It is a fascinating turnaround story that is unfolding in West Bengal’s power sector. The Left-ruled state managed to make its electricity board profit-making two years ago.
Last year, it split the board into a distribution company and a transmission company, both of which are earning profits.
Interestingly, all this was done “without a single demonstration or court case”, according to Malay De, the chairman of the West Bengal State Electricity Distribution Company Ltd (WBSEDCL), which was spun off from the electricity board last year.
WBSEDCL had a revenue of Rs 6,500 crore in its first year of operation (2007-08), which is larger than that of telecom company MTNL or real estate firm DLF. However, the Rs 50 crore net profit it earned is a fraction of what firms in the same income bracket manage.
A part of this profit is attributable to trading revenues, but since the state power regulator ensures that 90 per cent of the trading profit is passed on to the consumer, the impact of these revenues on the profitability is limited, says De.
The profit would have been higher — at Rs 450 crore — had the trading revenues estimated at the beginning of the year been realised. “Potential benefit of Rs 760 crore trading revenue was passed on to the consumer but the company could only earn Rs 400 crore last year,” explained De.
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So what is the real story behind the turnaround, if it is not a trading spectacle? “Metering,” says De. The 100 per cent electronic metering project was started in 2002 and was followed up by meter-by-meter energy accounting and auditing. This was not a capital intensive process with just about Rs 100 crore invested till now.
There were no significant consumer protests against electronic metering, which was the case in Delhi where resident welfare associations raised strong objections to what were perceived as fast-running meters.
“All initiatives flow from metering,” says De, since it enabled the company to know exactly where the revenue leakages were taking place, and hold the local manager accountable. That was the stick of the policy. The carrot was performance linked incentives (PLIs).
The Aggregate Technical and Commercial (AT&C) losses, now down to 25 per cent against the country average of 35-40 per cent, were monetised and 15-20 per cent given back to employees as incentives.
| POWER-PACKED SHOW |
| * West Bengal is one of the few states to boast profit-making power utilities |
| * The turnaround was managed “without a single demonstration or court case” |
| * There were no tariff shocks, as the process was not capital-intensive |
| * Success formula: dialogue mechanism with key stakeholders (read employees) |
| * New buzzwords in the state power sector — performance linked incentives, corporate plan, productivity, independent directors |
The corporate lingo: Incentives, corporate planning and professionalism are some of the many new buzzwords in the state’s power sector today.
The 10-member WBSEDCL board boasts no less than four independent heavyweight directors — former telecom secretary Shyamal Ghosh, former chairman of Gail India Proshanto Banerjee, former chairman of Indian Aluminium Tapan Mitra and former commerce secretary S N Menon.
“Our whole exercise was governance oriented,” says the state’s additional chief secretary (energy), Sunil Mitra, who personally tracked and persuaded the independent directors to join the board.
Productivity is now tracked. WBSEDCL has 21,700 employees for its 7 million customers, which means about 320 customers per employee, compared with the global standard of 700 customers, says De. Incidentally, each employee served just 178 customers three years ago. This is quite a feat for a company whose average age of employees is over 50.
The fact that there were no lay-offs in the process, or any tariff shocks, made the whole turnaround a win-win proposition for all the stakeholders — the government, which does not have to budget for a power subsidy any more; the consumer, who benefits from flat-to-lower tariffs; and obviously the utility.
As a precursor to the split, the state government did however write-off Rs 10,000 crore worth of loans and accumulated interest of the electricity board to enable the successor companies to begin with healthy balance sheets.
“It is a significant transformation for a state which has traditionally not been considered progressive from a reform perspective,” says KPMG’s executive director Arvind Mahajan.
Inclusive model: West Bengal ensured that it was talking to all the key stakeholders through the process. The dialogue mechanism was a Joint Management Council comprising directors and heads of departments and the representative workers from recognised unions and associations.
It was a time-consuming process but it ensured consensus decisions that were acceptable to the employees, 80 per cent of whom were just high-school pass.
According to Central Electricity Regulatory Commission chairman Pramod Deo: “West Bengal went about the whole process in a very systematic way. It is interesting the way they managed unbundling with the participation of the employees.”
Individuals matter: “The solution for the state power sector is not investments, but organisational transformation, which West Bengal managed,” says Ashish Khanna, financial analyst at the World Bank who has been involved with the West Bengal reform process for the last few years.
De and Mitra — whose earlier claim to fame was successfully privatising sick state units — are the current toast of the state’s power circuit. “Individuals do make quite a bit of a difference,” says Mahajan, “and it would be good if there is continuity in this leadership.”
There are the sceptics who fear a deterioration in the utilities’ performance once the key people change, or if the gains from reduction in non-technical losses dry up and the cost of power generation (or purchase, since West Bengal has a peak deficit now) increases.
Industry officials do not rule out a slide, though the likelihood of that happening decreases with corporate systems and processes that have been put in place, and with a board strengthened by independent directors.
De expects “a secular increase in tariff which will be moderated by efficiency improvements” in the future.
The West Bengal example needs to be emulated by other state utilities which together ran up commercial losses of almost Rs 26,000 crore last year, yielding a negative return of 18 per cent, according to the last economic survey.
This estimate may be understated given that utilities like the Uttar Pradesh Power Corporation Ltd have not finalised their accounts for the last four years.