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REFORMS

The Power sector reforms initiated by Government of India (GOI) in 1991, opened up power generation and distribution to private investment. The Government of Karnataka, like other States invited private investment in power generation. A number of private investors stepped forward to set up power projects in the State and signed Memorandum of Understanding with the State Government, and some have also signed Power Purchase Agreement. But things did not progress as anticipated. The financial health of KEB emerged as the major constraint for addition of new generation. Potential investors began expressing doubts about realising their energy bills from the Board and scarce resources prohibited GOK from supporting the power sector.

Realising the need for enormous investments in the power sector, GOK came out with a Power Policy proposing fundamental and radical reforms in the Sector. The main objectives of the policy are:

1. To establish a regulatory mechanism to ensure competitive cost in generations through competitive bidding. By regulating the prices in transmission and distribution of power, which are natural monopolies, the consumer would get better quality of power supply at reasonable price through improved efficiency. At the same time investors are ensured a reasonable return on their investment.
2. To make the sector financially viable to attract private investment for generation, transmission and distribution which leads to adequate power availability to meet existing and emerging demand.
3. To provide incentives for better performance, encouraging demand side management and energy conservation.
4. To release scarce Government resources being deployed for power development to other areas of greater priority (private investment would be available for power development).

The process of reforms envisages unbundling of transmission and distribution from generation, with the distribution function further being organised into several economically viable units. The first step in this direction, i.e. separating generation assets into VVNL and corporatisation of KEB into KPTCL has been completed. These companies have been incorporated on 1-8-1999. It is also planned to create viable corporate entities with clean opening balance sheets so that the new corporate entities are not burdened with the historic liabilities. This separation involves amongst other things valuation of the terminal benefits of the employees, creation of Trusts for the Employee Terminal benefits, Assessing System requirements for Quality Improvement, creating plans for clearing past dues to creditors, creating plans for financial requirements of KPTCL and gaining Government and World Bank approval of funding.

As part of the Reform process an independent Regulatory Commission has already been formed during 1999 and also the first tariff order has been passed by the Commission.

An MOA has also been signed with Government of India to bring in reformation in the power sector within a scheduled time frame. The MOA contemplates techno-economic assistance from GOI.

The second phase of the reforms process, which KPTCL is now undertaking is even more complex. It envisages permanent change of the old systems through the creation of smaller viable customer oriented distribution companies with private sector ownership. In future KPTCL would restrain itself to only transmitting power to these entities.

Government of Karnataka has appointed consultants to advise it on the modalities to be adopted for privatisation of the distribution sector. The consultants appointed are:

1. CMS Cameron Mckenna, UK as consultants for Financial/Distribution Privatisation.
2. Price Water-House Coopers, UK as consultants for Institutional Strengthening of KPTCL and for Power Market Development.
3. MECON, India Knight Piesold, UK as consultants for Environmental Assessment.
4. CMSR, Hyderabad as consultants for Social Assessment.