Shift The Mindset

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Directly involved in power management in J&K since 2002, J&K’s Finance Minister Dr Haseeb A Drabu has restored dichotomy in state budgeting, separating power from the rest of the public finances. For the next fiscal, he plans rudimentary shifts in power policy with focus on drafting a dynamic Power Purchase Policy that will delink generation from purchase. The idea, he tells Kashmir Life, is to use de-controlled and professionally regulated power sector to make some money for managing the six-decades deficit on energy front

Dr-Haseeb-Drabu

For J&K, power is the biggest problem and perhaps the most sustainable solution to engendering economic development of the state. The state is in a problem because we have not invested in the power sector the way we ought to have, in last 60 years.  The Fiscal deficit of the government exactly equals the power deficit. If power pays for itself, J&K which is the revenue surplus state net of power as of now, will have investible surplus to finance economic development.

There are two important issues: first is that focus has been only on the generation of power. There has not been a comprehensive plan for looking at generation, transmission and distribution.

Second, it has not been recognized that power is now a tradeable commodity. A recognition of this means that we need a power purchase policy which will lower the cost of purchasing power.

There are three sets of issues that need to be addressed – administrative, operational and policy issues related to the power sector.

We need to reorganize the entire power administration with unbundling and creating an administrative sector that enables reforms, looks at State Power Development Corporation (SPDC) differently, changes the administrative structure of the line departments, and also build capacities within the administrative set up.

Operationally, there are many issues. One, we have yet to do a comprehensive mapping of power sector – the demand-supply infrastructure. I keep saying that transformer in a village is a status symbol and not an infrastructure. Nobody has mapped yet the adequate requirement of transformers in a district that would set in place the infrastructure at the retail institution level. The issue of transmission and distribution losses,  that Jairam Ramesh used to term as theft and dacoit losses, and its fiscal impact are the few operational issues that need to be tackled.

Power Policy

On policy issues front, generation and transmission is a big issue. Then, how do we invest in power in terms of equity and how do we organize various power projects for which we have created a holding company like Chenab Valley Power Projects (CVPP).

Firstly, we have to understand that post-1996 power has become a tradeable commodity. I do not think there is any recognition of this fact in the state government’s power management. We still believe that the power is still un-tradeable commodity, so we need to generate and distribute. The fact of the matter is that J&K can today meet its entire power requirements through a power purchase policy (PPP). We do not have to generate to be able to supply. And the first reform which we are trying to do is to have a PPP. A committee constituted already is looking at a comprehensive PPP whereby we will surrender some of the costly allocations and go into power swapping and banking arrangements. We will try to see what is the mechanism of purchase and trading of power from the exchanges through professional expert agency, which does dynamic power management on a minute-to-minute basis. It will see how to generate an efficient system that break up the demand into segments so that it is not just one generic power that comes in at a particular time.

Secondly, we must start thinking in terms of every hydropower project as a specific Special Purpose Vehicle (SPV) and held by a holding company where we are able to get some serious private investments. This was the intention in 2008 when we created CVPP. It was hugely misunderstood and subsequently the whole structure was changed and it was reduced to an EPC (Engineering, Procurement, Construction) company. It was supposed to hold equity in the NHPC projects which were transferred by J&K government. That was the key factor that was driving our efforts.

We want to revise it and go back to the earlier structure so that we, at least, hold a large chunk of all those projects which are with NHPC. We have 49%  share in CVPP and we want the same share in all other projects.

Thirdly, the management of the SPDC which is the key resource needs to be improved. In the next three years the best thing that can turn around the state is to take SPDC public. We have been talking on these lines since 2004 but there has not been any progress. SPDC needs a professional board, a new governance structure, an unbundled structure where SPDC is the owner of the hydro resource in the state.

PMRP-II

Finally as we know in generating power, equity is the only constraint. But in the course of PM’s Reconstruction Package, J&K was able to secure equity for Sawlakote and Pakal Dul. So in the next six years, Rs 2500 crore equity investment would ease off the demand part of the power.

Besides, the central government has worked out the modalities for transfer of two power projects from NHPC to the state. That would take J&K to a completely different level. While the two projects will take time in coming up, transfers may happen earlier, which would change the power scenario and the fiscal balance and allow some investible surplus in new projects. That would be the larger design about how we would run the power sector.

In terms of ground level retail, the biggest initiative is metering. Unless that is done, there is no way we could change power situation in the state. We have been struggling with metering for a long time. Now we need to work out a comprehensive metering plan whereby we will be able to track the usage at domestic and transmission level so that we know how much power is being wasted. We will come to know why it is not getting us the revenue for the energy consumed. Those are the basic contours of the power policy.

Drabu believes de-congesting an unbundling power will profit J&K more.

Drabu believes de-congesting an unbundling power will profit J&K more.

Holding Company

It is a great irony that the last government did not understand that CVPP was supposed to be a holding company. I was amazed when the former Chief Minister said that the biggest achievement of his government was the creation of CVPP while it was created by his predecessor. They only appointed its Chairman. Misunderstanding its role, they designed it as an EPC company as a result of which they were unable to allot even a single tender. There was one international tender for Pakal Dul and it has not been allotted.

The original idea was that CVPP will do a completely different financing for the power projects and hold equity in seven projects that J&K had already given to the NHPC. With all the seven projects with NHPC, this was the only route for taking at least 10 percent of them back. But that did not happen. Instead something worse happened as the viability gap that had come as free money to the state through PMRP (I) was utilized by the CVPP as subordinate debt. This is the first time in history when somebody converted equity into debt and celebrated it. There has been a complete destruction of policy making at the CVPP level. But we hope to restructure it.

When the ‘Agenda of Alliance’ was written, the CVPP mention was seen as if CVPP will subsume the SPDC. That is incorrect. SPDC is a separate entity that hosts the entire resource of the 20,000 MW of power in J&K. They are the owners. Many people may not know this but the fact is that a government order was passed in 2005 declaring that the entire hydro resource in the state rests with SPDC and not with the government.

The idea was to build value in CVPP in terms of exploited hydro and unexploited hydro resource and get the valuation from the market which is very good.

With SPDC owning the entire hydro resources, CVPP was supposed to add another layer of those seven projects that are with NHPC to it and get back at least ten percent in which we failed.

SPDC is the main receptacle for all hydro resources and CVPP will hold equity in the NHPC projects which we will monetize. It is possible that we can sell 49% in Pakal Dull or in Keru or Kawar and raise those resources. CVPP was seen more as financing rather than operative project building.  That is what we will see how we can go back to that.

SPDC

SPDC is the most critical part of the power sector but is not in complete shape right now. It is the vehicle that will allow J&K to bring about reforms, create resources and reinvest in the sector. But hopefully, we shall have a board in place soon. I have been arguing since 2004 that we must have a professional board. Even the MD PDC should be a professional whom you can hire on a lateral basis and task to deliver a listed company in three to four years. Today the situation is that the SPDC has not been audited for so many years. A professional board and a management with a mandate to deliver a listed company is the only way forward for the SPDC.

There are two things very important to design the power policy – the tradeable nature of power and power sector being not controlled sector but regulated. Power regulator does pricing on some principle. If we have to empower these two institutions, lot more investments will come.

The real problem why the investments are not coming to power is that the boards are not paying the charges for the consumption they register.

Liabilities in J&K power sector amount to Rs 7000 crore. In this situation a small power producer will face huge difficulties to work, and may face solvency issues, if he does not get his dues. Regulatory framework gives a lot of comfort to the investors.

Besides, we also need to look at some investment policy in the power sector which is less onerous than what is in vogue.

Small Projects

The new power policy will look at the small projects that SPDC is running. Basically, the SPDC should see only the mega power projects. Plus, SPDC’s own track record on generation has not been good. It created a 1MW project at Rs 15 crore when the market rate was only Rs 6.5 crore.

In SPDC, competencies may not be there to handle small projects so we will open it to the private sector. Projects below 25 MW, for instance, may go out of SPDC reach. Right now, we have a growing appetite for the power sector in the market. People in other sectors have made enough surpluses and are keen to invest in power provided we are able to clean up the act and improve the PPA. Power now being a tradable commodity, one can now generate at one place and supply to anywhere in India.

Next Budget

This year again, we will have a power budget and emphasis will particularly be on power purchase. Certain simple things can be done. Against a liability of Rs 7000 crore, if we are able to have a power bond at 8 or 8.5%, we will save at least Rs 800 crore. If we make a dynamic PPP, we will save some more money. We have to change the way we look at power.

Today, J&K has a loss of Rs 3500 crore but when I look at it from the perspective of funding, it is only Rs 2000 crore because Rs 1500 crore goes for subsidizing industrial tariff. We do not recognize this and see it as loss which it is not. This time, power will bill at commercial rates to the industry and finance will do a subvention and provide that subsidy to the industry. This will help us to tell the people that we are doing this much of subsidy for the industry in power.

Even then, with such an inflated loss on our books, an investor will not invest.

For J&K, it is also very important not to physically invest in projects but financially invest in power. What prevents us from investing or utilizing the coal block we have in mainland India to generate resources and buy power?

The mindset I want to change is that if you have to supply power you have to generate it. There is enough power floating in the country. We need to purchase at a desirable price and whatever assets you have can be used to generate power and sell it elsewhere. It should become more like of a power trading kind of a thing rather than power generation.

We may have to change the mix of power. We are 99% on hydro and it gets into problems in winter because of reduced discharge of rivers. One idea is to swap some capacities – we will give hydro and get thermal in return because other states also need a mix of power. So one big chunk which we are exploring is that as part of power policy can we swap power capacities with other states?

We need a modernistic and not an archaic power policy.

T&D

Power is at the core of PMRP (II) and within it, distribution system is vital. Apart from various schemes being implemented to improve transmission and distribution set up, a specific amount is being given exclusively for power governance. We want T&D losses getting down to realistic levels. Lot of money is being spent on metering and in the next eight months, the big push that will become evident is complete revamp of T&D lines.

(The copy is based on a long interview and the questions have been edited out for paucity of space.)

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