• OUTLOOK ARENA
  • SECTOR FOCUS
  • FEBRUARY 26, 2000

Power reforms happening or not

We keep hearing of power sector reforms and the great efforts of the power ministry in speeding these up. However, are these really happening ? As politics has played a dominant role in the Indian power industry the reforms process had been delayed and this lead to stagnancy in this sector. Politicians have been averse to privatisation in the power sector in the past mainly to keep vote banks intact, and they are not concerned if darkness and gloom surround thousands of people's lives. Also many foreign power companies who had initially shown their intention to enter the Indian power industry had lost interest. The main reasons being delays in the project to start operations, corruption and too many bureaucratic hitches. Luckily things are now moving in the right direction albeit very slowly…

The recent unbundling of some state electricity boards (SEBs) and the separation of the power functions into generation, transmission and distribution of the SEBs with the aim of corporatising them is a case in point. A recent example of this is Uttar Pradesh State Electricity Board which has been trifurcated into corporations handling generation, transmission and distribution separately. This was achieved inspite political pressures and the 11 day strike by workers of the UP SEB in January'2000 against privatisation.

Other states too have managed or are in the process of privatisation: Orissa which have has fixed stringent loss reduction targets for its newly formed distribution companies, the Gujarat government is considering restructuring the Gujarat Electricity Board by retaining the board as a transmission company and plans to create separate companies for generation and distribution, the Bengal government has decided to give blanket permission for setting up captive power plants to meet 100% of a unit's requirement till now these were allowed permission on a case by case basis after the issuance of a no object certificate from CESC or WBSEB. In a recent news article the Maharashtra government too plans to unbundle the Mahashtra State Electricity Board (MSEB) by dividing the functions to be handled by separate legal entities.

Maharahtra leads state-wise sales
by consumers as of 31st March 1996.

Another positive, which came in April '99, was for the returns of power licensees. This was earlier linked to the bank rate, however since April'99 the returns of the licensees have got delinked from the bank rate. This is a positive as now the profits of power companies are not dependant to changes in the bank rate.

The sops given to the power industry in the last budget were more for power generation companies than for power transmission and distribution companies. Transmission and distribution companies still continue to attract MAT as well as higher customs duties as compared to generation projects. However unlike the previous years the power ministry and industry are of the opinion that if any sops should be given in this year's budget they should be for transmission and distribution sectors where reforms are very essential.

One of the biggest wishes that transmission and distribution companies have is to get 'infrastructure status' in the coming budget. Another area in which they want a change is in the duty structure of fuels. There is a wide variation in the duties for different fuels, the industry is of the view that these should more or less at the same level so as to allow the power developers to choose the most suitable fuel. For example Naptha enjoys a duty of 5% while LNG has a duty of around 30%. Hence the industry wants a more rationalised duty structure so as power companies can choose the most appropriate type of fuel for the project instead of the one that is the most economical.

The industry also feels that the government should introduce the licensee business concept for cities and towns, just as is being practised in Mumbai by TEC/BSES. Under IPP the returns could be higher for a company but it has to face the financial risk of the SEBs. Whereas under Licensee the returns maybe lower but extra costs can be more easily recovered from the customers. All or some of these measures if adopted in the coming budget would imply that the government is serious of continuing the much needed reforms in the power sector.

This would encourage more private and foreign investment in the power transmission and distribution sector. As this part of the power sector suffers from many losses due to distribution and transmission it is necessary for the government to encourage these companies to grow by giving them other incentives. Private participation is necessary in transmission and distribution of power to reduce losses and bring it down to international levels.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407