95

CHAPTER IV

PROGRESS IN TECHNICAL AND FINANCIAL

PERFORMANCE

In Chapter III, an overview of the profile of power sector and major

steps in the process of restructuring in Punjab was presented. The Punjab

State Electricity Regulatory Commission (PSERC) was constituted as an

independent regulatory body to regulate the generation, transmission and

distribution businesses in the power sector in 1999. Overall objective of

reforms was to improve the technical and financial performance of power

sector in the state. In this Chapter, an attempt is made to examine the

technical and financial performance of the power sector comparing the level

of economic efficiency in the pre-reforms and post reforms period. A

comparison of the technical and financial performance in the pre reforms

period and post reforms periods has been undertaken.

The chapter is divided into two sections. Section IV.1 examines the

operational performance of power sector in Punjab especially focusing on

technical performance improvement in the post reforms period. Section IV.2

presents an overview of the financial performance made in the post reform

period. The issues related to tariff structure and pricing policy have also

been examined.

96

IV.1: Technical Performance of Punjab Power Sector

In this section, the technical performance is measured on the basis of some

performance parameters. Key parameters such as Plant Load Factor (PLF),

Transmission and Distribution Losses (T&D losses), collection efficiency,

etc. have been taken into account for measuring the operational performance

of the generation and distribution functions of power.

Plant Load Factor

Plant Load Factor (PLF) is an important indicator used to measure

operational performance of thermal power plants. PLF represents the rate of

capacity utilisation achieved by the power plant. Technically, it is defined as

the ratio of the actual energy generated in a year to the energy that could be

generated if the plant was operated at its full rated capacity. Mathematically,

it can be written as:

Actual Energy Generated (Kwh)

Plant Load Factor = -------------------------------------------×100

Rated Capacity in KW×8760 (No of hours in a year)

For a thermal power plant, if the plant load factor less than 60%, the

performance is considered to be unsatisfactory. A PLF below 60%

technically means that the plant’s capacity could not be utilised for more

than one third of the total time due to some technical problem in the plant or

97

because of fuel shortage. Plant Load Factor for the state of Punjab and

national average is presented in Table 4.1.

Table 4.1: Plant Load Factor of Punjab and National Average

(in percentage)

Year PLF of Punjab PLF of all India

1980-81 38 42

1985-86 59 52

1988-89 56 55

1992.93 50 57

1993-94 64 61

1994-95 57 60

1995-96 55 63

1996-97 66 64

1997-98 69 65

1998-99 69 64

1999-00 75 67

2000-01 78 69

2001-02 79 70

2002-03 74 72

2003-04 77 73

2004-05 77 75

2005-06 80 77

2006-07 83 74

2007-08 88 76

2008-09 85 77

2009-10 88 77

Source: Planning Commission, (Data Tables), website

Power Finance Corporation Reports (Various Years)

The Table 4.1 shows that in early 1980s, the performance of thermal

power plants of Punjab was not satisfactory. For example in 1980-81, the

average PLF of Punjab stations was just 38%. Thereafter, some

improvement was reported in the PLF. The PLF increased to 59% in 1985-

98

86. However, it was reported less than the national average for the FY 1992-

93. Because of two reasons, the efficiency of thermal power stations was

very low. One, there was a lack of adequate coal supply, the plant capacity

could not be fully utilised. Secondly, poor maintenance of the power plants

was another important reason for the low PLF. However, from 1995-96 the

thermal plants of the state have reported significant improvements in the

capacity utilization. From 1997-98 onwards, the operational efficiency of

thermal power plants was improved significantly. Adequate attention was

provided to undertake the repair and maintenance of the power plants.

Consequently, the PLF of PSEB remained much above than all India

average during most of the post reforms period. This may be considered as a

remarkable improvement in the technical performance of PSEB.

The data on PLF needs to be analysed examining the plant wise

details. There were high variations in the performance levels achieved by

various power plants in the state. More details on PLF are given in the Table

4.2. It may be noted that some of the thermal power stations in the state have

shown significant improvements in the operational performance. For

example, the PLF reported by GHTP Lehra Mohabat improved from 59% in

1998-99 to 96% in 2009-10. On the other hand, the performance of GNDTP

Bhatinda power station was not very much satisfactory in comparison to

99

other plants. Further, there were high fluctuations in the PLF reported by the

plants during different years. For example the PLF was reported to be 72%

in 2001-02. It declined to 52% in the FY 2004-05. Then, from 2004-05

onwards, the PLF has increased continuously. So, there is scope for further

improvement in the overall Plant Load Factor if proper renovation and

maintenance work is undertaken in the operation of power plants.

Table 4.2: Plan Load Factor of Power Plants in the State

(in percentage)

Years GNDTP,

Bhatinda

GGSSTP,

Ropar

GHTP, Lehra

Mohabat

Overall

1997-98 65.11 70.34 -- 69.10

1998-99 66.70 70.01 59.20 69.40

1999-00 68.79 74.11 81.35 74.70

2000-01 72.49 76.44 87.71 77.90

2001-02 71.70 80.20 83.55 79.20

2004-05 51.69 82.28 89.94 77.5

2005-06 57.84 84.52 85.51 79.9

2006-07 56.8 88.52 93.58 83.1

2007-08 77.83 88.54 95.1 87.65

2008-09 73.83 87.07 94.89 85.48

2009-10 70.66 91.11 96.44 88.43

Source: Basic Statistics issued by PSERC

Auxiliary Consumption

Auxiliary consumption is considered as an indicator measuring the

technical efficiency of thermal power plants. It represents the amount of

electricity consumed by the plant itself in the process of electricity

generation. During the stage of production some electricity is used to meet

100

the cooling, lighting and logistic needs of the plant. It can be calculated

using the following formula:

Auxiliary Consumption = Total Energy Generation- Energy Received at

the Bus Bar

Auxiliary consumption efficiency is defined as the ratio of the auxiliary

consumption to the total energy generated by the power station. The

auxiliary consumption of power stations in Punjab and all India average is

given in the Table 4.3.

Table 4.3: Auxiliary Consumption of Punjab All India Average

(in percentage)

Year Auxiliary consumption

Punjab

Auxiliary consumption

All India

1994-95 4.49 7.44

1995-96 4.46 7.11

1996-97 4.36 6.59

1997-98 5.01 7.15

1998-99 4.69 7.04

1999-00 5.54 7.20

2000-01 5.47 7.19

2001-02 5.20 7.06

2004-05 5.84 8.57

2005-06 5.96 8.46

2006-07 6.10 8.30

2008-09 6.18 8.36

2009-10 6.36 8.36

Source; Planning Commission report for the year 2002

PFC report and CEA report (2008, 2009)

It is shown in the Table 4.3 that auxiliary consumption in Punjab was

much lower than all India average. However, it shows an increasing trend of

101

the auxiliary consumption of the power stations in the state. The auxiliary

consumption has increased from 4.49% in 1994-95 to 6.18% in 2008-09.

The main reason for increasing auxiliary consumption is the older life of the

power plants. Over the time, the plants are becoming older, requiring high

auxiliary consumption of power. It can be reduced by taking various

measures such as proper repair and maintenance of the plants. So, there is a

need to undertake proper and timely maintenance of power plants so that the

auxiliary consumption is reduced.

Transmission and distribution losses in the state

The high transmission and distribution losses were identified as one of

the main reasons responsible for poor performance of the State Electricity

Boards (SEBs) in India. Energy losses basically consist of technical losses

and non-technical losses. Some technical losses occur due to inherent

characteristics of the generation, transmission and distribution systems. In

the process of transmission, transformation and distribution activities, some

amount of energy is consumed by the conductors used as part of network

system. Many times, energy is wastefully consumed due to defectiveness of

equipments such as loose conducting and wiring. Energy is also consumed

in the process of transformation from one voltage level to another, which is

also a part of technical losses.

102

Non-technical losses are also termed as commercial losses. The

commercial losses are resulted from unaccounted and unpaid use of energy.

This may be the result of inaccurate metering and poor billing methods.

Another major component of commercial losses is the pilferage of power

that is made by unauthorised users.

In past, various SEBs including PSEB computed T &D losses by

computing as the difference between power available for sale and the energy

attributed to consumers on arbitrary basis. Since most of the power supply to

agriculture sector was unmetered, so the estimates of energy consumption

were not very much reliable. Therefore, PSERC had directed to PSEB to

evolve a scientific methodology to make accurate estimation of the

consumption as well as energy losses. The estimates of T&D losses are

given in the Table 4.4.

103

Table 4.4 Transmission and Distribution Losses in Punjab

Year T&D losses (Million Units) T&D losses (in percentage)

1991-92 3595 22

1992.93 3507 20

1993-94 3754 20

1994-95 3421 17

1995-96 3706 18

1996-97 4187 19

1997-98 4363 19

1998-99 4582 18

1999-00 4909 18

2000-01 7319 27

2002-03 7002 24

2003-04 7952 26

2004-05 7678 25

2005-06 9232 28

2006-07 9569 27

2007-08 8834 23

2008-09 7416 20

2009-10 8142 25

Planning Commission Report, Oct. 2002

PSEB: Electricity Statistics of various years.

PSERC: Tariff Orders (various year)

It may be noted from the Table that T&D losses were quite high in the

state. It lies in the range of 17% to 28% for the period of 1991-92 to 2009-10

where as the maximum acceptable limit is about 15% as per norms and

standards laid down at the national as well as international levels. In India,

some distribution companies in various states such as Andhra Pradesh,

Karnataka, Gujarat, etc. have controlled the T&D losses to the limit of 15%.

104

As stated earlier on major problem regarding T&D losses is the

accurate estimation of the energy consumed by the agriculture sector. Most

of the power supply to farm sector was un-metered and farmers were billed

on the basis of flat rate tariff structure. Therefore, it was not possible to

make a reliable estimate of the consumption made by the agricultural sector.

At the same time, PSEB had a tendency to overestimate the agricultural

consumption so that it can conceal the high transmission and distribution

losses. When the Punjab State Electricity Regulatory Commission (PSERC)

came into existence, it questioned the estimates made by erstwhile PSEB

about the agricultural consumption and energy losses. It also used an

alternative approach for the purpose of making accurate estimation of the

energy consumption and energy losses. It directed the PSEB to separate the

agriculture feeder from the rural feeders. Then, on the basis of feeder

metering, the consumption of agriculture sector was estimated. Ultimately, it

was confirmed that PSEB was overstating the consumption of agriculture

sector because of the following two reasons:

1. By overestimating the electricity consumption in agriculture sector,

the PSEB was able to understate the actual energy losses. Major part

of the unaccountable consumption was booked to the agricultural

sector.

105

2. It helped PSEB in justifying its claim for higher subsidy from the state

government. In Punjab, farm sector is being provided power supply

free of cost. The estimated subsidy for the ensuing year is based on

the estimated power consumption to be made by the farm sector.

However, PSERC started reducing the proposal estimates of agricultural

consumption. It was observed that the actual energy losses were much

higher than the claim made by PSEB. It started lifting up the energy losses to

make a reliable estimate of the energy losses. That is why in the post 1999-

2000 period, the energy losses were higher than the levels which were earlier

reported by the Board. The commission directed the utility that the power

supply to all consumers including agriculture sector should be fully metered.

So, the distribution company should ensure complete 100% metering at

consumer ends.

It is concluded that the high level of transmission and distribution losses

is one of the major problems in the development of power sector in the state.

Another important matter is the under recovery of sale revenue form

electricity consumers. In the pre-reforms period, under-recovery of dues was

also reported as one of the major factor responsible for poor financial

performance in the power sector. In the next sub-section, an analysis of

collection efficiency has been undertaken.

106

Recovery of Electricity Dues

Smooth recovery of dues from consumers is essential for the sound

financial health position of a distribution company. A utility is not expected

to be financially secure unless the electricity dues were being fully recovered

from consumers. In the pre-reforms period, under recovery of consumer

dues was identified as one of the major factors responsible for the poor

financial health of the Punjab State Electricity Board. This was also

highlighted in the report of Expert Group on Power1.

Table 4.5: Collection Efficiency of Distribution Company in Punjab

(in percentage)

Financial Year Revenue Collection efficiency

2004-05 99.61

2005-06 98.01

2006-07 97.66

2007-08 100.44

2008-09 93.63

2009-10 99.03

Source: PFC Report for various years

It is presented in the Table 4.5 that the collection efficiency of

distribution company has reported to be satisfactory. The collection

efficiency was reported approximately 100% for the period from FY 2004-

05 to 2009-10 except FY 2008-09. It is an instrument of improving financial

performance of the distribution company. It may also be noted that 100%

recovery ratio for a specific financial year does not mean that nothing was

1 Report of the Expert Group on Power under the chairmanship of Gajendra Haldea (March 2003) Pg. 18

107

due towards consumers for that year. Whenever, some incentives were given

to consumers to pay their pendent dues, they were responsive towards such

time of schemes. Consequently, a jump was reported in the collection

efficiency. Therefore, the revenue collected in the current years also includes

the money collected on account of dues pending towards consumers.

However, if the collection efficiency is 100% or around it for a longer period

on continuous basis, it implies that the distribution company was able to

recover the dues adequately.

Aggregate Commercial and Technical Losses (AT&C Losses)

The estimated T&D losses were only an intelligent guess and not

based on the accurate data. More than 70% of the total electricity supply to

agriculture sector was un-metered. Hence, estimates of T&D losses were

not very reliable to assess the actual technical and financial performance of

the power utilities. So, a new concept namely Aggregate Technical and

Commercial losses (AT&C) losses was used across various states in the post

reforms period. These are calculated combining the technical & non-

technical losses and non-recovery of dues. AT&C method is understood as

superior over the T&D losses. By using this method, it is convenient to make

a comparison of various states about their overall financial position. The

performance of power utilities about AT&C is presented in the Figure 4.1. It

108

reveals that the AT&C losses were lesser in Punjab than the national

average.

24

34.33

25.84

34.54

24.88

32.07

24.3429.24

18

23.85

17

23.17

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Figure 4.1: AT&C losses in Punjab and All India Average

(%age)

Punjab

All India

Source: Power Finance Corporation Report (2011)

It is shown in the Figure 4.1 that in the recent years, there are some

improvements in the reduction of AT&C losses. The most contributing

factor towards loss reduction is the improvement in the recovery of dues

from consumers. As stated earlier the recovery of dues has increased

substantially. Consequently, the AT&C losses have been showing

decreasing trends. However, the technical and non-technical losses are still

very high. So the distribution company should focus more in order to reduce

these technical and non-technical losses. It can be done though renovation

and modernisation of transmission and distribution system. Ministry of

Power (MoP) has been providing financial support under its programme

namely Accelerated Power Development and Reforms Programme

(APDRP). Therefore, such initiative may be utilised so that the loss level is

109

further reduced in the state. In order to reduce the commercial losses,

adequate focus is required to ensure accurate metering and billing process.

IV.2 Financial Performance of the PSEB

Overall profitability of a utility depends upon its technical and

financial performance. Only a utility having sound financial health position

can attract adequate investment for the development of the sector. A utility is

said to be financially viable if it is able to fully recover its operating

expenses and to earn a reasonable rate of return on its net capital base. After

independence, in the power sector more focus was to boost up the generation

capacity to meet the increasing demand for power. Therefore, initially

respective state governments made huge investment to expand the

transmission and distribution network. As stated in Chapter 3, about 30% or

more of total plan expenditure was spent on the development of power

sector. However, because of emergence of other priorities, it was not

feasible for the state government to spare the larger budgets for the

electricity sector. It was realised that SEBs should be made commercially

viable and self sustainable entities. In this regard, an amendment to the

electricity (supply) act, 1948 was made requiring respective SEB to earn a

rate of return not less than 3% on its net capital base after meeting all its

operating expenses.

110

But the financial performance of the most of the SEBs including

PSEB did not remain very attractive over the period of time. Because of

their inability to generate revenue surplus, the commercial losses increased

rapidly. Under the pressure of sstate government, the tariff for some

category of consumers such as agriculture and domestic sector was kept very

low in comparison to the cost of supplying power. In this section, the

financial performance of the PSEB is highlighted. A comparison of the cost

of supply and average revenue realised from various consumers has been

undertaken. It also examines the adequacy of average electricity tariff to

recover the cost of supply from various categories of consumers. Finally, the

role of state government is also examined in paying the promised subsidy on

account of subsidised power supply to farm sector.

Average Revenue realized in relation to cost of supply

Average cost of supply or average operating expenditure comprises all

essential expenses required to keep the electricity supply system in the

working condition. Fuel cost, power purchase cost, operation and

maintenance cost, interest, depreciation are the main elements of operating

expenditure in the power sector. There has been a continuous increase in the

average cost of electricity. This was because of rapid increase in various

types of expenses such as fuel cost, power purchase cost, employee cots, etc.

111

Average revenue may be define as the per unit revenue realised from

the sale of power to all consumer categories. Cost recovery is the ratio of

average revenue realization to the average operating expenditure incurred by

the Company. It may be noted this ratio was less than one for the PSEB. It

shows that there was a gap revenue gap. The average cost of supply was

higher than the average revenue realised. A comparison of average cost of

supply and average revenue realised is presented in Table 4.6.

Table 4.6: Revenue Gap and Cost Recovery Ratio from Sale of Energy

Year

Average

cost

Average Revenue

(with subsidy)

Revenue

Gap

Cost Recovery

Ratio

1990-91 107 55 52 51

1994-95 155 108 47 70

1997-98 243 146 97 60

1999-00 245 161 84 66

2003-04 294 255 39 87

2004-05 357 203 154 57

2005-06 247 205 42 83

2006-07 285 201 84 71

2007-08 305 201 104 66

2008-09 313 232 81 74

2009-10 332 223 109 67

Source: Planning Commission, Oct. 2002

PSEB, Electricity Statistics (various financial years)

PSERC, Tariff Order (various financial years)

112

It may be noted from the Table 4.6 that average cost of supply has

been increasing at a rapid growth rate. It increased from 107 paise per unit in

1990-91 to 245 paise per unit in 1999-00 and 332 paise per unit in 2009-10.

At the same time period, the average tariff increased from 55 paise per unit

in 1990-91 to 161 paise per unit in 1999-00 and 223 paise per unit in 2009-

10. However, the gap between average tariff and average cost has been

showing an increasing trend. The reported gap was highest in 2004-05. It

indicates that losses were increasing on the sale of every unit of electricity.

Under these conditions, it becomes very crucial to examine how far the

PSEB could recover its average cost of supplying electricity. Average cost

of supply and average revenue realised are plotted in the Figure 4.2. Cost of

recovery from tariff increased from 51% in 1990-91 to 70% in 1994-95 but

again declined in 2004-05. We can state that average tariff (including the

subsidy received from the state government) did not increase at the same

rate at which average cost was increasing. The increasing gap has adversely

affected the financial viability of the power sector utilities in Punjab.

113

Figure 4.2: Average Revenue and Average Cost

0

100

200

300

400

1990-91 1994-95 1999-00 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

AC

AR

We can examine from the Figure 4.2 that the gap was highest in the

FY 2004-05. This highest gap was reported due to the rapid increase in

average cost of supplying power to consumers. The reported revenue gap

was lowest for the FY 2005-06. In subsequent years, one an average the

revenue gap has increased. Hence, we can say that the position of the utility

in revenue realization was very poor in the state. It shows that PSEB was

unable to recover its cost through tariff. It resulted in poor financial

performance of the PSEB. Over the years; the accumulated losses have

increased manifolds. Hence the Distribution Company (PPDCL) should

undertake some effective remedial measures to increase the average revenue

realisation from consumers. It should also take steps to cut down the

avoidable & wasteful expenses.

Further, the cost recovery of the system is not homogeneous across

various consumer categories. The average tariff applicable to various

consumer categories differs widely. The tariff payable by domestic and

114

agricultural consumer was very low. These consumer categories are charged

below than average cost incurred for supplying electricity to them. A details

of average revenue realised from various consumers is given in the Table

4.7.

Table 4.7: Consumer Category wise Average Revenue Cost of Supply

(Paise Per unit)

Year Average Revenue Realised

Average

cost*

Domestic Agriculture Commercial Industrial

1991-92 87 10 161 104 94

1994-95 121 35 210 167 155

1997-98 149 00 294 252 243

1999-00 195 00 367 289 245

2003-04 266 57 451 371 294

2004-05 259 61 424 339 357

2005-06 283 28 451 373 247

2006-07 274 03 447 373 285

2007-08 253 02 431 368 305

2008-09 268 00 459 397 313

2009-10 293 00 493 431 332 Source Planning Commission Report on working of State Electricity Boards and

Electricity Departments (various years)

Report of the Power Finance Corporation (various years)

* Average cost refers to the average system cost which is assumed to be the same for all

consumer categories.

In 1991-92, the agriculture and domestic were charged only 10 paise

and 87 paise per unit respectively. While the average cost of supply was 94

paise per unit for these categories. On the other hand some consumer

categories such as commercial, industrial, etc. were paying comparatively

115

higher tariff. The tariff for commercial users was 161 paise per unit in 1991-

92. It shows there was high cross subsidisation in the power sector.

Industrial and Commercial consumers were required to generate surplus

revenue to cross-subsidise the agriculture sector.

It reveals that average revenue realised from commercial sector is

highest among all the categories of consumers for the FY 2009-10. Further,

the average revenue realised from this category is greater than average cost

of supply during the whole time period under consideration. At the same

time, industrial consumers have also been paying higher tariff than the

average cost of supply for the same time period. The average revenue

received from the domestic and agriculture consumers is lower than the

average cost of supply of the system. Hence, we can say that cost recovery

form commercial and industrial sector is above 100%. It may be noted that

cost recovery is different from the collection efficiency. Collection

efficiency only means the efficiency ensured in collecting the dues while the

cost recovery ratio represents the ratio average revenue realised from the

consumer category to the cost of supply applicable to that category.

However, in case of domestic and agriculture consumer categories, the cost

recovery ratios are less than 100%. The cost recovery ratios for various

consumer categories are presented in the Table 4.8.

116

Table 4.8: Consumer Category Wise Cost Recovery Ratio

Year Domestic Agriculture Commercial Industrial

1991-92 93% 11% 171% 111%

1994-95 78% 23% 135% 108%

1997-98 61% 0% 121% 104%

1999-00 80% 0% 150% 118%

2003-04 90% 19% 153% 126%

2004-05 73% 17% 119% 95%

2005-06 115% 11% 183% 151%

2006-07 96% 1% 157% 131%

2007-08 83% 1% 141% 121%

2008-09 86% 0% 147% 127%

2009-10 88% 0% 148% 130%

Source: Planning Commission Report (2002)

Tariff Orders of PSERC (From FY 2001-02 to FY 2011-12)

It may be observed from the Table 4.8 that cost recovery ratio for the

commercial consumer category was the highest across the years. The

recovery ratio of the industrial sector was lower than the commercial sector.

It may be noted that actual average cost of electricity supply to the industrial

sector is less than that of other consumer categories. Most of the industries

117

receive the energy at a higher voltage level which is also called high tension

(HT) voltage. Technically, the cost of supply at HT voltage is less than the

cost of receiving supply at a Low Tension (LT) line. So, effectively the

industrial as well as commercial consumer categories were generating

surplus revenue to cross-subsidise the agricultural and domestic consumer

categories. The cost recovery ratio was less than 100% for domestic

categories for this period except the FY 2005-06

It implies that the average cost was not being fully recovered from the

domestic consumer category. There were high fluctuations in the cost

recovery ratios for domestic sector during across various financial years.

The average recovery for agriculture sector has been at the lowest

level among various consumer categories. About one third of the total

electricity sold is consumed by the agriculture sector. The farmers have been

receiving power free of cost.

Issues in Subsidy and Cross Subsidy

As was stated in pervious section, the cost recovery from agriculture

sector was nil. This sector was getting a large amount of electricity subsidy

and has been enjoying free power supply since 1997-98. Thought the free

power was discontinued for some period (from FY 2003-04 to FY 2005-06),

however, it was restored w. e. f. April 1st 2006 (tariff Order 2006-07 issued

118

by PSERC, Table 5.7 of the Order). Free supply was highly criticised on

different platforms. During the Chief Ministers’s conference held in 1996, it

was concluded that no state would charge price less than Rs 0.50 per unit

from any category of the consumers. The main objective was to discourage

the high subsidisation existing in the sector. The state government has been

providing subsidy to compensate the losses incurred by utility. The details

on subsidy received from the state government are given in the Figure 4.3.

499 720

1313 14691737

28482602

3144

0

1000

2000

3000

4000

1990-91 1994-95 1998-99 2003-04 2006-07 2007-08 2008-09 2009-10

Figure 4.3: Subsidy Received from the Government (Rs Crore)

The Figure 4.3 highlights that the actual amount of agriculture subsidy

increased from Rs.499 crore in 1990-91 to Rs. 1313 crore in 1998-99 and

reached to Rs. 1773 crore in 2006-07. In 2006, the Government of Punjab

reintroduced free power supply to agriculture. Therefore, the amount

payable on account of subsidy to agriculture sector increased rapidly after

the FY 2006-07. The subsidy amount jumped to Rs. 3144 crore in 2009-10.

However, the subsidy paid by the state government was not adequate to

119

compensate the full cost of supply on account of free power supply to

agriculture sector.

Apart from the agriculture sector, the power supply to domestic

consumers was also being subsidised. Under some schemes such as Rajive

Gandhi Grameen Vidyutikaran Yojana (RRGVY) the small and Below

Poverty Line (BPL) households were being subsidised. Therefore, the state

government is required to compensate the Company on this account.

Subsidy made available to small and BPL consumer category is presented in

the Figure 4.4.

Figure 4.4: Subsidy Available for Domestic Consumers

45.3476.98

310

190.6

145.52

314.18

243

0

50

100

150

200

250

300

350

1990-91 1994-95 1997-98 1999-00 2003-04 2006-07 2008-09

It shows that amount of subsidy for domestic consumers increased

from Rs. 45.34 crore in 1990-91 to Rs. 310.75 crore in 1997-98. After that, it

120

reduced in 1999-00 and 2003-04. It again increased for the financial year

2006-07. So, it shows that the subsidy was made available on arbitrary basis.

The subsidy needs to be rationalised so that all consumers pay according to

cost of supply. Only genuine consumers should be provided subsidy.

Otherwise, the wastage of scare economic resource would be continuing at

the public cost.

Cross Subsidisation

PSEB like other SEBs, pursed the policy of cross subsidization to

generate the surplus revenue to compensate the losses on account of

subsidized electricity supply provided to agriculture and domestic

consumers. The average recovery of the cost was more than 100% for

commercial and industrial consumer categories. The amount of cross

subsidy generated by industrial and commercial users is presented in the

Figure 4.5.

121

Figure 4.5: Cross Subsidy Generated by Commercial and Industrial Sectors

-71.1

219.44

953.09

522.73

354.4

-200

0

200

400

600

800

1000

1200

1990-91 1997-98 2003-04 2006-07 2008-09

It is presented in the Figure 4.5 that in 1990-91 surplus generated by

commercial and industrial users was negative. In 1997-98 and 2003-04

surplus generated by commercial and industrial users is showing an

increasing trend. It was highest in 2003-04 but it declined in 2006-07 and

2008-09.

It showed that the level of net subsidy in Punjab has been very high.

The magnitude of subsidy has been increased after the reform process. It was

mainly because of two reasons. One, the total subsidy to domestic sector and

agriculture sector increased significantly during the post reforms period.

Two, after the enactment of the Electricity Act 2003, the scope for heavy

cross subsidisation has reduced. As per provisions of the Electricity Tariff

Policy, the regulatory commissions are required to eliminate the cross-

subsidisation from the sector. Consequently, the subsidy bill of the state

government has been increasing rapidly. The subsidy received as a

122

percentage of total revenue received from sale of power has increased

rapidly.

Table 4.9 Share of Subsidy in Sale Revenue (Rs Crore)

Year

Subsidy received Percentage of sale revenue

2004-05 2285 15.78

2005-06 1436 22.24

2006-07 1424 20.94

2007-08 2848 37.15

2008-09 2602 29.84

2009-10 3144 37.71

Source: Report of the Power Finance Corporation on Performance of State

Power Utilities (2004-05 to 2009-10)

It is shown in the Table 4.9 there was an increasing trend of subsidy

received from the state government. The percentage share of subsidy in the

total sale of power has increased from 15% in 2004-05 to 38% in 2009-10.

So, it shows that the dependency on the subvention received from the state

government has increased substantially. It concludes that ability of the

distribution company to generate adequate revenue has declined. The high

dependency on the public exchequer for the purpose of meeting current

expenditure is not a good indicator of sound financial health of the

distribution company.

123

Commercial losses without and with subsidy

Commercial losses may be defined as the gap between total revenue

received from sale of energy and total expenditure incurred by a utility in a

financial year. Total revenue includes the subvention given by the state

government in lieu of free power supply made available to agriculture

sector. Total expenditure includes operating expenses, payments towards

depreciation and interest payable to the state governments as well as

financial institutions. Table 4.10 presents the detail of commercial losses

without and with subsidy.

Table 4.10: Commercial Losses with and without subsidy

Year Losses without subsidy Losses with subsidy

1990-91 580 580

1995-96 644 644

1997-98 943 943

2002-03 2351 1636

2003-04 2478 1571

2004-05 2359 1403

2005-06 2224 1109

2008-09 3242 640

2009-10 2183 1585

Source: Planning Commission and PFC Reports for the respective years

Table 4.10 presents that commercial losses with subsidy have been

increased. However, commercial losses with subsidy are reported highest in

2002-03. For the FY 2009-10 the commercial losses with subsidy were

reported to be Rs. 1585 Crore in compassion to Rs. 2183 Cores as the losses

124

without (excluding) subsidy paid by the government. It shows that net cash

transfers were inadequate to compensate the Distribution Company. So,

there is an urgent need to provide adequate attention to reduce the losses

increased by the utility.

We may conclude that the operational performance of the power

generation as well as distribution company of Punjab has improved

significantly. There was adequate progress in improving the Plant Load

Factor and reducing the energy losses. At the same time, recovery of dues

has also increased significantly and reported satisfactory in the recent years.

However, the financial performance of the power sector of Punjab was still

unsatisfactory. The utility was reporting huge commercial losses. The main

reason for poor financial performance is the lower tariff for domestic users

and free power supply for the farm sector. Moreover, the state government

was not paying adequate subsidy to compensate the utility on account of free

power supply to the agriculture sector. Hence, there is an urgent need to

rationalise the electricity tariff to improve the financial performance of the

power utility. The State Government should pay the promised subsidy by

making actual transfers of cash to the Company within the stipulated time

limits.