No. MERC/Legal/120/MSEB Restructuring/1732 September 17, 2004
Shri B.P. Pandey,
Principal Secretary (Energy),
Industries, Energy & Labour Department,
Government of Maharashtra,
Mantralaya, Mumbai 400 032.
Subject: Commission’s
advice on restructuring of MSEB.
Sir,
Government
of Maharashtra (GoM) under letter dated April 8, 2004, had referred
certain issues relating to restructuring of the Maharashtra
State Electricity Board (MSEB) for advice of the Commission
under Section 86 (2) (ii) of the Electricity Act, 2003.
The Commission communicated its initial views to the
State Government on May 14, 2004, and addressed the specific
issues on which GoM had sought its opinion. The Commission also
highlighted certain other issues relating to implementation
of the changes in the sector structure that GoM and MSEB would
need to consider, including issues relating to allocation of
costs (including power purchase costs), intra-State ABT implementation,
settlement systems, asset valuation, treatment of contingent
liabilities, scheduling and despatch, metering, etc.
2. In view of the impending deadline of June
9, 2004 existing at that stage for restructuring MSEB, the Commission
provided its overall recommendations to the GoM well before
that date. However, the Commission’s review revealed several
complexities in the restructuring process that required further
evaluation. The deadline
for restructuring having been extended by the Government of
India, the Commission has now evaluated in greater detail certain
issues relating to formation of the distribution companies and
protection of consumer interests. The findings and further advice of the Commission,
including certain clarifications of its earlier advice, are
enclosed herewith.
3. The Commission has been of the opinion
that the present unwieldy structure of MSEB is responsible for
much of the inefficiency and poor service quality, and that
smaller distribution companies are essential.
In this regard, the Commission has reviewed the typical
size of distribution companies in India and abroad.
Based on this review and its assessment of the operations
of MSEB, the Commission is of the opinion that formation of
five or six distribution companies out of the present distribution
operations of MSEB would be optimal.
4. Among the restructuring options proposed
earlier, Option III proposed by GoM for restructuring of MSEB
aims to create six distribution companies.
It appeared to the Commission that the GoM was in favour
of this option. However, the Commission is not convinced about
the supporting data and justification provided by GoM/MSEB for
formation of two urban and four rural distribution companies. The Commission’s analysis has revealed wide divergence in performance
between the urban and rural areas. The Commission believes that
the urban-rural structure could cause imbalances and inflexibility
in future, unless necessary measures are adopted to avoid this
through a more deliberate approach on solving rural supply and
subsidisation issues.
5. The Commission is of the opinion that
rural supply issues must be tackled directly at the time of
sector restructuring, and
that the conventional Utility supply approach to rural supply
requires to be looked at afresh.
Utilities are generally reluctant to extend supply in
rural areas where recoveries from tariff are significantly lower
than costs. Utilities
also have little appreciation of local problems, leading to
service denial and poor service levels.
Review of international examples reveals that local and
private participation in rural supply can yield encouraging
results if the schemes are appropriately structured. The enclosed document includes certain instances
in this regard.
6. The Commission is of the view that franchising
arrangements should be encouraged as vehicles of service delivery
in rural areas. The
primary responsibility of maintaining performance standards
would continue to be the obligation of the distribution licensee
in the area. The distribution licensee can in turn put in place incentive/penalty
mechanisms to ensure that the performance of the franchisee
meets the desired standards and targets. Adequate metering and
related infrastructure would need to be established on a priority
basis to ensure commercial accounting, adherence to quality
of service standards and governance requirements.
7. The Commission believes that continuation
of certain subsidies for rural and economically backward sections
of consumers will be necessary in the foreseeable future. In general, the experience across the world
has been that rural electrification and supply programmes can
rarely be self-supporting. The Commission has also observed
that such subsidies are not unique to India, and even developed
countries such as the USA provide subsidies for certain sections
of consumers. However
subsidies must be targeted and administered better. The Commission is of the opinion that a separate
Power Development and Subsidisation Fund (PDSF) should be set
up to administer subsidies and facilitate development of the
sector, particularly in the rural areas. Subsidies that are
intended for objectives for which the Fund has been established
should be routed through the Fund. The Fund can be financed through a combination
of State support and production/ consumption taxes declared
upfront. Such arrangements
would help in targeting subsidies better and make cross-subsidies
from the subsidising categories, if any, transparent.
8. The State Government should develop a
comprehensive reform implementation plan while undertaking the
restructuring exercise taking into consideration the measures
suggested by the Commission. The Commission recommends that
the State Government, through a qualified expert body/consultants,
should undertake further studies and analysis on the issues
and suggestions provided in the enclosed document and in the
earlier advice of the Commission on restructuring of MSEB.
Based on such studies and analysis, the framework for
restructuring of MSEB and development of the electricity sector
in the State should be put forth for public views and comments.
The final framework of sector structure should be decided
only after considering them.
With regards,
Yours faithfully,
Sd/-
(A.M. Khan)
Secretary,
MERC
Encl: as above.
