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Gujarat's power sector turnaround story


N. Madhavan

January 31, 2012

Executive Summary: Gujarat's power sector was in a shambles in 2001, when Narendra
Modi became chief minister. A decade later it is in the forefront of states that have carried
out sweeping power reforms, as a result of which it now has surplus power. This case
study details the key steps the government took to bring about the change, which was
carried out in a manner fair to all stakeholders.
When Narendra Damodardas Modi took over as chief minister of Gujarat in October
2001, he found the state's power situation grim. The Gujarat State Electricity Board, or
GSEB, had posted a loss of Rs 2,246 crore for 2000/01, on revenues of Rs 6,280 crore.
Interest costs alone were Rs 1,227 crore. Transmission and distribution, or T&D, losses
were a substantial 35.27 per cent, and load shedding was frequent. GSEB had no funds to
add generation capacity on its own, nor was it able to persuade the private sector to
invest.
Reforming the GSEB, thus, became one of Modi's top priorities. "He feared that a
bankrupt power utility could derail his vision for the state," says Saurabh Patel, Gujarat's
Industries and Power Minister, then as now. "He knew electricity is crucial for growth."
Modi's first step was to identify a bureaucrat capable of taking on
the enormous challenge. He chose Man- jula Subramaniam, a
Gujarat cadre officer, who had been joint secretary in the prime
minister's office from 1993 to 1998, playing a key role in the
country's liberalisation, and appointed her Chairperson of GSEB
and Principal Secretary, Energy and Power.

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Subramaniam quickly realised that GSEB was too large an entity


to be managed effectively. But she did not rush into unbundling it.
Instead, she initially concentrated on two areas: bolstering the
power utility's finances and building employee morale.
Discovering that GSEB had secured loans at interest rates of 18
per cent or more, she sought debt restructuring, convincing banks
and financial institutions to lower their rates, which resulted in
savings of Rs 500 crore in 2002/03.

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Her next step was more radical. Rarely before had electricity
boards renegotiated power purchase agreements, or PPAs,
already signed with private players. But having examined the PPAs her board had entered
into, Subramaniam felt the heat rate - a measure of generator efficiency - had been
inflated by the power suppliers, who were consequently charging more than they should
have.
Though the private players initially resisted, the governmentconstituted committee set up for the process stood firm, and
ultimately, after more than 18 months of hard bargaining, got the
rates lowered, leading to a further saving of Rs 675 crore in 2002/03
and Rs 1,000 crore in 2003/04.
Simultaneously, Modi's government began plugging the leakages in
distribution. Power thefts in Gujarat then ranged between 20 per cent
in urban areas and 70 per cent in rural regions. It passed a law
against power thefts and set up five police stations across the state,
solely to nab such thieves. Stringent action began against those who ran up large power
bill arrears, including disconnecting their supply.
Unmetered power supply, which some rural areas were getting was stopped altogether,
with GSEB entering into a structural loan re-adjustment with Asian Development Bank to
fund the installing of meters.
Subramaniam also found that many employees, disturbed by widespread talk of power
reforms, feared for their jobs, and were feeling somewhat alienated from GSEB. She
appointed a consultant to suggest ways to win back their loyalties.
From mid-2002, armed with the consultant's suggestions, the board began its special
effort to reach out to employees. It started training programmes at all levels to reassure
them that while people may be redeployed, no one would be laid off. Senior officials
increased their interactions with the staff, including holding 'town hall' meetings where they
shared details of the board's financial position and encouraged employees to ask
questions. An internal newsletter was also started.
Once assured of retaining their jobs, the employees themselves began discussing
possible reforms. A 'reforms progress management group', comprising GSEB employees,
was also set up.
It was now time for the unbundling. In May 2003, the Gujarat government passed the
Gujarat Electricity Industry (Reform and Reorganisation) Act, which divided the GSEB into
a holding company, a power generation company, a power transmission company and
four distribution companies. This enabled better management and more efficient
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operations.
Another key reform was the separation of the feeder line that supplied power to the rural
areas into two: one to supply power for agricultural needs and other for household and
other needs. This was part of the Jyoti Gram Yojna, a scheme Modi announced in 2003 to
supply round-theclock power to villages.
"A single feeder has its limitations," says Mukesh Puri, Managing Director of the holding
company, Gujarat Urja Vikas Nigam. "The villages got power for only 12 to 15 hours a
day, often of poor quality and at odd hours."
Since the tariff for power used for agricultural purposes was much lower, many used this
subsidised supply for their household needs as well, resulting in huge losses for GSEB.
"The chief minister asked us to have separate feeders, which was a
path-breaking step no state had attempted before," Puri adds, "The
results were good." Though many rural residents had higher power
bills to pay than in the past, they cooperated with the government,
once they found they were assured of uninterrupted, better quality
power.
A study by Indian Institute of Management, Ahmedabad has
estimated that the project saved the state capital expenditure of
around Rs 23,000 crore, or about 5,000 megawatts, or MW.
The Modi government has also taken scrupulous care to ensure that the state electricity
regulator - unlike in most states - remains truly independent of political pressures. The
regulator has, thus, been able to revise power tariffs every year, which ensured the state
bridged the gap between the average cost of supply and what users paid for it.
The result? The state electricity board posted its first profit of Rs 203 crore - after tax - in
2005/06. By 2010/11, net profit had risen to Rs 533 crore, while T&D losses had fallen to
20.13 per cent. Tariff collection efficiency is close to 100 per cent. Private players, once
reluctant to invest in Gujarat's power generation, are now rushing in: of the power plants
with a total installed capacity of 16,945 MW coming up in the state, 6,864 MW - or roughly,
a third - is by the private sector. "Abundant power is a major USP of our state today," says
minister Patel.
A few worries remain. Though T&D losses have fallen, they are still higher than those of
the southern states such as Andhra Pradesh, Karnataka, and Tamil Nadu. The cost of
power in Gujarat has been traditionally high, and remains so.
"Our share of hydel power is very low and our power plants are very far away from
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coalfields," says Puri. "At times the cost of transporting coal equals the cost of the coal." A
sizeable proportion of its power - around 29 per cent - also comes from gas-based plants,
and the high cost of gas has forced scaling down the operations of some of them.
But ultimately, it is a remarkable transformation for a state which was power deficient
barely a decade ago, but now has a surplus of 2,114 MW and a vibrant energy sector.
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