1 State Level Power Sector Reforms in India: A Case Study of Odisha Dr. Asit Ranjan Mohanty 1 Dr. Suresh Kumar Patra 2 Abstract The electricity distribution sector is critical for entire value chain for the electricity sector as it deals with the end consumer and as it provides the vital link between the end consumers and the other segments of the electricity sector. In India, the Transmission & Distribution loss (T&D loss) and aggregate technical & commercial loss (AT&C loss) are still very high. The reform measures envisaged since 2002 through privatization model in India in the distribution sector is yet to be crystallized. In India, Odisha being the first state to kick start the privatization model in 1996 is the worst performer regarding very low billing and collection efficiency. As a result, the AT&C loss is one of the highest in India. This paper empirically establishes that AT&C loss Granger causes revenue realization per unit (RPU). It is also confirmed that lower AT&C loss will raise the RPU. Higher billing and collection efficiency have a positive effect on RPU, though; billing efficiency has more positive impact on RPU as compared to collection efficiency. The empirical evidence suggests that tariff hike for the consumers have a negative correlation with RPU and positive correlation with AT&C loss. Keywords: AT&C Loss, T&D Loss, Billing Efficiency, Collection efficiency, Random Effects Model, VAR Granger Causality/Block Exogeneity Wald Tests 1 Professor in Finance, Xavier Institute of Management, Bhubaneswar, E-mail: [email protected]. 2 Research Associate, Centre for Fiscal Policy and Taxation, Xavier Institute of Management, Bhubaneswar, E-mail: [email protected].
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State Level Power Sector Reforms in India: A Case Study of Odisha
Dr. Asit Ranjan Mohanty1
Dr. Suresh Kumar Patra2
Abstract
The electricity distribution sector is critical for entire value chain for the electricity sector as it
deals with the end consumer and as it provides the vital link between the end consumers and the
other segments of the electricity sector. In India, the Transmission & Distribution loss (T&D
loss) and aggregate technical & commercial loss (AT&C loss) are still very high. The reform
measures envisaged since 2002 through privatization model in India in the distribution sector is
yet to be crystallized. In India, Odisha being the first state to kick start the privatization model in
1996 is the worst performer regarding very low billing and collection efficiency. As a result, the
AT&C loss is one of the highest in India. This paper empirically establishes that AT&C loss
Granger causes revenue realization per unit (RPU). It is also confirmed that lower AT&C loss
will raise the RPU. Higher billing and collection efficiency have a positive effect on RPU,
though; billing efficiency has more positive impact on RPU as compared to collection efficiency.
The empirical evidence suggests that tariff hike for the consumers have a negative correlation
Model, VAR Granger Causality/Block Exogeneity Wald Tests
1 Professor in Finance, Xavier Institute of Management, Bhubaneswar, E-mail: [email protected]. 2 Research Associate, Centre for Fiscal Policy and Taxation, Xavier Institute of Management, Bhubaneswar, E-mail:
The T&D loss has statistically significant negative impact on RPU (Table 3). The T&D loss
is one minus billing efficiency. Since the causality runs from billing efficiency to RPU, it is
implicit that T&D loss will cause RPU. Therefore, the impact of T&D loss on RPU is estimated.
To establish the magnitude of the impact of T&D loss on RPU, Random effects model is carried
out, and Hausman test validates the appropriateness of Random effects model (Annex VI & VII).
If the T&D loss is reduced by 20%, then RPU will increase by Rs.1.27.
Reduction in both AT& C loss and T&D loss improves the efficiency of the distribution
sector which results into higher RPU. Mostly, the reduction in AT&C loss and T&D loss raise
the both billing and collection efficiency. If the impact of T&D loss and AT&C loss are
compared concerning their impact on RPU, then decline in AT&C loss has more positive impact
on RPU for as against the decline of T&D loss by the same magnitude. Therefore, it can be
derived that AT&C loss is a comprehensive measure as compared to T&D loss as it capture the
impact of collection efficiency and as a result, it impacts on RPU is more.
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Tariff Hike, AT&C Loss, and RPU
Often, the DISCOMs suggest the regulator of the electricity hike the tariff applied to the
consumers to cushion against higher AT&C loss. The idea behind the higher tariff is to increase
the revenue collection from the consumers and to reduce AT& C loss. Since 1990-91, Odisha
Electricity Regulatory Commission has raised the consumer tariff eleven times, out of which on
two occasions, there has been a downward revision of tariff only (Annex – VII). To find out the
correlation between tariff hike, RPU, and AT&C loss, the correlation matrix is prepared by
taking into account the percentage change in tariff, the percentage change in RPU and change in
AT&C loss from 1990-91 to 2012-13. The correlation Matrix is presented below.
Table 4: Correlation Coefficient Matrix
Variables Change in RPU Tariff Hike Change in AT&C loss
Change in RPU 100%
Tariff Hike 19.16%
(0.87)
100%
Change in AT&C loss 16.66%
(0.75)
30.34%
(1.4)
100%
Note: ‘t’ statistics are given in the parentheses.
As inferred from the table 4, the change in tariff has statistically insignificant positive
correlation with the percentage change in RPU implying that tariff hike has no impact in raising
RPU. Tariff hike and rise in AT&C loss are positively correlated at 10% level of significance,
indicating that despite tariff hike, AT&C losses are not reduced, rather it increases. Therefore,
tariff hike is not a solution either reducing AT&C loss or increasing RPU in distribution sector of
Odisha. It raises the concern that tariff hike could have encouraged the consumers for more
unmetered and illegal electricity consumption to avoid paying higher electricity charges.
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4. Conclusion
The primary objective of the Electricity Act, 2003 has been to promote competition and to
reduce losses that would enable the consumers to have the best possible price and quality of
supply by unbundling the unbundling of the state electricity boards (SEBs) into separate power
production, transmission, and distribution companies. In 2002, the Accelerated Power
Development and Reform Program (APDRP) was created to fund the DISCOMs to improve
billing and collection efficiency for bringing down the AT&C loss level to 15% level.
Consequently, R-APDRP (Restructured-APDRP) in 2008 was introduced focusing be loss
reduction on a sustainable basis and incentivizing the DISCOMs who are maintaining AT&C
loss level at 15% level for five years. However, at the end of 2012-13, the T&D loss is at 23.40%
level in India. At the end of 2010-11, the average T&D loss an international level is 8.9% as
compared to 23.97% T&D which has placed India as one of the five highest countries in the
world concerning T&D loss. In 2010-11, the T& D loss for Odisha is reported at 39.55% which
is highest in India. Hence, the reform measures envisaged in EA, 2003 to bring in efficiency in
electricity distribution sector of India has not been successful. In India, the state of Odisha is one
of the worst performers in distribution sector with yearly average T&D loss at 42.20% during
1996-97 to 2012-13 as compared to the national average of 28.17%. The AT& C loss is recorded
at 45.75% in Odisha as compared to national average of 30.63% during 2001-02 to 2012-13. The
difference in AT& C loss and T&D loss during the 1990-91 to 2012-13 and the post-reform
period is proved to be statistically insignificant. Though the state of Odisha was the first state in
India to initiate the reforms process in electricity distribution sector by unbundling the state
electricity board into four privatized DISCOMs in the year 1996, the inefficiency persists,
indicating the failure of privatization model. The mean value of billing and collection efficiency
in Odisha is calculated at 59.44% and 88.73% respectively, during 1999-2000 to 2012-13 which
is significantly lower than all India average of BE and CE at 71.21% and 96.49% respectively.
CESU has the both lowest mean value of BE and CE among the four DISCOMs during this
period. Hence, CESU is emerged as the most inefficient DISCOM in Odisha during 1999-2000
to 2012-13. Since the inefficiency in the DISCOMs in Odisha is because of very low billing and
collection efficiency, it has resulted in very low the revenue realized per unit of electricity
consumed at Rs.1.70 from 1999-2000 to 2012-13. The average RPU of the four DISCOMs in
Odisha is reported at Rs.1.75, Rs.2.08, and Rs.2.54 as against all India average RPU of Rs.2.68,
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Rs.3.03 and Rs.31 respectively in 2009-10, 2010-11 and 2011-12. Among the four DISCOMs in
Odisha, CESU has the lowest average RPU during the period 1999-2000 to 2012-13.
It is established that causality runs from AT&C loss and billing efficiency to RPU. From the
random effects model, the impact of AT& C loss and T&D loss (one minus billing efficiency is
T&D loss) is captured regarding magnitude and direction. It is empirically proved that reduction
in both AT&C loss and T&D loss will raise RPU. Since the decline of these losses increases both
the billing and collection efficiency which results in system improvement and as a result, RPU
improves. However, reduction in AT&C loss has more positive impact on RPU as compared to a
reduction of T&D loss by the same magnitude. This is because of AT&C loss captures the
impact of collection efficiency besides billing efficiency whereas T&D loss only captures the
impact of billing efficiency. Therefore, AT&C loss is a comprehensive measure of efficiency
(inefficiency) as compared to T&D loss. It is also established that increase in tariff to the
consumers to plug losses in the distribution sector does not reduce the AT&C loss, rather the
AT&C loss increases. Besides, the hike in tariff does not have a significant impact in raising
RPU.
AT&C loss is a comprehensive and better metric to evaluate the commercial performance of
the distribution sector. The AT&C loss may be taken as a policy variable and RPU as target
variable to improve the performance of the distribution sector. For minimizing AT&C loss,
maximization of both billing efficiency and collection efficiency should be the policy
intervention. Relatively, improvement in billing efficiency should get more attention. Billing
efficiency has both technical and non-technical components. To improve both the components,
capital expenditure regarding investment in infrastructure is essential. DISCOMs should also
give importance to operation and maintenance (O&M) expenses to improve part of the non-
technical component of billing efficiency and collection efficiency. O&M costs are short term in
nature which addresses the consumers’ day to day problem immediately. Billing and collection
efficiency also aim at optimizing billing coverage ratio15 and collection coverage ratio16.
Reducing AT&C loss will augment the revenue realization and, will address the financial losses
incurred by the DISCOMs. Tariff hike for the consumers should not be taken as a policy
measure as it is counter- productive effect on the system. Therefore, minimization of AT&C loss
15 Billing Coverage Ratio is defined as numbers of billed consumer about live consumers. 16 Collection Coverage Ratio is defined as numbers of collected consumer about live consumers.
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would raise the revenue realization and, would ensure supply reliability and quality power supply
to the consumer, as a result, there will be scope to reduce the consumer tariff further.
References
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