Orissa was the first state in India to introduce power sector reforms, including privatizing distribution. However, the results did not meet expectations and raised issues. Orissa faced high transmission and distribution losses, inadequate accountability, and poor finances and service. Reforms unbundled generation, transmission, and distribution. Distribution was privatized by assigning assets to four distribution companies, which were then majority acquired by private investors. However, higher than estimated distribution losses, lack of tariff increases, and neglect of needed government support burdened the reforms. While Orissa pioneered many reforms, the experience shows subsidies and government support may be needed during transition for reforms to succeed.

1. PRIVATIZATION OF ORISSA

2. BACKGROUND
Orissa was the first state in India and also in South Asia to introduce
comprehensive reforms in its state-owned electricity industry, including
privatization of the distribution business. The reform exercise was
expected to turn around the ailing power sector of the state and also
serve as a model for other states to follow. However, the results have
belied many expectations and raised a number of issues. These have
been debated widely in various forums, including the Orissa Legislative
Assembly during early 2001.

3. NEED POWER SECTOR REFORM IN ORISSA
 Orissa suffered from high transmission and distribution losses
 Inadequate accountability for various segments
(generation, transmission, and distribution)
 Poor financial performance,
 Poor quality of service and manpower related issues
 There was a pressing need to solve the financial problems of Orissa
State Electricity Board (OSEB) and meet the projected demand of
funds for investment in generation, transmission and distribution
system. It was also the time when the new
 National Economic Policy, 1991 was announced which envisaged
liberalization and private participation in infrastructure
development.

4. Reform Agenda
The State Government of Orissa pioneered Reform and Restructuring in
the power sector by introducing POWER SECTOR REFORM
ACT, 1995, which came in to effect from 1st April 1996.
 Unbundling and structural separation of
generation, transmission, and distribution into separate services to
be provided by separate companies
 Private sector participation in the new hydroelectric generation and
transmission utilities, the Grid Corporation of Orissa (GRIDCO) and
the Orissa Hydro Power Corporation (OHPC)
 Privatization of thermal generation and distribution
 Competitive bidding for new generation

5. Reform Agenda (Continues)
 Development of an autonomous power sector regulatory agency,
the Orissa Electricity Regulatory Commission. The role of OERC was
to:
a) Take measures conducive to an efficient electricity industry in the
State
b) Issue license for transmission and distribution and set tariff
c) Safeguard the interests of consumers
d) Prevent monopolistic behavior by operators
e) Reforming of electricity tariff at the bulk power, transmission, and
retail levels

6. O.E.R ACT 1995 & ELECTRICITY ACT 2003
OVERALL OBJECTIVES
 Restructuring Electricity Industry
 Rationalizing Generation, Transmission, Distribution & Supply
 Providing avenues for Private Sector Participation in the Electricity
Industry
 Development and Management of Electricity Industry in the State in an
efficient, economic & competitive manner
 Establishment of Independent Regulatory Commission
 Ensure financial viability of the sector and attract investment

7. O.E.R ACT 1995 & ELECTRICITY ACT 2003
Ensure availability of quality power to consumers at a reasonable
rates
Promote transparency, consistency and predictability in regulated
approaches and minimize regulatory risks
Balancing of interest of consumers & investors
ELECTRICITY ACT 2003:
Trading recognized as a distinct activity
Growth of power market and competition
Consumer Grievance Redressal Mechanism
Open Access and consumer choice
Liberalization of Generation & facilitation of CGP
7

8. Orissa power sector reform was carried
out in two phases :-

9. First Phase
Two Government-owned corporate utilities were formed with
agreement ensuring full autonomy with effect from 1st April 1996. These
were:
 Orissa Hydro Power Corporation (OHPC) - responsible for hydro
power generation
 Grid Corporation of Orissa (GRIDCO) - responsible for transmission
and distribution functions

10. 2nd Phase
Pursuant to the Orissa Electricity Reform Rules, 1998, the Govt. of Orissa
transferred the distribution assets and properties along with personnel of
GRIDCO to four distribution companies with effect from 26th November 1998.
1. CESCO,
2. NESCO,
3. WESCO and
4. SOUTHCO continued to function as affiliates of GRIDCO up to 31st March
1999.
 GRIDCO disinvested 51% share to Private Sector Investors keeping a share
holding 39% with it and 10% share for Employees Welfare Trust.
 No asset sale had actually taken place. Assets have been assigned to
respective companies.

11.  On 19.11.97 GRIDCO divided its distribution functions into
four geographical zones viz. Western zone, North-Eastern
Zone, Southern Zone and Central Zone.
 The assets and liabilities were assigned to these Companies
with an equity base for each Company.
 A decision was taken at the Govt. level for privatization of the
distribution system in the State through a joint sector/joint
venture route, in which the proposed equity sharing will be as
under :
 Private Strategic Investors (PSI) : 51%
 GRIDCO : 39%
 Employees Trust : 10%

12.  The private companies because of their majority shareholding
were responsible for day-to-day management of the
Distribution Companies.
 They were issued retail supply licenses by the Regulatory
Commission who had also the authority to regulate their
functioning as per the provisions of OER Act, 1995.
 Three distribution Companies viz. WESCO, NESCO and
SOUTHCO were taken over by M/s BSES of Mumbai from
01.04.99
 CESCO was taken over by the AES of USA with effect from
01.09.99.
 The State Govt., which was paying a subsidy to the tune of
Rs. 300 Crores per year by 31.03.96 during the OSEB
time, did not pay any subsidy from 01.04.96 onwards after the
split up of OSEB and creation of GRIDCO and OHPC.

14. Outcome
 The T&D losses that were assumed (Staff Appraisal Report of the World
Bank) to be 39.5%, were actually greater than 50%. OERC based their Tariff
Order considering 35% T&D losses, leading to an additional T&D loss of 15%
being absorbed by GRIDCO as losses.
NOTE : The higher than anticipated T&D losses are one of the most important reasons for
the current situation in Orissa wherein the private distribution companies are unable to
pay GRIDCO and hence have caused shadow on the overall reform exercise. The higher
than assessed T&D losses were in turn on account of higher agricultural
consumption, which were actually commercial losses. Non metered supply to most
agriculture consumers made it impossible to estimate the true extent of the T&D losses
 Even though 100% Collection Efficiency was assumed by FY98, the
actual collection was 83% in FY99

15. Outcome (Continued)
 Tariff increase was assumed to be 16% in FY97 and 18% in FY98.
However weighted tariff increase by OERC in its two orders was less
than 10% each year, with a 20 month gap between the two tariff orders
 The crucial aspect of government support during the transition period
was neglected, and GRIDCO was expected to break even in FY 98.
Haryana and Andhra Pradesh learnt form the Orissa example and have
provided for transition period support from the State government
 The impact of captive power was not analyzed which took away a
significant share of consumers
 To make the distribution business attractive to private investors, only
around Rs. 650 crores of total liabilities was passed on the four
Distribution Companies while GRIDCO, the Transmission
company, retained with it Rs. 1950 crores of liability in its own books, as
all distribution companies were loss making undertakings

16. POWER SECTOR REFORM IN ORISSA –
RESULTS – SUCCESS OR FAILURE?
 Orissa is the acknowledged pioneer in reform of the power sector. The
First state to
 Enact an electricity reform Act
 Bring about functional unbundling
 Set up an electricity regulatory commission,
 Privatize distribution,
 Divest shares of a government generation company,
 Set up a state transmission utility,
 Lay down procedure and to operationalize the quasi-judicial regulatory
body
 Set tariff through open hearing
 Set standards of service.

17. Has the Orissa Power Sector Reform
Failed?
An analysis:
The first fatal error is withdrawal of subsidy..
But that subsidy is per se bad and that it has no place in a
reform environment is a dangerous misconception.
Withdrawal of subsidy and subvention at one go without
evaluating the economic, political and commercial
consequence was a faulty step.

18. An analysis. Contd.
 Up-valuation of Assets
 The financial condition became weak due to up-valuation of
assets by over Rs.2000 crores
 Gridco faced an enormous financial burden with empty kitty.
 Private investment
 The power sector reform has attracted private investment in the
sector but state does not get the full benefit from such
investment.
 Setting up of large power plants has huge costs associated with
land, water and environmental degradation, as well as
rehabilitation and degradation of infrastructure like road and
rail.

19. An analysis. Contd.
 Power Sector Reform has helped the State finances turn
around.
 Transitional financial support is needed for investment in
speedy operation and maintenance work.
 Besides this, theft control requires pro-active involvement of
State Govt. which needs to recognize the menace as the
single most reason for the sickness of the industries.
 Govt. of Orissa should play a very pro-active role to ensure
effective functioning of Energy Police Station and Special
Courts.

20. THANK YOU