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The Thirteenth Finance Commission, in its report to the Government in November 2009, clearly
highlighted the worsening financial position of the State Power distribution companies, even after
reforms, which is further leading to deterioration in State finances. The Deputy Chairman, Planning
Commission, Dr. Montek Singh Ahluwalia, has rightly reiterated his very serious concern in the State
Power Minister's Conference held on 28 April 2010 about the mounting losses and fast deteriorating
financial position of the State Power Utilities and the need for tariff revisions.

In the earlier years the Planning Commission used to bring out an annual performance report of State
Electricity Boards (SEBs) in the country, highlighting the achievements and failures on various
performance parameters, including T & D losses, rate of returns, etc. This practice, unfortunately, has
been discontinued for some inexplicable reasons best known to the Planning Commission.
Subsequently, CRISIL and ICRA have been mandated by the Power Finance Corporation (PFC) at the
instance of Ministry of Power to carry out a Performance Rating of the State Power Utilities and the first
report was put in the public domain in January 2003. The report focussed on various performance
parameters of the utilities, more importantly on Aggregate Technical and Commercial (AT & C) losses,
financial losses, etc. to enable the public to know the comparative performance of utilities in the
country. The last such report was published in the year 2006. Even these Performance Rating studies
appear to have been discontinued. In this context, the Thirteenth Finance Commission Report provides
considerable food for thought. It is high time that the Planning Commission restarts the rating system of
power utilities in the country to evaluate how the utilities are performing after the reforms were
introduced and put the same in public domain periodically. This would help in sensitising the public
about the performance or to be precise, about the poor performance of the power sector for various
reasons.

The National Electricity Policy rightly entails provision of adequate reliable power at affordable cost and
with access to all citizens. As Electricity is in the Concurrent List in the Constitution, both the Centre and
the States have to play a decisive and positive role in this respect, as electricity is a very essential
component for the growth of the nation.

The Electricity Act, 2003 also mandated, inter alia, with independent regulation of licensees and
generating companies selling power to licensees. The impact of Power Trading on State finances and
state utilities that are net buyers in the market has been significant. On account of shortage of power
supply, the price in competitive markets has been scaling progressively at higher levels. On the whole,
the competitive markets have been sending strong signals for the efficient procurement of power,
reduction of AT & C losses, levying reasonable tariffs on consumers, recovery of revenues, etc.

One of the fundamental reasons for introducing power sector reforms was to improve the finances of
the SEBs, which were otherwise nearing bankruptcy, through efficient management of the sector.
Unless the overall finances improve, the power utilities finances can be even more adversely affected
due to the high power procurement costs. The Finance Commission report clearly highlights the financial
losses, in spite of the huge subsidy by the respective State Governments.

The financial losses, including subsidies, are progressively increasing from Rs. 18,400 in 2005-06 to Rs.
27,300 in 2008-09. The losses of the state utilities even under reasonable assumptions of efficiency
improvement, are estimated to increase significantly from current levels of Rs. 68,000 crore in 2010-11
to Rs. 1,16,000 crore in 2014-15. These losses are expected to be significantly higher than what has been
projected.

Some of the key reasons for the increasing losses are the inability of the state utilities to enhance
operating efficiencies and reduce AT & C losses adequately; high cost of short term power purchases;
absence of timely tariff increases, etc. In some cases, states have not raised tariffs for the past 10 years
in spite of increasing deficits and in spite of having SERC, etc. While the tariffs could be increased thrice
in three years while I was Chairman, Maharashtra State Electricity Board, without SERCs, I wonder how
no tariffs could be revised for as many as 10 years in spite of having SERCs. On account of this, the tariff
increase requirements are varying from 7 percent to as high as 20 percent per annum on the average,
which is almost impossible to achieve. It also needs to be noted that in several places where the tariff
revisions have occurred, the gap has been reduced by not recognizing the true extent of the cost,
eventually resulting in large financial deficits to the states. The Regulatory Commissions have not even
been able to do routine tariff increases. Tariff reforms including Multi-Year-Tariff implementation as
required by the Act should be undertaken with vigour.

In addition, to multifarious problems faced by the sector for decades, a new problem has been added to
the state power utilities due to the sharp rise in the price of power purchased in the open market and
due to chronic power shortages. Further, the subsidies in 2008-09 were of the order of Rs. 18,000 crore,
thus there is a large burgeoning and uncovered gap that needs to be addressed. It is estimated that the
subsidies and subventions are increasing year-on-year considerably. In addition to the direct subsidies
and subventions, the states also have been extending substantial guarantees to the state utilities. The
overall outstanding guarantees extended by the states to the power sector utilities are about Rs. 88,000
crore as on March 2008.

Finally, the development and operations of the T&D network of the country is in the hands of the state
owned utilities and expected to continue thus putting considerable strain on state finances, even after a
large component of the generation is being developed by the Central Public Sector Undertakings and the
Private Sector Companies. Even though the state governments are required to pay subsidies, many
States are unable to pay or make delayed payments due to resource crunch. Clearly, the financial losses,
increasing subsidies, un-remunerative investments and large outstanding guarantees present a large
exposure for the states.

It is amply clear that a vast majority of the state power utilities are in a precarious financial position. AT
& C losses reduction, revision of tariffs and collection efficiency remains key concerns for the sector. In
general, the achievements have fallen far too short of the needs and the targets established. Serious
efforts are needed to contain AT & C losses. The performances of the utilities have been found wanting
in the state owned power utilities.

Apart from several initiatives taken by the central and state governments such as R - APDRP, the
distribution franchising for efficiency improvement need to be considered by the utilities on a large
scale. Some states have started implementing franchising in urban pockets and the initial results are
encouraging. Mahavitaran (MSEDCL), in Maharashtra had experimented with the idea of power
distribution franchisees for the first time in 2006. It had appointed M/s. Torrent Power, a private
company as the franchisee for Bhiwandi Town, which was a chronic defaulter of power bills for more
than 20 years. The franchisee will act as an entity empowered by the state to operate an existing utility
and distribute electricity within an identified area for 15 years. The experiment appears to be a great
success, as AT & C losses were brought down from 50 percent to 25 percent; monthly recovery has gone
up from Rs. 30 crore to Rs. 40 crore, signifying approximately Rs. 120 crore for year; no staff cost; no
day-to-day O&M cost and above all, no management headaches. Because of this success, Mahavitaran,
recently invited bids for selecting franchisees in Nagpur and Aurangabad urban areas, as part of its
strategy to curtail power distribution losses and improve delivery of services with the help of the private
sector. Such measures need to be scaled up significantly in all the states in the interest of better
performance and improve delivery of services in the power sector.

The distribution reforms in the power sector were ushered more than a decade ago, when the Common
Minimum National Action Plan for power (CMNPP) was approved by chief ministers in the year 1996,
while I was the Union Power Secretary. One of the major reasons for initiating the power sector reforms,
more importantly the distribution sector, was the neglect of management of distribution sector over a
long period of time which was probably one of the major causes, for the deterioration in the
performance of the power sector. The State Electricity Boards (SEBs) were losing money not because
they were not producing enough power, but because they were not charging enough, and collecting
even less. The biggest factor of all was that the socio-political reasons consistently got the better of
economics. The key to the future of the Indian power sector lies in the implementation of accelerated
power reforms in distribution sector.

In spite of the several measures initiated by the distribution companies, the Aggregate Technical and
commercial (AT&C) losses at the national level continues to be extremely high. There is no respite from
the subsidy regime. Some states continue to announce free and/or subsidized power for various
segments including agriculture, and the uncovered subsidy remains still substantially high. The overall
increase in tariff has not kept pace with the cost of supply leaving a huge gap between the cost of supply
and tariff.

One of the primary objectives for establishing the State Electricity Regulatory Commissions (SERCs) was
to delink the state government's interference in the functioning of SEBs and entrust functions, inter-alia,
most importantly the fixation of tariffs in a transparent manner to SERCs. Sufficient and effective
measures are lacking in bridging the gap between the cost of supply and tariff. Most of the utilities have
not issued multi-year tariff orders and even if they were issued, they are not being followed in practice.
Many SERCs, unfortunately give an impression of depending on government on several matters for their
functioning. It is necessary for SERCs to discharge the mandated functions independently and fearlessly.
The legal provisions in the Electricity Act, 2003 specifically provide for fixed tenure of 5 years or 65 years
of age, whichever is early for their functioning once they are appointed, as in the case of Constitutional
Authorities like, Election Commission and Union Public Service Commission. Such a provision was
specifically provided after considerable thought, when the first Electricity Regulatory Commission was
created in Orissa in 1996. It is necessary for the government to revisit the various provisions in the
Electricity Regulation Commissions Acts and make changes for their efficient and effective functioning
for which they were statutorily created. Most important of it being to revise the tariffs and adjust the
same on the basis of improvements or deterioration in their performance and the cost of supply to the
consumers.

The real challenge to the Power Sector is to develop the arduous process of tariff reforms and to fix-up
cost related tariffs. A unanimous and resolute commitment alone can transfer the sector from its
current state of affairs. Time is the essence for speedy implementation of tariff reforms.