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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: Commissionís advice on restructuring of MSEB.




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 Commissionís 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 Commissionís 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,



(A.M. Khan)

Secretary, MERC


Encl: as above.


Recommendations of the MERC to the State Government on the restructing of MSEB
Annexure I
Annexure II
Annexure III
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(zip version) 163 kb

Commission's advice on restructuring of MSEB.
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