Literarure Reviw On Power Sector

Chapter 2: LITERATURE REVIEW
2
CHAPTER 2
LITERATURE REVIEW
2.1 OVERVIEW
For any specific research to occupy the place in the development of a discipline,
the researcher must thoroughly familiar himself not only with previous theory and
research but also with industry background. To assure this familiarity a review of
the relevant literature is done. A Survey of related studies was undertaken by the
researcher to get an insight into the work that has already been in the field of this
investigation in the context of related industry. An attempt is made in this chapter
to review the existing literature on the subject of research. The available literature
related to the present research work studied by the researcher is divided into the
following subcategories:-
 Prior studies on power sector
 Power sector scenario in India
 Recent issues & challenges of Indian power sector
 Overview of Indian power sector performance
 Power sector reforms in Madhya Pradesh
 The concept of performance & its measurement
 Approaches of performance measurement
 KPI approach of performance measurement
 KPIs for a power distribution utility
 The Concept of Customer satisfaction
 Summary and research gaps
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The literature was reviewed with an intention of finding research gaps and
developing the base for conceptual framework.
2.2 PRIOR STUDIES ON POWER SECTOR

2.2.1 STUDIES ON DEVELOPMENT & EVOLUTION OF THE POWER
SECTOR
After electricity was introduced in the 1880s in the United States and Europe, its
use expanded dramatically throughout the world, transforming almost every
aspect of daily life. It is now essential to the operation of most modern
technological systems, and, for this reason, it has attained the status of a
‘metatechnology’. The inner logic of this metatechnology has shaped
contemporary development patterns – grid expansion and urbanization are nearly
synonymous; national and local politics – pro-growth and pro-electrification
coalitions significantly overlap; social values, culture and identity – to be modern
is to be electrified; and community life – our connection to one another (in
industrial countries especially is often electrical telephone, television, e-mail). It is
not surprising therefore, that electricity supply is often viewed as an essential
public good in contemporary society. The electricity systems developed over the
last century mainly rely on large-scale power plants and extensive networks of
transmission and distribution that deliver electricity at affordable prices (at least,
in most industrial countries). However, these systems have also created a host of
environmental, social, and economic problems (Dubash, 2002).
Electricity production is characterised by scale economies and sunk investments.

This is why an effective regulatory system is crucial for both investor confidence
and consumer protection. At the same time, because electricity is viewed as an
essential public service, local and central governments have incentives to
intervene in price, output and investment. Public ownership becomes the default
mode of organisation if it is not possible to create an efficient and credible system
of private-sector regulation (Short, 1984). The primary purpose of a well-designed
regulatory system is to protect consumers from monopoly abuse, while providing
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investors with protection from arbitrary political action alongside incentives for
efficient operation and investment (Laffont and Tirole, 1993).
Suzuki (2002) attempted to throw light on indigenous structure as well as foreign

aid policy towards India’s electricity power development. He concluded that
Japan’s official development assistance should be carefully monitored taking into
consideration the input output relationships in the unique rent seeking process in
India which is characterized by the political power among the dominant
proprietary classes that prevents politically weak tax payers, who ought to
criticize and oppose this inefficient structure, from organizing the political powers
against the classes.
UNEP (2005) explained the dual challenge of ensuring electricity for national
economic development and at the same time providing increased electricity access
to the poor parts of the population. Special focus was put on the role of energy in
achieving the Millennium Development Goals (MDGs).
Carreon et. al. (2006) found that electrification is most closely correlated with
economic growth and urbanization. Their study further reveals that residential and
agricultural tariffs declined in the 1970s, which aided electrification, but progress
in electrification has continued even through the flat and rising tariffs of the
1980s. Even as the sector has experienced enormous financial difficulties in the
1990s, electrification continued apace.
Bishnu Dash (2010) studied that The National Thermal Power Corporation
(NTPC), the state owned power generator, aims to become a 75,000 MW plus
company by 2017. Since the public sector company plans to add 1000 MW
through renewable energy sources, it is keen to develop some renewable energy
based projects in Orissa, which has untapped potential in wind and solar energy
sectors.
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2.2.2 STUDIES ON ISSUES & CHALLENGES OF POWER SECTOR

Partha et. al.(1996) studied the issues and challenges of Power Sector in India and
tried to tried to prioritize the challenges so that various impediments could be
overcome as early as possible. They also examined the various facilities and
placed them in perspective of physical and financial achievements in the power
sector
Juskow (1998) found that the privatization of the generation sector may lead
towards competition in bulk supply through transmission access, while
distribution network could remain a natural monopoly along with availability of
retail choices to consumers.
D. Sa et. al. (1999) found that the Indian power sector was opened to private
participation in 1991 to hasten the increase in generating capacity and to improve
the system efficiency as well. However they revealed that some important
problems have not been addressed such as an addition to the generation capacity
without corresponding improvement of the transmission and distribution facilities
is likely to further undermine system efficiency. They also stated that investment
in infrastructure has been a responsibility of state governments because
intrinsically long gestation periods coupled with the relatively low rates of return
from serving all categories of consumers had rendered such projects commercially
unviable.
Graham (2000) found that the involvement of the public sector in the electricity
industry is partly explained by the sector’s technical and economic evolution. As
utilities pursued economies of scale both in supply and in demand, electricity
systems became highly centralised, large-scale technological networks.
According to India Infrastructure Report (2000) the root of chronic inability of

SEBs to raise required investment is the uneconomic pricing of electricity.
Absence of cost based economic principles in consumer category wise tariff
design, uneconomic level of cross subsidies, reliance on historical rather than
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marginal costs and inability to cover the costs incurred are the main weaknesses in
the tariff policy.
A series of proposals during the late 20th century sought to address issues of
power shortages, as well as capital shortages suffered by developing country
public sectors. Power liberalisation has differed by country, but common elements
of an agenda for sectoral change can be identified (IEA 2001; Littlechild, 2001;
Rosen et.al. 2000):
 Vertically integrated utilities are broken up, either by sale of generating
plants, or by placing generation assets in separate unregulated generating
companies that remain utility subsidiaries.
 Markets are created into which the generating companies can sell, and
from which others can buy.
 Capital investment in the sector is increasingly decided by market actors
and forces.
Ruet (2002) found that improvement in the Plant Load factor (PLF) and reduction
in the non technical losses at least worth present tariffs can increase 17 percent
energy level. These will keep away unpopular measures such as tariff increase. He
also expressed the view that these actions are not done because of the reasons that
state electricity boards are operated based on self enforcing political executive
instruction, absence of focus on costs and budgets in actual decision making,
absence of properly designed information system.
Government of India in its Tenth Five year Plan (2002-07) wrote that the power
sector has been suffering from serious problems, which were identified as early as
ten-year ago. However, no corrective action was taken and the result is that the
power sector faces an imminent crisis in almost all states. No state electricity
board (SEB) was recovering the full cost of power supplied, with the result that
they made continuous losses on their total operations.
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The efforts undertaken in increasing the production are not yielding the desired
results mainly because the transmission system in unable to take the load of
transferring the power from one place to another and thus is leading towards high
T&D losses. As per the latest estimates, the T&D losses are as high as 40 to 50%.
Thus, special efforts have been undertaken to improve the Power transmission and
distribution capacity in the 10th (2002 - 2007) and the 11th five-year plan (2007 -
2012) (Govt. of India report of the expert group on restructuring of SEBs, July
2002).
Godrole (2004) has expressed that several state governments, including

Maharashtra have announced free power for farmers. In this rush towards
competitive populism, the past experience of states that adopted the suicidal
policy of giving free power for agriculture appears to have been lost sight
completely. Moreover, considering that subsidies for agricultural consumption
largely benefit big farmers and other well-to-do people, the subsidization of these
sections by common taxpayers militates against all cannons of the welfare state.
2.2.3 STUDIES ON POWER SECTOR REFORMS

Baijal (1996) mentioned that several countries, both in the west and in the east,
developed and underdeveloped, have introduced reforms in the power sector. In
all cases, restructuring revolved around the economic and institutional
organization of the sector and the advantages of introducing competition to raise
the overall efficiency in the power sector including India. The reforms already
initiated, at the federal level, have been the enactment of laws which enable
setting up of regulatory commissions and state at the levels providing for
separation of generation and transmission and distribution activities.
Woode & Kodwani (1997) examined the lessons that can be learned from the
British privatization programme for India’s reforms since the reform of the energy
sector is considered key economic objective in India. They felt that there is a
necessity of strong political will to design the restructuring programme. They
suggested that separating generation from bulk transmission and leaving the task
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of distribution to regional companies makes accountability for performance of

these activities more transparent. They suggested that breaking up of those state
electricity boards which were then serving large geographical areas. They also
opined that a national grid company is essential to carry bulk power across the
states. They also expressed the idea of restructuring and reviving of state
electricity boards to make them attractive enough for the investors. They believed
that private ownership, competition and constructive regulation create an
incentive structure which will result in more consumer satisfaction in the long run.
They also suggested that development of autonomous regulatory regimes on the
lines of UK system.
The Government of India reports in the Ninth Five Year Plan (1997-2002)
emphasised on the significance of power sector reforms at the earliest and the
need for tariff rationalization. It was clearly stated that “the major cause of the
problems being faced in the power sector is the arbitrary and unremunerative tariff
structure”. The state governments not only desire to provide power at
concessional rates to certain sectors, especially to agriculture without subsidizing
SEBs for the issues arising out of it but also constantly interfere in tariff setting,
even though the tariff is fixed and realized by SEBs. Therefore, power supply to
agriculture and domestic consumers is heavily subsided. SEBs through cross
subsidization of tariff from commercial and industrial consumers are able to
covers only a part of this subsidy. The SEBs in the process, have been incurring
heavy losses. If the SEBs were to continue on the same lines, their internal
resource generation during the next ten years will be negative, being of the order
of Rs. (-) 77000 crores. This situation raised serious doubts about the ability of the
states to contribute their share to capacity addition during the Ninth Plan and
thereafter.
Godbole (1998) has explained that only the privatization of distribution coupled
with the setting up of effective regulatory bodies would provide a long term and
lasting solution to the power sector imbroglio. Otherwise this dance of one step
forward one step sideways and one step backwards will continue to create an
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illusion of forward movement. The views that the many unresolved problems
faced by private power projects can be traced to the liberalization process having
started at the wrong end namely power generating. He opined that it should
commence with the restructuring of the state electricity boards.
Ghosh (1999) felt that the argument about competition enhancing efficiency does
not apply to the electricity industry. Its advocacy has been motivated. He also felt
that the policy of separating generation, transmission and distribution of power is
not justified and there are strong technical reasons for keeping generation,
transmission and distribution under one authority. He opined that the need of the
hour is not bifurcation of the board in Andhra Pradesh, but a minor adjustment of
tariff rates for agriculture and domestic consumers. He felt that the private sector
is interested in acquiring existing low valued assets of state electricity board with
a view to make large capital gains. In any case, the private sector would look for
profitability rates comparable to what it can earn elsewhere which would be
entirely inappropriate for infrastructural facilities. He felt that the new approach is
disastrous for the entire range of rural consumers. According to him properly
targeting of input subsidy of electricity is good for economy.
Reddy (2000) opined that at present for all ills of the power sector, a uniform
system in being imposed on all states. There is no attempt to examine specific
experiences of different states and tailor the changes needed according to the
requirements of the particular state. The problems faced by the electricity
establishment in Andhra Pradesh are not the same as that of Orissa. And yet one
can see that not only the electricity reforms act passed in AP is a carbon copy of
the Orissa Act, even the regulations formulated by the APERC are only a copy of
the OERC. In AP no other alternatives are explored to solve the problem facing
APSEB. Even the recommendations made by Hiten Bhaya Committee were
brushed aside to impose the World Bank recommendations. While taking up these
reforms stake holders were not consulted. Until the recent tariff hike, public was
not aware of the changes taking place in the power sector. There is neither
participation nor transparency in the whole exercise. The ongoing changes in the
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power sector demand two things: one is to comprehend process and its
implications and another is to enable citizens to interact with the Regulatory
Commission and participate in its proceedings effectively as this exercise is new
to the people in their state.
Malaluna (2000) wrote that the power industry is the most scrutinized industry in
the world today. Sweeping reforms are being pushed in many countries Reforms
of the power industry have increasingly been used as the basis for the release of
funds by multilateral development banks and international financial institutions.
In the Philippines, power reform bill awaits finalization by the bicameral
conference committee. The bill has been in deliberation for the five years, while a
wide segment of civil society has been involved in drafting the bill. Their key
concerns have been kept aside or inadequately addressed. Beyond doubt this was
due to the successful and powerful lobby of business with vested interests in the
passage of a version of the bill.
Rao (2000) opined that independent regulations are new in India. Public opinion
has to recognize its value. It will do so when it sees results in terms of improved
quality, availability and in due course, reduced tariffs. Ultimately the
independence of regulators can only be guaranteed by strong public opinion.
While legislation will help, it is important that financial and human resources for
regulatory commissions are kept out of the scope of government approval.
Mahalingam (2000) wrote that the choice of Orissa for a pioneering electricity
reform experiment seemed logical as state with low literacy rate low income
levels and more importantly negligible consumption by agricultural sector (1ess
than) and hence lacking in a constituency which would effectively resist a drastic
overhaul. Nevertheless for the World Bank, the choice of Orissa came about more
by accident than design. Around the mid-90’s the Bank-funded upper Indravati
project in the state ran into rehabilitation problems. Unwilling to give up such a
sizeable account the Bank hit upon the idea of converting the upper Indravati loan
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into a reform loan. It set aside 350 million US dollars to be disbursed to the Orissa
electricity sector in phased manner linked to specific milestones in restructuring.
Kumar (2000) stated that the process of power sector reform was initiated in India
in the early 1990's. Haryana was the second state after Orissa to undertake power
sector reforms under the overall supervision of the World Bank. The Haryana
Electricity Reforms Act 1997 came into force with effect from 14 August 1998.
Consequently a number of structural changes were undertaken. He studied the
experience of electricity sector reform process in the context of Haryana State.
Chandra (2000) emphasised the importance of public involvement in reforms. He

opined that any reform would be welcomed only if it is preceded by open
discussion and debate among the public. According to him anything imposed from
above will be opposed even if some of its implications might be beneficial to the
public. Geographical, social, economic and cultural factors of region have a
bearing on its power consumption pattern. Kerala, with regard to reform in the
power sector reflects the positive as well as negative characteristic of a society
with a rural production base a carbonized cultural. KSEB appears to be resorting
to this new process of reform slowly but steadily enlisting consumers’ support for
it. People will cooperate if they are convinced that they will be benefited not just
by promise, the credibility of an institution, be it SEB or SERVC should be
established beyond doubt, if people are to accept a reform package. What is true
of Kerala is this respect can be true of other states as well.
Labour Department, Mantralaya, Mumbai (2002) stated that the process of

reforms cannot achieve the desired results overnight, nor can change be brought
about overnight. The success of the reform process depends on its acceptance by
all stakeholders including consumers, employees and investors.
Dubash (2003) opined that in developing countries, government leadership in the

development and use of electricity was part of a broader “social compact”.
Reforms that exclude voices that deserve to be heard have not proven to be
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sustainable-financially, socially, or environmentally. Reforms that are supported

by a robust process of discussion and debate are much more likely to produce the
social consensus needed to consolidate a better, more sustainable electricity
future.
Morris (2000) expressed that true reform and restructuring of any state electricity
board in India would have to address the issue of an enormous leakage of revenue
from the system. This would call for privatization of distribution, and change in
the institutional mechanism, for the administration of the subsidy. Rather than the
detailed regulatory mechanisms, which are being pushed by the central
government and the regulators, light and price-cap type regulation would suit
India better. A complete separation of distribution from generation is neither
necessary nor desirable, existing IPP contracts would have to be extinguished and
methods to carry out the same are suggested. The danger of mounting regulatory
risk, either shutting out private power production, or resulting in massive tariff
increases is real.
The strategy paper on infrastructure of the Government of Andhra Pradesh (2001)

reflected the view that vision 2020 sets challenging targets for economic growth.
To achieve these targets, Andhra Pradesh needs a new and comprehensive growth
agenda. To attract private investment the state will start need to create the
conditions that will allow private investor to successfully participate in its
development. This involves building infrastructure and reforming regulation to
create a conductive environment of business. Hence an infrastructure policy
should be framed. The infrastructure policy should be addressed to different
sectors. Among them the sectors of power generation, transmission and
hydropower projects are also included.
The strategy paper on power of the Government of Andhra Pradesh (2001)

presented various aspects of power sector in Andhra Pradesh. The paper consists
of a detailed presentation of year wise revenues, expenses, operating surpluses
and subsidies of electricity board and Andhra Pradesh Transco. The paper also
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focused on consumption, tariff of power and on energy balances. This paper

discusses various issues like generation, private sector participation in generation
projects, promotion of non conventional energy transmission and distribution in
the state. The paper also discussed power sector reforms and emphasized that the
ultimate goal of the reform process is to ensure that power will be supplied under
the most efficient conditions in terms of cost and quality to support the economic
development of the state and so that the power sector ceases to be a burden on the
state’s budget and eventually becomes a net generator of resources. The paper also
focused attention on the results of reform programme and said that Vision 2020
document of the government envisages the supply of world class quality power at
competitive prices, reduction of energy losses to 10 percent and total elimination
of commercial losses by 2020. The objective is to reach a per capita consumption
level of over 2000 KWH by 2020.
Raghu et. al. (2001) expressed that power sector reforms are being taken up in the
background of the liberalisation process that started in 1991 at the national level
as a precondition to the IMF/WB bail out of India from the balance of payments
(BOP) problem. The power reform process, as is being done, has only managed to
empower the anti-people processes, individuals and institutions, which have been
responsible for the present crisis situation through finances, new concepts and
approaches. The decision-making process has not been changed; only the actors
have changed, essentially it is the same which brought in the present crisis
situation – opaque, no local participation, fudged information and statistics, adhoc
planning, etc. A true review of the reform process should go into the question of
who is getting the free lunch, supposed to have been provided to the poor people
of India.
Bacon & Jones (2001) in their study on privatization & liberalization of electricity
sector in 14 developing countries viz. Albania, Argentina, Bolivia, Brazil
Colombia, Coted’ivorie, Georgia Hungary, India, Kazakhstan Mali Panama
Thailand, Turkey and Ukraine concluded that competition for the right to enter the
power market on contractual or regulated terms plays an important role in
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developing countries, notwithstanding the limited scope for sustaining

competitive power pools. Likewise, a limited transparent and soundly structured
process for sale of stakes in the power entities will yield the best terms for the
long term efficiency of the power sector. The sequencing of reforms is crucial to
their long term sustainability. First the legal and regulatory framework should be
in place before privatization of the restructured power supplier. Second, major
restructuring should precede the creation of private ownership rights to avoid
problem with stranded assets. Third, the scope for introducing competition to the
whole sale power market should be incorporated into the initial structure reforms
to the power market rather than relying only in regulatory interventions.
Steiner (2001) tired to measure the competitive aspects and the cost efficiency of
the reform. She also looked at some reform elements separately, including
unbundling wholesale power pool, third party access to transmission and
privatization. The study found that electricity market reforms generally induced a
decline in the industrial price and an increase in the price differential between
industrial customers and residential customers, indicating that industrial
customers benefit more from the reform. She also found that unbundling is not
associated with lower prices but is associated with a lower industrial to residential
price ratio and higher capacity utilization rates and lower reserve margins
Dubash & Rajan (2001) felt that three steps including de-metering of agricultural
consumption and giving subsidies, signing independent power producers contract
with major fiscal implications and implementing Orissa model on the national
scale made the power sector policy in India to be locked into adverse
arrangement. They criticized those international donor agencies that are largely
unaccountable to the Indian Public, playing crucial role in shaping the future of
the power sector. They explained the process of power reforms in India by
dividing the entire period into four overlapping but distinct periods. They are pre
1991, and 1991 independent power producer policy and its aftermath; the World
Bank led restructuring policy that began to be implemented around 1993 in Orissa
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and the period shortly after 1998. In total they provided an analysis of the social
and political context in which power sector reforms have taken place in India.
Parikh & Parikh (2002) studied the state of the power sector and experiences of
power sector reforms in India and suggested some means to enable state
electricity boards to control expenditures.
Borenstein (2002) felt that restructuring of electricity markets is a more difficult

task than that of airlines, trucking natural gas and oil due to unusual combination
of extremely inelastic supply and extremely inelastic demand. He says that real
time retail pricing and long term contracting can help to control the soaring whole
sale prices and to solve some problems to create a stable, well functioning
electricity market. He suggested that the difficulties which are the outcomes from
the experiments of California, New York, Pennsylvania, England and Norway
should not be interpreted as a failure of restructuring but also a part of learning
process towards an electric power industry that is still likely to serve customers
better than the approaches of the past.
Jones & Tenenbaum (2002) suggested that blind imitation of other countries is
hazardous. They stated that the model of reforms in the power sector
recommended by the World Bank too needs to be examined critically in the
Indian context. They opined that a number of doubts were raised about the
practicability, feasibility or even advisability of privatization of power distribution
on all India bases stating the instance of privatization of distribution in Orissa.
They also expressed that guarantees by state governments; counter-guarantees by
the Centre and escrow accounts will not create or sustain investor confidence
which is key to power sector reforms. They emphasised that state governments
have to play critical role in these reforms and also felt that some financial steps
including securitization of dues of state electricity boards to central PSUs or
writing off loans given by the state government to state electricity boards or
converting them into equity are not real solutions to the actual problems.
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Srinivasan (2002) recommends that state electricity boards should be reformed

into bankable, commercially and professionally run corporate enterprises, free
from political and bureaucratic interference. He further opined that it is a better
solution than to create conditions conducive for the private sector to take on the
task of further expansion of capacity he stressed that the objective of power for all
can be achieved with the help of funds provided from within and from outside
India.
Godbole (2002) felt that rationalization of tariffs is the most important

requirement for viability of power sector. He opined that an important step taken
in this direction is enactment of legislation for the setting up of the electricity
regulatory commissions (ERCs at the centre and in the states). But the experience
of the functioning of the ERCs so far is far from satisfactory. He pointed out that
it was time the ERCs made full use of the penal powers available under the
concerned legislation since viability and future of the power sector depends on
them.
Ruffin (2003) examined the institutional determinants of competition, ownership

and extent of reform in electricity reform process. The institutional determinants
employed are different measures of judicial independence, distributional conflict
and economic ideology. It was found that the relation between judicial
independence on the one hand, and competition and ownership on the other is
ambiguous. Besides, greater distributional conflict was found to be significantly
correlated with a higher degree of monopoly. Moreover, the results showed that
the relation between economic ideology favouring competition and private
ownership was generally positive and significant. The results also pointed out that
there is appositive relationship between judicial independence and reform scores.
Phadke et al. (2003) studied the electricity reforms in India and suggested that the
change in ownership through privatization alone cannot bring efficiency in the
sector. He opined that the success of electricity reforms in India will depend
critically upon the existence of some sort of restraining or disciplining mechanism
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in the sector, in the absence of which current efforts will likely result in transition
from inefficient public ownership to profit gouging monopolies or oligarchies. In
principle, such a mechanism should be strong, independent and effective
regulatory oversight over public or private monopolies or significant competition
among large number of public and private entities. But it is important to examine
without bias, and as thoroughly as possible, the feasibility and effectiveness of
both these sector disciplining mechanisms before making any claims regarding the
desirability of privatization. The researcher also argues that issues related to
protecting the environment, extending access to poor and other off-grid
populations and strategic concerns related to import dependence and foreign-
private ownership need to be addressed up-front in order for reforms to be in
broader public interest.
Michael et al. (2003) suggested that in order to achieve success in the reforms the
measures like adoption of a legal and regulatory framework based on the
principles of efficiency through competition market governance structure
including an independent regulator based on the principles of transparency and
non-discrimination have to be taken. A review of the power, water and transport
sectors along with certain legal and regulatory issues relating to PPI was carried
out in eight countries: United Kingdom, Australia, Hungary, Brazil, Philippines,
Argentina, Malaysia and Thailand the International experiences with competitive
wholesale power markets has been mixed. While some markets have seen supplies
drop and prices skyrocket (as in the US state of California), others have managed
to attract higher private investment after the market reforms. Throughout the
process it is crucial for the government to publish the overall policy on power
market reform, and where possible the timetable and the scope of each step in the
process so that investor can assess risks before investments. In addition existing
investors will seek reassurance from the government that their investments will be
protected during the transition period.
Stockholm (2003) analysed that key components of sustainable development in

the energy sector have been promoted through public benefit programmes, albeit
with mixed success. As reforms are introduced into power sectors around the
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world, some important public benefit programmes and social obligations are being
questioned by those traditionally responsible for the design and implementation of
these programmes. Power companies in increasingly competitive markets find it
hard to maintain spending on programmes that promote public benefits. There is
mounting evidence from developing and developed countries alike that important
public benefit programmes and other efforts fall through the cracks during reform.
Programme areas that can promote public benefits include: Energy efficiency,
Renewable energy, Public interest R&D, Access to modern energy services,
integrated resource planning, Environmental protection.
Rao (2003) expressed the views that the Electricity Bill, 2001 was intended to
enable a major restructuring of the electricity system in India. It would have been
better if the government had amended the existing three Acts relating to electricity
three years ago and introduced essential changes. The bill needs to be passed
speedily. This is despite its many short-comings which can be addressed through
later amendments after the bill is passed. The cost of supply model may become
an important tool for tariff fixation and identification of subsidy/cross subsidy.
For nearly a century, electricity around the world was typically produced by
vertically integrated utilities, which operated facilities for all three stages of
electricity service: generation, transmission, and distribution. In many cases,
utilities were state-owned monopolies. When private ownership was present, the
companies nonetheless operated as monopolies in designated franchise areas
regulated by governments that set rates and oversaw investments. Creating such a
network is a highly capital-intensive project with long payback periods (but
significant society-wide benefits), and, as a result, has required public sector
oversight of electricity supply in many countries. Even where private firms were
active from the outset in the electricity business (e.g., the USA, Germany, and
Japan), governments have played an important role in building electric networks –
sometimes as a supporter of, and at other times as a competitor to, private players
In December 1950 about 63% of the installed capacity in the Utilities was in the
private sector and about 37% was in the public sector. The Industrial Policy
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Resolution of 1956 envisaged the generation, transmission and distribution of

power almost exclusively in the public sector. As a result of this Resolution and
facilitated by the Electricity (Supply) Act, 1948, the electricity industry developed
rapidly in the State Sector (IEEMA journal, 2003).
Godbole (2003) opined that when the bill which was in due course enacted as the
Electricity Act 2003, was under consideration of the standing committee of
parliament, a number of issues, which deserved closer examination had been
highlighted. Several of their issues remain unattended. The Act, which is a half
way house, also raises a number of new issues which are likely to become serious
problems in the coming years.
Ranganathan (2004) has expressed that the Electricity Act 2003 opens the door to
immense possibilities in unleashing competition and trading, but at the same time
opens a new area of policy risk, which it is supposed to mitigate. The Act has an
enabling framework to introduce competition in generation privatization in
distribution, but the homework in terms of addressing transition issue has been
left undone.
Raju & Rao (2004) studied the impact of power sector reforms in AP and
concluded that power sector reforms have positive impact on Transmission and
distribution. They also hold the view that the state sector generation had decreased
during reform period.
Ranganathan & Rao (2004) stated that electricity reforms in India formally started
along with economic liberalisation in 1991-92, though the impetus for private
sector participation in the power sector predates this. However despite aggressive
reform policies in the 90s, private sector participation was moderate at best, and
the financial losses and cash flows of State Electricity Boards (SEBs) reached
crisis proportions. The author also explained the current market rules to put in
perspective the benefits of competition. The current market is only a residual,
unregulated bilateral market overlaid on a contractually bound, bulk regulated
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market. As such, the liquidity will remain low unless existing contracts are
migrated to the market. Production efficiencies, through regional trade, are limited
severely by the inflexible fuel markets. Open access will facilitate capacity
expansion, mostly for sale to private distribution companies and industries, but the
current rules do not contain sufficient measures to discipline costs thereof. An
important benefit of trading, though, is to generate megawatts – avoided supply
needs – through better utilisation of existing capacity.
Sankar (2004) analysed that the Electricity Regulatory Commissions (ERCs) that
have given tariff orders only two, namely Andhra Pradesh and Haryana, have
adopted the concept of cost-to serve whereas other ERCs, on the basis of same
level data availability, have stated categorically that the data was inadequate to
estimate the cost-to-serve. So if one talk with reference to long-run marginal cost
as base level cost then every consumer in most states would be considered as
getting a subsidy. But if the average cost is taken as the base level, tariffs for
agriculture and small households are below the base level and they would be
called subsidised categories. Whereas if cost-to-serve is taken into consideration,
agriculture may not be getting any subsidy at all in view of the supply being
restricted to specific hours, including mostly non-peak hours of the day. If all
factors are taken into costing the actual cost-to-serve, agricultural demand may be
lower than the average cost. The outcomes of reform, if left to the action of
natural political forces, will be complex and hard to predict. Thus, in states with
strong labour unions, large, regulated private firms may be the likely outcome of
reform rather than small, regulated private firms or co-operatives. In states with
large, unnerved rural areas, small co-operatives may result. Given the existence of
economies of density and diseconomies of geography, policymakers should lend
their own weight in support of multiple distribution structures.
Bajaj (2004) opined that both the centre and the states have very vital interests in
power sector, apart from its constitutional position of being a concurrent subject.
The lead in this sector for change has come from the central government, and by
and large many of the central policies have been responsible for where the states
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are today. The author also analysed necessity for regulators to conduct a
Regulatory Impact Analysis (RIA), because regulators can impose very large
costs on the system, which perhaps are not justified by the benefits that they are
intended to produce. An example may not be out of place in this connection.
Karnataka has had for long, a severe shortage of power. Industries have been
required to provide for captive generation capacity to cover a certain minimum
percentage of their needs. Prior to the coming into force of the Reforms Act, the
government had issued an order granting automatic permission to all industries to
set up captive power plants. However, with the passing of the Reforms Act, the
power to accord consent to the setting up of captive generating units, which was
earlier with the Electricity Boards, has now been vested with the Commission.
Though the shortage, reliability and quality problems of grid supply still continue,
the regulator has set in position a formal approval procedure in respect of captive
generation plants. Neither under law, nor in practice, does the regulator appear to
have any justification for denying permission to set up a captive plant. The
transaction costs that are incurred in this process do not seem to serve any
purpose.
Jamasb et al. (2004) in their study proposed a set of indicators for studying
electricity reforms in developing countries. They classified approaches to
analyzing electricity reforms into three broad categories: (i) econometric methods
(ii) efficiency and productivity analysis methods, and (iii) individual or
comparative studies. According to them, efficiency and productivity analyses are
suitable for measuring the effectiveness with which inputs are transformed to
outputs, relative to best practice. They also maintained that single or multi-
country case studies are suitable when in depth investigation or qualitative
analysis is needed. The proper study of economic reforms requires an analysis of
its impact and an assessment of the role of those factors that were influential in
determining its outcome. Any such analysis generally involve measuring (and
there by quantifying) specific aspects of cause and effect. Almost invariably, this
involves using both quantitative and qualitative indicators.
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Newbery (2005) expressed that modern infrastructure, particularly electricity, is

critical to economic development. Deficits cause shortages that constrain total
output, magnifying the return to their elimination. South Asia, faced with
inefficient and bankrupt state-owned vertically integrated electricity supply
industries, was under strong pressure to reform. An imperfect diagnosis
encouraged private investment in generation to address shortages, with IPPs
selling power under long-term contracts to the largely unreformed state electricity
boards (SEBs). Buying IPP power at prices above retail tariffs when the SEBs
could not even cover the cost of under-priced electricity from state-owned
generators exacerbated financial distress and was a recipe for conflict. Reforming
the SEBs, though unbundling, full metering, effective accounting and
management structures creating commercial discipline, under multi-annual
regulation insulated from client list political pressures was an essential first step.
Lal (2005) wrote case study of the power sector in India. The weakness of the
Indian power reforms programme has been that while it has focused on sorting out
distortions in the relationship between the owner government and power utilities
through the unbundling and regulation model, it has failed to carry credible
assurances that this will improve the equation between the reformed utilities and
their consumers.
Rajikumar (2005) opined that during the past 14 years the ministry of power has
produced several policy documents and issued numerous amendments but it has
failed to make any significant improvements in the power sector. The new policy
is another example that the ministry is not yet ready to learn from its own
mistakes.
Victor (2005) studied the effects of Power Sector Reform on Energy Services for
the Poor and revealed that no inherent connection between the promotion of
improved welfare for the poorest households and the reforming of energy markets.
The findings suggested that while electricity and development are correlated,
detailed studies have not clearly separated cause and effect. In fact there is not yet
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a robust theory and practice to identify when such strategies are a superior
investment when compared with the alternative development strategies.
According to the researcher, in practice, very few countries have actually
implemented substantial reforms of their power sectors. These “reforms” have not
much altered the industrial organization of the electric power sector. Given these
two weak signals—the ambiguous link between overt electrification and
development, and the lack of much real reform in developing country power
markets—it is not surprising that the reform processes observed so far have not
had much effect on the welfare of the poorest households.
Shashi (2005) analysed that the power sector poses a serious challenge to
infrastructure development in India. A recent forecast made by the Planning
Commission indicates that India requires an investment of US$ 300 billion for the
development of power sector. In terms of per capita power consumption, India is
well below China, the US, Russia, France, Germany, Japan and several other
countries of the world. The inadequate generation of power and its supply has
crippled industry, agriculture, trade, commercial and domestic sector consumers.
The exorbitantly high transmission and distribution losses have made power an
expensive input and constrained India's global competitiveness. Globalization,
macro and micro economic reforms and outmoded framework governing
functioning of power sector in India ushered in its privatization. Shashi also
explained developed countries would also stand to gain from the debate by
reflecting on the various models they have chosen to assist the developing
countries in the growth of their power sector. On micro front, the shashi has
successfully flagged issues of vital import to power sector ranging from debt-
equity mix, escrow, and risk management to repatriation of dividends,
technological up-gradation, reduction of technical losses and thefts.
As GDP growth accelerates to an ambitious 8 to 10 %, the shortage of power will

become more severe for India (NPC of India Ltd, 2001) The power situation in
India is characterised by demand in excess of supply, high Transmission and
Distribution (T&D) losses, low Plant Load Factor (PLF), peak demand and energy
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shortages, poor financial health of the State Electricity Boards (SEBs) and severe
resource crunch. The power sector reforms in the country and consequent
privatisation of generation, T & D have been sluggish, due to complexities
involved. The Ministry of Power has been making continuous efforts for
promoting reduction of T&D loss and re-structuring of SEBs. The electricity
regulatory commissions, recently formed as a part of the reforms, have been still
learning to exercise adequate control on power tariffs. With reference to above
power and energy scenario, Ministry of Power (MoP) and Ministry of Non-
conventional Energy Sources (MNES), Government of India, have been
promoting viable renewable energy technologies including wind, small hydro and
biomass power, energy conservation, demand side management etc. MNES have
been promoting various sources of renewable energy since 1990. (Bajaj &
Sharma, 2007)
In Indian power sector reforms effective competition in distribution (so that a

consumer can shift from one distributor to other) has not been achieved due to
lack of an enabling framework. Similarly, only two states (Orissa and Delhi), have
privatised electricity distribution, as private players have tended to stay clear of
the loss making distribution business (CRDF Policy brief, 2007).
Nepal & Jamasb (2009) quantitatively explored high-level links between power
sector reforms and wider institutional reforms in the economy for a set of 27
diverse countries in rapid political and economic transition since 1990. The results
indicated that power sector reform is indeed a more complicated process than
initially perceived. The results also showed that power sector reform is greatly
inter-dependent with reforms in other sectors in the economy. They concluded
that the success of power sector reforms on outcomes in developing countries will
largely depend on the extent in which countries are able to synchronize inter-
sector reforms in the economy.
Dash & Sangita (2011) examined the impact of governance reforms on efficiency,
equity and service delivery in order to identifying the factors responsible for the
success/failure of reforms in the power sector in Orissa. It is found from their
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study that the success of reforms depends not on mere change of ownership from
public to private. It depends on so many factors like to what extent the
stakeholders involved in the process are benefited and how the institutions
implement the policies in reality.
2.2.4 STUDIES ON PERFORMANCE OF POWER SECTOR & ITS

ENTITIES
The performance of power sectors supported by World Bank loans, found that
those countries using privatisation had significantly higher efficiency than the
non-privatising group (Hawdon, 1996).
Babalola (1999) studied the performance of Nigerian electricity sector to find out
the influence of ownership structures upon performance and productivity and
concluded that change of ownership and presence of regulator positively impacted
the scale efficiency of the industry.
Parameswaran (1990) examined the performance of Kerala State Electricity Board

(KSEB), and found that till 1983, when the state became energy deficient, Kerala
exported electricity to other states. For two decades from 1962 the guiding
philosophy of the Kerala State Electricity Board has been ‘abundant hydropower/
export of energy/profit’. This deterred the board from thinking about thermal
power. Even today the state depends on the hydro-system for its electricity needs.
However, realistic hydro-energy estimates fall far short of the projected electricity
demand.
Abey George (2000) expressed the views that several factors namely high levels
of transmission and distribution losses, increasing domestic consumption by a
few, subsidized supply electricity to the industrial and the tourism sector,
decreasing capacity of reservoirs, the unreliability of Monsoons etc., have led to a
very vulnerable electricity generation system in Kerala. The KSEB’s answers to
this very complex issue were rather simple viz., in the form of fossil fuel based
electricity generation system.
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Sankar & Ramachandra (2000) explained the principles of retail tariff fixation and
critically examined the performance of the Orissa Electricity Regulatory
Commission and found that the development of power sector is beyond the
boundaries of a regulator.
Prayas Energy Group (2000) found that, one of the major fallouts of the Enron
Controversy has been lack of concerted efforts to improve the performances of
MSEB. The measures have started yielding some results in term of reduction in
errors and better estimation of theft and identification of high theft areas. The
success of these efforts depended on co-operation of MSEB workers and
engineers and strong public pressure to ensure the top management of MSEB is
given free hand to deal sternly with erring staff and consumers alike and is made
accountable for performance of MSEB.
Kannan & Pillai (2001) studied the plight of power sector in India and explained
the significant aspects of inefficiency costs involved in SEBs functioning through
examining physical performances and financial performances.
Gurtoo & Pandey (2001) examined the past problems of power sector and initial
phase of reforms. They said the Uttar Pradesh State Electricity Board’s poor
financial condition and growing power shortages necessitated the radical reforms
in the state power sector. They said that the reforms model being implemented is
based on incomplete diagnosis of the Board’s past problems. High cost of power
purchase, arbitrary depreciation norms, misrepresentation of agricultural
consumption and over reporting of impact of subsidy, were as important reasons
as were poor maintenance, poor productivity, high transmission and distribution
losses, poor billing efficiency and high subsidy to agriculture, in affecting the
financial performance of the Board. They opined that besides lack of recognition
of the former set of causes, the reforms process is ridden with other major pitfalls
like shortage-prone gaps in the proposed model and adhoc handling of its
implementation. It appeared to them that the proposed reforms model appears to
have been conceived out of desperation to escape from financial burden imposed
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by past mistakes, rather than out of a conscious reorientation of past policies,

structures and systems in keeping with international changes in technological and
competitive environment.
Sharma et al. (2003) found that most of the State Electricity Boards (SEBs) in
India have been working under resource crunch and operating at massive
commercial losses. The inefficiencies were mainly due to the following:
1. The technical performance of the SEBs was not satisfactory. Transmission
&Distribution losses are very high, of the order of 22.9%).
2. Thermal power stations were operating at very low efficiency and with
average plant load factor of only 53.9%.
3. Poor billing and collection, because of incorrect reporting and billing and
inadequate collection efforts, tampering with meters, and misreporting in
collusion with consumers.
4. Unmanageable size and monolithic structure, making unwieldy, inefficient
and unresponsive to change as well manpower related problems, poor
productivity, low skills and lack of training for up gradation and low
motivation levels, etc.
Kativar (2005) revealed through the study of a primarily agricultural electricity

distribution subdivision in South Rajasthan that distribution losses are not only
very high, but that they are mostly commercial in nature, illegal hooking in both
the domestic and agriculture categories is rampant and forms a large proportion of
unaccounted energy. The reasons for this can be traced back to factors linked to
the performance of the utility and the wider socio-political environment. It will
not be possible to bring about improvements in the current set-up through
primarily technological measure. Instead reform packages must adopt a
framework for intervention that encompassed technical commercial, social and
institutional aspects of the problem.
Zhang et, al (2005) studied the effects of privatization, competition and regulation
on the performance of electricity generation industry and found that establishing
an independent regulatory authority and introducing competition before
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privatization is correlated with higher electricity generation, higher generation

capacity and in the case of the sequence of the competition before privatization,
improved capital utilization. The main conclusions are that own their own
privatization and regulation do not lead to obvious gains in the economic
performance, though there are some positive interaction effects. By contrast
introducing competition does seem to be effective in stimulating performance
improvements.
Mathur & Mathur (2005) expressed that commercially unviable policies are
responsible for the financial mess state electricity boards are in. They also
examined rural electrification from a socio developmental perspective and argued
that the direct and indirect benefits of rural electrification in reducing the burden
on women, its positive impact on health, education and farm income, justifies the
expenses of network expansion for universal access. They also advocated network
uses of electricity as this would enhance these benefits, have a beneficial effect on
the environment, increase the viability of rural electrification and result in savings
on household (total) energy expenditure.
2.3 POWER SECTOR SCENARIO IN INDIA

Power or electricity is one of the most critical components of infrastructure
affecting economic growth and well-being of nations. The existence and
development of adequate infrastructure is essential for sustained growth of the
Indian economy. The Indian power sector is one of the most diversified in the
world. Sources for power generation range from conventional ones such as coal,
lignite, natural gas, oil, hydro and nuclear power to other viable non-conventional
sources such as wind, solar, and agriculture and domestic waste. The demand for
electricity in the country has been growing at a rapid rate and is expected to grow
further in the years to come. In order to meet the increasing requirement of
electricity, massive addition to the installed generating capacity in the country is
required. (Indian Brand Equity Foundation, 2015)
Page 45
Indian Power sector is witnessing major changes. Growth of Power Sector in

India since its Independence has been noteworthy. However, the demand for
power has been outstripping the growth of availability. Substantial peak and
energy shortages prevail in the country. This is due to inadequacies in generation,
transmission & distribution as well as inefficient use of electricity. Very high
level of technical and commercial losses and lack of commercial approach in
management of utilities has led to unsustainable financial operations. Cross-
subsidies have risen to unsustainable levels. Inadequacies in distribution networks
have been one of the major reasons for poor quality of supply. (National
Electricity Policy, 2014).
The Indian power sector is undergoing a significant change that is redefining the
industry outlook. Sustained economic growth continues to drive power demand in
India. The Government of India’s focus to attain ‘Power for All’ has accelerated
capacity addition in the country. At the same time, the competitive intensity is
increasing on both market side as well as supply side (fuel, logistics, finances and
manpower). The Planning Commission’s 12th Plan expects total domestic energy
production to reach 669.6 million tonnes of oil equivalent (MTOE) by 2016–17
and 844 MTOE by 2021–22. (Indian Brand Equity Foundation, 2015)
Electricity industry is capital-intensive having long gestation period. Resources of

power generation are unevenly dispersed across the country. Electricity is a
commodity that cannot be stored in the grid where demand and supply have to be
continuously balanced. The widely distributed and rapidly increasing demand
requirements of the country need to be met in an optimum manner. Electricity
Act, 2003 provides an enabling framework for accelerated and more efficient
development of the power sector. The Act seeks to encourage competition with
appropriate regulatory intervention. Competition is expected to yield efficiency
gains and in turn result in availability of quality supply of electricity to consumers
at competitive rates. (National Electricity Policy, 2014)
The National Electricity Policy aims at achieving the following objectives:
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 To create an enabling policy framework for the deployment of 20,000 MW

of power by 2022.
 To ramp up capacity of grid-connected solar power generation to 1000
MW within three years – by 2013; an additional 3000 MW by 2017
through the mandatory use of the renewable purchase obligation by
utilities backed with a preferential tariff. This capacity can be more than
doubled – reaching 10,000MW installed power by 2017 or more, based on
the enhanced and enabled international finance and technology transfer.
The ambitious target for 2022 of 20,000 MW or more, will be dependent
on the ‘learning’ of the first two phases, which if successful, could lead to
conditions of grid-competitive solar power. The transition could be
appropriately up scaled, based on availability of international finance and
technology.
 To promote programmes for off grid applications, reaching 1000 MW by
2017 and 2000 MW by 2022.
 Supply of Reliable and Quality Power of specified standards in an efficient
manner and at reasonable rates.
 Protection of consumers’ interests.
 To deploy 20 million solar lighting systems for rural areas by 2022.
(National Electricity Policy, 2014)
By 2030 – 35, energy demand in India is projected to be the highest among all
countries according to the 2014 energy outlook report by British oil giant BP. As
of April 2014, total thermal installed capacity stood at 168.4 gigawatt (GW),
while hydro and renewable energy installed capacity totalled 40.5 GW and 31.7
GW, respectively. At 4.8 GW, nuclear energy capacity remained broadly constant
from that in the previous year. Indian solar installations are forecasted to be
approximately 1,000 megawatt (MW) in 2014, according to Mercom Capital
Group, a global clean energy communications and consulting firm. Wind energy
market of India is expected to attract about Rs 20,000 crore (US$ 3.16 billion) of
investments next year, as companies across sectors plan to add 3,000 MW of
capacity powered by wind energy. Around 293 global and domestic companies
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have committed to generate 266 gigawatts (GW) of solar, wind, mini-hydel and
bio-mass based power in India over the next 5-10 years. The initiative would
entail an investment of about US$ 310-350 billion. The industry has attracted FDI
worth US$ 9,548.82 million during the period April 2000 to February 2015. The
Indian power sector has an investment potential of Rs 15 trillion (US$ 237.35
billion) in the next 4-5 years, providing immense opportunities in power
generation, distribution, transmission and equipment. The immediate goal of the
government is to produce two trillion units (kilowatt hours) of energy by 2019.
This will mean doubling the current production capacity in order to achieve
provide 24x7 electricity for residential, industrial, commercial and agriculture use.
Government had rewritten the National Solar Mission with target of 100,000 MW
capacities by 2022. The government has also sought to restart stalled hydro power
projects and increased the wind energy target from 20 GW to 60 GW by 2022.
(Indian Brand Equity Foundation, 2015)
Assessment of demand is an important pre-requisite for planning capacity

addition. Section 3 (4) of the Act requires the Central Electricity Authority (CEA)
to frame a National Electricity Plan once in five years and revise the same from
time to time in accordance with the National Electricity Policy. Also, section 73
(a) provides that formulation of short-term and perspective plans for development
of the electricity system and coordinating the activities of various planning
agencies for the optimal utilization of resources to sub serve the interests of the
national economy shall be one of the functions of the CEA. The Plan prepared by
CEA and approved by the Central Government can be used by prospective
generating companies, transmission utilities and transmission/distribution
licensees as reference document. (National Electricity Policy, 2014)
Accordingly, the CEA shall prepare short-term and perspective plan. The National
Electricity Plan would be for a short-term framework of five years while giving a
15 year perspective and would include:
 Short-term and long term demand forecast for different regions;
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 Suggested areas/locations for capacity additions in generation and

transmission keeping in view the economics of generation and
transmission, losses in the system, load centre requirements, grid stability,
security of supply, quality of power including voltage profile etc. and
environmental considerations including rehabilitation and resettlement;
 Integration of such possible locations with transmission system and
development of national grid including type of transmission systems and
requirement of redundancies; and
 Different technologies available for efficient generation, transmission and
distribution.
 Fuel choices based on economy, energy security and environmental
considerations.
2.4 RECENT ISSUES & CHALLENGES OF INDIAN POWER

SECTOR
2.4.1 RURAL ELECTRIFICATION
The key development objective of the power sector is supply of electricity to all
areas including rural areas as mandated in section 6 of the Electricity Act. Both
the central government and state governments would jointly endeavour to achieve
this objective at the earliest. Consumers, particularly those who are ready to pay a
tariff which reflects efficient costs have the right to get uninterrupted twenty four
hours supply of quality power. About 56% of rural households have not yet been
electrified even though many of these households are willing to pay for electricity.
Determined efforts should be made to ensure that the task of rural electrification
for securing electricity access to all households and also ensuring that electricity
reaches poor and marginal sections of the society at reasonable rates is completed
within the next five years. (National Electricity Policy, 2014)
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2.4.2 GENERATION
The Government of India has initiated several reform measures to create a
favourable environment for addition of new generating capacity in the country.
The Electricity Act 2003 has put in place a highly liberal framework for
generation. There is no requirement of licensing for generation. The requirement
of techno-economic clearance of CEA for thermal generation project is no longer
there. For hydroelectric generation also, the limit of capital expenditure, above
which concurrence of CEA is required, would be raised suitably from the present
level. Captive generation has been freed from all controls. The progress of
implementation of capacity addition plans and growth of demand would need to
be constantly monitored and necessary adjustments made from time to time. In
creating new generation capacities, appropriate technology may be considered
keeping in view the likely widening of the difference between peak demand and
the base load. (National Electricity Policy, 2014)
2.4.3 TRANSMISSION
The Central Government would facilitate the continued development of the
National Grid for providing adequate infrastructure for inter-state transmission of
power and to ensure that underutilized generation capacity is facilitated to
generate electricity for its transmission from surplus regions to deficit regions.
Network expansion should be planned and implemented keeping in view the
anticipated transmission needs that would be incident on the system in the open
access regime. Prior agreement with the beneficiaries would not be a pre-
condition for network expansion. Central Transmission Unit / State Transmission
Unit should undertake network expansion after identifying the requirements in
consultation with stakeholders and taking up the execution after due regulatory
approvals. (National Electricity Policy, 2014)
2.4.4 DISTRIBUTION
For achieving efficiency gains proper restructuring of distribution utilities is
essential. Adequate transition financing support would also be necessary for these
utilities. Such support should be arranged linked to attainment of predetermined
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efficiency improvements and reduction in cash losses and putting in place

appropriate governance structure for insulating the service providers from
extraneous interference while at the same time ensuring transparency and
accountability. For ensuring financial viability and sustainability, State
Governments would need to restructure the liabilities of the State Electricity
Boards to ensure that the successor companies are not burdened with past
liabilities. The Central Government would also assist the States, which develop a
clear roadmap for turnaround, in arranging transition financing from various
sources which shall be linked to predetermined improvements and efficiency
gains aimed at attaining financial viability and also putting in place appropriate
governance structures. (National Electricity Policy, 2014)
2.4.5 RECOVERY OF COST OF SERVICES & TARGETED SUBSIDIES

There is an urgent need for ensuring recovery of cost of service from consumers
to make the power sector sustainable. A minimum level of support may be
required to make the electricity affordable for consumers of very poor category.
Consumers below poverty line who consume below a specified level, say 30 units
per month, may receive special support in terms of tariff which are cross-
subsidized. Tariffs for such designated group of consumers will be at least 50 %
of the average (overall) cost of supply. This provision will be further re-examined
after five years. Over the last few decades cross-subsidies have increased to
unsustainable levels. Cross-subsidies hide inefficiencies and losses in operations.
There is urgent need to correct this imbalance without giving tariff shock to
consumers. The existing cross-subsidies for other categories of consumers would
need to be reduced progressively and gradually. (National Electricity Policy,
2014)
2.4.6 TECHNOLOGY DEVELOPMENT AND R&D

Effective utilization of all available resources for generation, transmission and
distribution of electricity using efficient and cost effective technologies is of
paramount importance. Operations and management of vast and complex power
systems require coordination among the multiple agencies involved. Effective
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control of power system at state, regional and national level can be achieved only
through use of Information Technology. Application of IT has great potential in
reducing technical & commercial losses in distribution and providing consumer
friendly services. Integrated resource planning and demand side management
would also require adopting state of the art technologies. Special efforts would be
made for research, development demonstration and commercialization of non-
conventional energy systems. Such systems would need to meet international
standards, specifications and performance parameters. (National Electricity
Policy, 2014)
2.4.7 COMPETITION AIMED AT CONSUMER BENEFITS

 For achieving this, the policy underscores the following:-
a. It is the function of the Central Electricity Regulatory Commission to
issue license for inter-state trading which would include authorization for
trading throughout the country.
b. The ABT regime introduced by CERC at the national level has had a
positive impact. It has also enabled a credible settlement mechanism for
intra-day power transfers from licenses with surpluses to licenses
experiencing deficits. SERCs are advised to introduce the ABT regime at
the State level within one year.
c. Captive generating plants should be permitted to sell electricity to
licensees and consumers when they are allowed open access by SERCs
under section 42 of the Act.
d. Development of power market would need to be undertaken by the
Appropriate Commission in consultation with all concerned.
e. The Central Commission and the State Commissions are empowered to
make regulations under section 178 and section 181 of the Act
respectively. These regulations will ensure implementation of various
provisions of the Act regarding encouragement to competition and also
consumer protection. The Regulatory Commissions are advised to notify
various regulations expeditiously.
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f. Enabling regulations for inter and intra State trading and also regulations
on power exchange shall be notified by the appropriate Commissions
within six months.
2.4.8 ENERGY CONSERVATION

There is a significant potential of energy savings through energy efficiency and
demand side management measures. In order to minimize the overall requirement,
energy conservation and demand side management (DSM) is being accorded high
priority. The Energy Conservation Act has been enacted and the Bureau of Energy
Efficiency has been setup. The potential number of installations where demand
side management and energy conservation measures are to be carried out is very
large. Bureau of Energy Efficiency (BEE) shall initiate action in this regard. BEE
would also make available the estimated conservation and DSM potential, its
staged implementation along with cost estimates for consideration in the planning
process for National Electricity Plan. (National Electricity Policy, 2014)
2.4.9 TRAINING AND HUMAN RESOURCE DEVELOPMENT

In the new reforms framework ushered by Electricity Act 2003, it is particularly
important that the electricity industry has access to properly trained human
resource. Therefore, concerted action would be taken for augmenting training
infrastructure so that adequate well-trained human resource is made available as
per the need of the industry. Special attention would need to be paid by the
industry for establishing training infrastructure in the field of electricity
distribution, regulation, trading and power markets. Efforts should be made so that
personnel of electricity supply industry both in the private and public sector
become more cost-conscious and consumer-friendly. (National Electricity Policy,
2014)
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2.5 OVERVIEW OF INDIAN POWER SECTOR

PERFORMANCE
Utility performance analysis over the past decade presents a mixed bag of results.
Generation capacity in the country has been strong in the past decade, largely
driven by the Electricity Act 2003 that significantly improved investor perception
on the investment climate in the business. While the Act made generation a de-
licensed activity, the introduction of competitive bidding framework made the
criterion of selection of projects more transparent and efficient. Even in regulated
projects (i.e., those whose tariffs are determined by regulation and not through
competitive bidding) the operational norms for thermal based power plants have
improved over the years. CERC has been consistently tightening the operational
norms in the generation sector. The tables below present some of the key
operational norms including SHR, Auxiliary Consumption, and PLF for different
control periods. (CERC, 2014)
Table 2.1: Operational Norms for Coal Based Power Plants
Source: CERC regulations for different control periods
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Table 2.2: Operational Norms for Gas Power Plants
Source: CERC regulations for different control periods
Further, there have been significant increases in the share of private sector in
power generation in the country. The private sector installed capacity has
increased from 17112 MW in 2007 to 82715 MW as of 2014. As a result of these
changes over the years, the deficits between demand and supply have fallen
significantly in recent periods, as is shown in the chart below. (CERC, 2014)
Figure 2.1: Energy Gap and Demand Gap (Jan’ 12 to Sept ’13)
Source: CEA
While the transmission segment of the sector continues to be largely under the
public sector monopoly structure, several developments have resulted in increased
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investments and better efficiencies in this segment. GoI guidelines for tariff-based
competitive bidding for transmission services have encouraged private
investments. The rapid increase in inter-regional capacity has caused a change in
the nature of inter-state transmission system (ISTS) in a short span of time. The
integrated national system is expected to harness natural resources optimally,
evolve deep competitive markets, and also to add robustness to the power system.
In addition, the Electricity Act has provided for better monitoring, scheduling, and
dispatch of power in the form of Load Dispatch Centres, besides setting up
standards for grid operation in the form of the Grid Code. These have been
followed up by regulations by CERC where more efficient development and
pricing mechanisms for transmission have been instituted. However the
momentum has not carried over to state level policies and regulations on
transmission and in particular the inconsistencies in open access to state level
networks remain a serious concern. (CERC, 2014)
The Distribution segment of the electricity sector remains the only segment that
is yet to see radical improvements in efficiency. Despite several efforts, it is still
mired in problems and the overall performance of this segment remains
inadequate. While the network losses have reduced in the past decade, they
remain much above acceptable norms. The level of access has also improved, but
remains inadequate. Most importantly, supply quality remains very erratic and
inconsistent across the state owned distribution companies, and no state owned
distribution utility attempts to meet the service standards and the obligations cast
on them to serve load. (CERC, 2014)
Table 2.3: Access Level
Source: Statistical Handbook, GoI, 2014
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The distribution sector continues to be characterised with poor financial and

operating efficiencies primarily due to unmetered supply to consumers, high
T&D/AT&C losses, and free electricity to agriculture consumers, inadequate tariff
hikes and low realization of subsidies from state government. These factors have
resulted in deteriorating the financial performance of state utilities and reduced
their ability to attract private investment attract private investment. This has
resulted in heavy reliance upon government support for both investment and
working capital requirements. (CERC, 2014)
In order to assess the financial performance of distribution companies of the

country, the figure below presents the trend of ACS, ARR, and revenue Gap on a
per-unit basis at an All-India level. (CERC, 2014)
Figure 2.2: Financial Gap at All India Level
Source: PFC report on utility finances 2007-08 to 2011-12

* ACS – Average Cost of Supply, ARR – Average Revenue Realized
The steep increase in ACS over the last few years has been primarily due to
increase in power purchase costs, which form close to 80% of the total cost of
Discoms. Power purchase costs increased by over 16% in 2008-09, the year in
which international coal prices went up significantly, and thereafter have
remained high as compared to the price levels of 2007-08 (Refer to the figure
below). (CERC, 2014)
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Figure 2.3: International Coal Prices
Source: Coal spot.com
On the revenue front, the tariff increase has not been commensurate with the
increase in ACS. While the ARR has been increasing in the last 2 years (FY10
and FY11), the tariffs were not revised in many of the states for number of years.
The lack of cost coverage has forced the Discoms to borrow heavily from banks
and FIs, which has increased their interest burden over the years. Thus, Financial
Gap has consistently increased over the last few years and has reached
unsustainable levels at present. As of 2011-12, over one rupee is lost on every unit
of power purchased and sold by the distribution companies in India. In absolute
terms, the aggregate losses (without accounting for subsidy) in 2011-12 were Rs.
88,053 Crs. (CERC, 2014)
The total subsidy booked by distribution companies in 2011-12 was Rs. 30,242
Crs. However, not this entire subsidy is actually received by the Discoms. As a
result, the book losses underestimate the actual loss levels and do not provide a
clear picture of the financial health of Discoms. As highlighted before, inadequate
tariff hikes was one of the factors behind the continuous increase in revenue gap
over the years. In light of the deteriorating financial health of utilities, the
Ministry of Power (MoP) requested the Appellate Tribunal to take appropriate
action by issuing necessary directions to all the State Commissions to revise the
tariff periodically, in the interest of improving the long term viability of the
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electricity sector in general and distribution utilities in particular. The Appellate

Tribunal for Energy Judgement on OP1 of 2011 played a significant role in
driving SERC’s to undertake periodic tariff revisions thereby enabling financial
discipline in the sector. In line with the directions of the APTEL, more than 20
states revised their tariffs in 2012-13 and 2013-14. (CERC, 2014)
The efficiency in the distribution system is measured by the extent of aggregate

technical and commercial (AT&C) losses. These losses capture technical as well
as commercial losses in the network. In 2011-12, AT&C losses at an All-India
level were close to about 27%. Before looking at states’ AT&C loss figures, the
commercial component of these losses is presented in the figure below. The All-
India average collection efficiency level is close to 90%. (CERC, 2014)
Figure 2.4: State-level Collection Efficiency –5 year Average
Source: PFC report on utility finances
It can be observed that the collection efficiency for most of the states is above
90%, which is surely a positive sign. State like Uttarakhand, Madhya Pradesh, and
Jharkhand have low collection efficiency (below 80%). The technical component
of total losses in India is much more than acceptable international standards. The
main reason behind the high rate of T&D losses is the lack of sufficient
investment made in the T&D sector, especially in the sub-transmission and
distribution. Additionally, power thefts continue to plague the distribution system
in states. Further, improper load management and poor quality of distribution
transformers used are also responsible for high technical losses. The figure below
presents that average (5 year) AT&C losses for different states. As observed in the
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figure below, states with high unmetered agricultural consumption, including

Andhra Pradesh, Tamil Nadu, and Punjab have low AT&C losses. On the other
hand, states with a low agricultural share in total consumption have high ATC
losses. (CERC, 2014)
In addition to infrequent and inadequate tariff hikes, low revenue realization from
agriculture is also one of the major reasons for poor performance of some of the
large agricultural states. Discoms that have not been able to increase tariffs for
agricultural consumers are observed to have poor financials. Madhya Pradesh has
an average revenue realisation of Rs 1.65/kWh from agriculture. However, its
AT&C losses are as high as 38% which is one of the reasons for its poor financial
performance. Add to that, there are no subsidies have been given in the state
which has further aggravated the condition. Rajasthan has very low revenue
realisation from agriculture compared to other states. Also, the state government
subsidy provided to bridge the cost-revenue gap of the agriculture segment is less
when compared to other states. (CERC, 2014)
2.6 POWER SECTOR REFORMS IN MADHYA PRADESH

Madhya Pradesh Electricity Board (MPEB) was established under the Indian
Electricity (Supply) Act, 1948. Like other State Electricity Boards (SEB) in the
country, MPEB was a vertically integrated monopoly and functioned under the
guidance of the state government, interacting with the central power utilities for
planning and co-ordination.
The reform process of the Madhya Pradesh power sector had its genesis in the late
eighties and early nineties when the sector was facing mounting financial burden
and a peak power deficit in excess of 25%. Madhya Pradesh State Electricity
Board (MPSEB), the state utility could never earn the stipulated minimum 3%
return on its investment and instead needed a revenue subsidy of Rs17 billion in
1999 (or, as much as 40% of its revenue). MPSEB had at one point more than
60,000 employees for a 2,200 megawatt (MW) generation transmission
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distribution system. The transmission and distribution (T&D) losses were 47% –
more than half of it was “non-technical” or “commercial” losses (ADB. 2011).
The reform process was initiated in 1996 with the appointment of Tata Rao
Committee to look into the restructuring of sector and increased private
participation. The Committee came out with a report in 1997 that included key
recommendations for functional division of MPSEB, formation of an electricity
regulatory commission, private sector investment, etc.
In 1998, the state government constituted Madhya Pradesh Electricity Regulatory

Commission (MPERC), a statutory independent regulatory authority under the
Electricity Regulatory Commission Act of 1998. In May 2000, a Memorandum of
Understanding was signed between the Ministry of Power and the State
Government to fast-track the reform process with support from the Government of
India (the government). Subsequently, in July 2001, the state government enacted
the Madhya Pradesh Vidyut Sudhar Adhiniyam (Madhya Pradesh Electricity Act
of 2001) which provided for unbundling of state owned MPSEB as well as
development of a competitive business environment in the state. In accordance
with the Madhya Pradesh Reform Act, vertically integrated MPSEB was
unbundled into five independent corporations with MPSEB as the holding
company in July 2002. The Madhya Pradesh Reform Act was however superseded
by the Electricity Act of 2003 (ADB. 2011).
In 2000, there was another key development which had a huge impact on the
power sector reforms in Madhya Pradesh. This was the physical partition of the
state into Madhya Pradesh and Chhattisgarh that required the erstwhile MPSEB to
be split into (i) Madhya Pradesh State Electricity Board, and (ii) Chhattisgarh
State Electricity Board (CSEB). The split, however, raised a number of issues
around inequitable allocation of supply resources versus liabilities. As Table 1
summarizes, MPSEB was left to meet 78% of the energy requirements (including
90% of the heavily subsidized agricultural customers) using only 68% of the
capacity, and effectively ended up with a significant peak shortfall and 64% of the
total revenue. Therefore, MPSEB had started with an annual loss of Rs21 billion,
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while CSEB had positive profit of Rs9.3 billion. MPSEB needed significant
financial assistance to the tune of Rs175.6 billion over 2002-2005 from the State
Government that included inter alia (i) Rs74.6 billion of outstanding debt to
domestic financial institutions that was absorbed by the government; (ii) Rs32.3
billion on subsidies; and (iii) Rs53.3 billion for capital investment projects. The
debt restructuring efforts continued during 2007-2009 with an additional Rs111.4
billion provided to MPSEB (ADB. 2011).
Table 2.4: Allocation between MPSEB and CSEB

Key Parameters MPSEB CSEB
Energy consumption 78% 22%
Capacity (MW) 3000 (68%) 1250 (32%)
Central Generation Share (MW) 1116 498
Peak surplus/deficit(MW) -1690 +758
Employees 78% 22%
Revenues 64% 36%
Annual profit/loss (Rs billion) -21 +9.3
CSEB = Chhattisgarh State Electricity Board, MPSEB = Madhya Pradesh State
Electricity Board, MW = megawatt. Source: Abhyankar (2005).
The reform of the Madhya Pradesh power sector that started more than 15 years
ago comprises of the following key elements:
i. Segregation of the vertically integrated Board into generation,
transmission and distribution functions;
ii. Corporatization of the utilities i.e. formation of limited companies under
the Companies Act, 1956;
iii. Rationalisation of tariffs for prices to cover at least 75% of the cost of
supply of electricity by 2005; (Govt of Madhya Pradesh, 2000)
iv. Continuous review of the working of the reorganized utilities/companies
and taking measures to restructure them to achieve commercial viability
through:
(a) Rationalization of tariffs;
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(b) Reduction and eventual elimination of power theft within a stipulated

timeframe.
v. Limiting role of State Government to issue of policy directives;
vi. 100% electrification of villages including full coverage of rural
households
vii. All statutory responsibilities of the State Government to be transferred to
the State Electricity Regulatory Commission which was formed during the
early phase of reform in 1998;
viii. Augmenting state generation capacity with timely allocation of power
from Central Generating Stations and expeditious processing of new
generation investment proposals from the State including private sector
participation and joint ventures on hydro projects;
ix. Strengthening and enhancing transmission network in Madhya Pradesh to
enable supply of power including development of a number of high
voltage (HV) (400 kV and above) corridors;
x. Reducing T&D losses including development of a HV distribution system
in a phased manner; and
xi. Financial reform of the sector.
The original reform agenda has been followed over the last 12 years, albeit there
were many practical constraints that limited the achievement in some cases, not
the least of which was a continued poor financial performance of the state utilities.
In July 2002, MPSEB was divided into five state-owned companies – one each for
generation and transmission and three for distribution, namely:
i. Madhya Pradesh Power Generation Corporation that catered for about
65% of state’s generation with the remaining coming from the Central
Generating Stations and purchase from other states apart from a small
quantum of hydro/wind generation.
ii. Madhya Pradesh Power Transmission Corporation (MP Transco) that
owns and operates the state power grid;
iii. Distribution of electricity is looked after by three companies namely (a)
Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company (DISCOM-
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C); (b) Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company

(DISCOM-E), and (c) Madhya Pradesh Pashchim Kshetra Vidyut Vitaran
Company (DISCOM-W)
For about three years since their formation, the new companies functioned just as
the agents of MPSEB. All transactions including filing tariff revision petitions
were performed under the head of MPSEB. On 1 June 2005, the companies
started their independent operations. All transactions including filing tariff
revisions are currently performed independently by these companies.
The Asian Development Bank (ADB) has played a significant role in the power
sector reform since the nineties – most notably through its financing of the Sector
Development Program (SDP) to develop an enabling policy environment and
improve the financial performance of MPSEB. ADB had approved a total loan
amount of $350 million including a $150 million policy-based program and an
investment loan of $200 million. The program loan was disbursed in three
tranches between March 2002 and November 2003 and the counterpart funds it
generated were transferred to the State Government by the Government of India to
support the financial restructuring of MPSEB and finance part of the adjustment
cost associated with the SDP. The actual project cost at completion in 2007
including additional works approved in 2004 was $260 million, of which $179
million was financed by ADB.
SDP has been a significant part of the overall strategy adopted by the Central and
State governments to identify and fix the structural problems in the Madhya
Pradesh power sector. The regulatory and legal reforms have been effective in
establishing a transparent regulatory environment for the power sector. The
investment projects have been effective in containing and eventually reducing
transmission and distribution losses. The more recent investment in high voltage
distribution system and segregation of agricultural and residential feeders are
likely to deliver further improvement to render the distribution utilities to become
financially viable in future.
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The early reform process in Madhya Pradesh as well as some of the other States in
India paved the way for exploiting the opportunities presented through the
national policy reform process, namely, the introduction of The Electricity Act
2003. In particular, the private sector participation in Madhya Pradesh got a boost
albeit the continued poor financial performance of MPSEB meant that it had
limited financial ability to honour power purchase agreements with the
independent power producers (IPPs). Nevertheless, after a decade (1990-2000)
that saw less than 900 MW of new capacity addition, there was 4,218 MW of new
capacity that matured over 2002-2009, including 2,411 MW of state’s share in the
joint venture hydro projects. The installed capacity in the State (in all forms of
ownership including MPPGCL, joint ventures, Central Sector and Other States)
has increased from 4,000 MW in FY2011 to 10,632 MW at the end of FY2012.
As per the generation expansion plan for the state, the generation capacity is
estimated to be around 16,350 MW by the end of FY2015 (Energy Department,
Govt. of Madhya Pradesh).
As Shahi (2006) had pointed out, this was deemed to be a more challenging task
for Madhya Pradesh with its substantial share of agricultural consumption (e.g.,
41% in 2000 in Madhya Pradesh compared to 5% in Orissa). The reform
programs conducted by ADB, Department for International Development (DFID)
and Canadian International Development Agency (CIDA) all emphasised the need
for improved performance of the institutions, especially that of the Madhya
Pradesh State Electricity Regulatory Commission. A number of performance
criteria were set for all of the relevant power utilities. These criteria
comprehensively captured all aspects of governance and measured the
achievement of the utilities against set standards. The Table 2 summarizes these
criteria and the performance (DFID, 2012).
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Table 2.5: Review of Progress of Madhya Pradesh Power Sector Organizations

Performance criteria Status Comments
Formation of new The goal was expected to The new organization structure has been
organizations as per plan: be fully achieved by end of estimated to reduce wages by 12.6%
Personnel and assets 2013. In 2010, all assets ($38 million per year). Opening balance
transferred to successor and 98% of personnel have sheets of new organizations have been
companies been transferred and issued and approved by the Government
financial reporting has been of Madhya Pradesh. Performance Based
started. In 2012, revenue Promotion scheme have been introduced
collection accruing directly and Employee Service Rules for new
to fully autonomous recruits have been made operational in
utilities has taken place. 2012.
Management structure: Completely achieved. According to DFID Annual Review:
Boards with independent Training on new and “Independent directors with substantial
directors established and advanced management experience and expertise in the sector
CMDs appointed on open approaches have been have been posted to boards of various
selection basis completed in 2012. companies.”
Independent cash Independent cash The independent cash management
management, revenue management scheme is system of utilities accompanied with
target, and financial already operational since reasonable tariff hike is expected to
viability 2011. Revenue collection increase revenue collection by on an
has already improved by average 15%- 17% despite just 4%
2012 and future target to annual average tariff increase over last 5
increase it further over the years. As per the financial restructuring
next 5 years have been set. plan (approved by the GOMP)
Financial viability: transmission company and the west
Transmission company: distribution company is expected to be
2013 Generation company: profitable by FY2013. With all DFID
2014 Distribution recommendations approved and
companies: 2016 (DFID implemented, the generation company is
Annual Review) expected to be profitable by FY2014.
The other 2 DISCOMs are expected to
earn profit by FY2015
Implementation of cost- Significant improvement in Cost recovery in the sector has improved
reflective tariff cost recovery: 95% in 2010 from less than 80% in FY2005 to over
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and 96% in 2012, despite 94% in FY2010 and achieved the target
an increase in cost of of 96% for 2012 (ADB Independent
supply (MP Electricity Review report). Industrial consumers
Regulatory Commission, were paying 40% for the domestic
2013) consumers in FY2005, which has now
(FY2010) reduced to little over 20% and
likely to meet the FY2012 target of 16%.
Thus, the cross subsidies are declining.
Computerised systems: Computerised billing Online bill payment system has been put
billing, online payment, system is already in place. in place by all the 3 DISCOMs although
customer feedback Online payment system the coverage of customers has been only
rolled out fully as of 17% of the total customers of 8.2 million
December 2012. Customer and less than 1% of those covered
online grievance system in actually use the facility. Bill collection
place in 9 out of 42 Circles. has improved from 85% in FY2005 to
96% in FY2012 (Collated from Annual
Reports of Discoms, 2012). 15 out of the
42 circles have already implemented
online payment mechanism in the three
DISCOMs in FY2010. The roll out has
been completed in December 2012.
Although there was a target set to roll out
online customer feedback system in all
Circles by December 2012, it has not
been achieved yet (Central Discom
Annual Report 2012-13).
Aggregate technical and Significant reduction in ATC was 44% in FY2006and a 35%
commercial (ATC) losses ATC has been achieved target for FY2010 was set. In FY2010,
exceeding the FY2012 the realized losses were 33%, i.e.,
target and future targets up exceeded the loss reduction target.
to FY2015 have been FY2012 target of 28% has also been
revised in light of this. exceeded and the FY2015 target has now
been revised to 18% (DISCOM-E), 16%
(DISCOM-W) and 19% (DISCOM-C)
(MP Electricity Regulatory Commission)
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Private sector investment In May 2012, Madhya A total of 49 MOUs have been signed
in generation Pradesh Investment in under the old and new policy taken
Power Generation Projects together with a total capacity of 67,546
Policy for IPPs have been MW. A total capacity of over 10,000
enacted. The long term MW is in various stages of
target is for 50 GW implementation. (MPSEB Annual Report
including 10 GW by 2012. 2012-13) A benefit- cost analysis done
There has been significant by the DFID consultants noted that: “an
activity already including additional 3,148 MW of concessional
24 MOUs signed in 2012 power will be available to the state
for a total capacity of (compared to the Old Policy) with a an
31,480 MW. additional benefit of Rs 431.87 billion
(£6 billion) to the state. In addition this
will enable the state to raise revenue to
the tune of Rs252.83 billion (£3.5
billion) from electricity duty and cess.”
Renewable energy A target of INR 12.5 billion MP currently has 386 MW of wind and
investment was set for 2012 that has an estimated 270 MW of solar capacity.
been exceeded. There are (Ministry of New and Renewable Energy
very significant investments Annual Report 2012-13) There is an
in solar and wind that are estimated 870 MW of additional solar
forthcoming. investment worth INR 10 billion that is
likely to be achieved by June 2014.
(Government of MP, 2013) There are
proposals for 2,100 MW of wind in the
state that are worth INR 12.7 billion
In addition to the performance review in, it is also useful to note some of the
institutional developments that took place since early nineties, to gain a more
holistic understanding of the power sector in Madhya Pradesh. The enactment of
Madhya Pradesh Electricity Act of 2001 clearly delineated the responsibilities for
overall sector formulation, economic regulation, and utility function among
Madhya Pradesh Government, MPSERC, and MPSEB and its successor entities,
respectively. The prevailing institutional mechanism for tariff setting through the
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nineties was highly politicized was set significantly below cost of supply.
Although abundance of cheap coal in the nineties had the cost of supply around
Rs2 for kWh, the average realized tariff was below Rs1.50 through the nineties,
even after industrial and commercial customers paying substantially higher than
the cost of supply. The cross-subsidies from industrial/commercial consumers to
agricultural and residential consumers were no longer sustainable as industrial
consumers were increasingly resorting to captive power generation.
Under MPSERC’s Tariff Orders, the average domestic tariff increased from
Rs2.36 per kWh in FY2002 to Rs4.80 per kWh in 2012. The agricultural tariff
increased more sharply from Rs0.90 per kWh in FY2002 to Rs3.80 per kWh in
FY2012. Cost reflectivity of tariff for agricultural customers expressed as a
percentage of the average cost of supply improved from 27% in FY2004 to 75%
in FY2010. The cross-subsidy from HV consumers (mainly industrial) to LV
consumers (mainly residential and agricultural) has been significantly reduced
from Rs. 1.73/kWh in 2004 to Rs0.5 per kWh in 2013. A transparent tariff- setting
mechanism has clearly worked to increase the level of cost recovery. The 2013
tariff order issued by the MPSERC notes the following cost recovery for FY2012:
I. Domestic: 97.85%
II. Industrial: 122.29%, and
III. Agriculture: 75%.
Although agricultural customers continue to get some subsidy at the expense of

industrial customers paying above the cost of supply, the gap has reduced
significantly over the years. That said, subsidized agricultural consumption is a
source of financial stress for the DISCOMs that continues to prevent it from
getting into a profitable state. According to the latest survey by Power Finance
Corporation (2013), agricultural sector accounts for 31 per cent of the energy
consumption but only 13% of the revenue. It is a bigger consumer of energy
compared to the industries that consumes 25% of energy and accounts for 41% of
the revenue. Residential tariff, however, have aligned very closely to cost of
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supply notwithstanding the fact that the cost of supply has increased substantially
to Rs4.90 per kWh in FY2012.
The Government of Madhya Pradesh (GOMP) allowed MPSERC to act as an

independent economic regulator and did not interfere with tariff setting based on
full cost recovery. Through fiscal allocations, GOMP has promptly paid the tariff
subsidies that it provided to residential consumers below the poverty line and for
agricultural consumers. MPSERC has been constituted as an independent
regulatory agency for the sector. Its three commissioners are retired public
servants. MPSERC has instituted a transparent tariff- setting mechanism where
the tariffs are set on the basis of the tariff applications submitted by each regulated
entity and taking into account the reasonable cost of supply and future investment
requirement. Tariffs have been gradually increased to achieve near 100% cost of
the supply today including minimal cross-subsidy. This is in line with the agenda
that MPSERC initiated in 2007 in the form of a multiyear tariff-setting framework
with the aim of gradually phasing out the cross-subsidies in the sector.
2.7 THE CONCEPT OF PERFORMANCE & ITS

MEASUREMENT
Performance is a contextual concept associated with the phenomenon being
studied. (Hofer, 1983). Many management researches focused on the determinants
of performance. For instance, Kunkel (1991) proposed that new venture
performance was a function of new venture strategy and industry structure
(expressed as a formula as P=ƒ (VS, IS). Kunkel tested the relationship between
two independent variables and the dependent construct of new venture
performance. The focus of Kunkel’s research was on the hypothesized
relationship between certain independent variables and certain dependent
variables, while the focus of this dissertation is just on the “P”. The independent
variables are proposed as determinants of the changes in the dependent variables.
The changes in the dependent measures are considered to represent “performance”
caused by the variations in the independent measures. The critical point here is
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that performance as a concept involves measurement of the effects of

organizational actions.
The Chartered Institute for Personnel and Development (CIPD) identified

performance management as the sum total of different elements. Fully realised,
performance management is a holistic process bringing together many of the
elements which go to make up the successful practice of people management,
including in particular learning and development. But for this very reason, it is
complex and capable of being misunderstood (CIPD, 2008a).
Armstrong and Baron (1998) also highlighted the complexities of performance

management, referring to the phenomenon as a strategic issue, because it is
concerned with some of the wider issues affecting the organisation and its longer-
term goals and direction. At the same time, they advised that it needs to be
integrated so that individual and team objectives are aligned with the
organisational plans (particularly those that are HRM/HRD-related) and linked
across departments, achieving a coherent approach to the management and
development of people. They further assert that performance management is
about achieving individual, team or organisational effectiveness through
performance improvement emphasizing that it is equally, if not more importantly,
concerned with development.
Performance management is not achievable unless there are effective processes of

continuous development. This addresses the core competencies of the
organisation and the capabilities of individuals and teams. ‘Performance
management’ should really be called ‘performance and development
management’ (Armstrong and Baron, 1998). These definitions signal the need to
focus on performance management equally at three levels - organisational,
departmental and individual.
To achieve desired performance goals in an organization, the ability to measure

the performance are required. Increasingly, company managers are moving from
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management by opinion to management by facts, that is, away from a soft science
approach to performance measurement. That means that managers are collecting
hard numbers to set and achieve desired performance levels and to enable this
there is a need for a developed performance measurement system (Harbour,
1997). Harbour emphasized the importance of performance measurement as “You
can’t understand, manage, or improve what you don’t measure”.
Performance management can be seen as a more holistic complex system that

arose out of a combination of performance appraisals and performance
measurement systems (Furnham, 2004).
Performance measurement can be seen to be concentrated simply on measuring

specific activities, rather than measuring them with the aim of providing support
and facilitating improved performance, as is the case with performance
management (Radnor and McGuire, 2004).
The concept of performance measurement is formulated as “you get what you

measure, and you cannot manage a system unless you measure it”. Performance
measures are tools to understand, manage and improve organizations activities
(Franceschini et al., 2007).
A performance measurement system aims at providing the right performance-

related information to the right person in the company at the right time (Harbour,
1997). These performance measurement systems assist the company by providing
data that the company wants to collect, analyze report and use to make business
decisions (Franceschini et al., 2007).
Kaplan and Norton (1996) explained the importance of measurement by

comparing measurement in an organisation to the instruments used on an airplane.
One would not consider boarding a plane that measures only certain aspects, for
example fuel, and not airspeed. Airplanes therefore, have a dashboard of
indicators which displays information required to keep the plane on track and in
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the air with the end goal of reaching its destination. Following this reasoning,
managers of organisations should not be satisfied with anything less than a full
battery of instrumentation which supplies them with the correct information
regarding the environment they are competing in and the current condition of the
company to guide them in reaching their goals.
Performance measurement is so important, because it gives an organisation the

ability to mobilise and exploit its intangible assets, rather than only investing in
and managing physical assets (Kaplan & Norton, 1996).
The importance of information measurement becomes apparent without much

explanation. Information measurement is not something new as introduced by the
information age. Measurement in organisations goes far back in history. In 350
BC Sun Tzu (Niven, 2002) concluded "The general who wins the battle does
many calculations in his temple before the battle is fought. The general, who
loses, makes but few calculations." Although Sun Tzu refers here to calculations
made in his "temple", one can be certain that if they used measurement as an
organisational and management tool, they would go into battle better armed,
prepared and informed. An often quoted statement from Kelvin (Niven, 2002)
also explains the roots of measurement: “When you can measure what you are
speaking about and express it in numbers, you know something about it; but when
you cannot measure it, when you cannot express it in numbers, your knowledge is
of the meagre and unsatisfactory kind. According to Niven, the words "meagre"
and "unsatisfactory" paint a real picture of the importance of performance
measurement. Although Kelvin quoted this presumably 160 years ago, he is
already referring to the power and importance of measurement. Today, the
collection of information is even more applicable to organisations.
According to the IT Performance Management Group (ITPMG) (2007b), the most

basic benefits derived from measurement, are the opportunities to increase one's
knowledge and at the same time to reduce uncertainty; thereby, increasing the
accuracy of your decision-making and thus, reducing risk. This is done by making
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observations by means of measurement and processing these observations into

information. The four forms of observations mentioned by ITPMG (2007b) are
the following:
 Characterisation. Measurement in its purest form. To describe, to gain
understanding and to establish baselines for future comparison.
 Evaluation. This is to determine the status with respect to plans.
Measurements are the sensors that provide the signals when projects and
processes are not meeting targets, so that they can be brought back under
control. We also evaluate to assess achievement of quality goals and to
assess the impact of improvement.
 Prediction and preparation. To predict so that you can plan and prepare.
Measuring for prediction involves gaining understanding of relationships
and building models of these relationships, so that the values observed for
some attributes, can be used to predict others. This is done because one
wants to establish achievable goals so that appropriate resources can be
applied. Predictive measures are also used to extrapolate so as to reveal
trends.
 Improvement. To identify roadblocks, root causes, inefficiencies and
other opportunities for improvement. Measurements help plan and track
improvement efforts. Measurements of current performance provide
baselines to compare against, so that we can judge whether improvement
actions are working as intended and what the side-effects might be.
The following are important considerations regarding characterisation in

measurement Performance measurement must be (Anon, 2006a).
 Meaningful, unambiguous and widely understood.
 Owned and managed by the teams within the organisation
 Based on a high level of data integrity.
 Such that data collection is embedded within the normal procedures.
 Able to drive improvement.
 Linked to critical goals and key drivers of the organisation.
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In the cycle of never-ending improvement, performance measurement plays an

important role in (Anon., 2006a):
 Identifying and tracking progress against organisational goals;
 Identifying opportunities for improvement; and
 Comparing performance against both internal and external standards.
Reviewing the performance of an organisation is also an important step when

formulating the direction of the strategic activities. It is important to know where
the strengths and weaknesses of the organisation lie, and as part of the 'Plan - Do -
Check - Act' cycle, measurement plays a key role in quality and productivity
improvement activities. The main reasons it is needed, are to-
 ensure customer requirements have been met,
 be able to set sensible objectives and comply with them,
 provide standards for establishing comparisons,
 provide visibility and a "scoreboard" for people to monitor their own
performance level,
 highlight quality problems and determine areas for priority attention, and
provide feedback for driving the improvement effort.
2.8 APPROACHES OF PERFORMANCE MEASUREMENT

Dess and Robinson (1984) examined the usefulness of subjective performance
measures as compared to objective measures. Specifically, they investigated the
relationship between objective and subjective measures of return on assets (ROA),
growth in sales, and “global” performance measures. Dess and Robinson found
that top management’s subjective evaluation of performance was highly correlated
with objective measures, suggesting that researchers may consider using
subjective perceptual measures of ROA and sales growth under certain conditions.
These conditions include when objective measures are not available and when the
alternative is to remove the consideration of performance from the research
design. Another finding reported in the study was that there is some evidence that
the global measures of organizational performance overlap with subjective and
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objective measures of ROA and sales growth. However, the amount of unshared
variance between the constructs implies that the global measures may capture
some broader conceptualization of performance. In other words, there are more
dimensions to overall organizational performance then ROA and sales growth.
The Q ratio was proposed by Callard & Kleinman (1985) as a substitute for
Tobin’s Q, and is calculated as the ratio of the value of individual business units
divided by the inflation adjusted purchase cost of assets.
Chakravarthy (1986) empirically found that profitability criteria are not capable of
“distinguishing differences in the strategic performances of the computer firms in
the sample”. The importance of this research was that no single profitability
measure was capable of discriminating between the performances of firms. This
applied to both the accounting measures used and the market-based measure. As
strategic performance deals with the future, Chakravarthy proposed that a firm
needs slack resources to ensure its flexibility. Accordingly, in assessing strategic
performance, the ability of a firm to produce slack resources is critical. The
discriminant function developed includes multiple dimensions of performance,
once again indicating the importance of multivariate measures of overall
organizational performance.
Venkatraman and Ramanujam (1987) empirically examined the degree of

convergence across methods of measuring business economic performance and in
so doing, demonstrated that sales growth, profit growth, and profitability were
discriminate measures of different dimensions of business economic performance.
The purpose of this study was not to empirically derive the best measures of
business economic performance in the context of the variables selected by
researchers, but rather to test the convergence of methods used to obtain data on
business economic performance. Specifically, they compared two different modes
of assessment, objective and perceptual. The findings of the study suggested that
perceptual assessments of business economic performance by managers are
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strongly correlated with secondary data and consequently, can be used as

acceptable operationalization of business economic performance.
Brush and VanderWerf (1992) examined thirty-four different studies in the

entrepreneurship literature that explicitly used firm performance as the dependent
variable. They found that thirty-five different measures of performance were used
in those studies indicating that researchers perceived many different dimensions
of performance, and that there was no agreement on what measures actually
represent overall organizational performance. The most frequently used measures
of performance were changes in sales, organizational survival, changes in number
of employees, and profitability. Multiple objective measures were much more
frequently employed than were subjective or perceptual measures of performance.
Based upon the findings of their literature review, Brush and VanderWerf (1992)
examined methods and sources for obtaining estimates of new venture
performance.
Robinson (1995) examined ten different new venture performance measures to

determine which individual measure was the most effective in accurately
assessing long-term economic value creation. Each of the performance measures
were calculated for the three-year period following the firms’ initial public
offerings. A sample of 199 new ventures that had issued an initial public offering
prospectus between 1980 and 1987 were used as the basis of the analysis. The ten
measures studied were (1) change in sales, (2) sales level, (3) return on sales
(“ROS”), (4) return on invested capital (“ROIC”), (5) return on equity (“ROE”),
(6) return on assets (“ROA”), (7) net profit, (8) earnings before interest and taxes
(“EBIT”), (9) earnings multiples, and (10) shareholder value created. Robinson
found strong support for his hypothesis that return to stockholders provided the
most power of the ten measures evaluated in corroborating previously established
relationships between the influence of new venture strategy and the joint influence
of new venture and industry structure on the economic performance of new
ventures.
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2.9 KPI APPROACH OF PERFORMANCE MEASUREMENT

Most companies collect performance measures, but a lot of these companies rarely
or never use these measures. The key in performance measurement is to collect
only those measures that can and will actually be used (Harbour, 1997). Harbour
mentioned it as “Don’t measure what you can’t or won’t use”
A set of Key Performance Indicators (KPIs) will therefore, be effective in

coordinating and directing action within an organisation. The KPIs reflect a
balance between cost, quality, quantity and time. Balanced measures provide
insurance of one KPI working against another. These indicators must therefore, be
critical factors which can immediately alert the manager if something goes wrong,
so that he can react to it. KPIs are a performance management tool, containing
basic elements of measures and targets. The application of KPIs will assist an
organisation to be focused on key areas where performance is critical for
achieving the vision, mission and objectives of the organisation. Performance
needs to be measured and KPIs provide the link to shift between performance
measurement and strategic performance measurement. The act of simply
measuring performance would not provide a proactive perception of goal and
strategy achievement. Likewise, KPIs do not have meaning, unless they are linked
to an evaluation system (Seang, 2003).
KPIs are quantifiable measurements that gauge the outcome of a critical success
factor, goal and objective or performance (Bauer, 2004).
KPIs reflect strategic value drivers to achieve organisational goals. Value drivers
mean activities that, when executed properly, guarantee future success. Value
drivers could help an organisation to move in the right direction in order to
achieve its organisational goals, for example, high customer satisfaction or
excellent service quality. KPIs, in most cases, are non-financial (Eckerson, 2004).
Reh (2005) states that KPIs will help an organisation define and measure progress
towards organisational goals. Once the mission statement has been analysed,
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stakeholders identified, and goals defined, KPIs are set in place so as to measure
progress towards goals. KPIs are a performance management tool and they should
not just act as visual metaphors. The developer should understand what constitutes
KPIs that could deliver a long-term value-added tool to the organisation.
Masilamani (2005) presented her definition of KPI as "a relative measure of the
performance of an organisation". KPI can also be used to indicate the performance
of specific and focused activities in the organisation which could directly affect
the value of that organisation.
Pekeliling (2005) looks at KPI as something that one can measure continuously.
He also believes that in order to do well in performance measurement, the
company needs to understand its critical success factors so that it may increase
repeat business with key customers.
Another definition comes from a business measurement expert, Parameter (2002).

He defines KPIs as "quantifiable measurements, agreed to beforehand, that reflect
the Critical Success Factors of the company or (departments or projects)".
Key Performance Indicators represent a set of measures focusing on those aspects

of organisational performance that are the most critical for the current and the
future success of an organisation. KPIs are "leading" and not lagging performance
indicators. (Parmenter, 2007)
From extensive analysis and from discussions with over 1,500 participants his
KPI workshops, covering most organization types in the public and private
sectors, (Parmenter, 2007) defined seven KPI characteristics:-
1. Nonfinancial measures (not expressed in dollars, yen, pounds, euros, etc.)
2. Measured frequently (e.g., daily or 24/7)
3. Acted on by the CEO and senior management team
4. Understanding of the measure and the corrective action required by all staff
5. Ties responsibility to the individual or team
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6. Significant impact (e.g., affects most of the core critical success factors [CSFs]
and more than one BSC perspective)
7. Positive impact (e.g., affects all other performance measures in a positive way)
A KPI can be used to closely monitor the results of actions. When it is not certain
that a result is due to a specific set of plans and actions it is useful to introduce
KPIs to detect and track what is happening. KPI measures that are thought to be
appropriate can be trended over a period of time, and in different situations, to see
if they, in fact, do highlight the relevant factors that are truly important to the
successful outcomes from the actions. KPIs lead to positive actions and provide
the key to organisational success. KPIs should generate the intended action and
thus, improve performance. Only those factors that are essential and critical to the
organisation reaching its goals are selected. It is important to keep everyone's
attention focused on achieving the same KPIs. How to motivate people to reach
the KPIs targets? The top management could use KPIs as a carrot. Post and show
the progress of KPIs everywhere in the organisation such as the main entrance,
pantry room, on the walls of hallways, meeting rooms, staff areas, or even on the
organisation's website. The future success could be realised if the top executives
give their full commitment. When KPIs cascade throughout the organisation, it
will enable everyone to march together on the right path (Parmenter, 2007).
According to Hough (2007) the KPI profile describes the outputs (results)
expected of the individual, i.e. what he/she must achieve to be successful in the
particular role/position. It also explains how the individual will know whether
he/she has successfully achieved his/her objectives.
KPIs do not often change, as it is usually long-term considerations. The definition

of the KPI must stay the same from year to year. Critical success factors (CSFs)
focus the attention on the key dimensions of performance that the enterprise must
excel at if it is going to achieve its goals and meet customers' requirements. CSFs
emphasize the activities and processes that will have the greatest impact on
performance that will drive accomplishment in supporting areas (Anon, 2007a).
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A major benefit of KPIs is that the key issues are addressed and by using a
dashboard, the results are visible. They do not need to analyse rows of data on
spreadsheets or reports to come up with the same result. When an outcome is
monitored and trended with a KPI, the resulting figure tells one the process
performance effectiveness. The KPI should be an accurate, honest reflection of the
process efficiency in delivering the outcome. With a reliable KPI measure of
performance, the effect of a change made to a process, or a new strategy
implemented, is then reflected in the KPI results produced. KPIs can offer many
perspectives on an event. It can permit intense focus and scrutiny, it can detect
changed conditions, it can score performance, it can indicate a change from plan,
it can detect potential problems and it can drive improvement. Change to a certain
operation can be monitored and the reflected KPI will echo if the change
improved the result. Once the effects of a change can be monitored reliably,
repeatably and accurately by KPIs, it is reasonable to use the KPI as a tool to
improve the ongoing process performance. Simply introduce the test change into
the process and monitor its effect with the KPI. Keep those changes that work and
discard those changes that do not produce suitable results (Anon, 2009).
2.10 KPIs FOR A POWER DISTRIBUTION UTILITY

As per South Asian Discom the performance metrics is divided into five
categories namely: (1) operational performance, (2) customer service, (3)
metering, billing and revenue collection, (4) operational cost control, and (5)
financial performance and competitiveness. Table shows the detailed
classification of the same (Nexant, 2004):
Table 2.6: KPI as per South Asian Discom

Area Performance Measure Effect Measured Data Source
SAIFI Frequency of outages Substation logs
Performance
Operational
CAIDI Duration of outages Substation logs
Aggregate technical & Effectiveness in

Reports to regulators
commercial losses minimizing unrecoverable
or internal
energy cost
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Substation energy
Efficiency of distribution Audits / load flow
Technical losses
Infrastructure
studies
Unplanned outages/ Relative impact of outages

Substation reports
total outages on customers and system
Service restoration time Responsiveness of Substation, district

distribution Maintenance serv. Logs
Annual replacement Role of transformer Maintenance and
rate of distribution failures in maintenance equipment records
transformers (%) effort
Responsiveness and
Lead time for new Customer account
service orientation of
Connections Records
connection services
Customer account
Lead time to test/
Commitment to metering and
Customer Service
replace meters in case

Accuracy meter service
of complaint
records
Response time from Customer account
Effectiveness of complaint
fault complaint to and
Response
service visit service records
Customer care Adequacy of customer
Employment records
personnel per customer service resources
Employees providing Employment and
Provision of value-added
special services per special program
services to customers
1000 customers records
Aggregated reports
Metered customers/ Ability to bill consumers or
total customers for energy consumption customer account
records
Metering, Billing and Collection
Meters/meter reader Adequacy of resources Employee records

Service and
Frequency of meter/ Control of tampering and
customer
seal inspection maintenance of accuracy
account records
Meters replaced/ meters Adequacy of meter
Service records
in Service Technology
Meter
% of bills that are
Billing accuracy reading/billing
Estimated
Policy
Time lag between meter
Billing reports and
reading and bill Billing efficiency
Records
dispatch
Ave level of customer
Collection efficiency Accounting records
Arrears
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Operating efficiency and

Distribution cost/unit Financial reports
cost reasonableness
Functional shares of
non energy distribution
Cost and Management Cost accounting
costs: admin, Norms of cost allocation
reports
maintenance,
equipment, etc.
Total labor cost/
Labor cost efficiency Financial reports
customer
Employees/customer Employment level norm Employment records
Training participant Human resource/

Adequacy of training
days/employee-year training records
Sick and injury Human resource
Safety practices
days/employee records
Tariff sheets,
Average tariff levels by
Competitiveness internal
class
Reports
Financial Performance
Cost recovery (op Sustainability of cost

Financial reports
revenue/cost) levels/ tariffs
Average capital exp/net
Capital sustainability Financial reports
asset value
Customer Receivables /
Internal accounting
monthly revenue Cash flow management
Reports
collections
Reports on AT&C
Commercial losses (% Control of theft and losses and estimates
of sales) unaccounted losses of
technical losses
In the year 2007, a pioneering study was commissioned by Prince Edward Island
Regulatory & Appeals Commission (Prince Edward Island is a Canadian
Province), for devising a framework for comprehensive measurement and review
of the performance of Maritime Electric Company, Limited (power distribution
company functioning on the island province). The study has identified KPIs which
may be utilised for ascertainment of performance of a Power Distribution Utility
in relevant functional area. The major KPIs (with association to functional area to
which these KPIs relate) have been identified in the study are listed as below
(Murphy, 2007):-
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(A) Financial Performance

1. Return on Equity
2. Capital Structure
3. Debt Interest Coverage
4. Net Profit as Percentage of Energy Costs
5. Return on Average Rate Base
6. Accounts Receivable as a Percentage of Revenue from Energy Sales
(B) Customer Service Quality
7. Service Level (Percent of calls Answered within 30 Seconds)
8. Percent of Calls Abandoned
9. Average Speed to Answer
10. First Call Resolution
11. Call Handle Time
12. Meter Reading Exceeding 65 days
13. Complaints (Average Number per Month)
14. Scheduled Appointments Missed (Average Number per Month)
15. Service Connections Completed within 5 Days
(C) Reliability
16. SAIDI: System Average Interruption Duration Index
17. SAIFI: System Average Interruption Frequency Index
18. CAIDI: Customer Average Interruption Duration Index
19. Service Level: Fraction of the year which power is provided to customers
(On Average)
20. Voltage Performance – Substation Level
21. Generation Availability and Reliability: Percentage of time MECL is able
to provide required self-generation, and incremental costs at times own-
generation experiences forced outages.
22. Outage Frequency and Duration on the Ten Worst Performing Circuits.
(D) Efficiency in Operations (Including Asset Management & Dispatch)
23. Efficiency in Operations
a) Total Operating Expenses per Energy Delivered
b) Net Fixed Assets/Energy Delivered
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c) Total Energy Related Expense/Energy Delivered

d) Total Expenses/Energy Delivered
e) Controllable Expenses/Energy Delivered
f) System Losses
g) Efficiency and Technology Transfer
24. Efficiency in Dispatch
a) Energy Efficiency (kWh/kW Reductions and Benefit-Cost Ratio of
measures taken)
b) Demand-Side Management (kW reductions in Peak system Demand and
B/C Ratio)
c) Demand Response (kW of Demand under DR Contracts and B/C Ratio of
such contracts)
(E) Sustainability
25. Lost Time Work Incidents (Number of times employee accidents result in
missed work.)
26. Employee Sickness (Workdays lost due to sickness – Observation only.
No KPI target.)
27. Employee Development
28. Employee Participation in Community Organizations as Representatives
of MECL
29. Environmental Responsibility
In yet another report relating to performance benchmarking of Pacific Power

Utilities in the US, published recently in Sep 2012, 29 KPIs have been identified
for measuring the performance of Power Distribution Utility by Pacific
Infrastructure Advisory Center, which pertain to Distribution Function, Demand
Side Management, Human Resources, Consumer Satisfaction, Financial
Performance etc. The major KPIs (with association to functional area to which
these KPIs relate) have been identified in the study are listed as below (Holden,
2012):-
(A) Distribution
1) Network Delivery Losses
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2) Distribution Losses
3) Customers per Distribution Employees
4) Distribution Reliability
5) Distribution Transformer Utilisation
6) Transmission/Distribution O&M Cost
7) SAIDI
8) SAIFI
(B) Demand Side Management
9) DSM Initiatives
10) DSM Budget
11) DSM FTE Employees
12) DSM MWh Savings
13) Power Quality Standards
(C) Human Resources / Safety
14) Lost Time Injury Duration
15) Lost Time Injury Frequency Rate
16) Labour Productivity
(D) Customers / General
17) Service Coverage
18) Productive Electricity Usage
19) Lifeline Tariff Usage
a) Domestic Usage
b) Commercial Usage
c) Industrial Usage
d) Other Usage
20) Customer Unbilled Electricity
21) Self Regulated or Externally Regulated
(F) Financial Indicators
22) Operating Ratio
23) Debt to Equity Ratio
24) Rate of Return on Assets
25) Return on Equity
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26) Current Ratio

27) Debtor Days
28) Average Supply Cost
29) Per Unit Costs Breakdown
The flagship funding agency in India namely Power Finance Corporation has used
the following structure for performance evaluation of state power utilities (Power
Finance Corporation, 2013):-
(A) Performance on Financial Parameters
1) Introduction
2) Revenue from Sale of Power
3) Income, Expenditure and Profitability of the Utilities
4) State wise financial performance of utilities
5) Subsidy Booked and Received
6) Gap between ACS and ARR
7) Expenditure Details
(B) Financial Position
8) Capital Structure
9) Net worth
10) Borrowed Funds
11) Net Fixed Assets and Capital WIP
12) Capital Expenditure
13) Receivables for Sale of Power
14) Creditors for Purchase of Power
(C) Analysis of Profitability and Capital Structure Ratios
15) Return on Equity
16) Return on Net Worth
17) Return on Capital Employed
18) Debt Equity Ratio
19) Installed Capacity
20) Generation
21) Power Purchase
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22) Sale of Power

23) Aggregate Technical and Commercial Losses
(D) Analysis of Consumption Pattern and Contribution to Revenue
24) Sale of Power
25) Coverage in the analysis
26) Sale to Agriculture Consumers
27) Sale to Industrial Consumers
28) Cross Subsidy
29) Consumer Category wise Sales
(E) Status of Reforms and Restructuring
Central Electricity Regulatory Commission suggests reporting on following Key

Performance Indicators (Central Electricity Regulation Commission, 2014):-
(A) System Operation:
1) Efficiency of Dispatch and Network Operation
a) Efficiency of Unconstrained Dispatch of Region
b) Efficiency of Network Operation of Region
c) Efficiency of Power System frequency
2) Frequency Control
a) Frequency deviation
b) Frequency Bias Measurement (MW/0.1Hz)
3) Area Control Error ( in MW)
4) Computation of Deviations from Schedule (in %)
5) Disturbance Measurement
6) System Status Evaluation
a) Number of Hours status ‘Normal’
b) Number of Hours status ‘Critical’
c) Number of Hours status ‘Emergency’
(B) Market Operation:
7) Interconnection Meter Error (in %)
8) Accuracy of Forecasting
9) Effectiveness of Outage Coordination (Transmission)
a) Rate of Outage Request
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b) Average Period of Advance Request

c) Average Processing time
d) Frequency of cancellation
e) Level of unplanned transmission outages
f) Level of planned transmission outages
10) Transmission Service Requests
a) Number Transmission Service Requests received
b) Volume (MWH) of Transmission Service Requests
c) Number of Cleared Transmission Requests
d) Volume of Cleared Transmission Requests
e) Average age of Clearing Requests per application
f) Average Cost Incurred per requests
11) Loss of Generation due to Transmission Constraints
12) Loss of Load Expectation (LOLE)
(C) Ancillary and Support function:
13) Efficiency of Data Communication
a) Percentage of data point pending for connection
b) Percentage of data available from existing location
14) Standby Supply
15) Budget Control
a) Variance of Capitalized Expenditure
b) Variance of Non Capitalized Expenditure
c) Certification of Manpower
2.11 THE CONCEPT OF CUSTOMER SATISFACTION

Creating customer satisfaction is another known antecedent to a firm’s economic
performance. For example, high customer satisfaction levels have been found to
lead to customer retention (e.g. Day, 1984). Customer satisfaction is also believed
to influence consumer purchase intentions and repeat purchase behaviour (Cronin
and Taylor, 1994).
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Customer satisfaction has long been recognised as a process (Oliver, 1981) and is
the difference between consumers’ perceived and expected performance of a
product or service. In other words, customer satisfaction occurs when
performance is higher than expected, while dissatisfaction occurs when
performance is lower than expected. Overall, to gain customer satisfaction, some
argue that organisations need to exceed predictive expectations of customers,
rather than just satisfy expectations (Spreng and Mackoy, 1996).
Customer satisfaction is identified by a response (cognitive or affective) that

pertains to a particular focus (i.e. a purchase experience and/or the associated
product) and occurs at a certain time (i.e. post-purchase, post-consumption) Giese
and Cote (2000). Given this definition, a customer’s satisfaction with his/her
shopping experience may be an outcome of the value provided by the shopping
experience.
Carpenter and Fairhurst (2005) showed that utilitarian shopping benefits and
hedonic shopping benefits had a positive impact on satisfaction.
The basis for consumer satisfaction or dissatisfaction lies in mankind's ability to

learn from past experiences. Accordingly, consumer preferences are constantly
being updated by way of the learning process. Learning theory posits that “a given
response is reinforced either positively or negatively to the extent that it is
followed by a reward. Reward, in turn, leads to an evaluation that the purchase
was satisfactory” and hence it can exert an effect on brand beliefs and attitudes.
The probability of engaging in a similar buying act will be increased if there are
positive consequences in the act of purchase and use and vice versa" (Engel et
al.1968).
Day (1984) asserts that "while everyone knows what satisfaction means, it clearly
does not mean the same thing to everyone". Early conceptualizations of consumer
satisfaction view it as a single variable which involves a single evaluative reaction
from consumers, which may or may not be related to pre-evaluation concepts. In
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discussing the conceptualization of consumer satisfaction, for example, Hunt

(1977b) notes that “Satisfaction is a kind of stepping away from an experience
and evaluating it. One could have a pleasurable experience that caused
dissatisfaction because even though it was pleasurable, it wasn't as pleasurable as
it was supposed to be. So satisfaction/dissatisfaction isn't an emotion, it's the
evaluation of the emotion".
A number of theoretical approaches have been utilized to explain the relationship

between disconfirmation and satisfaction (Oliver, 1980b; Anderson, 1973). These
approaches can be viewed as variations of consistency theories and focus mainly
on the nature of the consumer's post-usage comparison process (Oliver, 1980b).
Consistency theories suggest that when expectations and the actual product
performance do not match the consumer will feel some degree of tension. In
order to relieve this tension the consumer will make adjustments either in
expectations or in the perceptions of the product's actual performance. Four
theoretical approaches have been advanced under the umbrella of consistency
theory: 1. assimilation theory, 2. contrast theory, 3. assimilation-contrast
theory, and 4. negativity theory.
1. Assimilation theory. Festinger's (1957) dissonance theory forms the basis of

assimilation theory. Dissonance theory posits that consumers make some kind of
cognitive comparison between expectations about the product and the perceived
product performance. If there is a discrepancy between expectations and
perceived product performance then dissonance arises. This view of the consumer
post-usage evaluation was introduced into the satisfaction literature in the form of
assimilation theory (Anderson, 1973). According to Anderson (1973), consumers
seek to avoid dissonance by adjusting perceptions about a given product to bring
it more in line with expectations. Consumers can also reduce the tension resulting
from a discrepancy between expectations and product performance either by
distorting expectations so that they coincide with perceived product performance
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or by raising the level of satisfaction by minimizing the relative importance of the

disconfirmation experienced.
2. Contrast theory. Contrast theory, first introduced by Hovland et al. (1957),

presents an alternative view of the consumer post-usage evaluation process than
was presented in assimilation theory in that post-usage evaluations lead to results
in opposite predictions for the effects of expectations on satisfaction. The
approach holds that when consumers experience disconfirmation they seek to
minimize the discrepancy between prior expectations and actual product
performance by shifting their evaluations away from the expectations. Dawes,
Singer and Lemons (1972) define contrast theory as the tendency to magnify the
discrepancy between “one's own attitudes and the attitudes represented by opinion
statements” endorsed by persons with opposing views. While assimilation theory
posits that consumers will seek to minimize the discrepancy between expectation
and performance, contrast theory holds that a surprise effect occurs leading to the
discrepancy being magnified or exaggerated.
3. Assimilation-contrast theory. The assimilation-contrast theory has been

proposed as yet another way to explain the relationships among the variables in
the disconfirmation model (Hovland et al. 1957). A combination of the
assimilation and the contrast theories, this paradigm posits that satisfaction is a
function of the magnitude of the discrepancy between expected and perceived
performance. Generally, consumers have zones or latitudes of acceptance or
rejection with respect to their perceptions. As with assimilation theory, the
consumers will tend to assimilate or adjust differences in perceptions about
product performance to bring it in line with prior expectations, but only if the
discrepancy is relatively small. When there is a large discrepancy between
expectations and perceived performance, contrast effects occur and the consumer
tends to magnify the perceived difference. Whether assimilation or contrast
occurs depends upon the perceived disparity between expectations and actual
product performance.
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4. Negativity theory. Like the three previous theories, negativity theory has its
foundations in the disconfirmation process. Introduced into the consumer
satisfaction literature by Anderson (1973), negativity theory posits that when
expectations are strongly held, consumers will respond negatively to any
disconfirmation. Accordingly, dissatisfaction will occur if perceived performance
is less than expectations or if perceived performance exceeds expectations
(Anderson, 1973).
Customer satisfaction is measured by using the following variable attributes under

different dimensions, namely, after sales service, ability to understand customer
needs, warranty, prompt delivery, 24 hours customer care, price, discounts and
rebates, convenience and accessibility, easy processing and documentation, safety
measures (Suresh and Raja, 2006).
Satisfaction can be measured on different dimensions of service quality. Service

quality can be defined as the difference between predicted, or expected, service
(customer expectations) and perceived service (customer perceptions). If
expectations are greater than performance, then perceived quality is less than
satisfactory and a service quality gap materializes. This does not necessarily mean
that the service is of low quality but rather that customer expectations have not
been met hence customer dissatisfaction occurs and opportunities arise for better
meeting customer expectations (Parasuraman et al. 1985).
SERVQUAL scale is a principal instrument in the services marketing literature

for assessing quality (Parasuraman et al., 1991; Parasuraman et al., 1988). This
instrument has been widely utilized by both managers (Parasuraman et al., 1991)
and academics (Babakus et al., 1992; Carman, 1990) to assess customer
perceptions of service quality for a variety of services (e.g. Banks, credit card
companies, and repair and maintenance companies). The results of the initial
published application of the SERVQUAL instrument indicated five dimensions of
service quality emerged across a variety of services. These dimensions include
tangibles, reliability, responsiveness, assurance and empathy (Zeithaml et al.,
Page 93
1990; Brensinger and Lambert, 1990; Crompton and MacKay, 1989). Tangibles
are the physical evidence of service, reliability involves consistency of
performance and dependability, responsiveness concerns the willingness or
readiness of employees to provide services, assurance corresponds to the
knowledge and courtesy of employees and their ability to inspire trust and
confidence, and finally, empathy pertains to caring, individualized attention that a
firm provides its customers (Lassar et al., 2000).
“From the consumer’s perspective price is defined what is given up or sacrificed

to obtain a product or service” (Zeithaml, 1988). Even though the relationship
between price and quality is assumed positive, the direction of relationship
between price and quality may also be negative (Peterson and Wilson, 1985). On
the other hand, while it is reported that postpurchase price perceptions have a
significant, positive effect on satisfaction (Voss et al., 1998), the price of the
service can greatly influence perceptions of quality, satisfaction, and value
(Zeithaml and Bitner, 2000).
Company image refers to perceptions of a firm reflected in the associations held

in consumer memory (Keller, 1993). Company image can impact perceptions of
quality, value, and satisfaction and loyalty (Gronroos, 1990; Andreessen and
Lindestand, 1998).
2.12 SUMMARY AND RESEARCH GAPS

This research work performed an extensive review of literature consisting of prior
studies on power sector classified in four broader heads namely ‘Studies on
Development & Evolution of the Power Sector’, ‘Studies on Issues & Challenges
of Power Sector’, ‘Studies on Power Sector Reforms’ and ‘Studies on
Performance of Power Sector & its Entities’. The researcher synthesised that
Indian power sector is facing severe challenges and the reforms have been
introduced not only by the Central Government but also by the various State
Governments. However it was found that no study was conducted with respect to
Page 94
performance of distribution companies in India after operational autonomy given

to them. Hence there was a huge gap in the body of knowledge and the researcher
proposed to study the performance of M.P. West Discom after Operational
Autonomy.
For obtaining in depth knowledge about the industry relevant with the research
further literature was reviewed under the heads ‘Power Sector Scenario in India’,
‘Recent Issues & Challenges of Indian Power Sector’, ‘Overview of Indian Power
Sector Performance’ and ‘Power Sector Reforms in Madhya Pradesh’.
Since the main research question of this study was to find out how did M.P. West
Discom perform after operational autonomy hence further literate review was
undertaken under the heads ‘The Concept of Performance & its Measurement’,
‘Approaches of Performance Measurement’, ‘KPI Approach of Performance
Measurement’, ‘KPIs for a Power Distribution Utility’ and ‘The Concept of
Customer Satisfaction’ so as to generate sound base for the conceptual framework
of this study. The researcher concluded that performance of M.P. West Discom is
to be studied through Key Performance Indicators applicable in its case. A
detailed discussion on Key Performance Indicators applicable for this study is
given in Chapter 3 – Conceptual Framework.
Page 95

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Chapter 2: LITERATURE REVIEW

2.2 PRIOR STUDIES ON POWER SECTOR

Electricity production is characterised by scale economies and sunk investments.

Suzuki (2002) attempted to throw light on indigenous structure as well as foreign

2.2.2 STUDIES ON ISSUES & CHALLENGES OF POWER SECTOR

According to India Infrastructure Report (2000) the root of chronic inability of

Godrole (2004) has expressed that several state governments, including

2.2.3 STUDIES ON POWER SECTOR REFORMS

of distribution to regional companies makes accountability for performance of

Chandra (2000) emphasised the importance of public involvement in reforms. He

Labour Department, Mantralaya, Mumbai (2002) stated that the process of

Dubash (2003) opined that in developing countries, government leadership in the

sustainable-financially, socially, or environmentally. Reforms that are supported

The strategy paper on infrastructure of the Government of Andhra Pradesh (2001)

The strategy paper on power of the Government of Andhra Pradesh (2001)

focused on consumption, tariff of power and on energy balances. This paper

developing countries, notwithstanding the limited scope for sustaining

Borenstein (2002) felt that restructuring of electricity markets is a more difficult

Srinivasan (2002) recommends that state electricity boards should be reformed

Godbole (2002) felt that rationalization of tariffs is the most important

Ruffin (2003) examined the institutional determinants of competition, ownership

Stockholm (2003) analysed that key components of sustainable development in

Resolution of 1956 envisaged the generation, transmission and distribution of

Newbery (2005) expressed that modern infrastructure, particularly electricity, is

As GDP growth accelerates to an ambitious 8 to 10 %, the shortage of power will

In Indian power sector reforms effective competition in distribution (so that a

2.2.4 STUDIES ON PERFORMANCE OF POWER SECTOR & ITS

Parameswaran (1990) examined the performance of Kerala State Electricity Board

by past mistakes, rather than out of a conscious reorientation of past policies,

Kativar (2005) revealed through the study of a primarily agricultural electricity

privatization is correlated with higher electricity generation, higher generation

2.3 POWER SECTOR SCENARIO IN INDIA

Indian Power sector is witnessing major changes. Growth of Power Sector in

Electricity industry is capital-intensive having long gestation period. Resources of

The National Electricity Policy aims at achieving the following objectives:

 To create an enabling policy framework for the deployment of 20,000 MW

Assessment of demand is an important pre-requisite for planning capacity

 Suggested areas/locations for capacity additions in generation and

2.4 RECENT ISSUES & CHALLENGES OF INDIAN POWER

efficiency improvements and reduction in cash losses and putting in place

2.4.5 RECOVERY OF COST OF SERVICES & TARGETED SUBSIDIES

2.4.6 TECHNOLOGY DEVELOPMENT AND R&D

2.4.7 COMPETITION AIMED AT CONSUMER BENEFITS

2.4.8 ENERGY CONSERVATION

2.4.9 TRAINING AND HUMAN RESOURCE DEVELOPMENT

2.5 OVERVIEW OF INDIAN POWER SECTOR

Table 2.1: Operational Norms for Coal Based Power Plants

Source: CERC regulations for different control periods

Table 2.2: Operational Norms for Gas Power Plants

Source: CERC regulations for different control periods

Table 2.3: Access Level

Source: Statistical Handbook, GoI, 2014

The distribution sector continues to be characterised with poor financial and

In order to assess the financial performance of distribution companies of the

Figure 2.2: Financial Gap at All India Level

Source: PFC report on utility finances 2007-08 to 2011-12

Figure 2.3: International Coal Prices

Source: Coal spot.com

electricity sector in general and distribution utilities in particular. The Appellate

The efficiency in the distribution system is measured by the extent of aggregate

Figure 2.4: State-level Collection Efficiency –5 year Average

Source: PFC report on utility finances