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REVISED STRATEGY

FOR THE MINISTRY OF


POWER
(Submitted on 7th January, 2011 evening)

DEEPAK SANAN
SANJAY MITRA

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Total pages 30

CONTENTS

1. SECTION I
Vision, Mission, Objectives, Functions and Stakeholders 5
2. SECTION II
Assessment of the Situation 7
3. SECTION III
SWOT Analysis 18
4. SECTION IV 19
Outline of the Strategy
5. Section V 23
Implementation Plan
6. SECTION VI 25
Linkages with RFD
7. SECTION VII 26
Cross Departmental and Cross Functional Issues
8. SECTION VIII 29
Monitoring and Review Arrangements
9. Annexure A 30

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List of acronyms and abbreviations used
APTEL-Appellate Tribunal for Electricity
APDP-Accelerated Power Development Programme
APDRP- Accelerated Power Reforms and Development Programme
ATC loss-Aggregate Technical and Commercial loss
BBMB-Bhakra Beas Management Board
BEE-Bureau of Energy Efficiency
BPL-Below Poverty Line
CEA-Central Electricity Authority
CERC-Central Electricity Regulatory Commission
CPSU-Central Public Sector Undertaking
CSGS-Central Sector Generating Station
DVC-Damodar Valley Corporation
DFI-Development Finance Institution
DSM-Demand Side Management
DTR-Distribution Transformer
EA- Electricity Act
ECA-Energy Conservation Act
EPA-Environment Protection Act
EPW-Economic and Political Weekly
E&F-Environment and Forests
FCA-Forests ( Conservation) Act
FYP-Five Year Plan
GIS-Geographical Information System
HVDS-High Voltage Direct Supply
HEP-Hydro Electric Project
IT-Information Technology
JV-Joint Venture
LT-Low Tension
MOP-Ministry of Power
MIS-Management Information System
NTPC- National Thermal Power Corporation
NHPC- National Hydro-electric Power Corporation
NEEPCO-North Eastern Power Corporation
NLDC-National Load Despatch Centre
NEWRA-North Eastern Water Resources Authority
PGCIL-Power Grid Corporation
PFC-Power Finance Corporation

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PAP-Project Affected Person
PAF- Project Affected Project Affected Family
QOS-Quality of Supply
REC-Rural Electrification Corporation
REC-Rural Electrification Corporation
R-APDRP-Restructured-APDRP
R&R-Resettlement and Rehabilitation
RGGVY-Rajiv Gandhi Grameen Vidyutikaran Yojana
SERC-State Electricity Regulatory Commission
SJVNL-Satluj Jal Vidyut Nigam
SCADA-Supervisory Control and Data Acquisition
THDC-Tehri Hydro Development Corporation
T&D-Transmission and Distribution
UMPP-Ultra Mega Power Project

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STRATEGY FOR THE MINISTRY OF POWER

SECTION I

Vision, Mission, Objectives, Functions and Stakeholders

1.1 VISION:

Create an efficient and vibrant power sector geared to the needs of inclusive and rapid
growth of the economy.
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1.2 MISSION:

Position itself as the key reform driver and ensure that market forces are able to
optimise efficient generation, transmission and distribution arrangements and areas of
market failure are addressed through appropriate policy and financial interventions
based on a constructive engagement with the state governments and other
stakeholders.

1.3 OBJECTIVES:

The Ministry of Power’s primary objective is to achieve the vision enunciated above
through the mechanism contained in the mission statement. In the immediate context
the objectives are:
1. Perspective planning for the sector including matters related to overall demand
and supply forecasting, generation capacity addition through various sources,
transmission network, universal access and appropriate human resource
requirement.
2. Plan for taking forward the goals of perspective planning by identifying the
key constraints and policy and schemes to overcome them.
3. Create and forcefully drive an agenda to reform the power sector to achieve
the vision of the Ministry

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4. Elucidate the key elements of the reform agenda and secure consensus to take
this forward.
5. Formulate and implement appropriate policies and schemes at the central level
to achieve goals in the centre’s own domain and secure state support in those
areas for which the states are responsible.
6. Strengthen the institutional framework for national level functions and inter
state co-ordination.

1.4 FUNCTIONS:

i) Policy formulation in furtherance of the objectives outlined above.


ii) Implementation of the policy formulated.
iii) Legislative action to further the policy and administration of existing
statutes such as the EA 2003, ECA 2001, DVC Act 1948 and BBMB.
iv) Administer and guide the national level institutional framework for the
power sector including the CEA, NLDC, CERC and the APTEL and
evolve new framework for inter state co-operation like NEWRA.
v) Oversee the functioning of CPSUs like NTPC, NHPC, REC, PFC,
NEEPCO, SJVNL, THDC, PGCIL and other organizations like the BEE.
vi) Implement specific transfer schemes to further distribution reforms and
promote universal access.

1.5 STAKEHOLDERS:

Central government-responsible for legal and regulatory framework; power sector


reforms; statutory clearances; fuel linkages; inter-state coordination; coordination
regarding renewable deployment;
State governments-responsible for the actual operation of the sector; key role in issues
related to tariffs and subsidies; rural electrification; facilitating LA, R&R and
expediting proposals for E&F clearances in connection with generation and
transmission projects;
CPSUs- NTPC, NHPC, PGCIL, THDC, SJVNL, DVC, NEEPCO etc.-responsible for
the actual implementation of generation and transmission projects; induction of new
technologies; linkages with renewable;

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Development finance institutions in the power sector-PFC, REC-provision of funds
for power projects; distribution sector finance; nodal points for reforms;
Regulators, including CERC, SERCS and APTEL-tariff setting, QOS, supply code,
ABT; capital cost approvals;
Private sector-promoters of UMPPs, JVs in Transmission; distribution franchisees;
Outsourcing agents for consumer services, fault repairs, IT deployment etc;
Consumers-all BPL, domestic, agricultural, industrial, commercial and other
consumers and theirorganisations
Project affected persons

SECTION II

Assessment of the Situation

2.1 The current annual per capita consumption of electricity in India is estimated at
less than 600 units, far lower than the world average of 2800 units. Raising this to an
acceptable level requires that the current installed capacity of 1,56,000 mw rise five
fold over the next two decades. Sustainable development requires that this capacity be
a judicious mix of thermal and renewable / non polluting modes. Equity requires that
every household is connected to a reliable and affordable source of supply.

These objectives are not new. They have been voiced in different policy documents
issued over the years and underlie targets set in successive plans. The achievement
has, of course, never matched these targets. In the recent past, the targets of installed
capacity in the ninth plan was 40,000 mw and achievement was 19,119 mw ( 48 %),
in the tenth plan the target was about 44000 mw and achievement was about 21000
mw (48%). In the eleventh plan, against the original target of 78000 mw, the
achievement is being projected as 62000 mw. This is unlikely to be achieved. As of
January, 2010, only 19500 mw had been added. A more realistic figure will be in the
range of 45000 mw (58%). In terms of the thermal: renewable mix, the goal has been
specified as a 60:40 ratio. In actual practice, thermal has always been a higher
proportion and has been growing over the years. At last count, it is estimated that 44%
of households in the country were still to be electrified. Most parts of the country live
under a regime of regular load shedding and poor quality of supply.

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2.2 In order to strategise for the power ministry, it is important to consider the factors
that are responsible for the failure to achieve targets and provide universal and
reliable access. The requisite investment has obviously not been forthcoming. At the
core has been the inability of the sector to raise resources from its activities. The
finances of utilities have always been parlous and the situation has not changed
despite various initiatives over the years.

The story of public policy for power in India has been one of trying to identify a silver
bullet to ensure investment in the sector in the face of political economy constraints
that have continued to debilitate the health of the sector over the decades. The state
electricity boards early on began exhibiting problems of operational inefficiency and
poor tariff policies leaving little surplus for capacity addition. Even the meagre
mandate for 3% return on assets under the Electricity Supply Act, reiterated in the
recommendations of many Finance Commissions was seldom realized. The CPSUs
created in the power sector in the 1970s, were the first major central attempt to tackle
this issue. The advent of liberalization presented the next opportunity to make a
significant inroad on the problem. The idea of the market as the key to an efficient
power sector with the state’s role primarily one of regulating areas of market failure,
could now be pursued.

The initial silver bullet was to secure private sector entry into generation with
guaranteed returns, skirting in the main the complexities bedevilling the revenue end
of the chain- distribution. While the critical role of distribution in securing the
financial health of the sector was always recognized, the difficulty was how to move
forward in this direction.

The unbundling recipe of the 1990s first adopted in Orissa was the second silver
bullet. Thereafter, the creation of electricity regulatory commissions for tariff setting
under the 1998 act, the 2003 act to hasten unbundling, ensure open access and create
the conditions for the success of competitive possibilities in the sector, the central
schemes of APDP, APDRP and now the R-APDRP have all been efforts aimed at
creating the framework and incentives for an efficient power sector that is able to
attract investment for growth of the sector. The statutory framework for the growth of

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an efficient, competitive power sector has been laid but the political economy has
exhibited a familiar ability to sidestep taking the hard decisions that are seen as
detrimental to short term political interests.

There were clearly limits to a course that sought to guarantee excessive returns to
investment in generation and fortunately Enron brought an early end to this phase.
Unbundling in Orissa brought up the shortcomings of attempting reform at the state
level without seeing through the ramifications of the design. The experiment of
private sector entry in distribution in Orissa was a disaster and the immediate remedy
was an insistence on unbundling without necessarily a change of ownership. The
promise of multilateral funding saw some compliance in the creation of a redundant
set of state owned institutions while the system of poor tariff and subsidy policies
continued with little incentive for even operational efficiencies being realized.

The electricity regulator was another panacea that quickly demonstrated its
limitations. A perspective that continues to guide some observers and policy makers is
rooted in seeing an independent regulator taking the decisions that the states find too
difficult to take at their level. As state ability to influence regulatory decisions or
sidestep them when these do not suit them is increasingly exhibited, the solution is
seen as one of somehow curtailing this ability of state governments to influence
regulation. This perspective can only end up ignoring the imperative of making the
states address the ills that dog their distribution sector.

2.3 MoP has sought to influence distribution reforms at the state level through three
schemes of specific purpose transfers in the last decade or so- the APDP, the APDRP
and R-APDRP.

The APDP (Accelerated Power Development Programme), introduced in 2000-01 was


the first attempt by the MOP to drive reforms in the distribution sector. The APDP
was to finance specific projects relating to renovation and modernization of old
generating plants and more importantly the upgrading and strengthening of sub
transmission and distribution networks including energy accounting and metering.
States that signed MoUs with the power ministry for implementing power sector

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reforms were to get access to these funds. Actual disbursal was linked to appropriate
investment plans to be vetted and co funded by financial institutions.

Against the allocation of Rs. 1000 crore in the first year only Rs. 163 crore could be
disbursed under the APDP and in the second year only Rs. 426 crore were spent out
of Rs. 1,500 crore. It was a short-lived programme, quickly supplanted in 2001 by a
bigger, more ambitious programme , the APDRP (Accelerated Power Reforms and
Development Programme), that was closely tied to the implementation of the
recommendations of the Montek Singh Ahluwalia Committee on the securitization of
CPSU dues.

The change in nomenclature was to show the desire of the MOP to effect sorely
needed reforms in the distribution segment. The APDRP was accessible only to states
agreeing to undertake reforms as per agreed milestones. It had a specific focus of
progressively narrowing and within a set time period eliminating the gap between unit
cost of supply and revenue realisation. The allocation was enhanced to Rs. 3500 crore
annually and the programme now had one entitlement based investment window for
distribution circle level improvement and a second incentive window that provided a
matching grant for achieving agreed reform milestones measured through the single
indicator of the distance between average cost of service and revenue realized.

Under the entitlement window of the APDRP, the MOP provided funds directly to the
Discoms to improve their technical and commercial performance, including energy
accounting, input metering, billing, revenue realization, raising the realization per unit
input purchased, etc. down to the circle level ( mostly equivalent to a revenue
district). Independent agencies were assigned to monitor progress. The scheme also
provided for the conversion of a certain proportion of these DFI loans to grants
depending upon the achievement of agreed milestones.

Several states responded quite whole-heartedly, the long-neglected distribution sector


at last got an infusion of funds and substantial loss reductions were reported. The all-
India losses, after accounting for state govt subsidies, fell sharply from Rs 17794 cr in
2000-2001 to 2268 cr in 2003-04 with major contributions from AP, Gujarat,

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Karnataka and West Bengal. Subsidy payments from the state governments became
regular, as states actively competed for the incentives.

All seemed well, but it soon became apparent that technical improvements , though
needed sorely, would not serve to address the core issues of free power, unmetered
supplies to agriculture and the basic mismatch between costs and tariffs. The focus on
audited statements led inevitably to shifting baselines and creative loss accounting by
the utilities and a lot of time was spent in filing and cross-checking loss –reduction
data. In fact, losses started slowly creeping upwards. Paradoxically, system
improvements actually increased cash losses as the technical savings from small,
well-defined, urban areas were subsumed and lost in the much bigger segment of
unmetered and unbilled supplies.

The desire of certain states to better identify power flows to agriculture and other
unmetered sectors, led to ambitious feeder separation programmes that physically
separated the distribution lines at the village level to cater exclusively to the
agricultural load during off-peak hours. In turn, the separation allowed the domestic
consumers and small village industries to avail uninterrupted quality power. In
Gujarat, for example, over 48000 kms of high tension lines, 7000 kms of low-tension
wires, 12000 transformers and 1.2 million electric poles were installed at a cost of
more than Rs 1000 cr ( Tushaar Shah, EPW Feb 16-22, 2008).

Not many states had such a volume of resources. Many did not have the requisite
technical wherewithal. APDRP did cut ATC losses by 5-15% ( Morris and Pandey)
across states, These were low-hanging fruits, easily harvested with minimal efforts,
but the inattention to the core mismatch between revenues and costs did not permit a
sustained growth path and the programme began to lose steam. Matters were not
helped by inexplicable delays on the part of the MOP to actually release the incentive
grants, possibly driven by a need to contain cash outflows from GOI. To quote the
Integrated Energy Policy document:

“To encourage distribution reforms, the Accelerated Power Development and


Reforms Programme (APDRP) was launched. APDRP supports distribution reforms
in the states through investment support and incentives for lowering AT&C losses.

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APDRP set out to bring down AT&C losses to 15% by 2007 from an estimated level
of 45% in 2002 and restore the financial health of SEBs. However, the performance of
APDRP has fallen well short of the promise. Investment in the distribution sector
remains low and the overall AT&C loss level continues to remain high.”

The APDRP, in separating entitlement based investment funding from incentive


grants, represented an improvement on the APDP. However, the continued emphasis
on minute process milestones in the investment support amounted to micro
management at the central level and detracted from ownership of reform at the state
level. The single monitorable indicator was in principle a fine idea but contained the
possibility of slipping in explicit subsidies to shore up revenues by showing reduced
losses and greater supply to unmetered sectors like agriculture. Moreover, the
emphasis on financial loss reduction meant that incentives for increasing access to
reliable power for the underserved were perverse. Overall the incentives to reform in
the power sector were inadequate. The message of a credible hard budget constraint
and no further bailouts, could not be driven home given the recent settlement of the
over dues of the SEBs to central power sector PSUs, which included a waiver of
surcharge amounts and bond issues to ensure there was no immediate cash outgo from
the SEBs/States (following the Ahluwalia Committee report).

Enter then the R-APDRP ( Restructured APDRP), a fresh initiative by the MOP in the
XI FYP. The focus was changed to actual, demonstrable performance in ATC losses
in selected towns with populations in excess of 30,000. Part A of the project in such a
town will establish firm base-line data through Customer indexing and GIS mapping,
DTR metering, SCADA and MIS. The scheme will also set up a comprehensive Asset
Map of the entire distribution system , covering poles, distribution transformers, LT
lines etc, in addition to the grounding of IT-based applications for meter reading,
billing, collection, energy accounting-verifiable by an independent agency. Part B will
involve the actual strengthening of the distribution infrastructure, 11 kV substations,
lines, HVDS, capacitors banks for VAR compensation etc. Likely resource flows in
the two parts will respectively be of the order of Rs10000 and Rs 30000 cr. As in its
precursor, funds under R-APDRP too will initially flow as DFI loans, to be
subsequently converted to grants under what is at first sight, a fairly complex formula.
( p to 50% of the project cost of Part B projects will be converted to a grant , payable

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in 5 equal tranches on achieving the 15% ATC loss target for the town for 5 yrs.
Utility level ATC loss reductions exceeding 3% per annum , for those with more than
30% baseline losses will now be incentivized ( 1.5% for those with lower baselines).
So far, Rs 4859 cr have been provided to 1344 Part A projects in 22 states. Results are
awaited.

R-APDRP has given up the incentive window created under the APDRP possibly
because it was essentially flawed and was resulting in outgo without yielding the
desired results. At another level, it needs to be seen as part of a phase in which the
emphasis on distribution reform actually waned.

2.4 The MoP focused on enhanced addition to generation capacity virtually on a stand
alone basis. The UMPPs represented one element of this strategy. The private sector
has also shown considerable appetite for cherry picking projects through captive coal
block linkage on the thermal side and by securing hydro power project allotments
from states with the relevant potential. With the economy booming, resources in states
buttressed both by the generosity of Finance Commission recommendations as well as
the buoyancy in central revenues, distribution woes were pushed into the background.
But with the full impact of the Pay Commission and other commitments eating into
state resources, the failure to take the tough decisions on distribution is beginning to
tell once again. States are falling behind on subsidy payments and distribution losses
are growing. A concomitant casualty is a deceleration in the growth of consumption,
as distribution utilities resort to load shedding rather than buying expensive power.
Electricity prices on the spot market have dropped and the days of windfall profits for
merchant power seem all but over.

2.5 A review of the status of UMPP does not present a very encouraging picture. The
only one likely to come on stream (partly) in the near future is the Mundhra UMPP of
Tata Power. Sasan handed over to Reliance Power in August 2007 is still mired in an
uncertainty about completion dates. Krishnapatnam (also with Reliance) handed over
in January, 2008, is yet to complete land acquisition. Tilaiya (also Reiance) handed
over in August, 2009, awaits forest clearance. The impression that coal resources have
been handed over without sufficient safeguards to achieve projected outcomes would
not be entirely misplaced. Under these circumstances it is difficult to share the

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optimism of the MoP regarding the pre-eminent role of the private sector in the years
to come.

2.6 It is only a matter of time before the MoP will have to face up to the fact that
private sector investment in fresh generation, the main pillar of its current capacity
addition strategy, will dry up, unless distribution reform is brought back into focus
immediately. However, given their past experience, it is important to rethink the
manner in which the intervention is designed so that the principal agency relationship
that micro management endangers and the shortcomings of focusing on loss reduction
as the key indicator, are not repeated. States have to be involved in a manner that
respects their autonomy and focuses on outcomes while leaving the roadmap of tariff
subsidy reform, encouraging open access, private sector involvement and other
measures to be tackled by them as they deem appropriate, given their specific
constraints and political economy considerations.

2.7 There are a number of other areas in which policy intervention is necessary to
expedite capacity addition in generation apart from measures to enhance the financial
viability of the distribution sector.

2.8 Environmental concerns have emerged as a major constraint to capacity addition


in the case of both thermal and hydel power projects. Thermal capacity, based on
domestic coal, is facing the problem of securing clearance for coal mining. The
concept of ‘no go’ areas and the related definition are already a matter of debate. An
early consensus on policy that harmonizes the need to mine coal and post mining
stabilization is essential if power capacity is to keep pace with 8%/9% growth.
Similarly on the hydel side, the delays consequential to a new concept of basin wide
environmental studies, is likely to prove detrimental to speedy development.

2.9 Fuel linkage issues in the case of coal and gas are also in a policy limbo at present.
Captive coal block allocation by non transparent mechanisms of allotment seems to
have given up. But an alternative policy of bid based allotment is still to be
announced. Gas allocation and pricing issues seem too still await resolution for the
fuel to become a competitive source of power.

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2.10 R&R issues form an important part of many power projects. As the pressure on
land grows, project proponents are increasingly faced with legitimate local
aspirations regarding the timely and proper resettlement and rehabilitation ( R&R) of
project affected persons and families (PAPs/ PAFs). The major brunt of these
demands has so far fallen on the CPSUs and state-owned gencos, which have devised
their own, project-specific solutions. As the private sector comes into its own, it is
also beginning to come up against R&R related issues and is dealing with them on an
ad-hoc basis. The overall framework for R&R is yet to be decided at a national level.
Two laws, one on land acquisition and the other on R&R, are yet to passed and
enacted.

In the 1960s and 1970s, the typical R&R responses of CPSUs and State PSUs,
consisted of offering a job to one member of each PAF. This led to gross over-
manning and was quickly given up once efficiency and cost-cutting norms in the
public sector began to bite. For a long time thereafter, effective R&R took a back
seat and PAPs had to fall back on the land acquisition compensation, meager as they
were. These were supplemented on occasion, by scattered ‘area development”
activities, such as roads, dispensaries, schools and industrial training facilities. The
first major comprehensive re-look at CPSU-driven R&R was under the Tehri HEP,
which involved large-scale relocation of a substantial population of PAPS. Even
here, the accent was on the replacement of lost social infrastructure and on a certain
amount of up/re-skilling.

This model is no longer working. There is widespread dissatisfaction over the loss of
homes, agricultural land and avocations as well as social infrastructure. PAPs are now
ever more aware of the resource earning potential of the big power projects and quite
justifiably want a fairer redistribution of the wealth created by these big power
projects. Hence, mere social infrastructure development is no longer acceptable , nor
are promises to provide industrial training. On their part, the project proponents are
unwilling to take on their rolls large numbers of relatively unskilled personnel. As a
result, a large number of projects, particularly hydel projects, are not progressing the
way they ought to. The dissatisfaction is coming through strong and clear, sometimes
directly and at times through other related concerns like environment and forest
protection. CPSUs and private players are both affected.

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Responses have varied. The national hydro policy 2008 has a provision for an
additional 1% free power for local area development. Some states additionally secure
a percentage of the project capital cost for this purpose. CPSUs have agreed to make
this contribution for new projects. Private sector players are still resisting this
provision. It remains to be seen whether these will work. Currently, the prospects are
uncertain given the patronage based systems on which this fund is allocated. A
policy that makes the project affected into stakeholders of the project needs to be
evolved.

2.11 Ensuring an appropriate mix of thermal and renewable / less polluting sources is
necessary to meet our international commitments on carbon emission. Given the
limited possibility of solar, wind or nuclear in the medium term, hydel remains the
only real option to focus most of our efforts. This will require a focus both on the
hydel potential in India and neighbouring Bhutan and Nepal. Within India, this
requires sorting out not only the environment related issue but also creating better
incentives for the resource rich states to be pro-active. A prime area requiring
consideration in this regard is a tax on generation. Inter state issues (as in the case of
Arunachal and Assam) will have to be addressed. Solutions will have to found that
emphasize mutual benefit sharing arrangements. In Bhutan, progress is being made
through CPSU investment backed by grant funding by the GoI to make up an equity
stake for the Bhutan government. A well thought strategy has to be put in place for
accelerated development of the huge hydel potential in Nepal.

2.12 In the context of hydel development, apart from addressing any state / national
concerns of the resource rich areas, appropriate transmission arrangements are
essential. Long term planning needs to be expedited to look at evacuation on a river
basin basis instead of the current project by project approach. Appropriate funding
mechanisms to incentivize the PGCIL in this direction need to be thought out.

2.13 CPSUs, specially in the power sector are constrained from participating in a bid
process for project allotment under the present policy. They need to be freed from this
constraint, if they are to have a level playing field with the private sector in securing
project allotment.

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2.14 The RGGVY has ploughed considerable funds into connecting villages and
electrifying poor rural households. But in its present form it will not be able to address
the issue of reliable, affordable power on a sustainable basis.

2.15 Demand side management has a lot of potential. The PAT (perform, achieve,
trade) mechanism that targets a large number of major power consumers needs to be
aggressively pushed along with the Bachat Lamp Yojana (use CFL). These efforts
largely relate to energy use reduction by taking advantage of technology.

Expeditious and widespread introduction of time of day tariffs has tremendous scope
to boost DSM. A related policy initiative with tremendous externalities in terms of
productivity gains, is the division of this country into at least two time zones.
According to TERI, this could leads to gains of 5%.
2.16 A very interesting, recent development relates to the growing realisation of the
use of power from the CSGSs as a possible policy tool.

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SECTION III

SWOT Analysis

Strengths Weaknesses

 Statutory framework in place  Lack of clear focus and failure to prioritize


 Regulatory framework in place  Negligible forward movement on
 National transmission grid distribution reforms
created  Ministry yet to reclaim position as key
 Growing private sector reforms driver
participation  Failure to focus on key objectives and
 Strong CPSU performance learn from the past while formulating
 UMPP specific transfer schemes

 Specific transfer instruments Over-emphasis on CPSU management and

to incentivize states exist (R- monitoring of project implementation

APDRP and RGGVY)

Opportunities Threats

 Growing awareness of the  Inability to take the lead and move ahead
threats posed to inclusive and on distribution reforms
rapid growth by the  Curbs on regulatory freedom
shortcomings of the energy  Being unable to evolve time-bound
sector mechanisms for E&F clearances
 Possible catalysing of centre-  Uncertainties over fuel linkages
state cooperation through  R&R issues
enhanced consultations and  Capital equipment shortages
redesigned interventions  Skill shortages
 Continuation of poorly designed specific
transfer schemes- R-APDRP and RGGVY

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SECTION IV

Outline of the Strategy:

4.1 The core elements of this strategy are:

 locate distribution and distribution reforms at the core of GoI’s initiatives in


the power sector
 recognize that the ability of markets to influence investment in the sector is
critically dependent on the health of the revenue generating end of the value
chain
 enable MOP to reclaim the role of the key driver of reforms
 redesign R-APDRP, RGGVY and use CSGS power to incentivize reform
 accelerate capacity addition by addressing factors that constrain project
clearance and implementation including fuel tie ups, environment, R&R, inter
state issues, etc. and
 promote DSM measures

4.2 Stemming from the assessment detailed above, the most important component of
the strategy advocated for MoP relates to the issue of central facilitation to improve
the financial viability of the distribution sector. Given that this is primarily state
responsibility, the centre should take action on the following fronts:

a) Try and create a political consensus on further action in this direction in the
national interest.
b) Redesign the R-APDRP and RGGVY to reward desired outputs instead of
focusing on inputs to secure these outputs. In this regard, these schemes must
better conform to appropriate design principles for specific transfers.
c) Creatively use other instruments like shares in CSGS to incentivise reforms
d) Institutionalize appropriate centre: state and inter state fora in the power sector
like the Empowered Committee of Finance Ministers and NEWRA.

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4.3 Any scheme of inter-government transfers should be seen as fair and transparent,
conform to the requirement of a hard budget constraint and minimise creation of any
moral hazard. In general, to ensure adherence to these precepts, the following cautions
are advocated.
i) Conditional or specific purpose grants should not attempt to tackle a large
number of areas. They should be a last resort to meet objectives unlikely to
be taken up by sub-national governments due to the presence of
externalities or because of paucity of resources that cannot be mitigated
through normal transfers.
ii) Allocation criteria whether formula driven or competitive or a combination
of both should be transparent and not amenable to manipulation. Dilution
of these requirements in formulation or implementation can render them
ineffectual in securing performance or reduce them to vehicles for
dispensing patronage. Formula driven transfers are most likely to meet the
requirements of transparency and a hard budget constraint. However,
where objectives require that appropriate proposals for funding should be
received in a competitive mould, it is essential that both criteria as well as
systems of evaluating proposals meet the conditions of transparency and
fairness. In the absence of these requisites, formula based transfers may be
preferable.
iii) The design of conditional grants should keep in view capacity to monitor
and manage at the central level. Objectives should be clearly spelt out, be
capable of being monitored and non-performance should invite the
possibility of sanctions. In the absence of these features in the design, even
conditional transfers based on transparent formula can become rights,
which sub national units are entitled to regardless of attached conditions
rendering issues of performance secondary and linking drawals to
expenditure alone.
iv) Specific purpose grants must contain sunset clauses to create effective
incentives for performance. In their absence, there is a clear incentive to
under perform in order to obtain a larger amount over time.
Distribution reform to actualise potential energy demand at a faster pace is critical for
the growth of the economy and fits the criteria of a goal with significant spillovers.

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The key issue is a design that ensures adherence to the other design principles
outlined above. Hence the stress on the designing of the specific transfer mechanism.

4.5 It is proposed that the R-APDRP be redesigned to have two components. One
component will support information data bases and infrastructure as a viability gap
funding for projects that receive bank /FI funding. This component should have a
corpus funding of Rs 30,000 crore in the 12th Plan. It is prposed that each specific
project’s shape and size, including the components to be funded, should move out of
the realm of the MoP and the institutions under its control. The states will pose
projects at their level to FIs and Banks which will be evaluated by the funding agency
and after due diligence will be sanctioned loans by them. MoP contribution will have
a normative allocation for each state (based on size/ population) which the states will
be able to draw upon to the extent of 20% of the project cost.

The second component would seek to reward increased energy consumption. This
criterion shall be an audited figure of increase in metered energy sale for which
revenue has actually been collected. Supply of energy that is not metered or supplied
free will be excluded. Demand side subsidy for metered supply would automatically
be included but supply side subsidy transfers from state governments would stand
excluded.

The logic of this formulation is that the states are free to take any action they choose
to improve distribution and for the country as a whole the positive externalities lie in
increased use of energy that propels growth and this should be the key indicator on
which the specific transfer should hinge. The requirement for metered supply alone
being considered in the criterion arises from the difficulty that non metered supply
poses for accurate measurement and the possibility of including figures that do not
actually represent increased energy off take but merely a juggling of T&D losses. The
condition that only units that yield actual revenue will be included in this criterion is
to ensure that distribution business focuses on its core business of selling energy and
sees receipts from the sale of energy as their main source of revenue. This
automatically creates an incentive for reducing AT&C losses and reducing supply
side subsidies for free supply. The incentive under this component needs to factor in
both high achievement in percentage terms as well as an increase in absolute number

21
of units. The exact formula should be finalized after consultation with the states. It is
felt that the corpus for this purpose in the 12th Plan period should Rs 50,0000 crore. A
proposed formulation is at Annexure A.

4.5 A revamp of the RGGVY will be affected to ensure a clear focus on reliable
access to rural areas. The current infrastructure support under RGGVY will ensure
access in terms of connectivity to households but actual supply of regular and reliable
power to areas where cost to serve is far higher that the revenues likely to be realized
may not occur. RGGVY needs to be redesigned so that it focuses on increased
consumption in rural areas. It should reward a subset of the overall criterion used
under the incentive component under the R-APDRP. This subset will be the metered
energy sale for which revenue is actually collected in rural areas. The possibility of a
direct subsidy to the poor for a lifeline consumption amount using smart cards should
be incentivized under RGGVY. A proposed formulation is at Annexure A.
4.6 R&R issues will need clear and focussed attention. It is another core component of
our strategy. As set out in the assessment section, our case is that the existing systems
will not work. Only a mechanism that specifically links the project revenues with the
direct monetary well-being of the PAFs will work. To elaborate, we propose that each
PAF be provided with a bank account into which a certain proportion of the project
revenues are automatically credited in accordance with a pre-determined and mutually
agreed formula, over the full earning life-time of the project. Consider, for example a
1000 MW hydel project that affects 10000 PAFs. These are reasonable numbers and
quite feasible in remote areas with low population densities of about one person to an
acre. Operating on an annual 30% load factor and assuming an average sale price of
Rs 3.5 per unit ( KWHr), the project could earn revenues of close to Rs 900 cr every
year. Further, if we assume that all the 10000 PAFs are BPL, that is they have annual
household incomes of Rs 25000 or thereabouts and that the project ought to make
them twice as well-off , that is they should get an additional income of Rs 25000 each
year, then a mere 2.5% of the annual project revenue would suffice. This could set the
minimum. The benefits could be scaled up depending upon the local circumstances.

What then, are the advantages? First, the flows will be direct. There will be none of
the usual leakages associated with government expenditure. The PAFs will directly
identify with the continued well-being of the project. The present uncertainty that the

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project proponents face will be addressed and streamlined to large extent. With
project after project running into intractable R&R problems, there is a good case to
revisit the existing systems and try out the direct benefit approach in a few cases. It is
understood that some states are already working a very similar ideas with their private
sector partners. It is welcome development and should spur on the CPSUs.
4.7 A creative and purposeful use of power from the CSGSs should be a key
component of the strategy. The MOP has the power to allocate “shares” in CSGSs.
True, there are serious moves by resource –rich states to seek a higher share as “home
state share”, but even so, the MOP will still retain a lot of clout through what is called
the “unallocated share” which is about 15% of the total capacity. It is our case that
this instrument be used to drive reforms and not used to dispense patronage.
4.8 The MoP should be pro active in activating inter ministerial forum for resolving
fuel linkage and environmental issues.
4.9 It must also activate the forum on hydel power (the Task force) to address issues
like the generation tax and inter state issues (as in the case of Arunachal and Assam).
Solutions should be proposed that emphasize mutual benefit sharing arrangements.
An option paper to take forward accelerated development of the huge hydel potential
in Nepal should be formulated for discussion with the relevant ministries. All these
steps are required to ensure that the thermal: hydel mix issue is not lost sight of.
4.10 The BEE should have a big role. The PAT mechanism should be fully supported
and augmented. Other DSM measures, like TOD (time of the day) tariffs should also
be suitably incentivised. The whole issue of power savings through the creation of at
least two time zones ought to be seriously explored without getting into extraneous
issues as was done in the past.

SECTION V

Implementation Plan

5.1 MoP should not be bogged down in tracking individual power projects. It should
be concerned with seeing through the policy changes that impact the overall vision for
the sector. It can at best monitor fuel linkages and statutory clearances to see if there
are other policy issues that need addressing that have not been foreseen.

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Time Lines for Key Activities

1. Finalize date for Conference of State Chief Ministers on Agenda and


Action Plan for Power Sector Reform to be addressed by Prime
Minister (preferably in May 2011)
2. Preparation of Draft Consultation Paper for Conference of State Chief
Ministers and dissemination to states (April 2011). This consultation
paper will discuss all the measures outlined in the strategy above.
Specifically it will include proposals for setting up a permanent
institutional mechanism to support the State Power Ministers
Committee (on the lines of the Empowered Committee of State
Finance Minister on GST) to evolve consensus on reform measures to
further the development of an unhindered power market in the country
that signals the right incentives for investment in generation,
transmission and distribution. It will seek views on the proposed
changes in central schemes like R-APDRP and RGGVY, on the
proposed framework for enhancing transmission arrangements, R&R
policy, introduction of more than one time zone in the country, etc.
3. Finalize Revised R-ADPRP and RGGVY for implementation in the
12th Plan by December, 2011 including EFC clearance and Cabinet
approval.
4. Set up Inter Ministerial Co-ordination Committees with Environment,
Coal, Water Resources and New and Renewable Energy with
participation of Planning Commission with clear ToRs to consider all
issues related to clearances, fuel linkages, etc. (by April, 2011).
5. Setting up of NEWRA and holding initial meeting. (by June, 2011).
6. Policy for generation CPSUs to be able to bid for projects to be
finalized by April, 2011.

5.2 For MoP, the key focus should be to place distribution reform at the core of its
agenda for securing a growth oriented, efficient power sector. It should, on the one
hand catalyse a serious and regular consultation between centre and states on the
issues related to improving distribution as the key driver for the sector. Appropriate

24
consultation mechanism needs to be set up. It should reframe schemes to focus on the
desired output rather than on processes that may constitute distribution reform. MoP
needs to set up mechanisms at GoI level to ensure that fuel linkage and statutory
clearance issues are adequately addressed.

Over the years, the MoP has ceded ground on the reform issue. It was active till the
early years of the first decade of the 21 st century. It needs to reclaim this position.

Failure to do so means that Business As Usual will prevail. We will continue to make
sporadic efforts at spurring investment at increasingly higher cost without tackling the
core issue of the sector and will soon arrive at a situation very similar to what
prevailed before the securitisation exercise undertaken based on MSA report, with the
notable difference that the losses this time around, could well be higher by a couple of
orders of magnitude.

SECTION VI

Linkages with RFD

6.1 The present approach differs considerably from that set out by the MOP in its
RFD document.

The first difference is the emphasis on the efficiency aspect in the vision statement.
The MOP sets its vision as “Reliable, adequate and quality power for all at reasonable
prices.” This paper states “Create an efficient and vibrant power sector geared to the
needs of an inclusive and rapidly growing economy”.
According to the present approach, inefficiency in the sector is the root cause of all
the problems and it would not be possible to achieve reliability, adequacy, quality at
any price, unless the root cause is faced and addressed.

6.2 The efficiency aspect also leads to differences with the MOP’s mission statement,
which says “Ministry of Power seeks to achieve its vision by providing necessary
support and enabling policy framework for integrated development of power
infrastructure in the country to meet the requirements of the growing economy and to

25
meet the requirements and aspirations of the people for quality power particularly of
poor households in rural areas.” The proposed approach states “Position itself as the
key reform driver and ensure that market forces are able to optimise efficient
generation, transmission and distribution arrangements and areas of market failure are
addressed through appropriate policy and financial interventions based on a
constructive engagement with the state governments and other stakeholders”
The emphasis is on enabling, not doing, on allowing market forces to play out and on
addressing market failures jointly with the other, very major set of stakeholders.

6.3 Consequent to the difference in vision and mission, the objectives also reflect a
difference with the present approach emphasizing policy changes and securing
consensus and movement in this direction instead of project related implementation.

6.4 Our critique is that the MOP is over-focussed on generation without adequate
focus on the constraints that actually impact on investment for capacity addition. It is
borne out from the weighting system. As much as 37% weight has been assigned to
power supply augmentation, with 22% accorded to capacity addition and additional
generation. ATC loss reduction has been assigned 15% weight and there are no
milestones showing enhanced engagement with the states and other stakeholders. The
excessive focus on physical targets also bears out the second critique that the MOP is
driven by its PSUs and does not drive the reform agenda in the power sector as a
whole.

6.5 The RFD document appears to be overly reliant on specific deliverables that
depend on action by other ministries and agencies. In case these are not forthcoming,
then the output with its undue reliance on physical achievement will suffer. In a sense
the MoP is washing its hands of what should concern it most- creating the conditions
for the rapid growth of an efficient power sector. The RFD in line with this overall
approach, refrains from claiming ownership and leadership of the reform process. On
the contrary, there is talk of constitutional limits to reform.

SECTION VII
Cross Departmental and Cross Functional Issues

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7.1 The Ministry has to address a number of cross-departmental issues requiring
intensive consultations and as and when required, consensus building. These include,

 provision of assured fuel linkages ( with the Ministries of Coal, Petroleum


and Natural Gas) ,

 facilitating statutory clearances at the apex level under the Environment


Protection Act (EPA) and the Forest Conservation Act (FCA) ( with the
Ministry of Environment and Forests ),

 Ensuring smooth transport of coal from pitheads ( with the Railways) as well
as from the ports ( with the Railways and Shipping Ministries)

 coordinating renewables development ( with the Ministry of New and


Renewable Energy),

 ensuring full industry cooperation in matters related to energy conservation (


with the Department of Industrial Policy and Promotion),

 expeditious supply of main plant equipment and Balance of Plant material,


erection and commissioning of projects being executed by BHEL, its
subsidiaries and by other domestic manufacturers ( with the Department of
Heavy Industries)

 promoting hydro development ( with the Ministry of Water Resources and the
Ministry of External Affairs- particularly for matters pertaining to Bhutan and
Nepal) and

 promoting regional cooperation in power-sharing ( with the Ministry of


External Affairs)

7.2 The Ministry also has to deal with issues that lie in the domain of state
governments, state regulators, domestic manufacturers, suppliers, EPC contractors
and industry bodies. Regarding R&R, the Ministry often has to intervene with the
states on behalf of CPSUs and sometimes on the behalf of other promoters, in order to
draw up an acceptable “benefits package”. It has to frequently tie up issues related to
land acquisition with the state governments. States have had to be persuaded to buy-in

27
on power purchase obligations arising out of the needs of Indian foreign policy. There
have been a number of occasions when the Ministry has had to reach out to the states
to ensure expeditious submission of proposals for statutory clearances under the EPA
and the FCA. Then there are issues related to greater coordination with domestic
manufacturers, suppliers, EPC contractors and industry bodies in the transmission and
distribution sector.

7.3 There are existing institutional mechanisms to deal with many of these cross-
departmental and cross-functional issues.

There is a standing mechanism under which the MOP recommends fuel linkages for
specific power projects to the Ministries of Coal and Petroleum and Natural Gas. The
Cabinet Secretary has a standing, inter-ministerial consultative mechanism to ensure
uninterrupted coal movement. Structured meetings are held with the manufacturers
under the aegis of the Department of Heavy Industry.

7.4 Issues related to the clearances under the EPA and FCA, are not subject to
institutionalized resolution mechanisms. True, there are problems of trying to resolve
purely statutory issues through committees, but information needs necessary to
expedite and facilitate proper and timely decision-making calls for a small, compact,
inter-ministerial professional body that would be responsible for harmonizing the
legal requirements with project-specific constraints.

7.5 The same would apply to the question of fuel linkages, where the development of
coal blocks has come up against a fresh set of rules and guidelines governing forests,
tribal rights and environment. As of now, the interventions are ad-hoc and dependent
on the urgency of a particular situation. This will have to be institutionalised and
embedded formally within the decision-making process, if required , through an
EGOM.

7.6 Inter-state cooperation in hydro-power development has been traditionally


catalysed by the MOP. This role will expand as we seek to develop the hitherto
untapped hydel resources in the north-eastern region. The PM had foreseen the need
for an integrated approach, particularly in the Brahmaputra Basin and mooted the
concept of a North-eastern Water Resources Authority ( NEWRA) on the lines of the
DVC in 2004. The idea did not fructify because the upper riparian, Arunachal

28
Pradesh, was slow to appreciate the need to alleviate the genuine concerns of the
lower riparian, Assam, regarding flood control, minimum, ecologically sustainable
flows, involuntary displacement and loss of livelihood, Had matters been handled in a
spirit if cooperation, it would not have been difficult to craft a win-win situation
through an agreed apportionment of project benefits. Instead, the situation was
allowed to drift and now further project development in the entire region is in danger
of being derailed. Mercifully, it may not be too late. The MOP will need to own and
re-activate this idea and thereafter be pro-active in devising a meaningful consensus.

7.7 The role of the Ministry with regard to land acquisition (LA) and resettlement and
rehabilitation (R&R) could undergo a major change after the enactment of the
pending bills on these subjects. As of now, it has to work within the existing
framework. R&R and LA are closely linked and the approach suggested in section IV
above could be profitably explored.

SECTION VIII

Monitoring and Review Arrangements

There will be two sets of monitoring and review arrangements to ensure that the time
lines laid out in the implementation plan are adhered to. The first level is internal to
the MoP and will comprise of a monthly review at the level of the Secretary and
quarterly by the Minister. The second level will be an external review at the level of
the Cabinet.

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Annexure A
Formulation for Incentive under R-APDRP
• Total electricity available in the country = estimated at 600 bu
• T&D loss allowance 15% = 90 bu
• Minimum metered realization of consumption 70% of 510 bu= 360 bu approx.
• Incentive on each %age improvement on above
– 0.25 p per unit for first 5% (70.01% to 75%) outgo on overall figures
=Rs 450 cr
– 0.50 p per unit for next 5% (75.01% to 80%) =Rs 900 cr
– 0.75 p per unit for next 5% (80.01% to 85%) = Rs 1350 cr
– 1.00 r per unit for next 5% (85.01% to 90%) = Rs 1800 cr
– 1.25 r per unit for next 5% (90.01% to 95%) =Rs 2250 cr
– 1.50 r per unit for next 5% (95.01% to 100%) =Rs 2700 cr
• Estimated outgo well within Rs 60,000 cr allocation assumed for 12th Plan
• Base year 2009-10 and improvement in 2010-2011 to be rewarded in 2012-13
• Assume 1% improvement in T&D loss each year and 2% improvement in
metered supply in each year thereafter for working out minimum qualifying
amount for incentive payment.
Formulation for Incentive under RGGVY
• Total electricity sold in rural area of the state in base year = ‘x’
• Minimum metered realization of consumption = 40% of ‘x’
• Incentive on each %age improvement on above
– 0.25 p per unit for first 10% (40.01% to 50%)
– 0.50 p per unit for next 10% (50.01% to 60%)
– 0.75 p per unit for next 10% (60.01% to 70%)
– 1.00 r per unit for next 10% (70.01% to 80%)
– 1.25 r per unit for next 10% (80.01% to 90%)
– 1.50 r per unit for next 10% (90.01% to 100%)
• Base year 2009-10 and improvement in 2010-2011 to be rewarded in 2012-13
• Assume 2% improvement in metered supply in each year thereafter for
working out minimum qualifying amount for incentive payment.
• States can move to smart card based demand side funding of BPL
beneficiaries to boost consumption and secure a higher incentive.

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