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Power distribution reforms in Andhra Pradesh
October 2009
Power distribution reforms in Andhra Pradesh
Introduction
The Andhra Pradesh State Electricity Board
(APSEB) was formed on 01 April 1959. Until its
unbundling in February 1999, APSEB was
responsible for electricity generation,
transmission, distribution and supply in the
state. It functioned under the overall guidance
of the state government, interacting with the
central power agencies for planning and co-
ordination.
APSEB enjoyed a good reputation amongst the
other utilities in India. The Plant Load Factor
(PLF) of APSEB owned generation stations was
83.2% in 2000, much higher than the national
average of 67%. Vijayawada Thermal Power
Station (VTPS) received the productivity award
in 2000 (PLF of 86.9%) and Rayalseema Thermal
Power Plant (RTPP) received the incentive
award. Other aspects of good performance
include fast erection of power stations, and low
employee/consumer ratio1. APSEB was third
largest SEB in terms of units of power sold, next
only to Maharashtra and Gujarat2.
Imperative for reforms in the state
Though APSEB’s performance on generation
side was far better compared to other State
Electricity Boards but performance on
distribution and financial aspects was poor1. By
the late nineties the state was facing both
energy and peak shortages and the quality of
power supply had deteriorated; the power
utility’s financial losses had grown to Rs 39
billion and new investments were not
financeable. The power subsidies had increased
to 1.6 percent of the Gross State Domestic
Product (GSDP) while on the other hand the
combined public expenditure on health and
education had declined from 4.7 percent of
GSDP in FY1987 to 3.6 percent of GSDP in
FY19983. The gap between average cost of
supply (ACS) and average revenue realized
(ARR) grew from 4.2 paise/kwh in 1990-91 to
138.8 paise/kwh in 1999-20002.
Power sector reforms became imminent as in
their absence the need for subsidies from the
government’s budget would have continued to
grow and crowd out social sector investments.
Figure 1: Cost of Power supply, Average tariff and Gap
Power distribution reforms in Andhra Pradesh
:
Box 1: APSEB’s Performance Review
Power Deficit: The power shortage faced by the state kept on increasing despite significant
growth witnessed in power generation in Andhra Pradesh. The total power deficit increased
from 6.7% in 1991-92 to 8.5% in 2001-02. During the same period, peak power deficit saw an
increase from 15.8% to 19.9%2.
Transmission and distribution losses (T&D losses): Inadequate infrastructure, low investments in
new infrastructure and improper O&M of the network led to an increase in T&D losses reported
by APSEB. T&D losses as a percentage of availability increased from 19.2% in 1992-93 to 35.2% in
1999-20002.
Gap in cost and revenue realized: The gap between cost of power supply and the average tariff
realized from the customers denotes the margin for a power distribution business. This gap grew
from 4.2 paise /KWh in 1990-91 to 138.8 paise/KWh in 1999-20002.
Increasing losses and subsidy: Increasing T&D losses combined with large gap in cost of supply
and revenue realized led to deterioration in financial health of APSEB. Commercial losses
without subsidy increased from Rs 4 crores in 1992-93 to Rs 3117 crores in 1999-2000. Subsidy
received from State Government increased during the same period from 0 to Rs 3064 crores2.
Power distribution reforms in Andhra Pradesh
The deteriorating situation on the power front
in Andhra Pradesh was caused by a number of
reasons. Some of the main reasons leading to
such a situation are:
Changing Hydro-Thermal Energy Mix: In
Andhra Pradesh installed capacity of hydel
power used to be more than thermal power
historically. In 1960-61 while hydel power
accounted for 58.2%, thermal power
accounted for 41.8% of the installed capacity.
Over time this mix has changed in favor of
thermal power. In 1990-91 the proportion of
installed capacity constituted 50.1% hydel
power and 48% thermal power, which further
changed to 36.5% for hydel power and 42.9%
for thermal power by 1997-98. The remaining
power capacity in 1997-98 was in gas
projects1. As the proportion of cheaper hydel
power declined over time and the proportion
of costly thermal power increased, the
average unit cost of power increased. With
increasing average cost of power supply the
gap in ACS and ARR increased which led to
deterioration in financial health of APSEB
Change in Load Mix: There was a huge
disparity between agricultural and industrial
tariffs over the years. This did put pressure on
the industrial sector leading to stagnation in
industrial consumption. Slowly industry
moved towards cheaper captive generation.
Share of industry in sale of power declined
from 35% in 1993-94 to 24% in 1999-2000
while the share of agriculture remained
unchanged at around 40% during the same
tenure. The average tariff charged from
industry and agriculture during 1999-2000
was 394.9 paise/kwh and 15.35 paise/kwh
respectively2.
Reforms undertaken
In the background of the deteriorating situation
on the power front and the new initiatives by
the Government of India to attract private
investment, the then State Government of
Andhra Pradesh contemplated to restructure
the power sector. Reforms in power sector
were brought about in multiple steps.
Hiten Bhaya Committee
State government of Andhra Pradesh
constituted a high level committee under the
chairmanship of Hiten Bhaya, a former
chairman of the Central Electricity Authority, to
suggest reforms to be introduced in the power
sector. This committee was constituted in
January 1995 and submitted its report in June
1995. The important proposals made by the
Hiten Bhaya committee were:
To fix a tariff structure which covers
production costs
To restructure APSEB on a functional basis to
promote efficiency and functional
specialization by unbundling the APSEB.
Constituting separate companies for each
function (namely generation, transmission
and distribution) and putting them in the
hands of different companies was suggested
To keep the companies thus formed as
subsidiaries of APSEB
To run the companies on commercial lines
To retain the Board as a holding company in
charge of long-term sector planning,
supervision and co-ordination of the
subsidiaries
Government to retain monitoring of reform
implementation and provision of policy
advisory
Power distribution reforms in Andhra Pradesh
To set up a regulatory commission to fix tariff
structure and to keep licensing powers with
the state government
The Committee did not recommend outright
privatization of public utilities and cautioned
that substitution of private monopoly in the
place of public monopoly would only make
the situation worse. The Committee felt that
privatization initiative should start initially
with management contracts in the
distribution business.
World Bank & the AP Power Sector
Restructuring Program
After Chandrababu Naidu became the Chief
Minister in September 1995, the Government of
Andhra Pradesh (GoAP) approached the World
Bank for a structural adjustment loan to tide
over the fiscal crisis that engulfed the state
Government. In response, the World Bank
brought out a comprehensive report ‘A.P-
Agenda for Economic Reforms’, in January 1997,
outlining its approach to reforms including
power sector.
Bank suggested comprehensive reforms in the
power sector going beyond the
recommendations of the Hiten Bhayya
Committee. Some important components of the
reforms proposed by the World Bank are:
Defining a structure for the sector consistent
with privatization of distribution and private
sector development in generation
Corporatizing the power utilities and ensuring
that they operate without Governments’
interference.
Creating an independent and transparent
regulatory system for the sector with broad
range of responsibilities including granting of
licenses and enforcing them
Table 1: Steps taken for Power sector reforms in Andhra Pradesh
1995 June Hiten Bhaya Committee Report
1996 September World Bank’s Agenda for Economic Reforms in Andhra Pradesh
1997 March AP State Government’s Policy Statement on Power Sector Reforms
1998 April Passing of AP Electricity Reforms Bill in the State Legislative Assembly
1999 January World Bank’s PAD on AP Power sector Reforms Programme (APPSRP)
1999 February AP Electricity Reforms Act 1998 comes into force
1999 February APSEB unbundled into APGENCO and APTRANSCO
1999 April AP Electricity Regulatory Commission starts functioning
2000 March APTRANSCO further unbundled into APTRANSCO and four DISCOMs
2002 April Financial autonomy to DISCOMs
2002 August Employee division (option process) among APGENCO, APTRANSCO and DISCOMs on permanent basis
2003 June Enactment of Electricity Act, 2003.
2003 August Suspension of the World Bank loan after the first stage itself quoting high interest rate and unacceptable conditions.
2004 May Change in Government and the announcement of free power to the agricultural sector.
Power distribution reforms in Andhra Pradesh
Enacting comprehensive reform legislation to
establish the new regulatory framework and
implement the restructuring measures.
Increasing the tariff rate to agriculture to at
least 50 paise/kWh in the near term and
continuing to adjust tariffs to cover costs and
reduce cross subsidies.
The Bank’s approach was driven by the idea of
changing the ownership from public to private
in a span of 8-10 years. The AP Power Sector
Restructuring Programme (APPSRP) was to be
implemented over a 10-year period, starting
from February 1999. The Adaptable Programme
Loan (APL) scheme was planned in five stages,
APL-1 to APL-5. The total loan amount was
US$4460 million with the World Bank
contributing 22% of the amount. The other
international lending agencies included
Department for International Development
(DFID) and Overseas Economic Cooperation
Fund (OECF). The Indian agencies included the
government of Andhra Pradesh, the Power
Finance Corporation and the Rural
Electrification Corporation. This loan had
several pre-conditions which were to be
satisfied so that the utility becomes eligible for
the next stage loan. These conditions included
privatization of distribution and generation,
average annual tariff hikes, implementing cost
based tariff and reducing government subsidy
to zero.
Reforms undertaken by AP Government
Within six months of the World Bank
recommendations, on 14th June 1997, The
GoAP released a power sector policy statement
indicating proposed policy and structural
changes in the power sector. In order to give a
concrete shape to this policy, the GoAP enacted
Electricity Reforms Act of 1998. The Reform Bill
was introduced in the legislative assembly on
April 27, 1998 and was passed on April 28th. It
was notified on 29th October 1998 and made
effective from February 1999.
Figure 2: Power sector: Structure pre and post reforms
Power distribution reforms in Andhra Pradesh
The APSEB was unbundled into APGENCO and
APTRANSCO in February 1999. The Electricity
Reform Act provided for the constitution of
Andhra Pradesh Electricity Regulatory
Commission (APERC). In April 2000, the
APTRANSCO was further unbundled into a
transmission company and four distributions
companies (DISCOMs) managing distribution in
four zones of the State, Central, Eastern,
Northern and Southern. State Government
signed a MOU with the Ministry of Power,
Government of India on reform and
restructuring which had the road map for
reform, plans for tariff rationalization, metering
and maintaining grid discipline. As part of the
distribution sector reforms, the four DISCOMs
were issued independent licenses for
distributions in April 2001.
Andhra Pradesh started power sector reforms
much earlier than most of other states in the
country. However, pace of reforms in AP slowed
down by year 2004. The signs of slowdown in
reforms were visible in suspension of the World
Bank loan after stage-I itself and no attempt to
privatize distribution. The reasons identified for
this slowdown were opposition to the reform
agenda, failure of the World Bank led reform
process in Orissa and the national level re-
thinking on the World Bank led reforms. In May
2004, the Congress government came to power
in AP by replacing Chandrababu Naidu’s TDP. It
announced free power to agriculture and
promised to review the reforms including
power purchase agreements (PPAs) with private
generators.
Initiatives taken during reform process
Power distribution sector reforms in Andhra
Pradesh were concentrated on reducing losses
and improving commercial viability through
improved infrastructure, better auditing and
usage of IT systems. The initiatives taken during
the reform process are:
Theft control: Government of Andhra Pradesh
(GoAP) enacted an anti-theft legislation in July
2000. It provided stringent penalties for theft
of electricity, including mandatory
imprisonment to the offenders. The
legislation enabled constitution of special
tribunals and courts for speedy trial and
recognized collusion of the utility staff a
punishable offense. The enforcement efforts
made by both government and distribution
companies has shown positive results in
controlling theft. According to a report by
World Bank, about 5 million services have
been inspected out of 12 million metered
services. About 150,000 theft cases were
registered during FY2000-03 compared to
9,200 cases during FY1998-2000. Also 4100
consumer and about 50 employees were
arrested3.
The success of the theft control initiatives was
built on proactive measures taken, including:
o Communicating about the objective, intent
and the enforcement of the new act to the
stakeholders
o Regularization drive was launched to
provide one time opportunity to the
unauthorized consumers to register as legal
customer. About 2 million3 residential
consumers were regularized in the
regularization drive
o Implementing institutional, management
and administrative changes in the power
distribution companies to ensure effective
enforcement of the Act
o To provide implementation support legal
support system geared up
Power distribution reforms in Andhra Pradesh
o The vigilance department has been
strengthened with appointment of the
Inspector General of the Police as the joint
managing director in the company
o The organizational structure was modified
to strengthen coordination between various
departments like operations/technical
department, commercial departments and
vigilance department
o Special police stations were set up to deal
with the electricity theft cases
Initially statewide inspections and revenue
collections drive were launched targeting
large industrial and commercial consumers,
which was gradually extended in the rural
areas. This was supported by a
comprehensive program of consumer
metering and energy audit. Discoms have
developed specialized IT based tools for
institutionalization of theft control and
monitoring measures. These efforts of theft
control, led to improvements in billing and
collection by the utilities.
Energy audit and metering: To measure
power transacted at various levels and
determine reliable extent of transmission and
distribution losses in the system, new
metering drive was launched. High quality
meters were installed on the interface points
between the power sector companies. The 11
kV feeders were metered and data loggers
were installed to monitor the supply of
electricity to agriculture consumers. For
realistic estimation of agriculture
consumption about 30,000 distribution
transformers (out of 190,000 DTRs) supplying
power to predominantly agriculture
consumers was metered3.
Program to improve the consumer metering
system was also started by distribution
companies. For high value customers, the
existing meters were replaced with high
accuracy electronic meters.
Consumer Analysis Tool (CATs): CATs is a
customer database used to analyze customer
information in order to identify trends in
metering, billing, and collections. Key feature
of the CATs is to risk profile customers to
enable the management to design strategies
for efficiency improvements targeted to
specific customer group. The customers are
grouped into different categories based on
their payment history– a matrix of proportion
of bill paid and number of defaults in twelve-
month payment track record.
CATs addresses needs of number of
departments including operations, vigilance,
regulatory affairs departments. It acts as an
effective monitoring tool and helps in
exercising control. The results are reflected in
improving billing and collection efficiency.
Monitoring and Tracking System (MATs):
MATS has been designed as a tool to assist
the process of monitoring and tracking of the
progress of various cases of irregularities, like
theft, malpractice, back-billing etc. The
objectives of the system are to:
o Streamline the regularization system by
reducing the effort and time required to
inspect and follow-up on irregularities
o Enable process automation to reduce high
documentation requirements and loss of
records
o Enable a performance based monitoring
system for tracking and taking action on
irregularities. MATs is based on a workflow
process where each completed document is
automatically sent to the appropriate
reviewing officer based on the defined
Power distribution reforms in Andhra Pradesh
process. Training is given to all officers on
the usage of the system to enable them to
fulfill their role.
o The system also enables performance
review of the employees by tracking the
period of time each case is kept pending at
each level.
o The system is highly role-based with each
officer only being able to track as well as
take action on cases that lie within his/her
jurisdiction.
Investment in infrastructure: The distribution
infrastructure was modernized to bring down
the technical losses and improve the
performance of the system. Under the first
power sector restructuring loan under the
adaptable loan program of the World Bank
(APL1), funds were provided for financing
high priority investments in T&D System. Till
2006 a total of Rs 6652 crores were spent on
improving the distribution system8. These
funds were utilized for installing new meters,
replacing or repairing of old meters,
installation of new transformers and up
grading the distribution lines. Yearly capital
expenditure of various discoms is shown in
table below:
Transformer Information Management
System (TIMs): TIMs enables effective
tracking of the distribution transformers as
well as the associated structures through-out
their life cycle and analyze the information to
o Improve asset tracking, utilization and
maintenance
o Improve customer service through
deployment of transformers and exception
handling (in case of failures
o Enable greater visibility leading to improved
decision making.
Discoms benefits financially by reducing
inventory carrying costs. Operationally it
helps to reduce transformer down time and
evaluating vendor performance. It enables
these through various reports which indicate
data like:
o Availability of stocks of DTRs in stores
o Locations with maximum transformer
failures
o Identification of transformers and
structures which show frequent failure
o Time required to repair transformers at
each repairing location
Book Consolidation Module (BCM): BCM is a
tool aimed to reduce the time taken and the
manual intervention involved in the
consolidation of accounts from the circle
level. The tool generates balance sheet and
profit/loss for the discoms after consolidation
of all accounting units. In addition to
consolidation, the tool also provides for
various variance reports
o Budgeted versus actual comparisons:
These reports compare monthly variance
between budgeted and actual income or
expenses from various account codes
o Comparative statements: These reports
compare income/expense for current
month with the previous month or the
Power distribution reforms in Andhra Pradesh
previous year to calculate appropriate
variances.
Outcome of reforms and initiatives
Reform process in Andhra Pradesh was started
under the guidance of World Bank. However
their loan was suspended after first tranche and
regime also changed in AP. The new regime
changed the course of reform process which
was also reflected in a number of parameters
used to assess the distribution sector. Some of
these parameters are discussed below:
Aggregate technical and Commercial Losses
(AT&C): AT&C losses in AP have decreased
from 27% in 2002-03 to 16% in 2007-08. Such
a decrease is attributable to the focus of
reforms on reducing losses through better
auditing and investment in infrastructure.
However AT&C losses have not reduced much
since 2005-06.
The performance of the discoms is shown in
table below. While eastern and northern
region discoms have reported low losses
significantly, AT&C losses reported by central
and southern region discoms are still high.
Also post 2004-05 loss reduction has not been
significant.
Collection Efficiency: The collection efficiency
in Andhra Pradesh has been above 90% post
reforms. High collection efficiency has been
possible due to energy auditing & metering
drive and implementation of tools like MATs,
CATS.
Collection efficiency of individual discoms is shown in table below. While collection efficiency of all discoms has been high, there has been a lot of variation in collection efficiency reported by APNPDCL.
Power distribution reforms in Andhra Pradesh
Subsidy by State: Subsidy provided by state government to power distribution sector has come down significantly from pre-reforms period. In 1999-2000 subsidy by state was more than Rs 3000 crore while the subsidy received in 2004-05 was Rs 1303 crores. However post 2004-05 subsidy has started increasing. Subsidy reported for the year 2007-08 was Rs 2408 crores.
Subsidy received by individual discoms is given below:
Financial viability of AP discoms:
1. Profitability: Discoms in AP have been registering losses without subsidy. While these losses were around Rs 1200 crores in 2004-05, it started increasing in later years. Aggregate losses registered without subsidy for year 2007-08 were Rs 2526 crores. With the help of subsidy discoms have been able to cover the losses made. However in 2007-
08 aggregate losses with subsidy were Rs 118 Crores.
2. Gap in cost and revenue realized: The gap in ACS and ARR has decreased significantly for AP post reforms. Gap reported for the year 1999-2000 was 138 paise/kwh as compared to 48 paise/kwh in 2007-08. However this gap has started increasing in last few years.
Conclusion
AP is one of the states that initiated the reforms
in power sector. Initial steps for reforms were
taken way back in 1995 by formation of Hiten
Bhaya Committee. Actual unbundling took place
in year 2000. It has been more than 8 years
since the power sector has been unbundled in
AP. During this tenure AP has seen a change of
regime which also brought a change in the way
Power distribution reforms in Andhra Pradesh
reforms were pursued in AP. At the time of
unbundling of APSEB reforms were driven by
guidelines given by World Bank and
minimization of cross subsidization and
privatization of discoms were considered as
eventual outcome of reforms. However World
Bank’s failure in Orissa led to AP withdrawing
from their program and change in course of
reforms.
All the discoms are still under government
ownership. Also new government announced
free power for agriculture. At the time of
introduction of free power to agriculture the
four DISCOMs together were receiving nearly
Rs. 400 crore1 as revenue from agricultural
connections. It was claimed that the same
amount will be saved by renegotiating the PPAs
with the IPPs in the state. However, increasing
subsidy and gap between ACS and ARR post
introduction of free power shows that it had a
negative impact on the financial health of the
sector.
The impact of distribution reforms had been
positive and can be seen in decreased losses,
improved collection efficiencies, smaller gap
between ARR and ACS compared to what
existed in the state prior to reforms. Also the
deficit condition of the state has also improved
over the years. Peak deficit for the state
reduced from 19% in 2002-03 to 7.6% in 2008-
09. Overall energy deficit reduced considerably
till 2003-04 but has risen again and stands at
6.8% in 2008-097.
Performance both in financial and operational
terms has varied across the discoms. While
APEPDCL has been able to reduce its AT&C
losses and subsidy received considerably,
APCPDCL and APSPDCL have not been able to
maintain similar performance.
The good performance of APEPDCL can be
attributed to the customer mix with high
proportion of industrial mix it inherited from
APSEB (see Annexure 1). However, APNPDCL
has performed better despite having high
proportion of agricultural customers.
In the long run the commercial viability of
various discoms without subsidy is questionable
especially with the rise in subsidy requirements
in last three financial years. Also Quality of
Supply (QoS) targets need to be set and
measured in order to achieve a power
distribution sector which is both commercially
viable and consumer friendly.
Power distribution reforms in Andhra Pradesh
Sales mix: Sales mix was inherited by discoms from APSEB depending on their region. While APEPDCL
inherited a favorable sale mix due to very low agricultural component, APNPDCL sells approximately
50% of their power to agricultural sector. Over the years sales mix for various discoms has remained
the same.
Revenue mix: Revenue mix of various discoms given below shows that maximum contribution to
revenue is made by industrial sector irrespective of the proportion of sales accounted by them. Also it
can be seen that agriculture sector contributes very little to the revenue of discoms. Also contribution
to revenue by commercial sector is also higher than proportion of sales accounted by them. This
revenue mix clearly shows the cross subsidization being done by industrial and commercial sector.
Annexure 1: Sales mix, Revenue mix and Cost components
Power distribution reforms in Andhra Pradesh
Cost components: The cost components as percentage of cost have remained the same over the years.
Interest cost for APCPDCL and APNPDCL has reduced over the years. APEPDCL has seen a continuous
increase in their employee costs.
Power distribution reforms in Andhra Pradesh
1. Power Sector Reforms in the State of Andhra Pradesh in India by B. Saranga Pani, N. Sreekumar
and M. Thimma Reddy
2. Annual Report (2001-02) on The Working of State Electricity Boards & Electricity Departments, Planning Commission (Power & Energy Division) Government of India, May 2002
3. World Bank implementation completion report on a loan in the amount of US$ 210 million to the Government of India for Andhra Pradesh power sector restructuring project, February 20, 2004
4. Report on the Performance of The State Power Utilities for the Years 2002-03 to 2004-05, Power Finance Corporation Limited
5. Report on the Performance of The State Power Utilities for the Years 2005-06 to 2007-08, Power Finance Corporation Limited
6. Presentation National Conference on Reforms in Infrastructure Sectors: Impact Assessment and Governance by Rachel Chatterjee, November 2003
7. Power sector at a glance by Central Electricity Authority, April 2009
8. Power Sector Reforms in Andhra Pradesh: Their Impact and Policy Gaps by B. Saranga Pani, N. Sreekumar and M. Thimma Reddy, 2007
References