Search the Internet          Tips  Sites: Finance, Investment

India moves to reform debt-saddled power utilities

After a decade of failed power reforms, energy-strapped India now says it is getting serious about making consumers do what people almost everywhere else do -- pay for the electricity they use.

The crackdown is being driven by a realisation that the energy sector is in dire straits and unless users pay for power, India will never generate enough to achieve the double digit economic growth needed to dent poverty levels.

"The basic ethos that we need to pay for the power we consume has to be instilled amongst all -- be it industrialists, agriculturists or even domestic consumers," Union Power Minister Suresh Prabhu said comments posted on his ministry's website.

Key to change, government officials and energy analysts say, is separating power from politics. Until now politicians have been deeply reluctant to force the issue of making consumers pay -- fearful of electoral backlashes.

This has made state electricity boards -- the monopoly distributors -- bankrupt. They face a total $5.1 billion loss this year, driven into the red by large-scale theft, consumers' refusal to pay, generous subsidies and free supplies to farmers.

Transmission and distribution losses in some states are as much as 50 per cent with theft "with connivance of the staff in the distribution segment very high", a federal report says.

Not just the poor

It's not just the poor who steal electricity by tapping into power lines. Many urban middle-class people as well as industry owners find it cheaper to bribe electricity company officials than pay their utility bills.

But now, politicians have no choice but to tackle the problem. Otherwise, the sector faces "total crisis", Prabhu said.

"Reform of the SEBs is crucial for India's power sector. Everything depends on this," says P S Bami, president of India Energy Forum, a voluntary group of energy specialists.

The shambles in the power sector has meant a dire shortfall in capacity.

India has a per capita consumption of 348 units compared with 750 units in China, the only other nation with more than one billion people.

India's generation capacity is 100,000 megawatts. This is 12 per cent below demand, making blackouts are a daily occurrence.

Prabhu wants to double capacity by 2012 and is pushing for reform in the sector but most of the $200 billion in funds that will be needed to provide the fresh capacity will have to come from foreign investment.

At the moment, India's ability to lure foreign investors to put up money for energy projects is under a dark cloud.

Enron factor

A utility in Maharashtra is embroiled in a nasty payments battle with Houston-based energy giant Enron Corp, which has threatened to pull out of its almost complete $2.9 billion power project because of unpaid bills.

Enron's project, set up to generate 2,184 MW, is India's largest direct foreign investment.

Enron may not be alone in packing its bags. Four other foreign firms have pulled out or are close to pulling out.

These include the U.S. company Cogentrix which walked out of a project to build a 1,000 mw plant in Karnataka last October and Electricite de France which scrapped plans to take a 15 per cent stake in a 1,084 mw project in Maharashtra.

Still, government officials and analysts say there is some light at the end of the tunnel.

"The realisation that reforms are urgently needed has now seeped into the entire power sector, including the government," says an economist with the Confederation of Indian Industry.

Electricity reform was a centrepiece of the 2001 budget, which was presented in February and dangled a variety of financial carrots in front of states to get them to reform.

"We will give more to states that are willing to reform," a power ministry official said.

Promises

All 29 states have promised to meter power supplied to every customer, conduct energy audits and set up regulatory bodies.

Over half have signed deals with New Delhi to pursue reforms in return for central funds, 14 have set up regulatory bodies to insulate tariff hikes from political pressures and nine of them have passed orders to boost tariffs.

In addition, the states have pledged to end subsidies that distort the power supply system unless they are specifically provided for in a state's budget.

They have also promised to unbundle the monolithic SEBs into separate, leaner companies focused on generation, transmission and distribution.

The US state of California created huge problems for itself with a 1996 deregulation law, barring utilities passing on sharply higher costs to consumers.

Leena Srivastava, senior fellow at Tata Energy Research Institute, says India may have something to learn from its experience but that essentially its problems are different.

"I don't think you can compare India with California," she says. "There are definitely lessons for the future from the experience in California, but India's problems are different."

In the meantime, government officials say some changes are already paying off.

Haryana, for example, saw a 27 per cent rise in revenues last year after smaller companies carved out of the board performed more efficiently.

Tell us what you think of this report