This case study looks at how India implemented ambitious reforms in the electricity sector following the landmark Electricity Act of 2003, with mixed success across different states. It highlights how challenges in implementation resulted from fragmented lines of authority, and a failure to instil a culture of performance in a number of state electricity boards.
In 1991, the amendment to the 1948 Electricity Supply Act opened India’s power sector to private participation in power generation. This aimed to address power shortages and financial losses, and was part of a broader programme of economic reforms designed to address India’s balance-of-payments crisis. In the face of crippling power shortages, states restructured their vertically integrated state electricity boards (SEBs) and established state electricity regulatory commissions (SERCs) to improve performance. But state utilities’ commercial performance continued to deteriorate and, by 2002, total SEB debt had risen to $8.5 billion, threatening their financial solvency.53 In response, the Electricity Act (EA) of 2003 was designed to create a new framework for the power sector. It delicensed thermal generation, introduced open access in transmission and distribution, and mandated the unbundling and corporatization of SEBs, with the aim of creating a more commercial culture.
Despite the EA’s considerable achievements in boosting installed capacity, expanding the role of renewables, and creating an integrated transmission system, some have described the power sector as in a state of “crisis”, with fuel shortages, a non-remunerative retail tariff regime, and high aggregate technical and commercial losses defined as the root causes.54 Power sector losses, excluding state government support (subsidies) to the sector, amounted to $11.6 billion in 2013-2014,55 equivalent to nearly 14% of India’s gross fiscal deficit, and around 0.6% of GDP.56 India is the worst performing of the E7 nations on the EAPI, ranking 95th, and the poor performance of its power sector is a key contributing factor – it ranks in the bottom quartile (93rd) for the quality of its electricity supply. The lack of reliable power is a leading concern for industry and a constraint to growth.
The challenges in India’s power sector are seen not as a failure of the EA’s design, but of its implementation. While the potential of the sector overall remains unrealized, several states and utilities have made significant progress. With all states operating under the terms of the same regulatory framework, the differentiating factor in their performance has been the extent of adherence to the EA’s terms. A number of common challenges have been highlighted:57
- While unbundling the SEBs has progressed quite well on paper, their actual separation and functional independence is considerably less than it appears.
- Boards remain state dominated, lack sufficient decision-making authority, and are rarely evaluated on performance. Utility boards tend to have more government and executive directors, and fewer independent directors, than recommended under the corporate governance guidelines issued by the Department of Public Enterprises. Only 16% of the 69 utilities studied have the recommended share of independent directors, and several lack them altogether.
- A lack of accountability, limited autonomy, and constrained technical capacity have restricted the ability of SERCs to create an independent, transparent and unbiased governance framework for the sector that balances consumer and investor interests. SERCs have been established in all states but have generally struggled to achieve true autonomy from state governments
In 2000 the Gujarat Electricity Board (GEB) was one of India’s worst-performing power utilities—a drag on the government’s finances and the state’s development. A decade later, the Gujarat Urja Vikas Nigam Ltd. (GUVNL) the holding company, comprising six interlocked companies, is a model public utility, winning innovation and customer service awards. It is efficient, agile, and profitable. State leaders gave full support to the turn-around. While power purchase remained centralized even after the GEB was unbundled, authority and decision-making were decentralized to constituent companies, each with its own corporate office and a professional board. Politicians were replaced by bureaucrats and professionals on the board of GUVNL, the holding company, as well as the boards of its constituent units, while the very best generalist administrators were appointed to the top management of the unbundled utilities. Strong political backing was given to the staff of the power distribution companies (discoms). Competition among discoms contributed to galvanizing employees around corporate goals. And a culture of performance management around key performance indicators (KPIs) further enhanced staff participation.58
This case study provides some insights into how ineffective state governments can serve to obstruct the reform process and lead to unintended consequences of reform. On the other hand, political will and leadership has the potential to drive through reforms in a substantive manner, as shown through the success story of Gujarat. With the past chief minister for Gujarat state now prime minister of India, there is hope that these lessons will be heeded for today’s ongoing regulatory changes to India’s electricity sector.