India is not alone in the unsatisfactory outcome of reforms in the power sector. A recent review of transition economies in Europe has observed that “power sector reforms in the transition economies have proven difficult. The current sectoral performance portrays that formulated policies did not effectively understand the functioning of market economy and the reform process itself largely failed to undertake country specific conditions into account. Policymakers for a large period failed to understand that the reform in transition economies is not an undertaking confined to the sector but is closely interlinked with institutional and legal context throughout the economy.”

Thus, reforms in the power sector should be viewed as a part of reforms in the institutional structure of the economy. The standard prescription of reforms advocated (on the pattern of reforms in the UK)  has not taken into account the fact that in addition to efficiency in democratic societies there are important concerns relating to access, service quality socially efficient pricing and environment issues.

In India, reforms in the power sector are intimately linked to land policies, process adopted in awarding licences and permissions, policies relating to the ownership and pricing of inputs like coal gas, and environmental issues. It is also important to recognise that the states in India widely differ in sizes and natural resources, and uniform policy actions therefore do not work consistently in all the states. The policies in India since the passing of the electricity act have tended to implement a ‘one-size-fits-all’ approach for states from Nagaland to Uttar Pradesh. This malaise is especially true of programmes and policies specified by the union government. 

Since their inception, the state electricity boards (SEB) have played a significant role in extending the availability of electricity to remote corners of the country. However, by the 1990s, the SEBs were beset with unsustainable inefficiencies, unviable tariffs, high transmission and distribution (T&D) losses, mounting subsidies, lack of adequate attention on distribution, wasteful practices and poor financial management. All these led to the financial fragility of the entire sector. Due to the uninspiring financial position of the state utilities, the power sector failed to attract the much-needed investments for its development. Hence, reforms were necessitated to turn things around.

The power sector reform in India started in 1991 with the opening up of the generation sector to independent power producers (IPPs) through a policy initiative of the union government. However, all the initial efforts came to naught as the sector attracted interest, but failed to get anything significant off the drawing board. Orissa was the first state to restructure its SEB and 12 states followed suit.

Recognising the need to make the sector solvent and the need to curtail the theft and losses of electricity, a legislative process set from 1995 culminated in the Electricity Act, 2003 (EA 2003). Enactment of the this law is a watershed in the Indian power sector as it introduced innovative concepts like power trading, open access, appellate tribunal, introduction of competition, independent regulation, removal of unnecessary controls and prevention of theft  and special provisions for the rural areas. The act made it mandatory for all the states to restructure their SEBs, which over the time has led to segregation of the vertically integrated SEBs into generation, transmission and distribution functions.

However, despite all actions, the sector continues to face significant challenges. A backlog of investments and inadequate increase in tariffs are often cited as the key reasons for such trends, however the acute deficiency in managerial and organisational capacity is a significant gap often ignored. Reforms at the state levels should have been accompanied by organisational transformation of unbundled entities, to equip them with adequate systems and processes to cope with the changes – this sadly has not been the case.

Suggested actions
No reform can succeed without leadership and the sustained support of the political executive. Examples abound where shifting political priorities have caused reforms to slip. The reform agenda has hitherto taken a back seat in the face of populist programmers and policies.

1 Revamp the role of the ministry of power

The MoP should be actively engaged in dialogue with the political hierarchy of the state. It needs to demonstrate leadership and be an agent for change in the power sector. It has the necessary wherewithal to do so given its control over (1) funding through PFC, REC and other central schemes such as RGGVY and (2) elements like unallocated power of CPSUs.

Active time-bound monitoring of actual investments made and benefits reaped, including reform milestones by the states should be mandatory and linked to the funding provided under various central schemes.

Additionally, the role of the MoP in designing and approving projects for APDRP and other similar programmes should diminish. Projects should be prepared by distribution utilities and submitted to banks and other financial institutions for approval. MoP should contribute a certain percentage of the cost as grant to the projects approved by financial institutions. The MoP should also allocate funds to distribution utilities that are able to demonstrate increase in energy consumption based on metered sale. Only electricity sold and bills collected for metered consumption should qualify for the grant. This process will give freedom to distribution utilities to formulate schemes based on their priorities and requirements while being rewarded on the basis of metered sale and collection of billed energy only. States that have large unmetered consumption and/or give large subsidies to suppress tariffs will consequently not qualify for this grant. The suggestion above outlines an interesting proposal recommended by Deepak Sanan and Sanjay Mitra in their paper on strategy for ministry of power, prepared for Lal Bahadur Shastri National Academy of Administration (LBSNAA), Mussoorie.

2 Incentivise local management to improve performance and collections on receivables

The sector continues to be constrained by a high level of receivables and hence high level of AT&C losses. The total receivables of SEBs, discoms and other utilities selling directly to consumers increased from  Rs 48,088 crore as on March 31, 2008 to  Rs 55,505 crore on March 31, 2009 and to Rs 64,871 crore as on March 31, 2010. The receivables for the sale of power (no. of days) were the same as last year at 109 days.

According to the PFC data, as at the end of fiscal 2010, discoms of Delhi, HPSEB, WBSEDCL, Orissa (NESCO & WESCO), Mizoram PD, TSECL, KSEB, Goa PD, Andhra Pradesh DISCOMS (except APNPDCL), PSEB, Rajasthan discoms (except JDVVNL) and Gujarat discoms have receivables of less than 60 days.
However, the utilities of BSEB, MeSEB, central DISCOM of Orissa, Manipur PD, discoms of UP (except Paschimanchal discom), Sikkim PD, Nagaland PD, Karnataka discoms (Gulbarga, Chamundeshwari and Hubli) and MP Purva and MP Madhya KVVNL have a high level of receivables of more than 200 days sales in 2009-10.

Very few utilities have a detailed analysis related to the ageing of receivables, which from the managerial perspective is of utmost importance, that is, what areas need to be focused on, which of these should be written off and declared as bad debts etc. Standard accounting practices should be used to categorise such receivables. Both the above aspects require limited or zero investment but will have significant impact on the utility finances and the reported loss levels. In Uttarakhand more than  Rs 900 crore of arrears are over nine years old.

This calls for adequate provisioning by the utilities in their balance sheets. Many commissions are not allowing adequate provisioning under the impression that this would imply writing off of dues. Provisioning will only give a more realistic picture of the financial health. There is urgent need to standardise accounting practice. The last time this was done was in 1985 and since then the whole structure of electricity industry has changed but the accounting practices have not been aligned with the current accounting standards.

3  Implement accounting standards and practices

The accounting standards prescribed have detailed guidelines regarding income recognition, provisioning and write-off of arrears. But these guidelines have not found a place in the regulations framed by ERCs or the accounting practices followed by the utilities. The result is that the balance sheets of companies hide the dismal picture of the finances of the utilities. The current accounting practices must reflect the current accounting standards required to be followed by private sector companies. This would necessitate adequate provisioning and write-off of arrears unlikely to be recovered from the balance sheets.

Adequate provisioning will only give a more realistic picture of the financial health. Thus there is urgent need to standardise accounting practices in line with the current accounting standards. The last time the system of accounting in the power sector was overhauled was in 1985 and since then the whole structure of electricity industry has changed but the accounting practices have not.

4  Review the institutional structure and governance practices

At the heart of the power sector crisis is the institutional malaise. Revitalising institutions would be impossible by allocating grants without creating any accountability. Weak institutional structures are vulnerable to political interference and lack commercial orientation. There have been serious gaps in the corporate governance practices in several states. For instance, in many states after unbundling the companies are still headed by the energy secretary or have high degrees of interference by the polity in key decisions impacting the company’s performance. Some distribution companies do not even have a separate company secretary or finance director as required under the law.

It is suggested that all public sector companies, whether they have raised funds from the market or not, should follow the provisions of the companies law in finalisation of accounts, appointment of audit committees and implementing the guidelines on corporate governance issued by the bureau of public enterprises.

5 Strengthen regulatory institutions

Regulatory institutions have a critical role in transforming this sector and hence need to be strengthened in most states. A few developments, here and there, in the past few years do give reasons for concern. Selection, accountability and transparency, particularly in view of multiplicity of electricity regulators (in all states), are areas which will need to be kept under watch for appropriate and timely correctives. The success of the reform agenda depends on the elimination of corruption which is rampant in the sector. Implementing the reforms requires a significant deviation from business as usual, thus imposing a political cost on those who implement the reforms. The Indian power sector presents a case study of how corruption can be a determining factor in the outcome of reforms.

6 Standardise and track key management information

A strong information regime needs to be created so that the requisite data is available to design specific interventions and measure the performance improvement over a consistent baseline. Some of the suggestions in this regard are:
IT interventions as enablers for better management and control should be considered. To start with, these can be basic IT measures that require minimal investments.
Business process re-engineering to improve efficiency and bring best practices, for example, in material procurement, inventory management, planning, energy accounting, finance and HR. Several studies undertaken in the past using sophisticated and well acknowledged benchmarking techniques like data envelopment analysis and stochastic frontier techniques have established that a strong possibility of improving operation efficiency exists among the power utilities in the country.
Customer focus: better service levels and IT-linked tracking and redressal mechanism.
In a number of cases, the above can be achieved through managerial actions or from already sanctioned investments to the power utilities.

7 Incentivise productivity

In addition to the above process improvements the improvements in the internal policies/strategies of the utilities should also be given due consideration. For instance, there is a huge scope of improvement in the manner in which utilities in India plan their power procurement, which constitutes roughly 70-80% of the cost of any distribution company. Hence, efforts need to be focused to ensure that better practices and optimal approaches are deployed for this. Techniques like portfolio optimisation, forecasting systems and solutions need to be encouraged for in-house development in the utilities. Potential saving in such cases can clearly outweigh the costs incurred for setting up such systems.

Similarly, energy efficiency and demand side management, launched through the bureau of energy efficiency, has made a significant impact. These need to be scaled up, particularly at the state government level, with focused attention and accelerated targets.

8 Develop skills and capacity, especially of managerial staff

The power sector is rapidly evolving. Several structural and operational changes have been made recently. The dynamic nature of the sector requires its professionals to have expertise in areas including regulation, economics, finance, legal and technical. This calls for strong focus of the power utilities and the ERCs on capacity and skill development of the core staff. Utilities should be encouraged to devise customised management development programmes and specialised executive courses for middle-level managers. As far as possible, these should be certification courses (long-term or short-term) and not focus purely only information dissemination. Several institutes like TERI, ASCI, IIPA and IIMs can offer such courses. Similarly, regulatory institutions should also look at providing specialised training to its staff through appropriate twinning arrangements with other national and international regulatory authorities.

Given the state of talent in the organisations, the gains from human resource interventions are likely to be significant. Some suggestions:
Strengthen the role of HR function in power utilities
Introduce performance management systems (and linked rewards) to usher productivity improvement at various levels
Regular and targeted recruitments 

9 Ensure staffing of key institutions is adequate and fit for purpose

Most of the power utilities in the country have excess staff with extremely low productivity. The core issue is to staff the right person for the right role and adequate training of these personnel. This is often missing in the utilities.

Most ERCs in India are grossly understaffed and lack the requisite skills. Most ERCs prefer to outsource core work to consultants without any aim to ensure adequate knowledge transfer to their own staff. The average staff in ERCs in India would be in the range of three to 25. In comparison, the office of gas and electricity markets (‘Ofgem’), the electricity and gas sector regulator of the UK, has more than 300 employees. The federal electricity regulatory commission (FERC) of the US has a staff of 1,300 and the California public utilities commission has a staff of 850 and half of them are for the electricity sector. In Argentina, the regulatory authority has a staff of 153, of which 87 are professionals (and 15 are economists). Of course, right-staffing the institutions will be meaningless without structural reforms.

In summary, in order to deliver desired results power sector reforms need to be backed up with adequate strengthening of institutions and training of managers. It is important to note that all interventions – be it structural, regulatory, system or process oriented, HR or policy related – are interlinked. The diversity of the country makes it necessary to avoid the one-size-fits-all approach.  Geographies, socio-political conditions, starting levels and other factors need to be considered in designing specific reform measures for different states.

Improvement in the operations of state utilities is crucial for a long-term stable outlook. Once this happens the impact of reforms shall be felt to a much greater extent and benefits will trickle down to all the stakeholders.