Mitigating AT&C losses

The government is betting big on the Restructured Accelerated Power Development Reforms Programme to plug power losses.

The supply chain for power consists of generation, transmission and distribution. While significant strides have been taken to introduce reforms in the generation leg, a lot is left to be done in the transmission and distribution legs.

Massive Aggregate Transmission and Commercial (AT&C) losses have long crippled the financial viability of State Distribution Companies (SDCs). To address this problem a targeted funding mechanism was introduced for the first time in 2003 in the form of the Accelerated Power Development Reforms Programme (APDRP). Its key objectives were to reduce AT&C losses, improve customer satisfaction as well as financial viability of the SDCs, adopt a systems approach and introduce greater transparency.

Unfortunately, the benefits under the first APDRP were not linked to demonstrable performance and it failed glaringly to achieve its goals. In several cases, funds under the first APDRP were utilised without taking cognisance of the need to reduce AT&C losses. To illustrate, in the state of Bihar, significant amounts of money received under the first APDRP were spent on sophisticated equipment for substations, while very little money was spent on procuring meters to measure actual consumption of electricity. In fact, AT&C losses increased in Haryana, Jharkhand, Punjab, Rajasthan and Uttar Pradesh under the first APDRP. It was in this backdrop that the Restructured APDRP (R-APDRP) was conceived in September 2008.

Key features

Funding under R-APDRP is contingent upon actual, demonstrable performance in terms of sustained reduction of AT&C losses. R-APDRP seeks to commence with tackling the problem of un-metered supply and lack of proper data acquisition systems, followed by system up-gradation and modernisation of equipment. Proposals under R-APDRP will be considered in two phases. In the first phase, proposals for establishing reliable and automated systems for the sustained collection of accurate baseline data and IT applications for energy accounting/auditing and IT-based consumer service centres will be considered for funding. In the second phase, proposals for strengthening/upgradation of power distribution will be considered.

Coverage

The Power Finance Corporation (PFC) has been appointed the nodal agency to run R-APDRP under the power ministry. It will cover urban areas with a population of more than 30,000 (10,000 in case of special category states).

Funding

For proposals under the first phase, 100 per cent funds for approved projects will be provided through loans from the Central government on terms decided by the finance ministry. The loan shall be converted into a grant upon the establishment of the required systems (as verified by an independent agency), and interest on the converted loan will be capitalised. But, no conversion to a grant will be made in case the proposal is not implemented within three years from the date of sanction.

For proposals taken up under the second phase, conversion into grants will take place annually, based on the relevant AT&C loss figures as on March 31 of that year (duly verified by an independent agency appointed by the power ministry). Up to 50 per cent (90 per cent for special category states) of the loan shall be converted into a grant in five equal tranches on achieving 15 per cent AT&C loss. If the SDC fails to achieve or sustain the 15 per cent AT&C loss target in a particular year, that year’s tranche of conversion of loan to grant will be reduced in proportion to the shortfall.

The scheme also envisages incentives for SDC staff in towns where AT&C losses are brought below 15 per cent. The funding corpus will be Rs 515.77 billion. Initially Rs 500 billion will be provided as a loan from the Central government or financial institutions, out of which an estimated Rs 300 billion is expected to be converted into grants.

Eligibility criteria for funding

Funding is subject to the following eligibility criteria: (i) Constitute the State Electricity Regulatory Commission; (ii) Achieve the following targets of AT&C loss reduction: For SDCs having AT&C loss above 30 per cent, reduction by 3 per cent per year; and for utilities having AT&C loss below 30 per cent, reduction by 1.5 per cent per year.

Criticism of urban bias

While R-APDRP has generally been hailed as a step in the right direction, it has also been criticised for its urban bias — its coverage being limited to urban areas. Given the emphasis on rural electrification by the government, limiting the coverage to urban areas is indeed surprising.

Challenges — lack of trained manpower

The lack of trained manpower to implement this ambitious programme is one of the biggest challenges faced by the government and the SDCs. External IT consultants are being appointed by the various SDCs to bridge this capacity gap. Given the size of R-APDRP, this may be a huge business opportunity for the IT sector. While our IT sector is robust and well-diversified, the availability of requisite expertise to carry out such an extensive exercise of applying IT for improving the distribution infrastructure is doubtful. The requisite domain expertise ought to be developed.

R-APDRP & the latest Mega Power Policy

The Union Cabinet on October 1, 2009 approved modifications in the existing Mega Power Policy. One of the key changes was that the condition of privatisation of distribution by power purchasing states was replaced by the condition that power purchasing states shall undertake to carry out distribution reforms as laid down by the power ministry. Incentivisation of distribution reforms through R-APDRP is likely to lead to more states undertaking distribution reforms and thereby enabling enhanced availment of Mega Power Policy benefits.

Conclusion

The biggest plus point of R-APDRP is its linkage of the disbursement of Central government funds to states to actual reduction in AT&C losses. The West Bengal State Electricity Distribution Co Ltd, which has managed to significantly reduce AT&C losses, has been an R-APDRP success story. This is a clear testimony of the efficacy of a performance-linked incentive approach in reforming power distribution — an indication that R-APDRP is a step in the right direction. n

The author is Partner & Leader of Infrastructure Practice at BMR Advisors. Views are personal