Orissa Electricity Regulatory Commission

After careful consideration, Government have been pleased to constitute a Committee of Independent experts to review the Power Sector Reforms. The Committee would have the following terms of reference.

1	Shri Sovan Kanunao, IAS (Retired)	Chairman
2	Shri Anirudh Kumar Sah Retired Chairman, (UPSEB) Former C.M.D., NTPC & Member CEA	Member
3	Dr. Sidharth Sinha Professor, Indian Institute of Management Ahmedabad	Member
4	Shri S.K. Mohapatra. Retired Chairman, OSEB	Member
5	Principal Secretary to Government Department of Energy.	Member
6	Special Secretary to Government Department of Energy	Member Convenor

5.1 Encouraged by the Government of India, assisted by the World Bank, and supported with grants from the Government of U.K. (DFID), Orissa took the initiative and became the first State to reform its electricity industry. The Orissa Electricity Reform Act,setting out the basic framework of the reform, enacted in 1995 came into force from 1 April 1996. The principal objective of the reform were the following.

(a) Restructuring of the electricity industry for rationalization of generation, transmission, distribution and supply of electricity.
(b) Development of the industry in an efficient, economic and competitive manner.
(c) To provide for avenues for participation in the industry of private entrepreneurs, attract private investment and reduce the need for government funding of the electricity sector.
(d) To improve the quality of service to the consumer.
(e) To enhance operational efficiency and reduce losses.
(f) To provide for a transparent mechanism for development and regulation of the industry, including tariff fixation and dispute settlement, through an independent , statutory body; the Orissa Electricity Regulatory Commission.
(g) To contribute to economic growth of the state by ensuring superior electricity supply.
(h) To create opportunities for increasingly rewarding employment for technical personnel and provide a stable environment for career development in the electricity sector.
The objectives mentioned above at (a), (c) and (f) seem to have been achieved substantially. The other expectations have yet to be realised.

5.2 OERC has done pioneering work in our country in the establishment of a regulatory mechanism for the electricity industry. The reform Act which has given the Commission a wide mandate, requires it to act effectively and independently. OERC’s working in the last few years, however, has not been free from problems. To avoid these, we make the following recommendations.

5.3 To ensure that the Commission is fully functional at all times, Government must prompt appointment of Commissioners. Action for filling up anticipated vacancies should start early so that recommendations of the selection committee are available to the Government atleast two weeks before the vacancy occurs. In the event an appointment or an selection process is stayed by a court, prompt action should be taken to have it vacated by moving a higher court or a larger bench. Further, no one should be considered for appointment unless there is a clear possibility of his serving for five years. To attract persons of ability, integrity and standing, wide publicity should be given while inviting nominations for selection of Commissioners.

5.4 Budgetary allocations. for the Commission should be adequate. Ordinarily, Government should not apply any budgetary cuts as long as the amount proposed by the Commission is within the limit of the license fees received. Accounting regulation for the Commission should be settled forthwith and budgeted outlays placed in a banking account at the disposal of the Commission for incurring expenditure in accordance with the accounting regulation, without further reference to Government.

5.5 The Commission should institute regular systems of monitoring to ensure that the prescribed standards of performance are actually adhered to in the industry.

5.6 The Government and the Commission should have purposeful interaction on- wide range of issues of monitoring, problem solving, planning and development of State's power sector. For exchange of information and discussion on administrative matters of mutual interest, the Government should interact with the Commission’s Secretary. There should also be a system of meetings with the Commissioners, at least once a year, taken at an appropriately high level to discuss and settle matters involving important issues of police.

5.7 Conceptualisation of reform was done under the guidance of the World Bank and the road map for implementation was set out in its Staff Appraisal Report (SAR). . The assumptions in the SAR of growth in the demand for power in the State was highly ambitious, not only in terms of totals but in the composition also. The demand for industrial power (EHT Supply) which, subsidises domestic demand (LT supply), was grossly under realised while domestic and commercial demand with high losses grew fast. T &D losses which were excessively high, and were targeted for substantial reduction, could not be brought down . Billing and collection efficiency under the privatised distribution companies (DISTC0s) far from improving, actually worsened and rampant theft of electricity continued unabated.

5.8 The reform scheme was further vitiated by sharp, upvaluation of assets at the time of transfer to the utilities. This led to steep increase in the cost of power. Unrealistic assumption that GRIDCO would become profit earning from 1997-98 -led to abrupt withdrawal of subsidiary by the State Government from 1996 – 97. There has been considerable increase in the average tariff at a cumulative rate of 15.5% annually over the last 9 years without any perceptible improvement in customer service. Cross subsidy has also been brought down, particularly in the post reform period, thereby casting a heavier burden on domestic consumers.

5.9 Unabated increase in tariff without perceptible reduction of Techno-commercial loss or improvement in customer service has led to growing public discontent against reform. This situation has worsened because of spiraling increase in costs and deteriorating the health of the utilities. The DISTCO and GRIDCO have been rendered utterly unviable as a result of their inability to reduce T&D losses, control rampant misuse and theft of electricity and contain costs. DISTCOs are unable to pay salary to their- employees without defaulting on payment to GRIDCO towards purchase of power. GRIDCO also is unable to recover cost and is incurring heavy debt to finance losses year after year. In this situation, the generating companies are also facing problems of inadequate cash realisation. The situation has become so critical that the private sector partner in one of the DISTCOs, AES has abandoned the management of CESCO which is now being managed by a CEO appointed by the Regulatory Authority. We recommend that the CEO attends to CESCO whole time.

5.10 The key to revival of the sector is in improving efficiency and bringing down cost. By efficiency improvement not only customer services can be geared up but T&D losses, currently at an unacceptably high level, can be brought down substantially. The reform scheme had sought to address the problem of T&D losses through (a) capital investment to strengthen transmission and distribution system so as to reduce technical losses, and (b) privatisation of distribution to bring in better management skills and practices for enforcement of accountability to reduce commercial loss. Neither of these have succeeded so far.

5.11 Large capital investments have been made but not a single project has been completed despite considerable time over-run. The delays in most cases are want of forest clearance, land availability, or right of way. Since none of the projects has been commissioned, no benefit has been realised from the investments of over Rs. 600 crore out of funds borrowed from the World Bank carrying heavy debt servicing liabilities. Efforts need to be intensified to complete and commission the ongoing works should be contracted until the majority of the ongoing works are completed. With the commissioning of these works, there should be significant improvement of system reliability and reduction of technical losses which would have its beneficial impact on cost reduction.

5.12 As far as commercial losses are concerned, which are massive by any standard. the result achieved in the last five years is insignificant. T&D loss which was 46.94% in 1995-96 as shown by Audit is now 46.63'% as reported by the utilities themselves. The loss is even more staggering in the LT segment at. 68%. The DISTCOS, in their projections have proposed very little loss reduction. The rate of loss reduction that needs to be attempted and achieved in the next five years must not be less than all average of 5% which, in our view, is well within reach. Attainment of the goal would, however, call for determined, comprehensive and relentless efforts. The following are some suggestions in this regard.

(i) A concerted drive to remove illegal connections such as hooking and effective measures to convert them into regular connections followed up by systematic billing and collection of energy charges.
(ii) Should the DISTCOs wish to have police escort for carrying out special drives to prevent unauthorised use of electricity, over and above the comfort of the Chief Secretary's circular to DMs and SPs asking for prompt intervention in the event of violence by anti-social elements, the Government should make available to the companies the requisite support on payment of costs.
(iii) 100% consumer metering within a year and immediate metering at the low voltage terminals of step down transformers should be provided so that supplies into HT & LT systems can be quantified for purpose of proper energy accounting which is practically missing.

5.13 A major cause of sharp increase in the cost of power was steep revaluation of assets at the time of transfer to GRIDCO. It called for substantially higher provision for depreciation as well as return on capital. Neither of these could be met because of shortfall in revenue. In these circumstances it would be worthwhile keeping the revaluation in abeyance till the system is brought to balance. In fact there is a case for setting aside the revaluation of OHPC which is expected to be profitable in the years to come. In addition to this, the State Govt. may agree to allow a moratorium on debt servicing to the state except the amounts in respect of loans from the World Bank which the State Govt. would need to pay to the Centre. After applying these correctives and also taking credit for T&D loss reduction at an average rate 5% per year, the revenue gap at existing retail tariff would still be substantial though declining. The unavoidable revenue gap would need to be financed from sources other then debt. Since the state Govt. themselves are passing through severe financial stress, it may not be realistic to ask them to make further sacrifice over and above what has been suggested already.

5.14 An exercise has been carried out estimating the annual shortfalls on cash flow basis without tariff hike but with the assumption that collection efficiency of the DISTCOs would progressively improve from the present level of 76% to reach 95% by the year 2005-06 instead of ending up with a, collection efficiency of 84% proposed by Distcos. With a tariff hike of 18% in 2005 the entire cash deficit would disappear and the year 2005-06 would witness both an operational profit as well as a marginal cash surplus. The sector as a whole would turn, around in 2005-06. The consumers could be called upon to pay higher tariff at that stage because by that time the utilities are expected to have given evidence of their concern for and efficiency in T&D loss reduction and improvement of customer service; not otherwise .

5.15 To bring the reform back on rails, the World Bank and DFID who helped Orissa initially, and hopefully have retained their interest in the reform, should come forward with a suitable package to fill the revenue gap in the intervening years. Without this interim financing estimated at Rs. 3240 crore, there seems there seems hardly any prospect of the reform coming to fruition. The Govt. of India should not only persuade them to do so but also extend a helping hand in sharing the responsibility of interim financing of the revenue gap.

5.16 Once a decision is taken on interim financing and its apportionment, the Distcos and GRIDCO may be pinned down to specific performance parameters by desegregating the proposed T&D loss reduction Distco-wise.

5.17 In the prevailing run down state of GRIDCO and Distcos, no durable rehabilitation is possible without interim financing of unavoidable, losses. However, it needs to be emphasized that no amount of support from outside would succeed unless the utilities conduct themselves with greater sense of responsibility. Privatisation was seen as a means to improve the performance of the DISTCOs. The private sector partners need to bear in mind their crucial role which can not be performed satisfactorily unless they face the tasks as a challenge and an opportunity and take the industry forward in true spirit of partnership for mutual benefit.

5.18 The private promoters of the DISTCOs neither brought superior management skill nor did they arrange financial support even by way of working capital for the companies which are in dire need of capital, working capital in particular. Instead of using the offices of BSES to working capital in terms of clause 8.1 of the Shareholders Agreement for the three DISTCOS under their management, the DISTCOs have persistently defaulted in payment to GRIDCO towards purchase of power. The outstanding overdues of GRIDCO as on 30 Sept. 2001 against these three DISTCOs is Rs.680.72 crore including bonds issued by them in lieu of cash payments. So far as the other distribution company CESCO is concerned, the situation is worse. AES, the private sector partner never fulfilled its commitment to bring working capital. They were allowed to pile up unpaid power purchase bills amounting to Rs.403 crore by, time they walked away in August 2001. Now that AES have abandoned CESCO, GRIDCO seems to be left with hardly any other option except exploring legal remedy. As far as BSES managed DISTCOs are concerned, the attitude of deliberate default in payment to GRIDCO must end. BSES should make all efforts to bring in working capital in terms of the Shareholders Agreement.

5.19 The system of Escrow put in place to regular payments to GRIDCO towards power purchase has not worked. With the package of financial relief recommended by us along with enforcement of the provisions of the Shareholders Agreement, the escrow mechanism should be made to work and strictly enforced.

5.20 There is an urgent need to develop mutual trust and goodwill between employees and the management. The vital role of the employees and their associations in building up the industry needs to be taken more seriously. While firm action against known miscreants is necessary to enforce discipline and accountability this can not be done without skillful handling of situations and willingness to mitigate genuine grievances. A specific matter in this connection relates to pensionary benefits. Employees apparently have found that the pension scheme preferred by them, and also adopted by tile companies, has turned out to be disadvantageous, particularly for those who came over from Government in higher age group. In a matter like this neither the present employers nor the Government should take any rigid stand. The effort should be to find a solution which may not even be difficult to reach. Likewise, there is an apprehension that liabilities of Government / GRIDCO towards Pension Trust may not have been assessed correctly. This being a matter entirely of actuarial. calculation, which may vitally affect the viability of the Pension Funds, there should be no reluctance to take a fresh look at the estimates.

5.21 Orissa has a rich endowment of natural resources, and now has the additional advantage of surplus power. This combination needs to be exploited to accelerate industrialization of the state through vigorous marketing of power by offering more competitive rates. By selling surplus power to industries, even at tariff lower than prescribed by OERC, not only would the State benefit from industrialization, the DISTCOs themselves would also stand to gain as long as they recover cost at the margin. The tariff fixed by OERC should be treated as the ceiling in each category, and utilities should have the freedom to supply power at lower rates in exercise of their commercial judgment.

5.22 With restructuring and privatisation, there is a much greater need now for rigorous enforcement of safety norms in the electricity industry. However, care needs to be taken to see that there is no mindless expansion of the Electrical Inspectorate. Services of chartered engineers, under a strict system of empanelment and penalty in the event of misconduct , may be utilized for the purpose of supplementing human resources of a slim, well structured Inspectorate.

5.23 The services of local consultants as well as highly rated consulting firms of international repute were used extensively in the preparation of the blue print reform, and to assist the utilities in developing internal systems of operation management, financial control, technical services, contract management, project implementation etc. The cost incurred so far is a staggering amount of Rs.306 cores. However, judging by the fate of the reform and the state of the utilities it is clear that the utilities, for whose benefit the consultants were engaged , could not assimilate much of their advice. The utilities, instead of developing inner strength with the assistance of consultants, tended to be excessively dependent on them leading to near atrophy of organisational strength. We suggest that this practice which weakens organisations rather than strengthening them and demotivates instead of improving their skill and confidence, should end as soon as possible.

5.24 Close attention should be given to strengthen the managerial competence of GRIDCO which is not only financially sick but also organisationally very weak. The following recommendations are made in this connection.

(a) The senior management of GRIDCO should be selected on the basis of merit and appointed for a fixed term of 3/5 years.
(b) The State Load Dispatch Center (SLDC) and its commercial counter part the energy billing centre should be provided with the necessary staff whose skills should be substantially honed and upgraded by regular training.
(c) GRIDCO's Project Management Unit (PMU) should take over the responsibility of all capital works irrespective of the source of funding. It should also monitor capital works executed by the distribution companies in addition to managing and monitoring GRIDCO's own works.

5.25 The entire power sector needs needs top management of high caliber just as it requires an efficient workforce motivated to further the interest of the industry. The task before the managements is daunting. Appointments to the Boards of Directors of all the utilities need to he reviewed to ensure that professionals including administrators with competence, vision and commitment may enrich the utilities from the very top. The prevailing system of part time appointments to key positions in the sector, including the Chief Executive Officer of OHPC should end. The Chief Executive Officers of the DISTCOs should be stationed at their respective head quarters.

5.26 The committee did not get evidence of any innovative practice introduced in the management of the privatized DISTCOs. However, in some of the DISTCO areas, an experiment is in progress to involve village communities in streamlining power supply in rural areas. While the results seem to be encouraging the exercise, currently being conducted by consultants, can succeed in the long run and over large areas only if the programme is implemented by DISTCO officials themselves.

5.27 It is recognised that Regulatory Commissions need to lay down norms for tariff determination Which would enable the utilities to have a clear idea of the range in which tariff may move over a reasonable period. Multi-year tariff regime is therefore being advocated by experts. OERC have also laid down norms is certain areas though much more needs to be done. But no purposeful result can be achieved in the matter of multi- year tariff unless there is a reasonable financial balance. Serious efforts are required to provide financial balance to the sector before multi-year tariff can be a reality.

5.28 Another idea often advocated by experts is multi-buyer model ot power trading. Here again, attainment of financial balance is an essential prerequisite to provide a basis for competition through various models of multi-buyers system as distinct from the single-buyer model adopted by Orissa as well as other States who have embarked on reform. In the prevailing situation of near bankruptcy of GRIDCO and disarray in the functioning of DISTCOs, the sector should be spared any further trauma. Meanwhile, GRIDCO needs to strengthen itself to develop ability and skill to handle the power trading function which calls for, among other things, prompt exercise of commercial judgment. Urgent attention should be paid to develop this within the organisation. It would be of advantage to develop within GRIDCO a well functioning trading unit which may eventually be turned into an independent trading organisation as a step towards bringing in a competitive regime that would provide the consumer the opportunity to choose the source of his power supply.

5.29 Rural electrification seems to have unintentionally become the worst casualty of the reform process. With the restructuring of OSEB, and privatisation of DISTCOs, the rural electrification wing of OSEB was disbanded and it was left to the DISTCOs. to carry on with whatever schemes were ill in the pipeline. Since the activity is commercially not attractive , the DISTCOs can not be expected to be very enthusiastic about rural electrification. The interest of DISTCOs has further slackened because even the modest rural electrification work done by them has not been paid for inspite of the fact that an amount of Rs.23 crore of capital subsidy due was certified by OERC several months ago. No Fresh scheme of rural electrification seems to have been posed for funding support of agencies like REC, nor any scheme drawn up for the purpose. Another regrettable feature is the utter lack of concern for productive use of electricity for rural development through agriculture pumping. In terms of agricultural demand for power among states, Orissa is practically at the bottom. What is worse is that agricultural demand for power in the state has gone down from a meagre 6% in 1992-93 to a dismal 3% in 1999-00, compared with national average of 30%. No single department of the State Govt. is entrusted with the administrative responsibility to plan, promote and monitor growth and press for rural electrification for development of irrigation pumping which is vital for rural development. Under a high priority national plan, all villages are required to be electrified by March 2007. For a State like Orissa, with 40% of the population from weaker sections of scheduled castes and scheduled tribes living in remote areas, the leeway to be made is large. Kutir-Jyoti program needs to be persued with vigour. It must however be ensured that the benefits of the subsidized electricity supply under this program flow to the targeted beneficiaries. The goal is unlikely to be reached unless determined efforts are made and an effective machinery is put in place for planning, execution and monitoring of rural electrification projects. The vacuum caused by abolition of the rural electrification wing of the OSEB needs to be filled up and an alternative system created. The following recommendations are made in this connection.

(a) A Rural Engineering Planning Organisation (REPO) should be set up under the Government to provide focus and direction to this vital programme, to prepare specific schemes, pose them to funding agencies and over-see utilization of the funds procured.
(b) REPO should have under it four Rural Electrification Planning Units (REPU), each corresponding to a DISTCO with which it would need to work in close coordination. These units would draw up, detailed schemes of rural electrification.
(c) Prioritisation of villages for electrification should be done by REPUs in consultation with the Collector of the concerned district.
(d) Execution of the works would be the responsibility of the concerned DISTCOs.
(c) REPUs would need to monitor the execution and report completion of schemes and the expenditure incurred thereon to the Collector of the district and the State REPO.
(f) On the basis of the Collectors' certificates of satisfactory completion, the State Government should promptly settle subsidy payments admissible to DISTCOs.
g) Government would need to provide DISTCOs with capital. subsidy; revenue requirements would, in normal course, be considered by OERC as a part of tariff exercise.

5.30 Our recommendations would help rehabilitate the utilities, bring stability and promote growth of the power sector only if these are implemented as a package and the implementation is managed and monitored closely. The reform adopted by Orissa may have been flawed, but mid-course corrections could have been successfully applied much earlier, and at less cost to the economy, had the reform been managed rather than its success taken for granted. The Committee's recommendations towards putting back the reform on rails would succeed only if the need for reform management is recognised and a system is put in place by the Govt. for regular monitoring, coordination and mid-course correction. It is interesting to know that of all the major parameters of reform laid down in the SAR, one of the few that proved realistic was tariff. Retail tariff has been fairly close to the SAR assumption in the first two years and substantially higher since 1998-99 Thus, consumers have not failed to provide support; they have made ample sacrifice in search better quality of service which has eluded them so far.

5.31 Power sector reform would succeed if the utilities bring in efficiency, cut costs, reduce losses and ensure greater consumer satisfaction. It would also. require strong enforcement to ensure that consumers of electricity pay for its use. All sections of tile society, particularly those, who are in a position to influence public opinion, have the responsibility to provide the requisite support. Revival of the power sector would depend to a large extent on how fast a consensus is built in this vital area.

5.32 The State's power sector is now on the brink of a crisis. It is high time all agencies namely, the State Government, the Central Government, the World Bank and the DFID, got together and took a holistic view on what can be done by each to rescue the reform. If electricity reform fails in Orissa, it would have its inevitable adverse impact on reforrn all over the country. What has taken place in the electricity, industry of Orissa is only restructuring, privatisation and establishment of a Regulatory Commission. The real reform, which brings in its wake benefits to consumers, strength to the industry and growth for the economy has yet to come.

Government of Orissa had constituted a Committee of Independent Experts to review Power Sector Reforms in Orissa Vide Notification.No.8480/E, dated. 30.05.2001 , who had submitted their report to Government on 02.11.2001.

After careful consideration of the recommendations of the Committee of Independent Experts and the correctives suggested by OERC, Government have been pleased to decided, as under

(i) The effect of up-valuation of assets of OHPC and GRIDCO indicated in Notification No. 5210 dated 01.04.1996 and No. 5207 dated 01.04.1996 would be kept in abeyance from the Financial year 2001-2002 prospectively till 2005-2006 or the sector turns around whichever is earlier to avoid re-determination of tariff for past years and also re-determination of assets of various DISTCOs. For this purpose depreciation Would be calculated at pre 1992 norms notified by Government of India.

(ii) Moratorium on debt servicing by GRIDCO and OHPC to the State Government would be allowed from the financial Year 2001-2002 till 2005-2006 except the amount in respect Of loan from the world Bank to the extent the State Government required to pay to the Government of India.

(iii) The Outstanding dues payable to OHPC by GRIDCO till 31.03.2001 account of Power purchase would be securitised through issue Of power bond by GRIDCO to OHPC.

(iv) GRIDCO and OHPC shall not be entitled to any Return on Equity to any Return on Equity (ROE) till the sector become viable on cash basis or 2005-2006 whichever is earlier.

(v) Under conditions of normal hydro availability the State becoming surplus in power availability. GRIDCO may take steps for export of Power. GRIDCO would take steps to procure cheap power from CPPs like NALCO & ICCL. OHPC & OPGC may be allowed to undertake 3rd Party sale outside the state subject to permission from appropriate authorities.

(vi) OERC would consider, multi-year tariff schedule, which would help the utility like Generator, GRIDCO & DISTCOS to embark upon long term business plan.

(vii) World Bank loan would be passed on by State Government to GRIDCO & DISTCOS as 70% loan @13% interest per annum and balance 30% would be as grant.

(viii) Tax-free bonds @ 8.5% interest would be guaranteed by Government of Orissa for PFC REC loan.

(ix) There shall be 5% overall reduction of Distribution losses every year from financial year 2002-.2003 to 2005 - 2006 bench-making the starting Distribution loss of 42.21% in financial year 2001 -2002.

(x) Collection efficiency of revenue to be calculated as 85% for the financial year 2001-2002 reaching to 95% in 2005-2006.

(xi) Aggressive feeder metering in LV side of Distribution Transformers should be made within 12-18 months to identify loss prone area. OERC would be requested for compliance from DISTCOS.

(xii) Swapping of Government dues from GRIDCO against dues of GRIDCO from Government and balance receivables if any be settled.

(xiii) Suitable budgetary provisions be made after actual verification for payment in full of electricity dues of GRIDCO/DISTCOS against various Departments of the State Government. Such dues could be paid directly to the OHPC Ltd. and the books of the concerned DISTCOS and GRIDCO adjusted as paid and received.

(xiv) Government would exempt watercess on the volume of water used by OHPC for generation of Electricity.

(xv) GRIDCO should refrain from purchasing materials, which are not required for minimum utilisation GRIDCO is also advised not to initiate new contracts unless the position is reviewed Board of Directors and approved by Energy Department.

(xvi) GRIDCO should take prompt and effective action for payment of interest towards World Bank Loan. In case of default, this should be adjusted out of the any release to GRIDCO.

(xvii) A year wise target or reduction of cash loss should be fixed and monitored.