India's Unlikely Model For Electricity Reform

The poor state of Orissa, with U.S. help, is privatizing power

Every morning, in an unadorned room in Bhubaneshwar, the temple-dotted capital of the eastern Indian state of Orissa, Michael Rosenzweig teaches three bureaucrats how markets work. The American from the Washington office of consulting firm National Economic Research Associates Inc. is helping Orissa manage its $1 billion effort to run the production and sale of electricity as a profitable business. He teaches his students, newly appointed regulators of Orissa's power industry, about tariffs, licenses, and other parts of the business. "Like papayas," Rosenzweig explains, "electricity is a commodity best left to the markets."

As India makes fitful attempts to liberalize its electricity sector, Rosenzweig's pupils are unlikely leaders. Big states such as Maharashtra and Karnataka have been caught up in endless wrangling, court cases, and public battles with private producers. But Orissa, the second-poorest of India's states, seems to have a program worth emulating. It has launched a series of reforms, creating an independent regulatory authority and separating the functions of generation, transmission, and distribution. The results so far are so encouraging that India's power secretary, P. Abraham, wants to make Orissa a role model for states throughout the country.

SLOW TRACK. Orissa's effort is all the more remarkable given the dismal state of India's power sector. Some 250 proposed projects that would provide an additional 100,000 megawatts of desperately needed power. But of those, only one has received permission to start operations: a small 235-megawatt plant backed by a local entrepreneur and CMS Energy Corp. of Michigan. Players such as Enron, AES, and Cogentrix Energy are on hold, entangled in India's political web. "India is being used as an example of how not to do business in the power sector," says Mark Riedy, chief of the India practice of Washington law firm Reid & Priest.

Yet Orissa seems to be doing something right. Last April, it dissolved the state electricity board and replaced it with an independent regulatory commission. Under the new system, power-project approvals formerly dependent on the capricious and bureaucratic state electricity board are instead screened by the commission, whose members are less vulnerable to political pressure. They set tariffs, grant licenses, conduct competitive procurement bids, and monitor performance standards.

Privatization is a central part of the strategy. The old monopoly's generation, transmission, and distribution functions have been broken up into separate corporate units. One entity is Grid Corp. of Orissa (Gridco). The $350 million company is supposed to make transmitting and distributing power a profitable undertaking. Currently owned by the state, Gridco will be privatized starting in 1998. It will buy power generated by private producers such as Virginia-based AES Corp., which plans two 250-megawatt coal-based plants. "The political will and support exists to make this work," says N.B. Misra, director of corporate planning at Gridco.

To succeed, Orissa's leaders need to root out time-honored practices. With help from experts such as Rosenzweig, whose firm was appointed by the World Bank, bureaucrats are trying to counter graft and indolence with performance incentives and bonuses. In a state where 22% of all power generated is lost, they are introducing efficient metering and strict billing and collection procedures. And they're taking politically risky moves. In the past, the state subsidized the agricultural sector--and its large chunk of voters--through low electricity rates. Now, Orissa has boldly raised them by 15% over five years to help cover costs.

"REPLICABLE." Orissa's stab at reform still has its share of troubles. The power-distribution business hasn't generated enough interested buyers. Moreover, Biju Patnaik, the Orissa chief minister who started the reform effort, lost his seat last year and now gripes that the new government isn't moving fast enough on a proposed agreement to purchase power from AES. Gridco's new management is scrutinizing the deal.

But other states in India are starting to pay attention to Orissa's resolve to separate politics from the electricity business. Four states have approached the World Bank with similar plans. Others have been making inquiries with Orissa about the merits of reform and privatization. Says Ronald Summers, vice-president for development at Cogentrix Energy Inc., whose $1.1 billion, 1,000-megawatt project in Karnataka has been stalled for three years: "The Orissa model is a replicable one." India's power policy needs a few successes. Orissa could be the answer.

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