power distribution reforms in maharashtra · changing hydro-thermal energy mix: in andhra pradesh...

Power distribution reforms in Andhra Pradesh

October 2009


Introduction

The Andhra Pradesh State Electricity Board

(APSEB) was formed on 01 April 1959. Until its

unbundling in February 1999, APSEB was

responsible for electricity generation,

transmission, distribution and supply in the

state. It functioned under the overall guidance

of the state government, interacting with the

central power agencies for planning and co-

ordination.

APSEB enjoyed a good reputation amongst the

other utilities in India. The Plant Load Factor

(PLF) of APSEB owned generation stations was

83.2% in 2000, much higher than the national

average of 67%. Vijayawada Thermal Power

Station (VTPS) received the productivity award

in 2000 (PLF of 86.9%) and Rayalseema Thermal

Power Plant (RTPP) received the incentive

award. Other aspects of good performance

include fast erection of power stations, and low

employee/consumer ratio1. APSEB was third

largest SEB in terms of units of power sold, next

only to Maharashtra and Gujarat2.

Imperative for reforms in the state

Though APSEB’s performance on generation

side was far better compared to other State

Electricity Boards but performance on

distribution and financial aspects was poor1. By

the late nineties the state was facing both

energy and peak shortages and the quality of

power supply had deteriorated; the power

utility’s financial losses had grown to Rs 39

billion and new investments were not

financeable. The power subsidies had increased

to 1.6 percent of the Gross State Domestic

Product (GSDP) while on the other hand the

combined public expenditure on health and

education had declined from 4.7 percent of

GSDP in FY1987 to 3.6 percent of GSDP in

FY19983. The gap between average cost of

supply (ACS) and average revenue realized

(ARR) grew from 4.2 paise/kwh in 1990-91 to

138.8 paise/kwh in 1999-20002.

Power sector reforms became imminent as in

their absence the need for subsidies from the

government’s budget would have continued to

grow and crowd out social sector investments.

Figure 1: Cost of Power supply, Average tariff and Gap


:

Box 1: APSEB’s Performance Review

Power Deficit: The power shortage faced by the state kept on increasing despite significant

growth witnessed in power generation in Andhra Pradesh. The total power deficit increased

from 6.7% in 1991-92 to 8.5% in 2001-02. During the same period, peak power deficit saw an

increase from 15.8% to 19.9%2.

Transmission and distribution losses (T&D losses): Inadequate infrastructure, low investments in

new infrastructure and improper O&M of the network led to an increase in T&D losses reported

by APSEB. T&D losses as a percentage of availability increased from 19.2% in 1992-93 to 35.2% in

1999-20002.

Gap in cost and revenue realized: The gap between cost of power supply and the average tariff

realized from the customers denotes the margin for a power distribution business. This gap grew

from 4.2 paise /KWh in 1990-91 to 138.8 paise/KWh in 1999-20002.

Increasing losses and subsidy: Increasing T&D losses combined with large gap in cost of supply

and revenue realized led to deterioration in financial health of APSEB. Commercial losses

without subsidy increased from Rs 4 crores in 1992-93 to Rs 3117 crores in 1999-2000. Subsidy

received from State Government increased during the same period from 0 to Rs 3064 crores2.


The deteriorating situation on the power front

in Andhra Pradesh was caused by a number of

reasons. Some of the main reasons leading to

such a situation are:

Changing Hydro-Thermal Energy Mix: In

Andhra Pradesh installed capacity of hydel

power used to be more than thermal power

historically. In 1960-61 while hydel power

accounted for 58.2%, thermal power

accounted for 41.8% of the installed capacity.

Over time this mix has changed in favor of

thermal power. In 1990-91 the proportion of

installed capacity constituted 50.1% hydel

power and 48% thermal power, which further

changed to 36.5% for hydel power and 42.9%

for thermal power by 1997-98. The remaining

power capacity in 1997-98 was in gas

projects1. As the proportion of cheaper hydel

power declined over time and the proportion

of costly thermal power increased, the

average unit cost of power increased. With

increasing average cost of power supply the

gap in ACS and ARR increased which led to

deterioration in financial health of APSEB

Change in Load Mix: There was a huge

disparity between agricultural and industrial

tariffs over the years. This did put pressure on

the industrial sector leading to stagnation in

industrial consumption. Slowly industry

moved towards cheaper captive generation.

Share of industry in sale of power declined

from 35% in 1993-94 to 24% in 1999-2000

while the share of agriculture remained

unchanged at around 40% during the same

tenure. The average tariff charged from

industry and agriculture during 1999-2000

was 394.9 paise/kwh and 15.35 paise/kwh

respectively2.

Reforms undertaken

In the background of the deteriorating situation

on the power front and the new initiatives by

the Government of India to attract private

investment, the then State Government of

Andhra Pradesh contemplated to restructure

the power sector. Reforms in power sector

were brought about in multiple steps.

Hiten Bhaya Committee

State government of Andhra Pradesh

constituted a high level committee under the

chairmanship of Hiten Bhaya, a former

chairman of the Central Electricity Authority, to

suggest reforms to be introduced in the power

sector. This committee was constituted in

January 1995 and submitted its report in June

1995. The important proposals made by the

Hiten Bhaya committee were:

To fix a tariff structure which covers

production costs

To restructure APSEB on a functional basis to

promote efficiency and functional

specialization by unbundling the APSEB.

Constituting separate companies for each

function (namely generation, transmission

and distribution) and putting them in the

hands of different companies was suggested

To keep the companies thus formed as

subsidiaries of APSEB

To run the companies on commercial lines

To retain the Board as a holding company in

charge of long-term sector planning,

supervision and co-ordination of the

subsidiaries

Government to retain monitoring of reform

implementation and provision of policy

advisory


To set up a regulatory commission to fix tariff

structure and to keep licensing powers with

the state government

The Committee did not recommend outright

privatization of public utilities and cautioned

that substitution of private monopoly in the

place of public monopoly would only make

the situation worse. The Committee felt that

privatization initiative should start initially

with management contracts in the

distribution business.

World Bank & the AP Power Sector

Restructuring Program

After Chandrababu Naidu became the Chief

Minister in September 1995, the Government of

Andhra Pradesh (GoAP) approached the World

Bank for a structural adjustment loan to tide

over the fiscal crisis that engulfed the state

Government. In response, the World Bank

brought out a comprehensive report ‘A.P-

Agenda for Economic Reforms’, in January 1997,

outlining its approach to reforms including

power sector.

Bank suggested comprehensive reforms in the

power sector going beyond the

recommendations of the Hiten Bhayya

Committee. Some important components of the

reforms proposed by the World Bank are:

Defining a structure for the sector consistent

with privatization of distribution and private

sector development in generation

Corporatizing the power utilities and ensuring

that they operate without Governments’

interference.

Creating an independent and transparent

regulatory system for the sector with broad

range of responsibilities including granting of

licenses and enforcing them

Table 1: Steps taken for Power sector reforms in Andhra Pradesh

1995 June Hiten Bhaya Committee Report

1996 September World Bank’s Agenda for Economic Reforms in Andhra Pradesh

1997 March AP State Government’s Policy Statement on Power Sector Reforms

1998 April Passing of AP Electricity Reforms Bill in the State Legislative Assembly

1999 January World Bank’s PAD on AP Power sector Reforms Programme (APPSRP)

1999 February AP Electricity Reforms Act 1998 comes into force

1999 February APSEB unbundled into APGENCO and APTRANSCO

1999 April AP Electricity Regulatory Commission starts functioning

2000 March APTRANSCO further unbundled into APTRANSCO and four DISCOMs

2002 April Financial autonomy to DISCOMs

2002 August Employee division (option process) among APGENCO, APTRANSCO and DISCOMs on permanent basis

2003 June Enactment of Electricity Act, 2003.

2003 August Suspension of the World Bank loan after the first stage itself quoting high interest rate and unacceptable conditions.

2004 May Change in Government and the announcement of free power to the agricultural sector.


Enacting comprehensive reform legislation to

establish the new regulatory framework and

implement the restructuring measures.

Increasing the tariff rate to agriculture to at

least 50 paise/kWh in the near term and

continuing to adjust tariffs to cover costs and

reduce cross subsidies.

The Bank’s approach was driven by the idea of

changing the ownership from public to private

in a span of 8-10 years. The AP Power Sector

Restructuring Programme (APPSRP) was to be

implemented over a 10-year period, starting

from February 1999. The Adaptable Programme

Loan (APL) scheme was planned in five stages,

APL-1 to APL-5. The total loan amount was

US$4460 million with the World Bank

contributing 22% of the amount. The other

international lending agencies included

Department for International Development

(DFID) and Overseas Economic Cooperation

Fund (OECF). The Indian agencies included the

government of Andhra Pradesh, the Power

Finance Corporation and the Rural

Electrification Corporation. This loan had

several pre-conditions which were to be

satisfied so that the utility becomes eligible for

the next stage loan. These conditions included

privatization of distribution and generation,

average annual tariff hikes, implementing cost

based tariff and reducing government subsidy

to zero.

Reforms undertaken by AP Government

Within six months of the World Bank

recommendations, on 14th June 1997, The

GoAP released a power sector policy statement

indicating proposed policy and structural

changes in the power sector. In order to give a

concrete shape to this policy, the GoAP enacted

Electricity Reforms Act of 1998. The Reform Bill

was introduced in the legislative assembly on

April 27, 1998 and was passed on April 28th. It

was notified on 29th October 1998 and made

effective from February 1999.

Figure 2: Power sector: Structure pre and post reforms


The APSEB was unbundled into APGENCO and

APTRANSCO in February 1999. The Electricity

Reform Act provided for the constitution of

Andhra Pradesh Electricity Regulatory

Commission (APERC). In April 2000, the

APTRANSCO was further unbundled into a

transmission company and four distributions

companies (DISCOMs) managing distribution in

four zones of the State, Central, Eastern,

Northern and Southern. State Government

signed a MOU with the Ministry of Power,

Government of India on reform and

restructuring which had the road map for

reform, plans for tariff rationalization, metering

and maintaining grid discipline. As part of the

distribution sector reforms, the four DISCOMs

were issued independent licenses for

distributions in April 2001.

Andhra Pradesh started power sector reforms

much earlier than most of other states in the

country. However, pace of reforms in AP slowed

down by year 2004. The signs of slowdown in

reforms were visible in suspension of the World

Bank loan after stage-I itself and no attempt to

privatize distribution. The reasons identified for

this slowdown were opposition to the reform

agenda, failure of the World Bank led reform

process in Orissa and the national level re-

thinking on the World Bank led reforms. In May

2004, the Congress government came to power

in AP by replacing Chandrababu Naidu’s TDP. It

announced free power to agriculture and

promised to review the reforms including

power purchase agreements (PPAs) with private

generators.

Initiatives taken during reform process

Power distribution sector reforms in Andhra

Pradesh were concentrated on reducing losses

and improving commercial viability through

improved infrastructure, better auditing and

usage of IT systems. The initiatives taken during

the reform process are:

Theft control: Government of Andhra Pradesh

(GoAP) enacted an anti-theft legislation in July

2000. It provided stringent penalties for theft

of electricity, including mandatory

imprisonment to the offenders. The

legislation enabled constitution of special

tribunals and courts for speedy trial and

recognized collusion of the utility staff a

punishable offense. The enforcement efforts

made by both government and distribution

companies has shown positive results in

controlling theft. According to a report by

World Bank, about 5 million services have

been inspected out of 12 million metered

services. About 150,000 theft cases were

registered during FY2000-03 compared to

9,200 cases during FY1998-2000. Also 4100

consumer and about 50 employees were

arrested3.

The success of the theft control initiatives was

built on proactive measures taken, including:

o Communicating about the objective, intent

and the enforcement of the new act to the

stakeholders

o Regularization drive was launched to

provide one time opportunity to the

unauthorized consumers to register as legal

customer. About 2 million3 residential

consumers were regularized in the

regularization drive

o Implementing institutional, management

and administrative changes in the power

distribution companies to ensure effective

enforcement of the Act

o To provide implementation support legal

support system geared up


o The vigilance department has been

strengthened with appointment of the

Inspector General of the Police as the joint

managing director in the company

o The organizational structure was modified

to strengthen coordination between various

departments like operations/technical

department, commercial departments and

vigilance department

o Special police stations were set up to deal

with the electricity theft cases

Initially statewide inspections and revenue

collections drive were launched targeting

large industrial and commercial consumers,

which was gradually extended in the rural

areas. This was supported by a

comprehensive program of consumer

metering and energy audit. Discoms have

developed specialized IT based tools for

institutionalization of theft control and

monitoring measures. These efforts of theft

control, led to improvements in billing and

collection by the utilities.

Energy audit and metering: To measure

power transacted at various levels and

determine reliable extent of transmission and

distribution losses in the system, new

metering drive was launched. High quality

meters were installed on the interface points

between the power sector companies. The 11

kV feeders were metered and data loggers

were installed to monitor the supply of

electricity to agriculture consumers. For

realistic estimation of agriculture

consumption about 30,000 distribution

transformers (out of 190,000 DTRs) supplying

power to predominantly agriculture

consumers was metered3.

Program to improve the consumer metering

system was also started by distribution

companies. For high value customers, the

existing meters were replaced with high

accuracy electronic meters.

Consumer Analysis Tool (CATs): CATs is a

customer database used to analyze customer

information in order to identify trends in

metering, billing, and collections. Key feature

of the CATs is to risk profile customers to

enable the management to design strategies

for efficiency improvements targeted to

specific customer group. The customers are

grouped into different categories based on

their payment history– a matrix of proportion

of bill paid and number of defaults in twelve-

month payment track record.

CATs addresses needs of number of

departments including operations, vigilance,

regulatory affairs departments. It acts as an

effective monitoring tool and helps in

exercising control. The results are reflected in

improving billing and collection efficiency.

Monitoring and Tracking System (MATs):

MATS has been designed as a tool to assist

the process of monitoring and tracking of the

progress of various cases of irregularities, like

theft, malpractice, back-billing etc. The

objectives of the system are to:

o Streamline the regularization system by

reducing the effort and time required to

inspect and follow-up on irregularities

o Enable process automation to reduce high

documentation requirements and loss of

records

o Enable a performance based monitoring

system for tracking and taking action on

irregularities. MATs is based on a workflow

process where each completed document is

automatically sent to the appropriate

reviewing officer based on the defined


process. Training is given to all officers on

the usage of the system to enable them to

fulfill their role.

o The system also enables performance

review of the employees by tracking the

period of time each case is kept pending at

each level.

o The system is highly role-based with each

officer only being able to track as well as

take action on cases that lie within his/her

jurisdiction.

Investment in infrastructure: The distribution

infrastructure was modernized to bring down

the technical losses and improve the

performance of the system. Under the first

power sector restructuring loan under the

adaptable loan program of the World Bank

(APL1), funds were provided for financing

high priority investments in T&D System. Till

2006 a total of Rs 6652 crores were spent on

improving the distribution system8. These

funds were utilized for installing new meters,

replacing or repairing of old meters,

installation of new transformers and up

grading the distribution lines. Yearly capital

expenditure of various discoms is shown in

table below:

Transformer Information Management

System (TIMs): TIMs enables effective

tracking of the distribution transformers as

well as the associated structures through-out

their life cycle and analyze the information to

o Improve asset tracking, utilization and

maintenance

o Improve customer service through

deployment of transformers and exception

handling (in case of failures

o Enable greater visibility leading to improved

decision making.

Discoms benefits financially by reducing

inventory carrying costs. Operationally it

helps to reduce transformer down time and

evaluating vendor performance. It enables

these through various reports which indicate

data like:

o Availability of stocks of DTRs in stores

o Locations with maximum transformer

failures

o Identification of transformers and

structures which show frequent failure

o Time required to repair transformers at

each repairing location

Book Consolidation Module (BCM): BCM is a

tool aimed to reduce the time taken and the

manual intervention involved in the

consolidation of accounts from the circle

level. The tool generates balance sheet and

profit/loss for the discoms after consolidation

of all accounting units. In addition to

consolidation, the tool also provides for

various variance reports

o Budgeted versus actual comparisons:

These reports compare monthly variance

between budgeted and actual income or

expenses from various account codes

o Comparative statements: These reports

compare income/expense for current

month with the previous month or the


previous year to calculate appropriate

variances.

Outcome of reforms and initiatives

Reform process in Andhra Pradesh was started

under the guidance of World Bank. However

their loan was suspended after first tranche and

regime also changed in AP. The new regime

changed the course of reform process which

was also reflected in a number of parameters

used to assess the distribution sector. Some of

these parameters are discussed below:

Aggregate technical and Commercial Losses

(AT&C): AT&C losses in AP have decreased

from 27% in 2002-03 to 16% in 2007-08. Such

a decrease is attributable to the focus of

reforms on reducing losses through better

auditing and investment in infrastructure.

However AT&C losses have not reduced much

since 2005-06.

The performance of the discoms is shown in

table below. While eastern and northern

region discoms have reported low losses

significantly, AT&C losses reported by central

and southern region discoms are still high.

Also post 2004-05 loss reduction has not been

significant.

Collection Efficiency: The collection efficiency

in Andhra Pradesh has been above 90% post

reforms. High collection efficiency has been

possible due to energy auditing & metering

drive and implementation of tools like MATs,

CATS.

Collection efficiency of individual discoms is shown in table below. While collection efficiency of all discoms has been high, there has been a lot of variation in collection efficiency reported by APNPDCL.


Subsidy by State: Subsidy provided by state government to power distribution sector has come down significantly from pre-reforms period. In 1999-2000 subsidy by state was more than Rs 3000 crore while the subsidy received in 2004-05 was Rs 1303 crores. However post 2004-05 subsidy has started increasing. Subsidy reported for the year 2007-08 was Rs 2408 crores.

Subsidy received by individual discoms is given below:

Financial viability of AP discoms:

1. Profitability: Discoms in AP have been registering losses without subsidy. While these losses were around Rs 1200 crores in 2004-05, it started increasing in later years. Aggregate losses registered without subsidy for year 2007-08 were Rs 2526 crores. With the help of subsidy discoms have been able to cover the losses made. However in 2007-

08 aggregate losses with subsidy were Rs 118 Crores.

2. Gap in cost and revenue realized: The gap in ACS and ARR has decreased significantly for AP post reforms. Gap reported for the year 1999-2000 was 138 paise/kwh as compared to 48 paise/kwh in 2007-08. However this gap has started increasing in last few years.

Conclusion

AP is one of the states that initiated the reforms

in power sector. Initial steps for reforms were

taken way back in 1995 by formation of Hiten

Bhaya Committee. Actual unbundling took place

in year 2000. It has been more than 8 years

since the power sector has been unbundled in

AP. During this tenure AP has seen a change of

regime which also brought a change in the way


reforms were pursued in AP. At the time of

unbundling of APSEB reforms were driven by

guidelines given by World Bank and

minimization of cross subsidization and

privatization of discoms were considered as

eventual outcome of reforms. However World

Bank’s failure in Orissa led to AP withdrawing

from their program and change in course of

reforms.

All the discoms are still under government

ownership. Also new government announced

free power for agriculture. At the time of

introduction of free power to agriculture the

four DISCOMs together were receiving nearly

Rs. 400 crore1 as revenue from agricultural

connections. It was claimed that the same

amount will be saved by renegotiating the PPAs

with the IPPs in the state. However, increasing

subsidy and gap between ACS and ARR post

introduction of free power shows that it had a

negative impact on the financial health of the

sector.

The impact of distribution reforms had been

positive and can be seen in decreased losses,

improved collection efficiencies, smaller gap

between ARR and ACS compared to what

existed in the state prior to reforms. Also the

deficit condition of the state has also improved

over the years. Peak deficit for the state

reduced from 19% in 2002-03 to 7.6% in 2008-

09. Overall energy deficit reduced considerably

till 2003-04 but has risen again and stands at

6.8% in 2008-097.

Performance both in financial and operational

terms has varied across the discoms. While

APEPDCL has been able to reduce its AT&C

losses and subsidy received considerably,

APCPDCL and APSPDCL have not been able to

maintain similar performance.

The good performance of APEPDCL can be

attributed to the customer mix with high

proportion of industrial mix it inherited from

APSEB (see Annexure 1). However, APNPDCL

has performed better despite having high

proportion of agricultural customers.

In the long run the commercial viability of

various discoms without subsidy is questionable

especially with the rise in subsidy requirements

in last three financial years. Also Quality of

Supply (QoS) targets need to be set and

measured in order to achieve a power

distribution sector which is both commercially

viable and consumer friendly.


Sales mix: Sales mix was inherited by discoms from APSEB depending on their region. While APEPDCL

inherited a favorable sale mix due to very low agricultural component, APNPDCL sells approximately

50% of their power to agricultural sector. Over the years sales mix for various discoms has remained

the same.

Revenue mix: Revenue mix of various discoms given below shows that maximum contribution to

revenue is made by industrial sector irrespective of the proportion of sales accounted by them. Also it

can be seen that agriculture sector contributes very little to the revenue of discoms. Also contribution

to revenue by commercial sector is also higher than proportion of sales accounted by them. This

revenue mix clearly shows the cross subsidization being done by industrial and commercial sector.

Annexure 1: Sales mix, Revenue mix and Cost components


Cost components: The cost components as percentage of cost have remained the same over the years.

Interest cost for APCPDCL and APNPDCL has reduced over the years. APEPDCL has seen a continuous

increase in their employee costs.


1. Power Sector Reforms in the State of Andhra Pradesh in India by B. Saranga Pani, N. Sreekumar

and M. Thimma Reddy

2. Annual Report (2001-02) on The Working of State Electricity Boards & Electricity Departments, Planning Commission (Power & Energy Division) Government of India, May 2002

3. World Bank implementation completion report on a loan in the amount of US$ 210 million to the Government of India for Andhra Pradesh power sector restructuring project, February 20, 2004

4. Report on the Performance of The State Power Utilities for the Years 2002-03 to 2004-05, Power Finance Corporation Limited

5. Report on the Performance of The State Power Utilities for the Years 2005-06 to 2007-08, Power Finance Corporation Limited

6. Presentation National Conference on Reforms in Infrastructure Sectors: Impact Assessment and Governance by Rachel Chatterjee, November 2003

7. Power sector at a glance by Central Electricity Authority, April 2009

8. Power Sector Reforms in Andhra Pradesh: Their Impact and Policy Gaps by B. Saranga Pani, N. Sreekumar and M. Thimma Reddy, 2007

References

power distribution reforms in maharashtra · changing hydro-thermal energy mix: in andhra pradesh...

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