First off the mark but last in the race – Odisha’s power sector is in the grip of a paradox. A power-surplus state, it is unable to provide its consumers uninterrupted supply at affordable cost. With production outstripping demand and plenty of low-cost hydropower at its disposal, it should have one of the lowest energy tariffs in the India. Yet energy tariff in Odisha is 13th among the states and climbing steadily for the last few years.

A pioneer in power sector reforms and in privatisation of the power sector, ironically Odisha’s transmission and distribution (T&D) sector is still in the red with unsustainably high losses and no funds to upgrade the system.

Odisha segregated its power sector from government control by appointing a regulator and privatising distribution as early as 1996 – seven years before the Electricity Act of 2003 ushered in power reforms in the rest of the country.

But while many other states have moved ahead by curbing losses and improving system performance today, Odisha remains a laggard in the power sector.
Losses in the distribution sector are high, quality of power is poor and in spite of regulations which mandate compensation for deficiency in service, minimum standards of service are regularly flouted. Voltage is low, power cuts are frequent and metering and billing is inefficient. Odisha’s aggregate technical and commercial loss (AT&C loss) at 41.89 percent is far higher than the national average of 26.15 percent. The state is yet to achieve 100 percent rural electrification as envisaged under the 12th plan. 

The main culprits are the private distribution companies (or discoms), which have neither infused funds into the system nor curbed theft of power that continues to bleed the sector white. Management of three of the four distribution zones in the state (NESCO, WESCO & SOUTHCO) is currently under Reliance Energy Limited (REL). The fourth is under CESU, which is run by an independent advisory board. CESU was taken over by the US-based power giant AES (American Electric Supply) in 1999 but the latter’s licence was cancelled when it failed to maintain supply.

PK Jena, the state energy commissioner-cum-secretary, squarely blames private discoms for high AT&C losses and for failure to invest a single rupee in system upgrade since they took over.

Technical losses in distribution are also high due to old and dilapidated distribution networks. To cut these losses, discoms need 100 percent collection and higher investment in information technology through AMR metering and LT-less systems. The former calls for crackdown on energy theft by domestic as well as industrial consumers, which is rampant in connivance with unscrupulous employees, while the latter requires heavy investment in men, materials and money.

“Power distribution is the final and most crucial link in the electricity value chain as it directly affects the consumer who pays for the supply. If this sector does not function efficiently and effectively, all efforts to make capacity addition in generation, transmission and distribution would be futile,” says KC Badu, former member of the Odisha Electricity Regulatory Commission.

PK Jena calls this a vicious circle. BC Jena, chairman of CESU, however, maintains that his company has brought down distribution losses by capital investment and deployment of franchisees in loss-making areas. Being a government-operated utility, CESU has been fortunate enough to receive funds from the central government under R-APDRP. However Cesu’s AT&C loss still hovers around 42.05 percent.

Jena says commercial losses can be reduced still further by effective support from ‘energy police stations’, which can deter power theft by implementing toughened anti-theft laws.

The state government has a major role to play in this. Though 30 energy police stations have been set up in 30 districts of the state and are being funded by the discoms, they are practically non-functional. The rate of arrest and conviction for energy theft is barely 10 percent.

AK Bohra, CEO of REL, says curbing theft is impossible without effective backup from law enforcement agencies.

DK Roy, former chairperson of OERC, also agrees that the state government cannot absolve itself. He points out the government has been utilising the sale proceeds of disinvestment, higher electricity duty and the impact of increased revenue without making investment in the sector. Discoms had inherited rundown systems and an inefficient and corrupt workforce from OSEB.

There was no financial support to the distribution sector for the first 10 years when handholding was essential. Neither did the distribution companies receive central government support under APDRP, which was liberally distributed to most other states undertaking power reform. It would not be an exaggeration to conclude that in Odisha the government has been the gainer from power reform by earning money and saving subsidies while consumers have been the losers by not getting improvement of service and reduction of rate of supply.

Moreover, despite a clear mandate in the Electricity Act for direct payment of subsidy to the discoms, lack of government support in providing targeted subsidy for consumers in low-income bracket and for rural electrification and expansion of the system as per government policy is the main reason for the financial infirmity of the sector. Every state government in India, with the single exception of Odisha, has provided subsidy to enable distribution utilities to maintain supply. The government also failed to provide governance support to enforce a law-abiding and bill-paying environment.

PK Jena, however, claims that the state government has been subsidising the sector by absorbing losses through Gridco. By doing so, it has cushioned the poor domestic consumers from regulatory price shocks for the last 15 years. Moreover, he says, after the 13th finance commission in 2012 the state government launched the capital expenditure (capex) programme to upgrade distribution networks. Under the scheme, the state government contributed
700 crore and private companies had to invest ' 12,000 crore.

He says ' 500 crore had already ben spent on procurement of materials and another ' 900 crore is to be spent by June 2014. The energy secretary says that about 6,000 transformers have been procured under the DESI scheme by the Odisha government to strengthen rural electrification.

According to him, 23 percent technical loss in distribution has been reduced by 10 percent through capital investment by the state government. However, the cumulative annual loss is to the tune of ' 700 crore a year. He says the government is trying to cut down the loss in two ways. One is through capex programme and the other by investment of ' 4,000 crore by distribution companies in three years. He adds that about 500 33/11 KV substations are being set up and this is the single largest programme in the country.

Hemant Sharma, chairman and MD of GRIDCO & OPTCL, admits that cumulative loss in the power sector is ' 4,500 crore as on September 30, 2013. This is surprising since by the end of 2012-13 Odisha was a power-surplus state with peak demand of 3,580 MW against an installed capacity of 4,900 MW. Sharma says GRIDCO had earned a profit of ' 10 crore in 2012-13 and in the first six months the trading margin was more than ' 400 crore. The trading utility is currently trying to sell surplus power outside the state to offset losses and pass on the benefit to the consumer, he says.

“Gridco’s problem is surplus power management, as we are unable to sell it. The demand is low at present and is unlikely to go up suddenly,” the Gridco CMD says. There are also transmission bottlenecks in evacuating surplus power. There is no connectivity to the southern range and congestion in the western and northern range. The transmission corridors are yet to be ready so the corporation cannot do distress sale at a loss, he says.

Sharma, too, attributes loss in the power sector due to poor performance of the discoms and deteriorating revenue collection. The outstanding arrears of the discoms are to the tune of ' 1,355 crore for the current year. Due to lack of investment by discoms there is mounting AT&C loss. It is not possible to provide quality power supply as the distribution system has not kept pace with the demand, he points out. The distcoms are not paying their power purchase bills, forcing Gridco deeper into the red, so an escrow arrangement has been created which is a security mechanism to divert revenue for meeting power purchase requirements of the state.

Roy, however, says reform in Odisha has achieved reasonable success despite the widespread perception that very little has been achieved. T&D loss, he says, is a critical element of reform and because failure to achieve the desired result in this area has given a bad name to the reform programme and has overshadowed the tremendous success in generation and transmission. The failure in arresting the aggregate technical and commercial loss is due to failure of the distribution companies in bringing about managerial efficiency.

Roy is also critical of the role of the regulators. In a regulated sector where the price of electricity is fixed at an unremunerative level by the regulator, the company loses more money in a growing business environment. OERC has allowed tariff only on normative loss level and not actual loss, and hence discoms have not been able to recover cost and they are not being allowed a reasonable profit. The distribution sector is in a vicious trap.
The commission does not allow full recovery of cost because the discoms do not achieve the targeted improvement criteria, including attainment of reduced loss level specified by the commission.

The tariff had not seen upward revision in at least seven years and tariff revisions have been at a reasonably low level since inception. However, in recent years the tariff levels have been on an upward spiral. Power tariff has gone up by 50 percent in the last four years alone. Combined with poor quality of power and inefficient service, the basic aim of providing reliable supply at affordable price has been undercut.

It should be the regulator’s goal to bring about economy, discipline and technical improvement so that tariff does not increase. The regulators have succeeded in putting a robust regulatory apparatus in place and have achieved their aims in improving, transparency, governance, consumer issues and other parameters but have failed to achieve the financial objectives of bringing about economy in supply, in introducing competition and in making the sector future ready.

Apportioning blame, however, is not the solution. Unless all stakeholders – the regulator, the government, and transmission & distribution utilities – meet their obligations, sectoral reform will not serve its purpose and ultimately the price of this inefficiency will be borne by consumers, consumer activist BK Mohapatra says.

Milestones of Odisha Power Sector Reforms

The state government enacted the Orissa Electricity Reform Act, 1995 which came into force with effect from April 1, 1996. This called for the unbundling of operations of generation, transmission & distribution which were then corporatised. Later trading also became a separate function.
Initially, transmission & distribution activities of the erstwhile Orissa State Electricity Board (OSEB) along with the related assets, liabilities, personnel and proceedings were vested in GRIDCO. Hydro-generation activities of OSEB, along with related assets, liabilities, personnel and proceedings were vested in the Odisha Hydro Power Corporation (OHPC). The thermal generation units of the state government were vested in the Odisha Power Generation Corporation, which was disinvested with 51 percent stake going to the American Electric Supply Company.
In order to privatise the distribution functions of electricity in the state, four distribution companies – Central Electricity Supply Company of Orissa Limited (CESCO), North Eastern Electricity Supply Company of Orissa Limited (NESCO), Southern Electricity Supply Company of Orissa Limited (SOUTHCO) and Western Electricity Supply Company of Orissa Limited (WESCO) were incorporated under the Companies Act, 1956 as separate corporate entities. Through a process of international Competitive Bidding (ICB), the four distribution companies were privatised during 1999.
AES took over management of the Central Electricity Supply Company (CESCO) with 51% shares and Reliance Energy Ltd of the three remaining distribution circles, NESCO, SOUTHCO and WESCO in the same year. Later AES distribution license was revoked due to inability to meet conditions and the company was renamed as Central Electricity Supply Corporation (CESU) and placed under an advisory board.


Revenue gap in tariff collection

For every 100 units the discoms purchase from the Grid Corporation of Odisha (GRIDCO), only around 59 are being billed and revenue collected for 58. Tariff is fixed on the benchmark set by the state regulator and not the actual loss. And since the regulator fixes the tariff at a normative loss of 21.7%, the distribution companies have to meet the purchase price of 100 million units (MU) at an average sale price of 58 MU besides meeting, salary, pension, operation and maintenance, debt servicing, administration and general expenditure costs. This leaves a revenue gap of 15%, which the distribution companies are unable to collect.

As a result, there is no capital for investment in system upgradation, which is necessary to improve quality and quantity of power provided to the consumer.

(This article appeared in the December 1-15, 2013 issue of the magazine)