Download the latest issue of Business Today Magazine just for Rs.49
Gujarat's power sector turnaround story

Gujarat's power sector turnaround story

Gujarat's power sector was in a shambles in 2001, when Narendra Modi became chief minister. A decade later it is in the forefront of states that have carried out sweeping power reforms, as a result of which it now has surplus power.

Executive Summary: Gujarat's power sector was in a shambles in 2001, when Narendra Modi became chief minister. A decade later it is in the forefront of states that have carried out sweeping power reforms, as a result of which it now has surplus power. This case study details the key steps the government took to bring about the change, which was carried out in a manner fair to all stakeholders.
When Narendra Damodardas Modi took over as chief minister of Gujarat in October 2001, he found the state's power situation grim. The Gujarat State Electricity Board, or GSEB, had posted a loss of Rs 2,246 crore for 2000/01, on revenues of Rs 6,280 crore. Interest costs alone were Rs 1,227 crore. Transmission and distribution, or T&D, losses were a substantial 35.27 per cent, and load shedding was frequent. GSEB had no funds to add generation capacity on its own, nor was it able to persuade the private sector to invest.

Reforming the GSEB, thus, became one of Modi's top priorities. "He feared that a bankrupt power utility could derail his vision for the state," says Saurabh Patel, Gujarat's Industries and Power Minister, then as now. "He knew electricity is crucial for growth."

Modi's first step was to identify a bureaucrat capable of taking on the enormous challenge. He chose Man- jula Subramaniam, a Gujarat cadre officer, who had been joint secretary in the prime minister's office from 1993 to 1998, playing a key role in the country's liberalisation, and appointed her Chairperson of GSEB and Principal Secretary, Energy and Power.

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

Her next step was more radical. Rarely before had electricity boards renegotiated power purchase agreements, or PPAs, already signed with private players. But having examined the PPAs her board had entered into, Subramaniam felt the heat rate - a measure of generator efficiency - had been inflated by the power suppliers, who were consequently charging more than they should have.

Energy drought threatens India's growth Though the private players initially resisted, the government-constituted committee set up for the process stood firm, and ultimately, after more than 18 months of hard bargaining, got the rates lowered, leading to a further saving of Rs 675 crore in 2002/03 and Rs 1,000 crore in 2003/04.

Simultaneously, Modi's government began plugging the leakages in distribution. Power thefts in Gujarat then ranged between 20 per cent in urban areas and 70 per cent in rural regions. It passed a law against power thefts and set up five police stations across the state, solely to nab such thieves. Stringent action began against those who ran up large power bill arrears, including disconnecting their supply.

Unmetered power supply, which some rural areas were getting was stopped altogether, with GSEB entering into a structural loan re-adjustment with Asian Development Bank to fund the installing of meters.

Subramaniam also found that many employees, disturbed by widespread talk of power reforms, feared for their jobs, and were feeling somewhat alienated from GSEB. She appointed a consultant to suggest ways to win back their loyalties.

From mid-2002, armed with the consultant's suggestions, the board began its special effort to reach out to employees. It started training programmes at all levels to reassure them that while people may be redeployed, no one would be laid off. Senior officials increased their interactions with the staff, including holding 'town hall' meetings where they shared details of the board's financial position and encouraged employees to ask questions. An internal newsletter was also started.

Once assured of retaining their jobs, the employees themselves began discussing possible reforms. A 'reforms progress management group', comprising GSEB employees, was also set up.

It was now time for the unbundling. In May 2003, the Gujarat government passed the Gujarat Electricity Industry (Reform and Reorganisation) Act, which divided the GSEB into a holding company, a power generation company, a power transmission company and four distribution companies. This enabled better management and more efficient operations.

Another key reform was the separation of the feeder line that supplied power to the rural areas into two: one to supply power for agricultural needs and other for household and other needs. This was part of the Jyoti Gram Yojna, a scheme Modi announced in 2003 to supply round-theclock power to villages.

"A single feeder has its limitations," says Mukesh Puri, Managing Director of the holding company, Gujarat Urja Vikas Nigam. "The villages got power for only 12 to 15 hours a day, often of poor quality and at odd hours."

Since the tariff for power used for agricultural purposes was much lower, many used this subsidised supply for their household needs as well, resulting in huge losses for GSEB.

The Man behind Gujarat's growth "The chief minister asked us to have separate feeders, which was a path-breaking step no state had attempted before," Puri adds, "The results were good." Though many rural residents had higher power bills to pay than in the past, they cooperated with the government, once they found they were assured of uninterrupted, better quality power.

A study by Indian Institute of Management, Ahmedabad has estimated that the project saved the state capital expenditure of around Rs 23,000 crore, or about 5,000 megawatts, or MW.

The Modi government has also taken scrupulous care to ensure that the state electricity regulator - unlike in most states - remains truly independent of political pressures. The regulator has, thus, been able to revise power tariffs every year, which ensured the state bridged the gap between the average cost of supply and what users paid for it.

The result? The state electricity board posted its first profit of Rs 203 crore - after tax - in 2005/06. By 2010/11, net profit had risen to Rs 533 crore, while T&D losses had fallen to 20.13 per cent. Tariff collection efficiency is close to 100 per cent. Private players, once reluctant to invest in Gujarat's power generation, are now rushing in: of the power plants with a total installed capacity of 16,945 MW coming up in the state, 6,864 MW - or roughly, a third - is by the private sector. "Abundant power is a major USP of our state today," says minister Patel.

A few worries remain. Though T&D losses have fallen, they are still higher than those of the southern states such as Andhra Pradesh, Karnataka, and Tamil Nadu. The cost of power in Gujarat has been traditionally high, and remains so.

"Our share of hydel power is very low and our power plants are very far away from coalfields," says Puri. "At times the cost of transporting coal equals the cost of the coal." A sizeable proportion of its power - around 29 per cent - also comes from gas-based plants, and the high cost of gas has forced scaling down the operations of some of them.

But ultimately, it is a remarkable transformation for a state which was power deficient barely a decade ago, but now has a surplus of 2,114 MW and a vibrant energy sector.

{mosimage}Where there is a will

The Gujarat experience clearly shows what strong political will to reform the electricity sector can achieve. Of the many innovations the state tried, the separation of feeders for supply towards agricultural use was a master stroke. It not only helped farmers get quality power at fixed time but also ensured that leakages were curtailed. It enabled measurement of the power used for agricultural purposes as well, so as to arrive at the exact quantum of subsidy that needs to be reimbursed to the distribution companies. Today feeder separation is being adopted by many others states.

Also the manner in which pilferage was tackled is interesting. I know how the CEO of a state-run distribution company that supplied to one half of a particular city in Gujarat was fully empowered to take all measures to match the low T&D losses of a private sector company that supplied to the other half of the city. The state has also been proactive in promoting renewable energy. By offering to buy solar power at `12.50 per unit, the state will soon see over 350 MW of power from solar energy.

It is true that the cost of electricity is higher in Gujarat but that is because the states electricity regulator has proactively raised prices as costs of generation rose. This makes sense in the long term.

As can be seen, companies foraying into Gujarat are not too concerned about paying a couple of rupees more for consistent and good quality power. The challenge that the state faces is on the T&D loss front where there is still scope for reduction by four percentage points or so. More needs to done there.

Kirit S. Parikh is Ex-member of Planning Commission, and Chairman, Integrated Research and Action for Development

{mosimage}Shining contrast

Commercial losses and poor health are hallmarks of the power utilities of states in India. The distribution companies, or discoms, incurred an accumulated loss of Rs 75,000 crore in 2008/09 which further rose to Rs 106,341 crore in 2009/10. The share of costs recovered has deteriorated from 82.5 per cent in 2006/07 to 77 per cent in 2008/09. The dismal state of affairs is due to continued political pressure opposing reduction in subsidies and efforts to lower distribution losses. Most state utilities have not revised tariffs for a number of years. The state regulatory commissions are independent only on paper and are subject to political compulsions.

Against this backdrop, the performance of Gujarat in turning around the GSEB is noteworthy. Timely tariff revisions have made the sector viable enabling the state to set up adequate generation capacity. The state is in a supply easy position with which it has been able to meet the requirements of the farm sector. It has also been able to meet the subsidy requirements of discoms on this account, which many states have not been able to do.

Gujarat has been able to achieve the growth with a mix of steps that have both commercial and social overtones, with stress on credible implementation and realising rational user charges. The political will along with the turnaround strategy has produced the expected benefits. The worrying signs are high T&D losses, which are still over 20 per cent, and inadequate transmission links. These need to be fixed. The demand for revision of tariffs of utilities, which are using imported coal and have increased costs, if not heeded, could derail the capacity addition plans. However, the track record indicates that Gujarat has the ability to attend to the concerns.

V. Raghuraman is former Principal Analyst, Energy, Confederation of Indian Industry

Published on: Jan 31, 2012, 12:00 AM IST
Posted by: Navneeta N, Jan 31, 2012, 12:00 AM IST