ARTICLE IN PRESS

Energy Policy 34 (2006) 2480–2490

www.elsevier.com/locate/enpol

Power sector reform in India: current issues and prospects

Anoop Singh
Department of Industrial and Management Engineering, Indian Institute of Technology, Kanpur 208 016, India
Available online 15 September 2004

Abstract

Power sector reforms in India were initiated at a juncture when the sector was plagued with commercial losses and burgeoning
subsidy burden. Investment in the sector was not able to keep pace with growing demand for electricity. This paper takes stock of
pre-reform situation in Indian power sector and identifies key concerns that led to initiation of the process of reform. The paper
discusses major policy and regulatory changes undertaken since the early 1990s. The paper also illustrates changes in the market
structure as we move along the reform process. We also discuss some of the major provisions of the recently enacted Electricity Act
2003 that aims to replace the prevailing acts which govern the functioning of the power sector in the country. In this context, we
discuss two issues arising out of it, namely open access and multi-year tariff that we think would have a significant bearing on the
performance of the sector in the near future. The paper also evaluates the reform process in the light of some of the regulatory
changes undertaken. Finally, the paper briefly discusses the issues involved in introduction of competition in the power sector
primarily through development of a market for bulk power.
r 2004 Elsevier Ltd. All rights reserved.

Keywords: Electricity sector reform; Bulk power market; Regulation

1. Introduction countries, Lamech and Saeed (2003) find that private

Recent experience in Californian electricity market
has elevated concern about the efficacy of power sector
reform in developing countries. This has implications
for the policies of privatisation and competition in the
power sector in developing countries. The Indian power
sector presents immense opportunities for private
investment in the generation, transmission and distribu-
tion (T & D) segments. For a capacity addition target of
about 100,000 MW over the next 10 years, there is a
foreseeable investment requirement of about Rs. 8000
billion1 (USD 170 billion). However, adequacy of the
regulatory structure and the roadmap of the reform
programme has a significant bearing on the mindset of
private investors. From a survey of international
investors interested in power sector in developing
Tel.:+91-512-259-7679; fax: +91-512-259-7553.
E-mail address: anoops@iitk.ac.in (A. Singh).
1
Including approximately half each for creation of generation, and T
& D assets.
investors seek reform-minded governments that ensure a
judicial and regulatory process free of arbitrary govern-
ment interference.
Taking the lead from the UK and the USA,
developing countries like Argentina, Chile, Brazil,
Pakistan and Philippines also initiated the reforms
process in the power sector. Restructuring in the Indian
power sector commenced with the unbundling, corpor-
atisation and privatisation of the Orissa power utility,
and the setting up of a regulatory commission. Begin-
ning with the opening up of power generation for
private investment and later through regulatory reforms,
the process has entered a new phase with the recent
enactment of the Electricity Act 2003. While the
electricity industry in the country gears up for competi-
tion through open access and multiple licensees, there
are a number of issues to be understood and adequately
addressed.
Joskow (1998a) proposes privatisation of the genera-
tion sector leading towards competition in bulk supply
through transmission access, while the distribution

0301-4215/$ - see front matter r 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2004.08.013
 ARTICLE IN PRESS
A. Singh / Energy Policy 34 (2006) 2480–2490
network could remain a natural monopoly along with
availability of retail choices to consumers. Pollitt (1997)
concludes that economic gains from electricity privatisa-
tion across the world are expected to be positive.
Reform programmes in the UK, Chile and
Argentina, with vertically integrated large and
inefficient public sector enterprises, have yielded
significant gains in economies. Gains from privatisation
in developing countries are likely to be a function of
market reforms and the modernisation of the
economic system in general. Using the data envelopment
analysis (DEA) of productive efficiency of the
power sector in 82 countries, Hawdon (1996) finds
that the privatising group of eight countries
exhibit significantly higher efficiency than the
non-privatising group. Though gains from power sector
reform in India cannot be reliably measured now, a
review of the reform process should help identify key
issues that can drive the success of reforms in the
country.
The Indian power sector has witnessed significant
changes since early 1990s. Continued power
shortages, poor operational performance and precarious
financial situation of state electricity boards (SEBs)
prompted a number of policy and regulatory
changes. Such policy changes of institutional and
regulatory nature are expected to address technical
and financial challenges facing the Indian power
sector. This paper takes brief account of the
state of Indian power sector and of concerns that have
prompted various steps by the central and the state
governments for the development of the sector.
Next, we take stock of the major policy and regulatory
changes in the power sector undertaken since 1991.
The paper also delves into the major provisions
of the recently enacted Electricity Act 2003 and its
implications on future prospects in Indian power
sector. It also puts these in perspective towards under-
standing the evolving market structure in the generation,
T&D segments. Finally, we deliberate on two issues
arising out of Electricity Act 2003, i.e. open access and
multi-year tariff, which could significantly affect the
market structure and performance of the Indian power
sector. Finally, the paper briefly discusses the issues
involved in introducing competition into the power
sector primarily through development of a market for
bulk power.
2. Indian power sector at cross roads and the pressure to
reform
Electricity is a prime mover of economic growth and
the expansion of the Indian economy would depend
heavily on the availability of quality infrastructure
services, including electricity. Per capita electricity
2481
consumption in India,2 at around 350 kWh, is less than
1/25 of that prevailing in the US and less than half of
that in China. After independence, the government took
upon itself the task of developing the power sector.
Power generation capacity in the country increased from
1362 MW in 1947 to about 105,000 MW by the end of
March 2002. The T & D network also witnessed
commensurate growth, enabling the expansion of the
network across the the country’s geographic space.
Officially 84% of the 587,000 villages have been
electrified;3 however, only 55% households have access
to electricity.
The power system faces high energy and peak demand
shortages. These were 7.5% and 12.6%, respectively, in
2001–02. Peaking shortages have reached a high of
20.49% in 1992–93 and energy shortages reached a high
of 11.7% in 1996–97 (GOI, 2002a). Faced with
continued power shortages, increasing tariffs due to
cross subsidy, and poor quality and reliability of supply,
a number of industrial consumers shifted to captive
power generation. While SEBs are losing their lucrative
customers, they continue to subsidise domestic and
agricultural consumers by pricing the power to them
much below what it costs to serve them.4 However,
Chattopadhyay (2003) shows that under certain condi-
tions higher tariffs in the industrial sector may not
induce greater cross subsidies. Apart from operational
inefficiencies, reflected in poor energy efficiency and
PLF of generating plants of SEBs, the T & D system
poses the most serious burden on the performance of the
Indian power system.
The gap between the average cost of supply and the
average tariff increased from 50 paise/kWh in 1996–97
to 110 paise/kWh in 2001–02. The commercial
losses of SEBs (without subsidy) during 2001–02 are
estimated to be Rs. 331.77 billion as compared to
Rs. 113.05 billion during 1996–97. With subsidies
paid by state governments, the above figures are
Rs. 248.37 and 46.74 billion, respectively. The
financial disorder in the SEBs could be attributed to a
number of factors, including large T & D losses,
overstaffing, large unpaid consumer bills, political
interference, etc. Revenue arrears of SEBs deteriorated
from Rs. 67.2 billion in 1992–93 to Rs. 247.73
billion in 1999–2000. The financial losses of SEB
resulted in burgeoning dues to power suppliers and the
railways. As on 28, February 2001, the SEBs owed
2
After factoring in the ‘theft’ component of T & D losses, ‘true’ per
capita consumption may be a notch higher than the existing levels.
3
Electrified villages may merely signify existence of transmission
lines and poles, enabling supply to rural consumers without adequately
serving them or having the ability to connect significant part of the
population of the respective village.
4
Dubash and Rajan (2002) discuss the political context of cross
subsidy and locate the seeds of crisis in the politicisation of subsidised
agricultural tariffs.
 ARTICLE IN PRESS
2482 A. Singh / Energy Policy 34 (2006) 2480–2490
Rs. 414.73 billion to various Central Public Sector
Undertakings (CPSUs) and the railways (GOI, 2001).
Such large outstanding dues severely constrain their
ability to raise finance for investment or to provide for
credible power purchase agreements with private power
producers.
The Indian power sector is poorly placed in terms of
the level of T & D losses which have swelled to
enormous proportions. Though official statistics placed
T & D losses in most of the SEBs to be less than 25%
during early 1990s, lack of metering of all consumers
and interface points make it a challenging task for the
regulators to arrive at a reliable estimate of the same.
Post-reform exercises by State Electricity Regulatory
Commissions (SERCs) have found the levels to be about
twice as large as reported earlier (Table 1). These losses
were often camouflaged as supply to un-metered
agricultural consumers, as discussed below. This not
only represents the technical shape of T & D network,
but also reflects on non-technical losses, which are a
euphemism for theft.
In Haryana, electricity consumption by un-metered
flat-rate agricultural consumers was estimated by the
utility on the basis of an unrealistic pump operation of
5.7 h per day. A realistic estimation of un-metered
agriculture consumption based on a consumption profile
similar to that exhibited by metered agricultural
consumption raises the underreported T & D losses in
Haryana for 2000–01 from 35.76%as projected by the
utility to 47.71% (HERC, 2001).
3. First phase of power sector reforms5
The financial state of SEBs and ongoing power
shortages in the country led the government, in 1991,
to amend the Indian Electricity Act, 1910 and the
Electricity (Supply) Act, 1948 to attract private invest-
ment in power generation (Fig. 1). This facilitated the
tapping of domestic and foreign capital markets,
provided assured returns on investment and reduced
legal hassles to allow the private investors to set-up
generation capacities or operate as licensee in distribu-
tion segments, which were hitherto a monopoly of the
SEBs. Private power initiative in generation banked on
long-term power purchase agreements. The financial
state of SEBs poses a serious threat to the long-term
sustainability of state subventions, especially when there
are competing objectives like education, health, etc.
Power sector reform and introduction of a regulatory
framework was proposed as one possible solution to
improve the SEBs’ finances (Carstairs and Ehrhardt,
1995).
5
Fig. 1 graphically presents a chronology of main events relating to
the reform process in Indian power sector.
In 1995, these measures were further strengthened by
a Mega Power Policy, whereby plants above 1000 MW
capacity would receive additional incentives in the form
of a 10-year tax holiday, exemption of customs duty for
imports, reduced hassles for clearances, etc. This also
provided for the setting up of Power Trading Corpora-
tion (PTC) to act as an intermediary between the private
developers of mega projects and the SEBs. Though
independent power producers (IPPs) evinced interest for
adding generation capacity for about 95,000 MW, only
6500 MW was added during the eight and ninth five-year
plans (1992–2002) (WEC, 2002). Out of a targeted
capacity addition of 17,588 MW from the private sector
during the nineth five-year plan (1997–2002), a mere
5061 MW only materialised (GOI, 2002b).
Assured returns, lack of transparency and over-
whelming concessions have drawn criticism from
various quarters. Guaranteed rate of return on invest-
ment, and hence, covering even the normal business risk
for a private investor, has been termed excessive
(Srinivasan, 2002). Ranganathan (1996) asserts that
the lack of competition in awarding private projects in
generation, without transparency, represents a high-cost
solution to the woes of the Indian power sector.
Having experienced successes in electricity supply
industry restructuring in Latin American countries, the
World Bank had put forth power sector reforms as a
necessary condition for future assistance to the power
sector in recipient countries, including India. This was
instrumental in initiating of comprehensive power sector
reforms in the State of Orissa.6 Nelson (1996) discusses
the role of multilateral financial institutions in promot-
ing policy reforms through conditions attaching to loan
disbursements. The choice of Orissa was guided by
various factors, including the fact that agricultural
consumers accounted for a small share of consumption
in the state, thereby reducing the political fallout of the
reform process (Rajan, 2000).
The ‘Orissa Model’ was based on functional unbund-
ling and corporatisation of the SEB into two generation,
one transmission and three distribution companies. The
distribution companies were subsequently privatised.
The Orissa Electricity Regulatory Commission (OERC)
was set-up under the Orissa Electricity Reforms Act
1995. Subsequently, Haryana and Andhra Pradesh
followed suit but did not privatise the distribution
companies. The main functions of SERCs include
licensing for undertaking business in its jurisdiction
and the setting of tariffs for T & D businesses. For the
purpose of tariff determination, the SERCs follow cost
of service regulation because a basis for costs-plus
6
In the context of power sector reform in Orissa, Rajan (2000)
identifies certain factors leading to power sector reform in the country
and categorised them into contextual, triggering, and facilitating
factors.
 ARTICLE IN PRESS
A. Singh / Energy Policy 34 (2006) 2480–2490 2483

1991 1992-5 1996 1997 1998 1999 2001 2002 2003 2004

Electricity Regulatory Commission; Act to setup

Act to allow private participation in transmission

Reforms in the state of Orissa; Setting up of

CERC and SERCs; Electricity Laws (Amend.)

Orissa Electricity Regulatory Commission

Reforms in the state of AP; Setting up of AP

Reforms in the state of Haryana; Setting up of
Haryana Electricity Regulatory Commission

Electricity Act 2003: De-licensing thermal

IE Act and ES Act Amended to attract IPPs

Benefits of Mega Power Policy Extended;

Availability Based Tariff introduced in

Restructuring and Privatisation of Delhi

generation and to allow open access to

Electricity Bill introduced in Parliament
Energy Conservation Act; Accelerated

Accelerated Power Development and

Mega Power Policy;

Power Development Programme

(Private Power Policy)

Western Region

Conference of Chief Ministers

Reform Programme launched

usher in a competitive era.

Vidyut Board (DVB)B
Fig. 1. Chronology of Indian power sector reform.

tariff-setting was already existing (Sankar and Rama- Policy & Regulatory Functions: Ministry of

chandra, 2000). This was also necessary due to the SEBs CPSUs Pvt. Licensees Generation
Power (GOI), CEA, State Governments

inheritance of a system that was not only performing

badly, but was also ill equipped to provide adequate
information for performance-based regulation.7 The GRIDCO SEBs Pvt. Licensees Transmission
presence of a regulatory framework is deemed necessary
for an industry characterised by natural monopoly, at
least for some of its segments, and which could be SEBs Private Licensees Distribution
owned by private interests. Hence, the power sector was
evolving from a quite rigid market structure (Fig. 2) to a
more open yet regulated one (Fig. 3). Apart from the
Dom. Ind. Agri. Comm. etc. Consumers
prevalent ad hoc inter-state sale of electricity, PTC also
began to provide an interface between buyers and - Power Flow
sellers, which included the state power companies as well
as private entities. Fig. 2. Indian power sector (pre reform).
While the reform process in the UK and the US was
primarily oriented towards introducing competition in
Policy & Regulatory Functions: Ministry of
GENCOs CPSUs Pvt. Licensees IPPs Captive
the sector,8 at the beginning it was initiated to facilitate
private investment, and to alleviate the financial Power Trading Corp. Power (GOI), CEA, CERC, SERCs, State
condition of the power sector. Since electricity is in the
concurrent list of the Indian constitution, both union
Governments
Central Transmission State Transmission Pvt. Licensees /
Utilities (GRIDCO) Utilities (Transco) New Trans. Lic.
and state governments have the power to make policies
for the sector. While generation and transmission has
participation from both the central and the state Discoms Private Licensees
governments, distribution segments fall within the
purview of respective state governments. Beginning with
Orissa, so far, 22 states have set-up SERCs and 13 Dom. Ind. Agri. Comm. etc. - Power Flow
SERCs have issued tariff orders and nine states have - Contracts
unbundled/corporatised their SEBs. Reforms at the
Fig. 3. Indian power sector (current scenario).
7
However, there are traces of performance-based regulation in the
existing system as well. Cost components approved by the SERCs/ central level that span generation and transmission-
CERC are often based on certain norms or ‘‘perceived best practices’’. related issues covering more than one state were
In some states, approved T & D losses are based on SERCs
projections, which may differ from the actual ones.
initiated in 1998, through the enactment of the
8
Newbery and Green (1996), and Gilbert and Kahn (1996) and electricity Regulatory Commissions Act, which provided
Joskow (1997), respectively. for the setting up of the Central Electricity Regulatory
 ARTICLE IN PRESS
2484 A. Singh / Energy Policy 34 (2006) 2480–2490
Commission (CERC) and state level regulatory commis-
sions. The main functions of CERC include regulating
tariffs of generating companies, owned or controlled by
the Government of India and any other generating
company catering to more than one state, and also
tariffs for the inter-state transmission of electricity.
Apart from this, two significant steps taken by CERC
include introduction of Availability Based Tariff (ABT),
and Indian Electricity Grid Code. ABT has been
instrumental in bringing discipline to the grid by
providing frequency linked incentives and disincentives.
In the ABT, a two-part tariff is supplemented with a
charge for Unscheduled Interchange (UI) for the supply
and consumption of energy in variation from the pre-
committed daily schedule and depending on grid
frequency at that point of time.
The regulatory changes have brought transparency to
the tariff-making process. They have also led to the
rationalisation of distribution tariffs, thereby arresting
increases of cross-subsidy in the system. Public hearings
have been able to give voice to consumers in raising their
concerns and contribute constructively to the regulatory
process. In order to address the consumer complaints,
SERCs have come up with a complaint-handling system
for the utilities and have provided a similar platform
with respect to themselves. This has given a much-
needed voice to consumers’ point of view which has
hitherto been missing from the system.
Due to poor capacity realisation by the IPPs, the need
for distribution reforms was recognised. Some level of
political convergence concerning the reforms was
demonstrated in the Meeting of the Chief Ministers on
Power held in March 2001. The Accelerated Power
Development & Reform Programme (APDRP) was
introduced in February 2001 by the union government
to promote distribution reforms and provide transi-
tional finance for the SEBs undertaking reforms. The
main objectives pertaining to distribution reform are
aimed at achieving 100% metering, conducting energy
audits, improving HT/LT ratio, replacement of distribu-
tion transformers and the use of IT solutions to ensure
accountability. Most of the SEBs were on the verge of
financial collapse. Large amount of SEBs debts to
CPSUs and the railways cast a shadow on their balance
sheet. One-time settlement of SEB debts was initiated
and came into effect from 17 April 2002 as a tripartite
agreement between the respective state government, the
Ministry of Finance and the Reserve Bank of India
(RBI). As per this scheme, 60% of the surcharge and
interest on delayed payment as of 30 September 2001 is
waived. The scheme securitises the remaining surcharge
and interest and the full principal amount through tax-
free bonds to be issued through RBI by the respective
state governments. It also provides for recovery of
future defaults exceeding 90 days from the funds due to
the state. While such measures help alleviate the
immediate financial woes of electricity utilities, long-
term sustainability of the Indian power sector needs
deepening of the reform process, alongside providing a
long-term vision to stimulate investor confidence.
4. Electricity Act 20039
Recognising the need for a paradigm shift in the
reform process rather than the piecemeal approach
being followed in a number of states, a comprehensive
Electricity Bill was drafted in 2000 following a wide
consultative process. After a number of amendments,
the bill finally sailed through the legislative process and
was enacted on 10 June 2003. It replaces the three
existing legislations governing the power sector, namely
Indian Electricity Act, 1910, the Electricity (Supply)
Act, 1948 and the Electricity Regulatory Commissions
Act, 1998. Apart from consolidating such laws relating
to generation, transmission, distribution and use of
electricity, the main additional provisions of the act are:
 De-licensing of thermal generation and captive
generation.
 Provision for license-free generation and distribution
in rural areas and provision for management of rural
distribution by Panchayats, Cooperative Societies,
non-government organisations, franchisees, etc.
 Non-discriminatory open access in transmission.
 Multiple licensing in distribution.
 Open access in distribution to be introduced in
phases. Provision for across-subsidy surcharge on
direct sale to consumers untill cross subsidies are
gradually phased out.
 Power Trading recognised as a distinct activity with
ceilings on trading margins to be fixed by the
Regulatory Commissions.
 Provision for payment of subsidies through budget.
 Setting up of an Appellate Tribunal to hear appeals
against the decisions of the CERC and the SERCs.
 Mandatory metering of all electricity supplies.
 Adoption of multi-year tariff principles.
The Act provides a less-constrained environment for
potential investors in the power sector by removing
administrative hurdles to the development of power
projects, apart from some control over hydroelectric
projects due to a multitude of issues related to water
utilisation, flood control, etc. The Act envisions a phase
shift in the reform process, providing a necessary
impetus to the sagging momentum for distribution
reforms in the country. Apart from this, a wider
mandate for bulk power market with de-licensing of
thermal generation, open access and multiple licensing
9
Hereafter referred to as the Act.

GENCOs CPSUs
PTC & Other Traders
Central Transmission
Bulk Power Market
Utilities
Direct Sale
Discoms
Dom.
Fig. 4. Indian power sector (Post Electricity Act 2003).
sets the tone for a competitive environment in the Indian
power sector. The emerging market structure that takes
into account these provisions is envisioned in Fig. 4.
This is expected to provide competing supply options to
the consumers and is expected to bring down electricity
prices, at least for those consumers who would be in a
position to bargain with competing suppliers. Two
aspects of the Act, namely open access and multi-year
tariff are discussed further. While the former one is
instrumental in the development of competitive power
markets, the latter one is expected to bring in necessary
incentives for performance improvement and to reduce
regulatory risk.
4.1. Open access
Open access and an ISO are crucial for the develop-
ment of bulk power market in the country. This,
however, raises additional issues in terms of transmis-
sion pricing, investment in redundant transmission
capacity and congestion management. Open access per
se would not foster a competitive environment unless
adequate transmission capacity is put in place, often
with some redundancy, in the system in order to manage
congestion and enhance competition. As the number of
players would increase, this could jeopardise grid
discipline and would require an efficient ISO. With the
absence of Availability Based Tariff (ABT) at the state
level, the captive generators could still pump power into
the state grid even when the system does not desire it. As
the number of captive generators, especially those
utilising open access to transmit power across the
transmission assets of the state, are expected to rise,
applicability of a mechanism similar to ABT in states
should be examined.
Even though private participation in transmission was
permitted in 1998 through the Electricity Laws (Amend-
ment) Act, there has been a feeble response to it. Only
one private initiative was realised through a joint
venture with POWERGRID, the government-owned
ARTICLE IN PRESS
A. Singh / Energy Policy 34 (2006) 2480–2490 2485
central transmission utility, to move the power to be
Pvt. Licensees IPPs Captive
imported from the Tala hydroelectric project from
Policy & Regulatory Functions: Ministry of
Power (GOI), CEA, CERC, SERCs, State
Bhutan. Lack of adequate investment in transmission
Governments, Appellate Tribunal
could delay the development of a bulk power market in
State Transmission Pvt. Licensees /
Utilities New Trans. Lic. the country and make open access only a legislative
gesture.
The Electricity Act 2003 provides for generators being
Private Licensees Rural Co-op. etc. able to sell power directly to consumers, bypassing the
Multiple Distribution distribution licensees. This could lead to the skimming
Licensees of the creamy layer of consumers, usually the large
Ind. Agri. Comm. etc. - Power Flow subsidised consumers. Such skimming may leave the
- Contracts state utility with less number of subsidised consumers
and could place added pressure on it to raise tariffs for
the remaining consumers. To compensate for this, the
act provides for the levying of a cross-subsidy surcharge.
To avoid the continued burden of such a surcharge, the
act provides for a timely phasing out of cross subsidies.
However, the lack of a clear definition of a cross subsidy
and any specific principle for determining the surcharge
for a cross-subsidy may open up another debate.10
4.2. Multi-year tariff
Even though the regulatory model adopted in India
was based on the one operating in the US, the Indian
regulatory system in all states has come to mean more or
less ‘mandatory’ annual review of tariffs even though
their respective legislations do not make this very
obvious. This is in contrast to the practice in the US
where tariffs are reviewed only at the insistance of the
utility or the consumers. This not only adds costs to the
regulatory costs but also increase regulatory risk borne
by power utilities (Gupta et al., 2002).
Regulatory risks, pertaining to allowance of cost
elements and fixation of T&D losses due to unavail-
ability of correct data, are high. Incentive mechanism
built with a multi-year tariff regime is useful in
addressing regulatory risk (Alexander and Harris,
2001). Post regulatory reforms, electric utilities have
been submitting annual revenue requirement and tariff
applications. An incentive-based multi-year tariff has
been under discussion in some of the states (APERC,
2003). However, a number of issues including data
inadequacy and benchmarking of various parameters
especially controllable costs needs to be resolved.
APDRP programme has specific incentives for the state
electric utilities for introduction of multi-year tariff
regimes. Electricity Act 2003 has clearly mandated for
the introduction of a multi-year tariff regime. The Tariff
Policy to be formulated under the Act would provide
broad guidelines for multi-year tariff principles, while
10
Though such details are to be specified in the document, Tariff
Policy, the initial draft available with the Ministry of Power has not
been able to address all such apprehensions.
 ARTICLE IN PRESS
2486 A. Singh / Energy Policy 34 (2006) 2480–2490
SERCs would follow up with detailed guidelines on the
same.
Bakovic et al. (2003) propose ‘regulation by contract’
as an alternative to ‘independent regulatory commis-
sions’ incorporating specific formulas rather than
general tariff principles. This provides better regulatory
certainty for the privatised utility over a multi-period
horizon. It incorporates the features of a multi-year
tariff regime. Success of privatisation also has significant
bearing on the incentives being provided for improve-
ment of performance and reduction in regulatory risk
through a multi-year horizon. These aspects have been
incorporated in the privatisation process of Delhi
Vidyut Board (DVB). Introduction of multi-year tariff
regime highlights urgency to compile reliable and
verifiable data. This would necessitate wider application
of IT solutions along the supply chain of the electricity
supply industry.
5. An evaluation of the reform process
Power sector reform is a long process and its impacts
are both short-term and long-term in nature. Though
one cannot pass a judgment about the outcome of the
reform process, a mid course review of developments
could, however, help learn from the past mistakes and
take some mid-course corrective measures. The concerns
about the reform process in most of the countries have
been on the process followed, the transition manage-
ment and the final destination of the reform process.
Timing as well as sequencing of major reform steps
has important bearings on the efficacy, acceptability,
continuity and success of the reform process. Liberal-
ising private investment in generation was an incomplete
step. Given the single-buyer model, in which IPPs need
to operate, the financial health of the sole customers of
these IPPs did not bode well for sustained investment
climate, let alone those being enticed in on account of
incentives in the form of assured returns, tax holidays
and selective counter guarantees. While initial effort was
placed on the generation side, most of the ills lay on the
distribution side. Distribution level reforms in states
were given an impetus through incentivised schemes like
APDRP. Such schemes are aimed at improving opera-
tional efficiency and rationalisation of tariffs in various
states. Even though many states unbundled and
corporatised their SEBs, political sensitivity to privati-
sation has forced many state governments to postpone
the same in their respective states.
Bacon and Besant–Jones (2001) advocate relying on
privatisation of the distribution and supply functions
first. This facilitates the entry of potential investors in
the generation by improving the creditworthiness of
buyers of power from the generators. They identified the
following reference sequence of six steps—corporatisa-
tion, restructuring, regulator, IPP entry and divestiture.
Though the Orissa model followed a similar sequence, it
was perhaps rushed through in a fast-forward mode.
Asymmetric information also proved to be risky for
private investors in privatised distribution zones. In
spite of being the pioneering state, a recent ranking of
reforms in power sector across 26 states places Orissa at
14th spot (ICRA/CRISIL, 2003). The Orissa experiment
also highlighted the role of regulatory risk in the reform
process. Learning from this, major changes were
brought in the privatisation model of the DVB.
Prior to privatisation, T&D businesses were bestowed
with a single state owned enterprise. In spite of broad
similarity with the reform process in the successful
efforts in the UK and Argentina, the reform process in
Orissa was fraught with information asymmetry, reg-
ulatory uncertainty and prior escrow commitments. The
presence of escrow accounts and long-term PPAs could
prove to be a hurdle to privatisation as private investors
taking over these state utilities would be burdened with
these revenue-draining mechanisms, which did not have
their participation.
In the case of Orissa, post privatisation, the opera-
tions of distribution companies are not viable at the
tariffs fixed by the regulator, which were fixed on the
basis of a normative T & D loss of 35% against the
actual losses that were estimated to be around 45–47%.
In contrast to this, ‘actual’ losses have been permitted in
tariff fixation by the regulators in Haryana. Premature
privatisation of distribution businesses increases the risk
borne by private investors due to information asymme-
try, especially with regard to assets, T & D losses and
revenue arrears.
These lacunae were addressed in the ‘Delhi model’ to
some extent. Regulatory involvement and commitment
in the privatisation process, and a long-term tariff
profile reduced the regulatory uncertainty. However, it
continues with the single-model buyer approach as in
the case of Orissa and other restructured state utilities.
Phased reduction in T&D losses and revenue collections
and transitional financial assistance (subsidy) are the
three crucial interrelated issues in privatisation process
in the Delhi model. Revenues from sale of the
government stake in Orissa were not ploughed back
into the sector. This limited the government’s ability to
influence the future developments in the sector. How-
ever, Orissa provided a powerful demonstration effect
for other states to follow and learn from its experiences.
Independence, transparency, accountability, expertise
and credibility have been cited as some key attributes of
a good regulatory institution. General guidelines for
designing regulatory structure in infrastructure sectors
can be found in Joskow (1998b). The initial phase of the
reform that emphasised the setting up of ‘independent’
regulatory commission was duplicated in almost all the
reforming states. This brought about some amount of
 ARTICLE IN PRESS
A. Singh / Energy Policy 34 (2006) 2480–2490
transparency in its functioning that was absent from the
previous system. However, the umbilical relationship of
the power sector with the government has raised
apprehensions about the independence of the regulatory
system (Sankar and Ramachandra, 2000). The impor-
tant lacuna in the institutional set-up that brings about
regulatory structure are—financial dependence of reg-
ulatory bodies on the government, powers to appoint or
influence appointment of members of regulatory institu-
tions, and ‘missing teeth’ to rein in those who continue
to default of regulatory orders.11
Disguising and window-dressing of the revenue gap
by some of the state commissions have deferred tariff
hikes for the consumers through mechanisms like
‘regulatory asset’ and ‘deferred subsidy’. These carry
forward the revenue gap to a future year to be made
good either by efficiency gains or is added to future
revenue requirements. These two elements serve as a
‘regulatory tool’ to bail out the government from selling
tariff hikes to the consumers. The commitment of the
state government to pay the promised subsidy has also
not stood the test of time. In the case of Haryana, the
level of unpaid subsidy by the state government for the
previous years stood at Rs. 15.71 billion. This is
significant compared with the approved annual revenue
requirement of about Rs. 26 billion for the distribution
and retail supply business for 2002–03 (HERC, 2002).
Electricity tariff, at least for domestic and agricultural
consumers, is expected to rise initially along the reform
process. Due to significant power shortages, additional
electricity supply would occur at higher costs from new
power plants. This could further delay tariff decline, till
significant gains are made through improvement in
operational efficiency and financial management, and
untill competitive bulk markets lead to decline in power
procurement costs for distribution companies. Untill the
realisation of such benefits, the most trying times for the
stakeholders are during this transition period. The
transition shocks could be alleviated if winners com-
pensate the potential losers so that all major interest
groups have a stake in promoting and not opposing
reforms (Joskow, 1998a). In the Electricity Act 2003
scenario, large consumers who would have potential to
tap cheap electricity outside the system of state utilities
would continue to contribute towards a cross-subsidy
surcharge till this is eliminated from the system in a
time-bound manner.
In the case of Poland, Freund and Wallich (1995)
observed that household energy subsidies help the rich
more than they help the poor. Not only do the wealthy
consume more energy in absolute terms than the poor,
but they also spend a larger portion of their income on
energy. The impact of power sector in developing
11
See Bakovic et al. (2003) for further discussion on regulatory
independence in developing countries.
2487
countries would not only differ across income categories
but also across urban and rural area. While the former
would be affected by a rise in the tariffs, the latter ones
are better off by reduction in access cost. Powell and
Starks (2000) observe that urban poor stand a greater
chance of benefiting from power sector reform. For the
rural poor, off-grid solutions may be required. In the
Indian context, studies (World Bank, 2001) have also
revealed the farmers’ willingness to pay for quality
power. Poor quality of power not only leads to loss of
agricultural productivity but also inflicts indirect cost
through motor and transformer burnouts. This raises
doubts about continuing with subsidised prices for all
consumers in domestic and agricultural categories, and
signifies better targeting of power subsidy to needy
consumers only and effective monitoring of the same.
Foster (2000) discusses some welfare indicators to
measure the impact of energy sector reform, including
electricity sector reform, on the poor and asserts that it
is not only necessary to know the impact of reform on
the poor but also help focus on poverty-related issues
before such interventions are made. The proposed
methodology takes into account coverage, reliability,
affordability, total cost, health impact, etc. Dubash and
Rajan (2002) expressed concern about the failure of
market-led power sector reform process in developing
countries to take into account the social and environ-
mental concerns.
Wamukonya (2003) warned against recipes imported
from developed countries where conditions are far from
those prevailing in developing countries and emphasised
the need for progressive government intervention to
shift the reform process towards a more responsible
development path that take into account the social and
environmental issues. The ongoing process of reform in
most of the developing countries has been initiated in
response to financial concerns of the sector or towards
development of ‘markets’. There seems to be less
consideration of social and environmental issues.12
Pollitt (1997) provides an exposition of the impact of
reform in power sector in various developed and
developing countries. While performance-based regula-
tion has been rated as more successful, rate of return
regulation has been criticised for obvious reasons.
Kwoko (1996) reviews some of the studies and finds
that costs are not significantly lower in private electric
utilities as compared with their public counterparts. This
puts the continuance of rate of return regulations into
serious doubts. The emergence of incentive-linked
privatisation in Delhi raises hopes for achieving better
performance. This may not be reflected in an early
12
In the case of the state of Karnataka, tariff policy suggests
consideration of the paying capacity of the consumers. In the case of
the State of Gujarat, environmental considerations found explicit
mention in state’s reform Act.
 ARTICLE IN PRESS
2488 A. Singh / Energy Policy 34 (2006) 2480–2490
decline in consumer tariffs. Recently, Gorini de Oliveira
and Tolmasquim (2003) find that the inequality of
benefits from the restructuring of the British power
sector severely affected fuel suppliers and benefit
investors and shareholders. When regulation is similar
under private or public ownership, exposure to market
forces through liberalisation can bring in larger im-
provement in performance than privatisation per se
(Newbery, 1997). Competitive and contestable bulk
electricity market appears to be a necessary step for
enhancing efficiency and transferring such gains to
consumers (Newbery, 2000).
Lack of appropriate and verifiable data creates ample
problems for regulators as well as investors. Baron and
Myerson (1982) emphasise the information problems,
especially those related to cost components. Imperfect
information about the true costs of the utilities leaves
ample space for hiding possible cost reductions. In the
case of privatised utilities, imperfect information also
posed significant regulatory risk in fixing T & D losses
and this added to the woes of privatised utilities as in the
case of Orissa.
Because of the pressure to manage the deficit in states,
the APDRP programme acts as a carrot to induce
favourable developments towards reforming the state
power sector. However, the long-term sustainability of
the sector would depend on how soon there can be a
political will to cut the umbilical cord of politics off with
the power sector. Political interventions are a part and
parcel of the system rather than exceptions and the
power sector is not unique in this respect. Given the
recent experience regarding interventions in the telecom
and petroleum sectors influencing the regulatory pro-
cess, it is a long wait for the investors to find less
political linkages with the functioning of the sector.
Political decoupling could be the single most important
factor in rejuvenating the power sector in the country.
6. Towards a market for bulk power
With a view to developing a power market in the
country, PTC was set-up in 1999 under the joint
ownership of power producers, the central transmission
utility and a number of financial institutions. It has since
then facilitated power exchange among various state
utilities and a few private generators in the country.
Such trade has grown from 43.77 million kWh in
2000–01 to 4178 million kWh in 2002–03. ABT has been
instrumental in promoting power trade by providing
correct commercial signals in the current environment.
With trading being recognised as a distinct activity
under Electricity Act 2003, there is a clear vision
towards development of a bulk power market in the
country (Fig. 4). Power generators, traders, captive
generators and emerging cooperative producers would
have an opportunity to participate in such a market
mechanism.
The availability of adequate and reliable transmission
infrastructure, transparent and non-discriminatory
transmission tariffs, and independent system operator
(ISO) and regulatory structure are crucial to the
development of a bulk power market.13 Transmission
flexibility is necessary for an efficient market for power
trading. This implies that there needs to be some
redundancy in the system. The five regions of the
country currently face varying degrees of power
shortages, with the eastern region remaining in a surplus
situation, in general. Inter-regional trade in power in the
country has been constrained by the availability of
transmission and the poor financial health of importing
utilities. Variations in weather, including rainfall,
temperature, and load profiles due to the structure of
economic activity and consumer tariffs would provide
opportunities for power trading even if supplies keep
pace with demand in general. The present inter-regional
transmission capacity is 8000 MW. Five regional grids
in the country are interconnected through back-to-back
HVDC links, having a cumulative capacity of 5000 MW.
Further work to strengthen the existing transmission
capacity towards a National Grid is in progress.
POWERGRID expects to achieve an inter-regional
transmission capacity of 30,000 MW by the year 2012
through the involvement of private investors.
Appropriate pricing of transmission services is useful
in providing economic signals for efficient short-run
operation, recovery of costs, long-term capital invest-
ment and fair allocation of costs among participants
(Lai, 2001). Open access to transmission should be
accompanied with appropriate transmission pricing that
not only recovers the investment but also provides
appropriate signals for further investment in transmis-
sion infrastructure. Liquidity, efficiency and complete-
ness of market are necessary elements towards
development of competitive power markets (Hunt,
2002). Large number of players could ensure sufficient
liquidity in the market, and this could curb market
power to some extent. Adequacy of information is
necessary for the development of efficient power market.
Completeness of markets requires a full set of spot and
forward market for each specific product, time and
place. This would also require availability of risk
management tools to avoid extreme price shocks.
Since a sufficient quantity of power to be pushed into
the bulk power market would come only after contrac-
tual bilateral agreements have been met, the existing
public as well private sector players may continue to
operate on the margin in the bulk power market. Long-
term power purchase agreements are in place for almost
13
See Chao and Huntington (1998) for a discussion on issues related
to design of power markets.
 ARTICLE IN PRESS
A. Singh / Energy Policy 34 (2006) 2480–2490
all of the existing power generation capacity. Apart
from merchant power plants,14 part of the future
capacity creations, which are chiefly meant to serve
bilateral contracts, could be made available in the
market place. A market for bulk power can also induce
the desired changes in distribution tariff structure to
reflect price variability across time of day and seasons of
the year, and design of interruptible/firm supply
contracts with consumers. Entrepreneurial ingenuity
would pave its own path to sell power in a competitive
environment.
7. Conclusions
With an annual gross domestic product (GDP)
growth target of 8% set for the Tenth Five-Year Plan,
electricity demand in India is expected to grow sign-
igicantly. Rural electrification is targeted for completion
by the end of Tenth Plan (2007), whereas full coverage
of all households is targeted for completion by the end
of Eleventh Plan (2012) (GOI, 2002b). Ongoing reforms
in the power sector are expected to help meet such
targets. While the main objective of the power sector
reform in developed countries has been to enhance
competition in the sector, the need to improve financial
state and to attract private investment to the power
sector, has been the main driving force for undertaking
reform in India. This has so far included functional
separation of generation, T&D, setting up of federal and
state regulatory commissions and selective privatisation
of distribution segments in a few states. Regulatory
changes have been able to bring about tariff rationalisa-
tion, and transparency and consumer participation in
the regulatory process.
The Electricity Act 2003 holds many promises for the
sector. Licensee-free thermal generation, non-discrimi-
natory access to the transmission system and the gradual
introduction of open access for the distribution system
would go a long way in developing a power market.
These, along with multiple licensees, could help usher in
competitive environment in the Indian power sector.
This, however, is not a panacea to all the ills of the
power sector. The improvement of distribution segments
is the key to long-term sustained growth of the power
sector. This would significantly depend on decoupling
the power sector from politics. Efforts must flow to
address the issues that relate to the distribution segment
along with ensuring competition in the unbundled
segments of the sector, especially for bulk power.
Gradual reduction in the cross-subsidy burden on the
sector and improvement in operational and commercial
14
In fact, the concept of a merchant power plant is not new in India.
Already, a private hydro power plant of 86 MW is operating as a
merchant power plant without any long-term PPA with buyers.
2489
efficiency, including reduction in T & D losses, would
help improve the financial condition of the Indian power
sector. However, transition management may prove to
be the most difficult task while trying to balance the
commercial goals and social obligations facing the
sector. This requires balancing commercial prudence at
one end and the social acceptability of the reform at the
other, which is linked to the political fallout of the
reform process.
Acknowledgements
The author would like to thank Puneet Chitkara and
two referees for their valuable suggestions.
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