Guest Editorial

Distribut
By Lalit Jalan

Lalit Jalan, CEO and WTD of Reliance Overview

Infrastructure Ltd and Chairman of BSES
Rajdhani and BSES Yamuna Pvt Ltd. He
joined RIL as CEO in 1995 and at 39 was
the youngest ever CEO at Reliance.
An MBA Finance from Wharton and MS
in Computer Science from Moore School,
University of Pennsylvania he did his
BTech from IIT Kanpur. He was the win-
ner of Directors Honours and was on the
Deans List at Wharton.
Awarded the Distinguished Alumni
Award from IIT, Kanpur, he was
showcased as one of the 15 achievers from
the IIT system at the 1st PAN IIT meet in
California in January 2003.
As you read this, somewhere in India there is a
power cut.
Most cities in India go without electricity for 4 to
5 hours duration everyday; rural India is much
worse off with power cuts ranging between 16 to
20 hours. Our industries find it increasingly
difficult to compete globally with cost of power
being one of the highest in the world.
It is evident that the power sector in India faces
serious challenges. Unless the health of this
sector is restored with a sense of urgency, it has
the potential to derail the fast pace of India's
growing economic might.

In 2009, he was ranked 70 in the Eco-

nomic Times elite list of India's 100 Most
Powerful CEOs. He has recently been se- ' Power sector faces serious
lected in the prestigious IIK@ 50 at the challenges and can derail the
Golden Jubilee Alumni Convention at IIT country’s fast paced growth
Kanpur in January 2010.
' High AT&C loss and incorrect
Reliance Infrastructure, a part of Reli-
ance - Anil Dhirubhai Ambani Group, is In-
pricing of power has destroyed
dia's leading private sector utility and in- financial health of DISCOMS
frastructure company with presence in gen-
' Inadequate investment has
eration, transmission, distribution and
trading of power along with EPC division.
led to serious shortage scenario
The company is ranked among India's top
listed private companies on all major fi-
nancial parameters.

Monthly Economic Review, July 2010

2

ution Reforms
After the initial hiccups in the 90's, the genera-
tion segment witnessed spectacular progress on
the reforms front and its success is reflected in
the keen interest being shown by almost all large
business houses. Transmission too has recently
seen increased activity in the form of many
projects being taken up by private parties.
Distribution, being the revenue generating link
of the Generation, Transmission & Distribution
(G->T->D) value chain, is the most critical one.
At the same time it is the most difficult to deal
with.
Organisational issues such as complete a lack of
accountability, inefficient and archaic systems,
corrupt practices and an unprofessional work
culture, have led to gross operational inefficien-
cies and reflects in completely dissatisfied
electricity customers.
High technical & commercial losses on the one
hand and incorrect pricing of power on the other
has completely destroyed the financial health of
almost all state run distribution companies in the
country, which accounts for 87% of the sector.
Poor financial health has resulted in inadequate
investments. As a result thereof, a serious
shortage scenario has emerged all over the
country.
We often come across large urban areas/towns,
where the average revenue realization is as low as
Guest Editorial
Rs 1.5 per unit of input energy, which translates
to AT&C loss in the range of 60 %. Combined with
the fact that rural India typically has higher
losses, our estimate of overall AT&C loss in the
country far exceeds the official numbers at 35 %.
The magnitude of the problem that affects this
sector can be gauged from the fact that potential
savings from just AT&C reduction is estimated at
2 % of GDP.
' Distribution, the revenue
genrating link in the G>T>D
chain is unfortunately the
weakest
' Health of distribution sector
needs to be addressed through
Distribution Reforms
' Distribution reforms can
reduce fiscal deficit by 2%
of GDP
The objective of distribution reforms is to have in
place a healthy and robust distribution sector for
stimulating and sustaining investments in the
entire electricity value chain by comprehensively
Monthly Economic Review, July 2010
3
 Guest Editorial
addressing various issues that plague this sector.
It is in this context that we have looked into
important constituents of the reform process, the
progress made so far and what more needs to be
done.
Distribution Reforms
Electricity Act 2003, along with various policy
announcements such as National Tariff policy,
National Electricity policy, Rural Electrification
policy etc, provides a comprehensive framework
and also the blueprint for power sector reforms.
The previous decade has seen significant prog-
ress in implementation of various aspects of the
reform's agenda – in most states the process of
unbundling, corporatisation, instituting regula-
tory commission etc, has been completed; the
ambitious R APDRP programme for undertaking
improvements in urban pockets and the Rajeev
Gandhi Grameen Vidyuti-Karan Yojana
(RGGVY) for providing the much needed boost
for rural infrastructure, are going ahead with full
steam.
There is a lot more that needs to be done. In order
to restore financial health of distribution utilities
it will be necessary to concentrate and focus
attention in the following areas:
ŸTowns with population greater than 1.0 million
have to be franchised out
ŸTheft control measures such as special courts to
facilitate speedy trial have to be implemented
ŸPopulist policy such as free power to agricul-
tural consumers has to be given up and cross
subsidy to domestic segment has to be progres-
sively brought down
· To ensure competition in distribution,
bottlenecks in open access implementation have
to be removed
· Steps have to be taken to ensure that,
regulatory commissions have a high degree of
competence, operate independently and are
focused on customers.
States that do not fall in line with the above, have
to be made ineligible for various benefits that
flow to them under different central schemes.
Monthly Economic Review, July 2010
4
Public Private Partnering
Progress on privatisation has been hesitant and
tentative, despite the fact that, it is expected to
lead to all round improvements.
Efficiency gains from privatisation, has not only
been demonstrated in the remarkable turn-
around at Delhi but also in the high level of
operational efficiencies at Ahmedabad, Kolkata,
Mumbai and Surat; locations where private
utilities have been operating historically. AT&C
loss at all these locations is well below 15%.
Successful privatisation has also been witnessed
in other countries such as UK, Chile, Argentina
and Brazil.
' Privatisation, the most
crucial part of reforms needs to
gather pace
' Efficiency gains from
privatisation seenin
remarkable turnaround of
Delhi
' Also evidenced at Mumbai,
Surat, Kolkata and Ahmedabad
where private utilities operate
While several states have considered
privatisation as a part of reform and restructur-
ing process, Orissa (1999) and Delhi (2002)
moved forward with implementing the same. At
both places 51% equity was sold to the private
partner.
There was no further privatisation for sometime
till franchisee model was implemented at
Bhiwandi, in 2006.

Franchisee model being a softer approach faces
lesser resistance. As such it has emerged as the
preferred route recently and many states have
initiated action in this direction – Uttar Pradesh,
Bihar, Madhya Pradesh, Maharashtra and
Uttarakhand.
The right choice of partner holds the key towards
successful privatisation. It is in this context that
qualification criteria needs to be framed in a
manner such that it shortlists only those parties
who have the commitment, capabilities and
financial strengths to deal with numerous
complexities involved in managing electricity
distribution operations.
Delhi Success Story
Delhi implementation of PPP model incorpo-
rated several lessons that were learnt in Orissa.
Large errors in opening loss estimates at Orissa
led to unrealistically low tariff. This along with
absence of transition support not only made the
companies illiquid right from the start but also
destroyed the financial health of the companies
in the very first year of operations.
Delhi did not repeat these mistakes. As such it
has been a remarkable success story.
' Loss reduced from 60%
to<20% range
' Cumulative savings to Delhi
government more than Rs
24,000 cr
' Significant investment in
CAPEX (Rs6,500cr) has led to
world class power supply
' 80% drop in sales of gensets,
invertors and voltage
stabilisers
Guest Editorial
Loss reduction from 60% to less than 20% range
has not only resulted in elimination of subsidy
support that was necessary in the past, but also is
reflected in the lower tariff levels in the city.
Cumulative savings to Delhi Govt on this account
works out to a whopping Rs 24,000 crores and Rs
5,000 cr every year hence forth.
Large investments in network and technology
(Rs 6,500 cr) along with streamlining of systems
and processes, has meant dramatic improve-
ments in quality and reliability of supply. The
days of inverters, Gen sets and voltage stabilizers
are over for a typical Delhi resident.
World class customer care initiatives like 24X7
call center, multiples modes of payments cover-
ing almost all available payment options, clear
and colourful bill format, customer focused staff
and processes have all resulted in making life
much easier for the customer.
Conclusion
There is an urgency to restore financial health of
distribution utilities, to sustain huge invest-
ments that are being made into the power sector
(G->T->D value chain).
Since early 90's, as sector by sector, the economy
opened up, customer experience transformed in
terms of choice, service level, convenience and
cost. There is no reason to suspect that this will
play out any differently in power sector.
In this context privatization, the most critical and
important part of reforms process needs to
gather pace in the Distribution Sector.
Disclaimer: Views of the author are entirely personal
Monthly Economic Review, July 2010
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