Articles

Indian power sector reform for sustainable development: the public benefits imperative[1]
Amulya K.N. Reddy International Energy Initiative, 25/5 Borebank Road, Benson Town, Bangalore -- 560 046, India

The crises of utilities in developing countries led to a World Bank diagnosis of their problems and to a prescription of remedies for the situation. The resulting approach has been assessed with a case-study of the power sector in Karnataka carried out by the International Energy Initiative. This bottom-up approach has yielded remedies that do overlap with the top-down World Bank approach as far as liberation from government management control, corporatisation and the establishment of an electricity regulatory body are concerned. However, the bottom-up approach does not lead to other World Bank solutions such as unbundling of generation, transmission and distribution, removal of all subsidies and cross-subsidies, and privatisation, which appear to follow, not from ground realities, but from global trends of reform/restructuring. It appears that the reform process in the industrialised countries has been driven primarily by technical developments, rather than by the financial crises that are the justification for reform in the developing countries. Despite this, there is an epidemic of reform in India. It appears that a bootstrap operation (= improving by ones own efforts) coupled with some elements of reform can rejuvenate the utilities. What may not result from this financial rejuvenation are several crucial public benefits -- access, self-reliance/empowerment, environmental soundness, research and development and sustainability over the long term. To achieve these benefits, one has to go beyond economic growth and advance sustainable development. This larger goal requires that the invisible hand of the market has to be assisted by the visible hand of regulations and the intervention of the state. Privatisation against this background may not be the magic wand that it is claimed to be. 1. The crises of Indian electricity boards For over 15 years, Indian electricity boards (as Indias utilities are called) have been trapped in the crises of capital, access/equity/distribution, environment and performance [Reddy, 1993] as briefly described below. 1.1. Capital crisis Severe financial losses have led to the almost total inability of these utilities to self-finance improvements. Utilities also borrowed heavily and aggravated their losses. In the past, these losses used to be made good by government treasuries, but now, most treasuries are empty. The lack of internally generated funds and the inability of treasuries to provide funds have resulted in severe shortages of capital for expanding generating capacity. Governments (central and state) and utilities hoped to solve these capital scarcity problems with an influx of private capital [Reddy and DSa, 1995]. It was also believed that the indigenous private sector might not have the necessary capital. Also, the foreign exchange component of funds required by the power sector could be large because very few developing countries have an indigenous electricity generation equipment industry[2] . Hence, foreign assistance/capital has been sought/invited. Since multilateral and bilateral funding agencies cannot meet capital requirements [Churchill and Saunders, 1989], foreign private capital has been invited since 1990. 74 1.2. Access/equity/distribution crisis The benefits of electricity have not reached the whole population -- a substantial percentage of households (particularly in rural areas) do not have electricity connections. Hence, a significant fraction of the population (particularly the rural poor) does not have access to electricity. At the same time, some consumer categories, not necessarily the poorest, are given subsidised electricity. Benefits are skewed in favour of certain categories of consumers (e.g., irrigation pumpset owners) and certain areas (e.g., urban areas). 1.3. Environmental crisis India is quite unusual among developing countries in that there is growing organised public concern about the environmental impacts of electricity generation. These concerns have focussed on pollution from coal-based thermal plants (particulates, acid rain, etc.), on the various problems of nuclear plants such as reactor safety, the NIMBY (Not in my backyard!) syndrome, low-level radiation and disposal of high-level wastes, and on the negative impacts of hydroelectric plants including the displacement of people, the submergence of forests and siltation. There are also concerns about global warming impacts of energy production and use. 1.4. Performance crisis The power sector has shown an inability to meet rising electricity consumption/demand with the demand-supply
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gap being aggravated by declining technical performance. This decline has involved low plant-load factors, large transmission and distribution (T&D) losses (technical and commercial), non-standard voltages and frequencies, frequent load-shedding, and brownouts and blackouts. However, there have also been other problems such as uncertainties in future demand and in future supply, and the challenge of grid interconnections. The situation has also been complicated by the entry of new players (nonutility generators/ consumers/ regulators/ conservationists/ environmentalists) and the declining role of monopoly of utilities in decision-making (which has moved closer to consumers). 2. World Bank approach The World Bank, which has been a major funder of power projects, carried out a study of 300 power projects between 1965 and 1983 and concluded [Mason et al., 1988] that pursuit of further electricity expansion was neither possible nor desirable. It believed that access had been extended sufficiently and utility performance was declining because T&D losses were high. There was under-investment in distribution, leading to bottlenecks. Demand forecasts could be as much as 20 % above consumption. Sometimes, over-investment in capacity led to over-capacity and the utility could not optimise long-term capacity expansion. Based upon this analysis, the World Banks diagnosis of the sickness of electricity boards was that they suffer from (1) centralisation and excessive size, leading to inflexibility, (2) monopoly power due to which they are exploitative and (3) public ownership resulting in inefficiency and vulnerability to political interference. This diagnosis led to the World Bank (1993) cure for the sickness of the power sector -- there must be much greater emphasis on restructuring and performance improvement than on capacity expansion. This view implies no further Bank funding for grid expansion. Simultaneously, the three problems of centralisation, monopoly power and public ownership must be tackled through institutional change, financial reforms and management measures. The institutional change recommended by the World Bank was privatisation involving inter alia the following measures: attraction of private capital into the power sector because government does not have enough capital, attraction of foreign private capital into the power sector because the indigenous private sector may not have enough capital, and divestment or sale of publicly-owned utilities to the private sector. It was envisaged that privatisation would achieve several results -- solve the financial crises of the power sector, restore the inflow of improved technology, introduce profit-driven investment and management decisions, eliminate political interference, eliminate monopoly (and thereby introduce competition), reduce size of the utilities and decentralise decision-making. Financial reforms were considered necessary to make prices rise to marginal costs in order to raise the level of

efficiency of utilities. In addition, these reforms were intended to attract private capital with a variety of incentives such as tax breaks, easy access to land, guarantees for repatriation of profits, and power purchase agreements. The reforms would also ensure that future expansion would be via low capital-intensity technologies (natural gas) to reduce the gestation period of power projects. The management measures recommended included the reduction of T&D losses, emphasis on maintenance, repair and distribution, review of reserve margins and engineering standards, reduction of demand, scrutiny of electricity-GDP coupling and emphasis on conservation and load management. 3. Case-study of Karnatakas power sector The general prescriptions of the World Bank can be compared with a case-study carried out by the International Energy Initiative [Reddy and Sumithra, 1997] of the power sector of the south Indian state of Karnataka with its 1991 population of about 45 million and its installed capacity of 2,760 MW. The case-study showed that, contrary to conventional wisdom, the financial ills of the Karnataka Electricity Board (KEB) were not due to the subsidised electricity given to irrigation pumpsets (IPSs) of farmers at the behest of the state government. In 1996, this subsidy was shown by IEI to be compensated by cross-subsidy primarily from industrial and commercial consumers and there was no net subsidy of consumers. Because the meters on IPSs had been removed in 1981[3], the consumption by IPSs and the T&D losses had to be guessed or fabricated every year. Some reductions in technical losses are possible with system improvements such as straightening lines [Sen Gupta, 1993], reducing low-voltage distribution, etc. The real opportunities, however, lie in reducing T&D losses. If the upper limit of technical T&D losses is taken[4] to be about 20 %, then the balance (up to about 10 % of Karnatakas electricity) is in fact commercial loss (the utilitys euphemism for theft). IEI concluded that commercial T&D losses were the fundamental reason for KEB being in the red. If these losses had been minimised, if not eliminated, and the resulting revenue brought into the utilitys coffers, KEB would have had a revenue surplus that could be used as an internal source of funds for improvement of the system and expansion of capacity. KEBs balance-sheets did not reveal information on the revenues that were not realised even though as much as 58 %[5] of the electricity purchased by KEB did not yield revenue because the associated consumption was not metered. Karnatakas power sector used the fabricated IPS consumption to hide many of its technical and commercial shortcomings, in particular its commercial T&D losses. Many of these observations from IEIs analysis were strongly rejected when they were published, but they have now become conventional wisdom repeated by the highest authorities in the power sector [Kumaramangalam, 2000][6].
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IEIs diagnosis of the ills of KEB corresponds to a bottom-up approach to the reform of its power sector, which is basically different from the top-down approach of the World Bank. This IEI alternative starts with the detailed diagnosis of the specific problems of the power sector under consideration and prescribes what is necessary to cure the ailment. The first element of the reform is removal of the state governments management control (without accountability) over the KEB. This requires corporatisation of KEB in order to end its status as a department of government and to liberate it from the stranglehold of the government. However, making KEB a commercial entity is a necessary, but not sufficient, condition because it may lead to social and political objectives being sacrificed in the pursuit of profits. It is essential, therefore, to regulate the corporatised body through an independent regulatory body. To ensure that such a body is not hijacked by vested interests, it must function in a democratic manner involving participation by the government, all categories of consumers, potential consumers, and civil society, and requisite legislation to ensure independence. Efficient democratic functioning is not possible without transparency, which in turn requires right to information so that information is available and accessible to the public. Thus, a bottom-up approach based on the diagnosis of KEBs ills suggests that the reform process must involve (1) liberation from direct management control of the utility by the government[7], (2) corporatisation of KEB, (3) establishment of an independent regulatory body and (4) transparent democratic[8] functioning. There is overlap between IEIs bottom-up cure and the top-down World Bank prescription. The common features are liberation from government management control, corporatisation and an independent regulatory body. But the World Banks other prescriptions, namely, removal of all subsidies and cross-subsidies, unbundling of generation[9], transmission and distribution, and privatisation of these functional entities do not follow from the detailed diagnosis of the power sector. These other prescriptions have to be justified on other grounds such as global trends in the power sector[10] and theoretical arguments[11]. 4. Reform/restructuring in the industrialised countries It is important therefore to understand the basic dialectics and logic underlying the reform/restructuring of utilities in the industrialised countries. Before that reform/restructuring process, the electricity system consisted of vertically integrated monopolies involving generation in mega-plants (~1,000 MW per plant), transmission over extensive grids (spanning hundreds of kilometres) and distribution to millions of end-users. Advances in the technologies of generation at smaller-scales (~100-250 MW) plants (for example in gas turbines and through the cogeneration of electricity) led to the growth of smallerscale independent power producers (IPPs) and cogenerators demanding the right to generate electricity. This led to legislation such as the Public Utilities Regu76

latory Policy Act (PURPA) of the USA according to which it became mandatory for the utility to off-take and purchase surplus electricity from IPPs and cogenerators at the avoided cost of generation to the utility. In addition, unrestricted access of cogenerators/IPPs to the utility-controlled grid suggested separation of generation from transmission. Disaggregation of distribution into bulk consumers and smaller distribution entities also took place. This meant that there arose a need for a regulator to prescribe the rules and oversee the generation and transmission and distribution process. Computerised dispatch on a merit-order basis paved the way for consumers to choose their generators. New generation options and information and communication technologies made it possible to restructure the market for competition. And the final step involved the introduction of wholesale and/or retail competition (with transmission and distribution wires remaining regulated), leading to generators pursuing customers in an electricity market with customers having the right to purchase electricity from any generator. An important feature of the reform/restructuring of the power sector in industrialised countries must be noted. The evolution from monopoly unbundled generation, transmission and distribution regulation deregulation was not driven by capital shortages, financial sickness of utilities or poor quality of electricity delivered. It was primarily technology-driven in that technological developments rendered old systems inadequate for new possibilities[12]. In contrast, the arguments for immediate power sector reform/restructuring in developing countries are virtually all non-technical -- relating to capital shortages, financial sickness of utilities and poor quality of electricity delivered. Thus, it seems that the logic of the power sector reform/restructuring process in the industrialised countries is prima facie irrelevant to the short-term needs of developing countries. 5. The epidemic of power sector reforms in India The Indian power sector reform process started with the October 1991 amendment of the Electricity (Supply) Act to allow the private sector entry into generation. At the urging of the World Bank, Orissa was the first state to enact, in 1995, comprehensive power sector reform involving (1) an independent regulatory commission, (2) unbundling of the State Electricity Board into separate generation, transmission and distribution entities, and (3) eventual privatisation, particularly of distribution. Andhra Pradesh, Haryana, Rajasthan, Uttar Pradesh and Karnataka have since followed this World Bank pattern of power sector reform. A conference of Chief Ministers of states in late 1996 came up with a Common Minimum National Action for Power involving (1) establishment of independent regulatory commissions, (2) rationalisation of tariffs and (3) private sector participation in distribution. A Central Electricity Regulatory Commission (CERC) Bill was initiated in 1998 and the CERC has since started functioning. Surprisingly, there has thus far not been any specification of the criteria that should be used to judge the success
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or failure of the reforms/restructuring being pushed through the various states. Obviously, the criteria should include (1) the coverage of electricity services with widened access by more of the population, (2) the efficiency of generation, transmission and distribution measured by quantified technical parameters, (3) the quality of service as measured by the continuity, voltage and frequency of supply, (4) the price of electricity, (5) the minimisation of theft as measured by the commercial losses, (6) the financial health of the electricity board (or its successor entity), (7) the reduction of direct management control by the state government and its politician-bureaucrat nexus over the electricity board (or its successor entity), (8) the degree of independence of the regulatory authority and (9) the extent of transparent democratic functioning. Even more serious is the fact that, to date, there has not been any evaluation of the success of these reforms in the states where they have been introduced. For instance, there is still no reliable evidence in India that privatisation has prevented or reduced theft -- the Orissa experiment has not had enough time and the Noida (a township in Uttar Pradesh) experience is complicated by the large presence of industrial/commercial establishments. It appears that the case for the reform/restructuring process in India is based on World Bank ideology that has been propagated as a matter of faith and implemented regardless of objections. Thus far, it has not been backed by the track record of this process in India. And the lessons that are emerging from the recent California energy crisis [Reddy, 2001] raise doubts about the wisdom of rushing headlong into the type of reform being urged upon the Indian power sector. A more cautious experimental approach is warranted. 6. A road map for Indian power sector reform For instance, it is possible to construct a road map for an immediate reform based upon a detailed diagnosis of the ill-health of the electricity boards. The most important step is effective and creative management to reduce theft and increase revenues. The resulting revenues along with performance-tied grants from government and multilateral and bilateral agencies can be used to improve technical performance involving reduction of T&D losses and improvement of power quality (frequency, voltage, continuity). An emphasis on demand management (peak reduction, load-curve smoothing, end-use efficiency improvement) is also required. Advantage must also be taken of cost-effective cogeneration and decentralised generation. Corporatisation and liberation from government management control are urgently required along with consumer-oriented development of the power sector. An independent regulatory authority must be established with transparent democratic functioning (with stakeholder participation and accountability). Supply expansion on a least-cost basis to meet the demand-supply gap must be resorted to after efficiency improvement and decentralised generation. Price reform and subsidy reduction cannot be implemented without improving the quality and continuity of

supply because higher prices require better quality and improved end-use efficiency. It appears, however, that a bootstrap operation (= improving by ones own efforts) with minimal institutional changes can rejuvenate electricity boards[13]. After this rejuvenation is achieved, there is scope for further improvement of the system through, for example, reduction of inefficiencies by introduction of competition. These longer-term challenges may require additional elements of reform/restructuring similar to those that were proved in the industrialised countries. 7. Public benefits and sustainable development Such a bootstrap operation may turn the electricity boards into financially sound bodies and ensure profits and economic growth. But market-driven and growth-oriented reform will not ensure the protection and advancement of crucial public benefits -- widening access, strengthening self-reliance/empowerment, ensuring environmental soundness, promoting research and development and safeguarding the long term. Left alone, a corporatised and market-driven power sector may pursue economic growth and jettison public benefits. Power sector reform therefore is necessary, but not sufficient; it has to be buttressed with a public-benefit dimension/imperative. This public-benefit imperative requires a perspective that extends beyond mere economic growth; it requires the perspective of sustainable development. Sustainable development can be viewed as a process of economic growth with the following features: economic efficiency, equity through widening access and giving growth a basic-needs orientation, empowerment, environmental soundness and concern for the long term. Sustainable development implies the new energy paradigm. What human beings -- as individuals and as societies -- want is not energy per se but energy services to satisfy basic needs, improve the quality of life and advance development. Development requires, therefore, an increasing level of energy services to meet basic needs more fully and improve the quality of life. Thus, the level of energy services must be taken as the measure of development, rather than mere growth of the magnitude of energy consumption and supply. Economic efficiency must be attained by increasing energy services through a rationally determined least-cost mix of end-use efficiency measures, decentralised renewable sources and clean centralised sources of energy. Economic efficiency also requires that the issues of policy, institutions, financing, management, etc. involved in the implementation of such a mix be tackled. Energy efficiency also means making optimal decisions in terms of operations and new investments. Self-reliance and empowerment of rural communities requires the promotion of decentralised sources for rural areas. Self-reliance also requires the initiation and strengthening of technological capability in energy analysis, planning and implementation. Environmental soundness has to be achieved by exploiting end-use efficiency measures, renewable sources and clean centralised sources of energy. Concern for the long term requires the fostering and developing of emerging technologies
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of end-use efficiency improvement and of renewable sources and promoting their dissemination. 8. Power sector reforms with public benefits for sustainable development 8.1. Economic efficiency through competition Since competition enforces an external measure of performance, it is in general more conducive to efficiency than a monopoly situation that can only provide an internal standard. However, it must be noted that the introduction of competition may involve transaction costs that must be compared with the ensuing benefits. Also, the extent of competition in actual situations must be carefully monitored for the reason that market power may be defeating competition. Competition is required between old generators and new independent power producers (IPPs) to supply wholesale power to distributors. All generators (including IPPs) must have open access to the grid (as a necessary condition for competition); otherwise, new IPPs will be denied access to the grid. Competition is required between generators and distributors to supply power to large consumers. Competition is also required between the expansion of supply to consumers from distributors and the improvement of the efficiency with which they use the supply. Energy service companies (ESCOs) should compete with distributors to provide these efficiency improvements. 8.2. Equity through widening of access to electricity and protection of interests of economically weaker consumers Increasing the coverage of electricity (not necessarily grid electricity) requires the enforcement of an obligation to serve so that the whole population (even the poor segment outside the market) enjoys the benefits of electricity. Segments that are captive markets to electricity distributors require protection. It is also essential to protect the whole market against the monopolistic power of generators, grid transmitters and distributors. And it is vital to reduce, if not remove, the urban-rural and regional disparities with regard to the benefits of electricity. 8.3. Environmental protection through environmentally sounder technologies A major contribution to environmental protection can be achieved through improvement of the efficiency of production and use of energy. These efficiency improvements can be obtained through retrofitting of existing plants and devices and also through the choice of efficient devices and technologies. The transition to renewable non-fossilfuel sources must be facilitated as also the transition to cleaner technologies of generation from fossil fuels. An important instrument in this regard is the United Kingdoms Non-fossil Fuel Obligation (NFFO) according to which a levy is imposed on fossil fuel-based power generation and the funds thus collected are used to promote renewable sources of energy. The NFFO plans to bring into operation a base-load of 1,500 MW of renewable sources by 2000. Several states of the US have a Renewables Portfolio Standard (RPS) to ensure that a minimum quantity of renewable sources is included in the 78

energy portfolio of generators. Each retail supplier of electricity must provide a minimum percentage of renewable energy in its portfolio either through its own renewable energy facilities to obtain renewable energy credits (RECs) or purchasing these RECs from other sources. There is also the public benefit charge (PBC) according to which the US Federal Government plans to collect $ 3 billion per year through a generation or transmission interconnection fee on all electricity at the rate of 0.1 US (1 mill) per kWh. This PBC will provide matching funds to states for low-income assistance, energy efficiency programs, consumer education and the development and demonstration of emerging technologies, particularly renewables. 8.4. Self-reliance/empowerment through growth of decentralised sources for rural areas There is considerable scope for decentralised electricity generation from biomass-based sources via engines fuelled with biogas or producer gas. A new development is the availability of micro-turbines. In addition, it is also possible to utilise wind, small hydel and photovoltaic sources. 8.5. Concern for the long term It is essential that current energy decisions are part of a long-term strategy in which technologies appropriate for the future are developed and commercialised. This necessarily means an emphasis on research and development that is likely to be set aside amidst a preoccupation with the short term. 9. Regulation-assisted market to ensure public benefits A central question concerns the use of the market to guide technology choices, investment decisions and wholesale and retail prices. The good news is the power of the market -- the market is an excellent allocator of manpower, capital, technology and resources. The bad news is the limits of the market -- in its preoccupation with the bottom-line, the market tends to ignore equity/distributional justice, self-reliance/empowerment, environmental soundness and the long term. Even with regard to economic efficiency, there are barriers to market-based competition in the electricity sector because market power can thwart competition in the electricity sector, particularly under conditions of low reserve margins and significant supply shortages. Faulty capital allocations and stranded investments (for example, nuclear power) made under regulatory regimes also tend to distort the competitive process. End-use efficiency is opposed by the market (because profit maximisation requires sales maximisation, which means that the unaided market will not promote conservation) [14]. The private sector uses higher discount rates than the public sector; hence, a bias develops against capital-intensive projects. Higher discount rates mean higher prices, and therefore there are political hurdles. Establishing and maintaining competition may require major state interventions. Thus, competition requires regulation. With regard to equity, the market invariably ignores
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those outside the market, i.e., those without the purchasing power to articulate their demands through the market. It is also biased in favour of those with strong market power and towards rich regions and urban areas. In the matter of environmental soundness, the market considers environmental impacts as externalities and the market discount rate is too high to ensure long-term benefits. With respect to empowerment, the market is not concerned about strengthening self-reliance and empowering communities. Also, the market is biased against long-term investments on R&D and infrastructure. In conclusion, the market alone cannot ensure that electricity systems will advance public benefits and sustainable development. The invisible hand (market) needs help from the visible hand (regulation). Regulation is required to increase access to electricity, to protect the captive segment of the market (single commodity-two segment market with competitive and monopolistic segments), to protect those outside the market, to lay down rules and to establish level playing-fields. Removal of the government from the market and ownership changes by themselves will not produce competition. Without regulation, there may be no competition. In fact, private monopolies need heavier regulation to specify type and length of contracts (long contracts are good for planning, and short contracts are good for competition) between generators, distributors and large consumers. 10. Privatisation from the perspective of sustainable development One of the crucial weapons in the armoury of reformers is privatisation. In fact, for many categories of reformers, privatisation, rather than competition, is the real objective of reform. A major assumption underlying the World Bank approach is that private ownership leads ipso facto to competition and thereby to efficiency but unfortunately private ownership does not necessarily create competition. The transmission grid, for instance, does not lend itself to replication, or even duplication; hence, a single transmission grid and no competition are the natural situation. Similarly, the distribution system does not lend itself to replication/duplication except in very small areas such as villages; hence, there is a bias towards a single distribution system with no competition. Hence, it is only in generation and retail that there can be competition but even here there will only be a small number of generators (not the infinity required by an ideal market), i.e., a duopoly or oligopoly[15]. It is inevitable that there are tendencies for generators to dominate the market and to collude. Hence, withdrawal of government from the market and change from public to private ownership will not result automatically in competition. In other words, privatisation and competition are two separate issues. Competition is effectively about getting the structure of the market right. If no generators are able to exercise market power and there is open, non-discriminatory access to the transmission grid, then competition is possible -- even if the electricity industry remains largely in public ownership. Another issue relevant to privatisation is the theoretical

potential for the state to unlock economic value by divestment of its assets in the electricity sector. In theory, privatisation receipts can significantly reduce treasury debt -- thus reducing interest payments -- and free further fiscal resources for social purposes. Part of privatisation receipts could also go into an electrification fund, or a public benefits fund to guarantee widened access or investments in energy efficiency, renewables, etc. Unfortunately, divestments are notoriously susceptible to corruption, with the real value of the publicly-owned assets being rarely realised in practice. Since the energy sector is vital infrastructure (along with water, transport, communication, etc.) the wisdom of the state diverting its investments to focus on the human capital sectors of health and education should be examined. It may still be appropriate for the state to invest in this infrastructure rather than leaving it to a market that may not find the associated discount rate high enough. Another problem with privatisation is that private companies may exploit captive segments of the market by raising prices. In fact, private monopolies/oligopolies need stronger regulation. Hence, there must be no privatisation without regulation. More generally, there is a need for regulation in all electricity market structures. Also, private capital uses high discount rates, leading to less capital-intensive short-gestation projects. Private ownership is neither the only nor even a central issue in improving performance. Privatisation may become a recipe for foreign capital to earn substantial and secure profits from ownership of large segments of the electricity sector. Thus far, the merits and demerits of privatisation have been considered almost exclusively from the standpoint of economic growth rather than from the perspective of sustainable development. If privatisation can guarantee economic efficiency, equity through widening access, empowerment, environmental soundness and concern for the long term, then it should be the option of choice. If, however, it is pursued in the belief that it is a magic wand, then hard reality and energy crises may compel a re-entry of the state. 11. A power sector ensuring public benefits and advancing sustainable development To achieve a power sector that ensures public benefits and advances sustainable development, several categories of measures may be required. These may include the following. Restructuring of the existing ESI and introduction of new players. In order to promote competition, it may be necessary to break up a monopoly generator into more than one generator and to permit IPPs and decentralised generators (grid-connected and standalone). This would necessitate guaranteeing grid access to IPPs or separation of grid transmission from generation and ensuring open transmission access to any generator. If these two actions are not taken, IPPs would insist on long-term PPAs which could lock noncompetitive prices in. ESCOs may have to be created to compete with utilities to supply efficiency
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improvements to consumers. Promotion of competition through creation/maintenance of level playing-fields (LPFs) for various types of players. In particular, there have to be LPFs for (1) foreign independent power producers and national IPPs, (2) IPPs and the more generators than one created by breaking up the monopoly generator, (3) centralised and grid-connected decentralised generators, (4) grid-based distributors and stand-alone decentralised generators, and (5) distributors and ESCOs providing efficiency improvements. Widening access and promoting equity. Several measures are required making it obligatory for generators and grid transmitters to supply distributors adequately to meet needs of small consumers, guaranteeing access to small consumers, preventing politically influential free riders (for example, irrigation pumpset owners) and making it obligatory for rural areas to be electrified through the grid-based distribution and/or standalone decentralised generators. Integrated resource planning (IRP). IRP is necessary to identify a socially beneficial mix of centralised generators, grid-connected decentralised generators, stand-alone decentralised generators and efficiency improvements. Such a mix will suggest what LPFs must be established and what must be the rules of the game that are prescribed. Research and development and demonstration. IRP will identify the technologies of centralised, grid-connected decentralised and stand-alone decentralised generation and of end-use efficiency improvements that can benefit from R&D and demonstration. These technologies must be assisted to go through the learning process. Environmental protection. Measures are required for internalising the externalities and correcting for the bias of the market discount rate against the long term. Pricing. Important measures are necessary for making electricity prices move towards true long-term marginal costs of generation + transmission + distribution, ensuring in the transition that consumer expenditures do not increase by making efficiency improvements and reduced consumption offset increasing prices and monitoring prices to ensure that they are not increased to skim profits. Protecting state-inspired stranded investments. Several massive state-sponsored investments in the electricity sector (e.g., nuclear power stations) have been stranded by newer technologies (e.g., gas turbines, cogeneration, etc.). Since they cannot withstand market forces, they may have to be provided a safety net and a transition to survival. The author can be contacted at: Tel/Fax: (+91)(80)3538426, E-mail: ieiblr@vsnl.com
Acknowledgement This paper was revised in response to the detailed and careful comments of Anton Eberhard and an anonymous referee to whom the author would like to extend special thanks. Notes 1. This paper is a modified version of the paper presented at the IEI-sponsored Workshop

on Electric Sector Reform and Public Benefits at the University of Cape Town, Cape Town, 10 April, 2000. 2. India is an exception in that its public sector company, Bharat Heavy Electricals Limited, manufactures electricity generation equipment and establishes power plants. 3. The initial move arose from a temporary shortage of meters. An expert suggested that, instead of meters, a flat rate could be introduced. What was forgotten was that once meters were removed, consumers would find it advantageous to resist their reintroduction later. 4. T&D losses are generally greater than in industrialized countries because of the long lines to remote rural areas with their small loads. 5. Apart from the commercial losses of 10 %, this 58 % includes other items that did not yield revenues (for example, IPS consumption that was free). 6. The utility after initial resistance to the charge that it was hiding T&D losses under IPS consumption decided to report the two items honestly. As a result, the T&D losses went up by 10 to 15%. It is now being unfairly criticised for this. 7. However, the role of the government does not disappear -- the government should still be able to set policy directions and put in place legislative and regulatory controls. 8. Involving all the stake-holders. 9. This was already done in Karnataka with the separation of the Karnataka Power Corporation Ltd. (KPCL) and KEB. 10. For instance, it could be argued that effective regulation is only possible when the potentially competitive components of the industry are separated from the natural monopoly components. 11. For instance, there is the belief that improved investment and operational performance is enhanced when owners and managers are forced to operate in a competitive environment and where the risk of decisions is passed to owners and managers -- not automatically to consumers. This belief must be justified on the basis of the costs and benefits compared with the costs and benefits of a vertically-integrated monopoly. 12. Reform was also driven by the hope that considerable economic value could be unlocked from the old publicly-owned utilities and that competition might result in more efficient use of capital (investment decisions) and in more efficient, lower-cost operations. 13. The road-map also highlights the need for integrated resource planning to reveal/prevent inefficiencies in investment and in operations that are likely to be passed onto consumers in terms of higher prices. 14. This may not be true for energy service companies (ESCOs) competing to provide an effective service for new customers. 15. It may be feasible to construct a competitive market of 4, 5 or more generators. References (See also Additional reading below.) Churchill, A.A., and Saunders, R.J., 1989. Financing of the energy sector in developing countries, 14th Congress of the World Energy Conference, Montreal, 14-22 September. Kumaramangalam, P R., 2000. So why should the common man pay for someone elses theft?, The Rediff Interview with the Minister for Power, http://www.rediff.com, January 20. Mason, M., Gilling, J., and Munasinghe, M., 1988. A review of World Bank lending for electric power, World Bank, Washington. Reddy, A.K.N., 1993. Problems arising from current approach to electricity planning, Workshop on Integrated Electricity Planning, International Energy Initiative, Bangalore, February 24. Reddy, A.K.N., 2001. The California energy crisis: lessons for India, Economic and Political Weekly, Vol. XXXVI, No. 18, pp. 1533-1540, May 5-11. Reddy, A.K.N. and DSa, A., 1995. Enron and other similar deals vs the new energy paradigm, Economic and Political Weekly, Vol. XXX, No. 24, pp. 1441-1448, June 17. Reddy, A.K.N., and Sumithra, D.G., 1997. Karnatakas power sector -- some revelations, Economic and Political Weekly, Vol. XXXII, No. 12, pp. 585-600, March 22-28. Sen Gupta, D.P., Sargunaraj, S., and Devi, S., 1984. Rural electrification: distribution systems for loss minimisation, Electrical India, March. Additional reading (These works comprise, together with the those explicitly cited in th text and listed in the References above, a guide to the main works that have influenced this paper, rather than an exhaustive list with due credit to all contributors to the subject. If there a preponderance in both lists of the work of the author and his collaborators, it is to present the work of the International Energy Initiative and not to imply that others have not contributed to the subject. These two lists provide a partial bibliography of relevant sources.) Anon, 1993. Seven sins of privatisation, The Human Development Report, United Nations Development Programme, New York. Anon, 1995. Commercialisation of the Power Sector in India, Administrative Staff College of India, pp. 155-174. Anon, 1995. Disgusted: many Britons see privatisation as a rip-off. The evidence says otherwise, The Economist, pp. 61-62, March 11.

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Anon, 1995. How to privatise: what the rest of the world can learn from the unpopularity of privatisation in Britain, The Economist, pp. 14-15, March 11. Anon, 1995. Incredible: many governments face the problem of how to regulate monopoly utilities. Britain thought it had the answer. Now it is not so sure, The Economist, p. 90, March 11. Anon, 1997. The Nordic model of power marketing, ASCI Bulletin on Private Power, Administrative Staff College of India, Vol. 3, No. 2, pp. 5-7, June. Anon, 1999. What now for the PPA?, ASCI Bulletin on Private Power, Administrative Staff College of India, Vol. 5, No. 4, pp. 4-7, December. Barthold, L.O., and Brown, J.J.W., 1966. Power pooling, International Science and Technology, pp. 66-78, February. BT-C&L Research Project, 1996. Privatization paradigms, Business Today, pp. 68-81, January 2-February 6. De Oliveira, A., and Mackerron, G., 1992. Is the World Bank approach to structural reform supported by experience of electricity privatization in the UK?, Energy Policy, pp. 153-163, February. De Oliveira, A., 1997. Electricity system reform: World Bank approach and Latin American reality, Energy for Sustainable Development, Vol. III, No. 6, pp. 27-35, March. Donaldson, D., and Wagle, D.M., 1995. Privatization: doing the doable, IFC Review, International Finance Corporation, pp. 17-21, Fall. Jefferies, D., 1992. Experience with restructuring and privatising electricity in England and Wales, CIGRE keynote address, Paris, pp. 1-13, August 30. Ministry of Power & Non-Conventional Energy Sources, Department of Power, 1991. The Electricity Laws (Amendment) Act, The Gazette of India, Part II, October. Ministry of Power, Government of India, 1996. Common Minimum National Action Plan for Power, pp. 1-8, December. Ministry of Power, Government of India, 1996. Indias Electricity Sector -- Widening Scope for Private Participation, pp. 1-144, September.

Ministry of Power, Government of India, 1997. Indias Electricity Sector -- Widening Scope for Private Participation, pp. 1-87, September. ODriscoll, M., 1998. Restructuring top 10 hurdles, www.energy.com 101998. Reddy, C.R., 1996. The pendulum swings too far, The Hindu, p. 20, May 27. Reddy, A.K.N., and DSa, A., 2000. Electricity regulatory commissions -- they must ensure public benefit, Business Line, p. 11, August 28. Reddy, A.K.N., 1997. Karnatakas power sector -- what is to be done, The Economic Times, p. 5, April 5. Reddy, A.K.N., 1997. Electrical energy subsidies and tariff changes -- some criteria for efficient use, Deccan Herald, p. 8, August 28. Reddy, A.K.N., 1997. Karnatakas power sector: from revelations to recommendations, The Hindu, p. 25, August 20. Reddy, A.K.N., 2000. Paying for power, The Hindu, p. 10, June 15. Sankar, T.L., 1995. The Power Sector in India: a Macroeconomic Perspective, Administrative Staff College of India. Srinivasan, T.N., 1995. Competition for Private Investment: Some Analytical and Regulatory Issues, pp. 1-25, December. Upadhyay, A.K., 2000, Power sector reforms: Indian experience and global trends, Economic and Political Weekly, Vol., XXXV, No. 12, pp. 1023-1028, March 16-24. Venkitaramanan, S., 1995. The politics of infrastructure: a contrarian view, Business Line, p. 20, July 31. Wilson, J., 1999. How restructuring works to create a competitive market, Enron presentation at meeting of Independent Power Producers Association of India, pp. 1-16, August. Wolfram, C.D., 1999. Electricity markets: should the rest of the world adopt the United Kingdoms reforms, Regulation, Vol. 22, No.4, pp. 48-53. World Bank, 1993. The World Banks Role in the Electric Power Sector: Policies for Effective Institutional, Regulatory and Financial Reform, World Bank policy paper, Washington.

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