

2.8 Environmental concerns have emerged as a major constraint to capacity addition

in the case of both thermal and hydel power projects. Thermal capacity, based on

domestic coal, is facing the problem of securing clearance for coal mining. The

concept of no go areas and the related definition are already a matter of debate. An

early consensus on policy that harmonizes the need to mine coal and post mining

stabilization is essential if power capacity is to keep pace with 8%/9% growth.

Similarly on the hydel side, the delays consequential to a new concept of basin wide

environmental studies, is likely to prove detrimental to speedy development.

2.9 Fuel linkage issues in the case of coal and gas are also in a policy limbo at present.

Captive coal block allocation by non transparent mechanisms of allotment seems to

have given up. But an alternative policy of bid based allotment is still to be

announced. Gas allocation and pricing issues seem too still await resolution for the

fuel to become a competitive source of power.

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2.10 R&R issues form an important part of many power projects. As the pressure on

land grows, project proponents are increasingly faced with legitimate local

aspirations regarding the timely and proper resettlement and rehabilitation ( R&R) of

project affected persons and families (PAPs/ PAFs). The major brunt of these

demands has so far fallen on the CPSUs and state-owned gencos, which have devised

their own, project-specific solutions. As the private sector comes into its own, it is

also beginning to come up against R&R related issues and is dealing with them on an

ad-hoc basis. The overall framework for R&R is yet to be decided at a national level.

Two laws, one on land acquisition and the other on R&R, are yet to passed and

enacted.

In the 1960s and 1970s, the typical R&R responses of CPSUs and State PSUs,

consisted of offering a job to one member of each PAF. This led to gross over-

manning and was quickly given up once efficiency and cost-cutting norms in the

public sector began to bite. For a long time thereafter, effective R&R took a back

seat and PAPs had to fall back on the land acquisition compensation, meager as they

were. These were supplemented on occasion, by scattered area development

activities, such as roads, dispensaries, schools and industrial training facilities. The

first major comprehensive re-look at CPSU-driven R&R was under the Tehri HEP,

which involved large-scale relocation of a substantial population of PAPS. Even

here, the accent was on the replacement of lost social infrastructure and on a certain

amount of up/re-skilling.

This model is no longer working. There is widespread dissatisfaction over the loss of

homes, agricultural land and avocations as well as social infrastructure. PAPs are now

ever more aware of the resource earning potential of the big power projects and quite

justifiably want a fairer redistribution of the wealth created by these big power

projects. Hence, mere social infrastructure development is no longer acceptable , nor

are promises to provide industrial training. On their part, the project proponents are

unwilling to take on their rolls large numbers of relatively unskilled personnel. As a

result, a large number of projects, particularly hydel projects, are not progressing the

way they ought to. The dissatisfaction is coming through strong and clear, sometimes

directly and at times through other related concerns like environment and forest

protection. CPSUs and private players are both affected.

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Responses have varied. The national hydro policy 2008 has a provision for an

additional 1% free power for local area development. Some states additionally secure

a percentage of the project capital cost for this purpose. CPSUs have agreed to make

this contribution for new projects. Private sector players are still resisting this

provision. It remains to be seen whether these will work. Currently, the prospects are

uncertain given the patronage based systems on which this fund is allocated. A

policy that makes the project affected into stakeholders of the project needs to be

evolved.

2.11 Ensuring an appropriate mix of thermal and renewable / less polluting sources is

necessary to meet our international commitments on carbon emission. Given the

limited possibility of solar, wind or nuclear in the medium term, hydel remains the

only real option to focus most of our efforts. This will require a focus both on the

hydel potential in India and neighbouring Bhutan and Nepal. Within India, this

requires sorting out not only the environment related issue but also creating better

incentives for the resource rich states to be pro-active. A prime area requiring

consideration in this regard is a tax on generation. Inter state issues (as in the case of

Arunachal and Assam) will have to be addressed. Solutions will have to found that

emphasize mutual benefit sharing arrangements. In Bhutan, progress is being made

through CPSU investment backed by grant funding by the GoI to make up an equity

stake for the Bhutan government. A well thought strategy has to be put in place for

accelerated development of the huge hydel potential in Nepal.

2.12 In the context of hydel development, apart from addressing any state / national

concerns of the resource rich areas, appropriate transmission arrangements are

essential. Long term planning needs to be expedited to look at evacuation on a river

basin basis instead of the current project by project approach. Appropriate funding

mechanisms to incentivize the PGCIL in this direction need to be thought out.

2.13 CPSUs, specially in the power sector are constrained from participating in a bid

process for project allotment under the present policy. They need to be freed from this

constraint, if they are to have a level playing field with the private sector in securing

project allotment.

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2.14 The RGGVY has ploughed considerable funds into connecting villages and

electrifying poor rural households. But in its present form it will not be able to address

the issue of reliable, affordable power on a sustainable basis.

2.15 Demand side management has a lot of potential. The PAT (perform, achieve,

trade) mechanism that targets a large number of major power consumers needs to be

aggressively pushed along with the Bachat Lamp Yojana (use CFL). These efforts

largely relate to energy use reduction by taking advantage of technology.

Expeditious and widespread introduction of time of day tariffs has tremendous scope

to boost DSM. A related policy initiative with tremendous externalities in terms of

productivity gains, is the division of this country into at least two time zones.

According to TERI, this could leads to gains of 5%.

2.16 A very interesting, recent development relates to the growing realisation of the

use of power from the CSGSs as a possible policy tool.

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SECTION III

SWOT Analysis

Strengths

Statutory framework in place

Regulatory framework in place

National transmission grid

created

Growing private sector

participation

Strong CPSU performance

UMPP

Specific transfer instruments

to incentivize states exist (R-

APDRP and RGGVY)

Weaknesses

Lack of clear focus and failure to prioritize

Negligible forward movement on

distribution reforms

Ministry yet to reclaim position as key

reforms driver

Failure to focus on key objectives and

learn from the past while formulating

specific transfer schemes

Over-emphasis on CPSU management and

monitoring of project implementation

Opportunities

Growing awareness of the

threats posed to inclusive and

rapid growth by the

shortcomings of the energy

sector

Possible catalysing of centre-

state cooperation through

enhanced consultations and

redesigned interventions

Threats

Inability to take the lead and move ahead

on distribution reforms

Curbs on regulatory freedom

Being unable to evolve time-bound

mechanisms for E&F clearances

Uncertainties over fuel l inkages

R&R issues

Capital equipment shortages

Skill shortages

Continuation of poorly designed specific

transfer schemes- R-APDRP and RGGVY

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SECTION IV

Outline of the Strategy:

4.1 The core elements of this strategy are:

locate distribution and distribution reforms at the core of GoIs initiatives in

the power sector

recognize that the ability of markets to influence investment in the sector is

critically dependent on the health of the revenue generating end of the value

chain

enable MOP to reclaim the role of the key driver of reforms

redesign R-APDRP, RGGVY and use CSGS power to incentivize reform

accelerate capacity addition by addressing factors that constrain project

clearance and implementation including fuel tie ups, environment, R&R, inter

state issues, etc. and

promote DSM measures

4.2 Stemming from the assessment detailed above, the most important component of

the strategy advocated for MoP relates to the issue of central facilitation to improve

the financial viability of the distribution sector. Given that this is primarily state

responsibility, the centre should take action on the following fronts:

a) Try and create a political consensus on further action in this direction in the

national interest.

b) Redesign the R-APDRP and RGGVY to reward desired outputs instead of

focusing on inputs to secure these outputs. In this regard, these schemes must

better conform to appropriate design principles for specific transfers.

c) Creatively use other instruments like shares in CSGS to incentivise reforms

d) Institutionalize appropriate centre: state and inter state fora in the power sector

like the Empowered Committee of Finance Ministers and NEWRA.

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4.3 Any scheme of inter-government transfers should be seen as fair and transparent,

conform to the requirement of a hard budget constraint and minimise creation of any

moral hazard. In general, to ensure adherence to these precepts, the following cautions

are advocated.

i) Conditional or specific purpose grants should not attempt to tackle a large

number of areas. They should be a last resort to meet objectives unlikely to

be taken up by sub-national governments due to the presence of

externalities or because of paucity of resources that cannot be mitigated

through normal transfers.

ii) Allocation criteria whether formula driven or competitive or a combination

of both should be transparent and not amenable to manipulation. Dilution

of these requirements in formulation or implementation can render them

ineffectual in securing performance or reduce them to vehicles for

dispensing patronage. Formula driven transfers are most likely to meet the

requirements of transparency and a hard budget constraint. However,

where objectives require that appropriate proposals for funding should be

received in a competitive mould, it is essential that both criteria as well as

systems of evaluating proposals meet the conditions of transparency and

fairness. In the absence of these requisites, formula based transfers may be

preferable.

iii) The design of conditional grants should keep in view capacity to monitor

and manage at the central level. Objectives should be clearly spelt out, be

capable of being monitored and non-performance should invite the

possibility of sanctions. In the absence of these features in the design, even

conditional transfers based on transparent formula can become rights,

which sub national units are entitled to regardless of attached conditions

rendering issues of performance secondary and linking drawals to

expenditure alone.

iv) Specific purpose grants must contain sunset clauses to create effective

incentives for performance. In their absence, there is a clear incentive to

under perform in order to obtain a larger amount over time.

Distribution reform to actualise potential energy demand at a faster pace is critical for

the growth of the economy and fits the criteria of a goal with significant spillovers.

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The key issue is a design that ensures adherence to the other design principles

outlined above. Hence the stress on the designing of the specific transfer mechanism.

4.5 It is proposed that the R-APDRP be redesigned to have two components. One

component will support information data bases and infrastructure as a viability gap

funding for projects that receive bank /FI funding. This component should have a

corpus funding of Rs 30,000 crore in the 12th

Plan. It is prposed that each specific

projects shape and size, including the components to be funded, should move out of

the realm of the MoP and the institutions under its control. The states will pose

projects at their level to FIs and Banks which will be evaluated by the funding agency

and after due diligence will be sanctioned loans by them. MoP contribution will have

a normative allocation for each state (based on size/ population) which the states will

be able to draw upon to the extent of 20% of the project cost.

The second component would seek to reward increased energy consumption. This

criterion shall be an audited figure of increase in metered energy sale for which

revenue has actually been collected. Supply of energy that is not metered or supplied

free will be excluded. Demand side subsidy for metered supply would automatically

be included but supply side subsidy transfers from state governments would stand

excluded.

The logic of this formulation is that the states are free to take any action they choose

to improve distribution and for the country as a whole the positive externalities lie in

increased use of energy that propels growth and this should be the key indicator on

which the specific transfer should hinge. The requirement for metered supply alone

being considered in the criterion arises from the difficulty that non metered supply

poses for accurate measurement and the possibility of including figures that do not

actually represent increased energy off take but merely a juggling of T&D losses. The

condition that only units that yield actual revenue will be included in this criterion is

to ensure that distribution business focuses on its core business of selling energy and

sees receipts from the sale of energy as their main source of revenue. This

automatically creates an incentive for reducing AT&C losses and reducing supply

side subsidies for free supply. The incentive under this component needs to factor in

both high achievement in percentage terms as well as an increase in absolute number

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of units. The exact formula should be finalized after consultation with the states. It is

felt that the corpus for this purpose in the 12th

Plan period should Rs 50,0000 crore. A

proposed formulation is at Annexure A.

4.5 A revamp of the RGGVY will be affected to ensure a clear focus on reliable

access to rural areas. The current infrastructure support under RGGVY will ensure

access in terms of connectivity to households but actual supply of regular and reliable

power to areas where cost to serve is far higher that the revenues likely to be realized

may not occur. RGGVY needs to be redesigned so that it focuses on increased

consumption in rural areas. It should reward a subset of the overall criterion used

under the incentive component under the R-APDRP. This subset will be the metered

energy sale for which revenue is actually collected in rural areas. The possibility of a

direct subsidy to the poor for a lifeline consumption amount using smart cards should

be incentivized under RGGVY. A proposed formulation is at Annexure A.

4.6 R&R issues will need clear and focussed attention. It is another core component of

our strategy. As set out in the assessment section, our case is that the existing systems

will not work. Only a mechanism that specifically links the project revenues with the

direct monetary well-being of the PAFs will work. To elaborate, we propose that each

PAF be provided with a bank account into which a certain proportion of the project

revenues are automatically credited in accordance with a pre-determined and mutually

agreed formula, over the full earning life-time of the project. Consider, for example a

1000 MW hydel project that affects 10000 PAFs. These are reasonable numbers and

quite feasible in remote areas with low population densities of about one person to an

acre. Operating on an annual 30% load factor and assuming an average sale price of

Rs 3.5 per unit ( KWHr), the project could earn revenues of close to Rs 900 cr every

year. Further, if we assume that all the 10000 PAFs are BPL, that is they have annual

household incomes of Rs 25000 or thereabouts and that the project ought to make

them twice as well-off , that is they should get an additional income of Rs 25000 each

year, then a mere 2.5% of the annual project revenue would suffice. This could set the

minimum. The benefits could be scaled up depending upon the local circumstances.

What then, are the advantages? First, the flows will be direct. There will be none of

the usual leakages associated with government expenditure. The PAFs will directly

identify with the continued well-being of the project. The present uncertainty that the

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project proponents face will be addressed and streamlined to large extent. With

project after project running into intractable R&R problems, there is a good case to

revisit the existing systems and try out the direct benefit approach in a few cases. It is

understood that some states are already working a very similar ideas with their private

sector partners. It is welcome development and should spur on the CPSUs.

4.7 A creative and purposeful use of power from the CSGSs should be a key

component of the strategy. The MOP has the power to allocate shares in CSGSs.

True, there are serious moves by resource rich states to seek a higher share as home

state share, but even so, the MOP will still retain a lot of clout through what is called

the unallocated share which is about 15% of the total capacity. It is our case that

this instrument be used to drive reforms and not used to dispense patronage.

4.8 The MoP should be pro active in activating inter ministerial forum for resolving

fuel linkage and environmental issues.

4.9 It must also activate the forum on hydel power (the Task force) to address issues

like the generation tax and inter state issues (as in the case of Arunachal and Assam).

Solutions should be proposed that emphasize mutual benefit sharing arrangements.

An option paper to take forward accelerated development of the huge hydel potential

in Nepal should be formulated for discussion with the relevant ministries. All these

steps are required to ensure that the thermal: hydel mix issue is not lost sight of.

4.10 The BEE should have a big role. The PAT mechanism should be fully supported

and augmented. Other DSM measures, like TOD (time of the day) tariffs should also

be suitably incentivised. The whole issue of power savings through the creation of at

least two time zones ought to be seriously explored without getting into extraneous

issues as was done in the past.

SECTION V

Implementation Plan

5.1 MoP should not be bogged down in tracking individual power projects. It should

be concerned with seeing through the policy changes that impact the overall vision for

the sector. It can at best monitor fuel linkages and statutory clearances to see if there

are other policy issues that need addressing that have not been foreseen.

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Time Lines for Key Activities

1. Finalize date for Conference of State Chief Ministers on Agenda and

Action Plan for Power Sector Reform to be addressed by Prime

Minister (preferably in May 2011)

2. Preparation of Draft Consultation Paper for Conference of State Chief

Ministers and dissemination to states (April 2011). This consultation

paper will discuss all the measures outlined in the strategy above.

Specifically it will include proposals for setting up a permanent

institutional mechanism to support the State Power Ministers

Committee (on the lines of the Empowered Committee of State

Finance Minister on GST) to evolve consensus on reform measures to

further the development of an unhindered power market in the country

that signals the right incentives for investment in generation,

transmission and distribution. It will seek views on the proposed

changes in central schemes like R-APDRP and RGGVY, on the

proposed framework for enhancing transmission arrangements, R&R

policy, introduction of more than one time zone in the country, etc.

3. Finalize Revised R-ADPRP and RGGVY for implementation in the

12th

Plan by December, 2011 including EFC clearance and Cabinet

approval.

4. Set up Inter Ministerial Co-ordination Committees with Environment,

Coal, Water Resources and New and Renewable Energy with

participation of Planning Commission with clear ToRs to consider all

issues related to clearances, fuel linkages, etc. (by April, 2011).

5. Setting up of NEWRA and holding initial meeting. (by June, 2011).

6. Policy for generation CPSUs to be able to bid for projects to be

finalized by April, 2011.

5.2 For MoP, the key focus should be to place distribution reform at the core of its

agenda for securing a growth oriented, efficient power sector. It should, on the one

hand catalyse a serious and regular consultation between centre and states on the

issues related to improving distribution as the key driver for the sector. Appropriate

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consultation mechanism needs to be set up. It should reframe schemes to focus on the

desired output rather than on processes that may constitute distribution reform. MoP

needs to set up mechanisms at GoI level to ensure that fuel linkage and statutory

clearance issues are adequately addressed.

Over the years, the MoP has ceded ground on the reform issue. It was active till the

early years of the first decade of the 21st

century. It needs to reclaim this position.

Failure to do so means that Business As Usual will prevail. We will continue to make

sporadic efforts at spurring investment at increasingly higher cost without tackling the

core issue of the sector and will soon arrive at a situation very similar to what

prevailed before the securitisation exercise undertaken based on MSA report, with the

notable difference that the losses this time around, could well be higher by a couple of

orders of magnitude.

SECTION VI

Linkages with RFD

6.1 The present approach differs considerably from that set out by the MOP in its

RFD document.

The first difference is the emphasis on the efficiency aspect in the vision statement.

The MOP sets its vision as Reliable, adequate and quality power for all at reasonable

prices. This paper states Create an efficient and vibrant power sector geared to the

needs of an inclusive and rapidly growing economy.

According to the present approach, inefficiency in the sector is the root cause of all

the problems and it would not be possible to achieve reliability, adequacy, quality at

any price, unless the root cause is faced and addressed.

6.2 The efficiency aspect also leads to differences with the MOPs mission statement,

which says Ministry of Power seeks to achieve its vision by providing necessary

support and enabling policy framework for integrated development of power

infrastructure in the country to meet the requirements of the growing economy and to

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meet the requirements and aspirations of the people for quality power particularly of

poor households in rural areas. The proposed approach states Position itself as the

key reform driver and ensure that market forces are able to optimise efficient

generation, transmission and distribution arrangements and areas of market failure are

addressed through appropriate policy and financial interventions based on a

constructive engagement with the state governments and other stakeholders

The emphasis is on enabling, not doing, on allowing market forces to play out and on

addressing market failures jointly with the other, very major set of stakeholders.

6.3 Consequent to the difference in vision and mission, the objectives also reflect a

difference with the present approach emphasizing policy changes and securing

consensus and movement in this direction instead of project related implementation.

6.4 Our critique is that the MOP is over-focussed on generation without adequate

focus on the constraints that actually impact on investment for capacity addition. It is

borne out from the weighting system. As much as 37% weight has been assigned to

power supply augmentation, with 22% accorded to capacity addition and additional

generation. ATC loss reduction has been assigned 15% weight and there are no

milestones showing enhanced engagement with the states and other stakeholders. The

excessive focus on physical targets also bears out the second critique that the MOP is

driven by its PSUs and does not drive the reform agenda in the power sector as a

whole.

6.5 The RFD document appears to be overly reliant on specific deliverables that

depend on action by other ministries and agencies. In case these are not forthcoming,

then the output with its undue reliance on physical achievement will suffer. In a sense

the MoP is washing its hands of what should concern it most- creating the conditions

for the rapid growth of an efficient power sector. The RFD in line with this overall

approach, refrains from claiming ownership and leadership of the reform process. On

the contrary, there is talk of constitutional limits to reform.

SECTION VII

Cross Departmental and Cross Functional Issues

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7.1 The Ministry has to address a number of cross-departmental issues requiring

intensive consultations and as and when required, consensus building. These include,

provision of assured fuel linkages ( with the Ministries of Coal, Petroleum

and Natural Gas) ,

facilitating statutory clearances at the apex level under the Environment

Protection Act (EPA) and the Forest Conservation Act (FCA) ( with the

Ministry of Environment and Forests ),

Ensuring smooth transport of coal from pitheads ( with the Railways) as well

as from the ports ( with the Railways and Shipping Ministries)

coordinating renewables development ( with the Ministry of New andRenewable Energy),

ensuring full industry cooperation in matters related to energy conservation (

with the Department of Industrial Policy and Promotion),

expeditious supply of main plant equipment and Balance of Plant material,

erection and commissioning of projects being executed by BHEL, its

subsidiaries and by other domestic manufacturers ( with the Department of

Heavy Industries)

promoting hydro development ( with the Ministry of Water Resources and the

Ministry of External Affairs- particularly for matters pertaining to Bhutan and

Nepal) and

promoting regional cooperation in power-sharing ( with the Ministry of

External Affairs)

7.2 The Ministry also has to deal with issues that lie in the domain of state

governments, state regulators, domestic manufacturers, suppliers, EPC contractors

and industry bodies. Regarding R&R, the Ministry often has to intervene with the

states on behalf of CPSUs and sometimes on the behalf of other promoters, in order to

draw up an acceptable benefits package. It has to frequently tie up issues related to

land acquisition with the state governments. States have had to be persuaded to buy-in

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on power purchase obligations arising out of the needs of Indian foreign policy. There

have been a number of occasions when the Ministry has had to reach out to the states

to ensure expeditious submission of proposals for statutory clearances under the EPA

and the FCA. Then there are issues related to greater coordination with domestic

manufacturers, suppliers, EPC contractors and industry bodies in the transmission and

distribution sector.

7.3 There are existing institutional mechanisms to deal with many of these cross-

departmental and cross-functional issues.

There is a standing mechanism under which the MOP recommends fuel linkages for

specific power projects to the Ministries of Coal and Petroleum and Natural Gas. The

Cabinet Secretary has a standing, inter-ministerial consultative mechanism to ensure

uninterrupted coal movement. Structured meetings are held with the manufacturers

under the aegis of the Department of Heavy Industry.

7.4 Issues related to the clearances under the EPA and FCA, are not subject to

institutionalized resolution mechanisms. True, there are problems of trying to resolve

purely statutory issues through committees, but information needs necessary to

expedite and facilitate proper and timely decision-making calls for a small, compact,

inter-ministerial professional body that would be responsible for harmonizing the

legal requirements with project-specific constraints.

7.5 The same would apply to the question of fuel linkages, where the development of

coal blocks has come up against a fresh set of rules and guidelines governing forests,

tribal rights and environment. As of now, the interventions are ad-hoc and dependent

on the urgency of a particular situation. This will have to be institutionalised and

embedded formally within the decision-making process, if required , through an

EGOM.

7.6 Inter-state cooperation in hydro-power development has been traditionallycatalysed by the MOP. This role will expand as we seek to develop the hitherto

untapped hydel resources in the north-eastern region. The PM had foreseen the need

for an integrated approach, particularly in the Brahmaputra Basin and mooted the

concept of a North-eastern Water Resources Authority ( NEWRA) on the lines of the

DVC in 2004. The idea did not fructify because the upper riparian, Arunachal

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Pradesh, was slow to appreciate the need to alleviate the genuine concerns of the

lower riparian, Assam, regarding flood control, minimum, ecologically sustainable

flows, involuntary displacement and loss of livelihood, Had matters been handled in a

spirit if cooperation, it would not have been difficult to craft a win-win situation

through an agreed apportionment of project benefits. Instead, the situation was

allowed to drift and now further project development in the entire region is in danger

of being derailed. Mercifully, it may not be too late. The MOP will need to own and

re-activate this idea and thereafter be pro-active in devising a meaningful consensus.

7.7 The role of the Ministry with regard to land acquisition (LA) and resettlement and

rehabilitation (R&R) could undergo a major change after the enactment of the

pending bills on these subjects. As of now, it has to work within the existing

framework. R&R and LA are closely linked and the approach suggested in section IV

above could be profitably explored.

SECTION VIII

Monitoring and Review Arrangements

There will be two sets of monitoring and review arrangements to ensure that the time

lines laid out in the implementation plan are adhered to. The first level is internal to

the MoP and will comprise of a monthly review at the level of the Secretary and

quarterly by the Minister. The second level will be an external review at the level of

the Cabinet.

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Annexure A

Formulation for Incentive under R-APDRP

Total electricity available in the country = estimated at 600 bu

T&D loss allowance 15% = 90 bu

Minimum metered realization of consumption 70% of 510 bu= 360 bu approx.

Incentive on each %age improvement on above

0.25 p per unit for first 5% (70.01% to 75%) outgo on overall figures

=Rs 450 cr

0.50 p per unit for next 5% (75.01% to 80%) =Rs 900 cr

0.75 p per unit for next 5% (80.01% to 85%) = Rs 1350 cr

1.00 r per unit for next 5% (85.01% to 90%) = Rs 1800 cr

1.25 r per unit for next 5% (90.01% to 95%) =Rs 2250 cr

1.50 r per unit for next 5% (95.01% to 100%) =Rs 2700 cr

Estimated outgo well within Rs 60,000 cr allocation assumed for 12th Plan

Base year 2009-10 and improvement in 2010-2011 to be rewarded in 2012-13

Assume 1% improvement in T&D loss each year and 2% improvement in

metered supply in each year thereafter for working out minimum qualifying

amount for incentive payment.

Formulation for Incentive under RGGVY

Total electricity sold in rural area of the state in base year = x Minimum metered realization of consumption = 40% of x

Incentive on each %age improvement on above

0.25 p per unit for first 10% (40.01% to 50%)

0.50 p per unit for next 10% (50.01% to 60%)

0.75 p per unit for next 10% (60.01% to 70%)

1.00 r per unit for next 10% (70.01% to 80%)

1.25 r per unit for next 10% (80.01% to 90%)

1.50 r per unit for next 10% (90.01% to 100%)

Base year 2009-10 and improvement in 2010-2011 to be rewarded in 2012-13

Assume 2% improvement in metered supply in each year thereafter for

working out minimum qualifying amount for incentive payment.

States can move to smart card based demand side funding of BPL

beneficiaries to boost consumption and secure a higher incentive.