EFFICACY EVALUATION OF INDIAN POWER SECTOR RESTRUCTURING POLICY FRAMEWORK

Abstract

Presently Electricity sector across the developing countries is under the process of restructuring and adopting the deregulatory structure for providing choice, quality and economic service to the consumers. The motive behind this structural change is to create some sort of electricity market and thereby introducing competition in the power sector. India is no exception to this and the power industries in India are undergoing a state of transformation. In India, State Electricity Boards (SEBs) are beset with unsustainable inefficiencies, unviable tariffs, high Transmission and Distribution (T&D) losses, mounting subsidies, lack of adequate attention to the distribution segment, wasteful practices and lackadaisical financial management. All these factors led to the financial fragility of the entire power sector. Due to the uninspiring financial position of the vertically integrated monolithic SEBs, the power sector was failing to attract the much needed investments for its development. The Indian power sector commenced an era of reform and restructuring since the year 1991 after the opening of the sector for Independent Power Producers (IPPs). Thereafter, enactment of the Electricity Act, 2003 introduced innovative concepts like power trading, open access, appellate tribunal etc. and special provisions for the rural areas electrification. The Act also envisions a phase shift in the reform process, providing a necessary impetus to the sagging momentum for distribution reforms in the country. Though reforms have been implemented by most of the states, power sector continued to render unsatisfactory performance as the attention was focused on generation expansion programs mainly, neglecting the distribution sector. As a result, the distribution segment as a whole has lagged, in terms of both operation efficiency and financial performance. The financial performance of Indian Power utilities is severely hampered by low Return on Investments (Rol) and poor collection recovery from the consumers. This situation is further aggravated by poor operational efficiency. Realizing the need to accelerate the reforms in the distribution sector, the central government introduced Accelerated Power Development & Reforms Program (APDRP) for urban areas withthe objective to improve the financial viability of state power utilities, reducing Aggregate Technical and Commercial (AT & C) losses, improving customer satisfaction, and increasing the reliability and quality of the power supply. In this scenario, it is being viewed with paramount importance to evaluate the performance of the distribution utilities and identify the scope for improvement in efficiency of various states, carrying out an intra state analysis. Data Envelopment Analysis (DEA) is one of the most widely used analytical approach for carrying out this analysis. The concept of measurement of utility efficiencies for the electricity distribution divisions has so far not investigated in India. The present work explores and establishes the need for measurement of performances in the context of the ongoing electricity reforms in India. This study evaluates the performance of Electricity Distribution Divisions (EDDs) of an Indian state power utility namely Uttarakhand Power Corporation Limited (UPCL) in terms of overall efficiency through application of input oriented DEA, a non-parametric approach to frontier analysis, with an objective to trace the effectiveness of ongoing restructuring process. Relative efficiencies of the divisions are compared for the period 2005-2008. Notably, production technology might have changed during the period of analysis. Therefore, further using Malmquist Productivity Index (MPI) and its decompositions, productivity change (efficiency change and frontier shift) is investigated for EDDs. Decrease in efficiency is observed during period of analysis. To investigate the root cause of decrease in efficiency during restructuring process, performance ofEDDs for the year 2007 is examined in terms of overall efficiency, technical efficiency and scale efficiency. Since data can be contaminated by statistical noise, an obvious question could be: to what extent can perturbations in the data observations are tolerated before an efficient DMU is misclassified as inefficient. Hence, reliability of the CCR efficient divisions is examined for the same year. Slack analysis is carried out to formulate improvement directions for relatively inefficient divisions. Slack analysis identifies the n scope for possible reduction in operating and maintenance (O&M) costs and number of employees. The results have been discussed in the context of policy alternatives and related issues in the Indian electric distribution sector. Asensitivity analysis has also been carried out to explore the type of inefficiencies prevalent in the divisions and to identify the factors that are advantageous for the inefficient divisions inefficiency improvement. In the year 2007, most of the inefficient divisions suffered from scale inefficiency to greater extent than technical inefficiency, thus different reorganization alternatives are investigated to enhance the efficiency of inefficient divisions. To improve the operational efficiency of EDDs, UPCL disintegrated several divisions into smaller ones over period 2005-2008. However, micro level examination revealed the ineffectiveness ofthis process. Therefore, in the present work an alternative model for selecting the EDDs for disintegration and for selecting the optimum scale for disintegration of EDDs is proposed based on the efficiency analysis of 2007. Thereafter, the model is verified by comparing the mean efficiency of the EDDs derived using proposed model with that of existing ones. Further, the result of analysis based on simple radial efficiency is re-evaluated with the introduction of cross efficiency measures in DEA to bring forth the true performance of divisions. Cross efficiency evaluation differentiates the true "overall efficient" divisions from "false positive" divisions which can be termed as apparent efficient ones. A difficulty with a linear combination of DMUs as the reference set in DEA is that, an inefficient DMU and its reference set may not be inherently similar in their practices. Therefore, it is possible that in some cases the reference targets may be unattainable goals for the inefficient DMUs. Thus, hierarchical clustering approach is adopted to effectively group similar distribution divisions; this technique can herald realistic targets for poorly performing EDDsto improvethe efficiency. In this method Pearson correlation coefficient between pairs of column in a Cross Efficiency Matrix (CEM) is calculated. This parameter describes the degree of similarity in the EDDs and hence using these correlation coefficients as the elements in a resemblance matrix and thereafter executing a clustering analysis using complete linkage method yields different clusters of divisions with similar in practices. Divisions with the highest column mean in a cluster can be used as the primary benchmark for the other EDDs in that cluster. A benchmark-share measure is also developed for technically efficient divisions in order to further characterize the performance of efficient ones and to yield information on the role of each efficient division played in benchmarking inefficient divisions and also to identify the best EDDs in terms ofthe benchmark-share. The bigger the benchmark share, the more important an efficient division is in benchmarking. The result analysis is envisaged to be instrumental to policy makers and managers to increase the operational efficiency ofthe EDDs leading to higher profitability ofthe state electricity board. It can provide aplatform for initiating benchmarking in a regulatory regime. Though the field ofperformance evaluation in the electricity sector is the vast area of study, the present work tries to fill-in some research gaps. The subject matter addressed in the present work is relevant for the policy makers to implement an effective restructuring process ofpower sector inIndia and other countries.