91157
DIREC TIONS IN DE VELOPMENT
Energy and Mining
Governance of Indian
State Power Utilities
An Ongoing Journey
Sheoli Pargal and Kristy Mayer
Governance of Indian State Power Utilities
Direc tions in De velopment
Energy and Mining
Governance of Indian State
Power Utilities
An Ongoing Journey
Sheoli Pargal and Kristy Mayer
© 2014 International Bank for Reconstruction and Development / The World Bank
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ISBN (paper): 978-1-4648-0303-1
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Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Contents
Acknowledgments ix
About the Authors xi
Executive Summary xiii
Abbreviations xvii
Chapter 1 Introduction 1
Notes 3
References 4
Chapter 2 Institutional Context 5
Notes 7
References 7
Chapter 3 Corporate Governance of State Power Utilities 9
Objectives of Unbundling and Corporatizing State Utilities 11
Corporate Governance Requirements for State
Utilities in India 13
Findings—Corporate Governance in Practice 14
Notes 34
References 36
Chapter 4 Regulatory Governance 39
Mandates of SERCs 40
Implementation of Regulatory Mandates 41
Institutional Design: SERC Autonomy, Capacity,
Transparency, and Accountability 52
Indexes on Institutional Design and Implementation
of Mandates 59
Notes 64
References 66
Chapter 5 Relationships between Governance and Utility
Performance 67
Corporate Governance 69
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 v
vi Contents
Governance and Performance 74
Notes 78
Chapter 6 Conclusions 79
Corporate Governance 79
Regulatory Governance 80
Recommendations 82
Notes 85
References 85
Appendix A Corporate Governance Requirements in India 87
Notes 89
Reference 89
Appendix B Coverage of Electricity Utilities 91
Appendix C Utility Performance on Corporate Governance Indexes 95
Appendix D Corporate Governance Data 97
Appendix E Coverage of State Electricity Regulatory Commissions 103
Appendix F SERC Performance on Regulatory Governance Indexes 105
Appendix G Regulatory Governance Data 107
Boxes
3.1 Literature on Corporate Governance 10
3.2 Types of Directors 14
3.3 Shunglu Committee Recommendations on Corporate and
Regulatory Governance 15
3.4 Corporate Governance as an Instrument of Change in
West Bengal 29
3.5 Corporate Governance in a High Performing Joint
Venture—Tata Power (Delhi) 31
3.6 Organizational Transformation and a Turnaround in
Performance in Gujarat 31
4.1 SERC Responsibilities 42
4.2 The Cost of Regulatory Assets 46
4.3 Involving Consumers as Stakeholders: Selected SERC
Experiences 58
6.1 MoUs 84
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Contents vii
Figures
2.1 Timeline—Establishment of SERCs 6
2.2 Timeline of Power Sector Unbundling (Orange) and Central
Electricity Acts and Policies (Green) 6
3.1 Power Sector Structures, 2010 12
3.2 Utilities with More than Two Government Directors 17
3.3 Government Involvement in Different Utility Decisions 18
3.4 Utilities with Board Share of Independent Directors Meeting
DPE Guidelines 19
3.5 Utilities That Have a Dedicated Regulatory Cell 20
3.6 Utilities That File Their Accounts on Time and Make Accounts
and Audit Reports Public 21
3.7 Average Chairperson/Managing Director Tenure 22
3.8 Number of Directors on Utility Boards 23
3.9 Average Number of Board Meetings per Year 24
3.10 Utilities with Audit Committees 25
3.11 Utilities with an Independent Director Chairing the Audit
Committee 25
3.12 Utilities with Executive Directors Constituting Less or More
than Half of Board Members 26
3.13 Utilities with an ERP System or Advanced MIS 26
4.1 Ratio of Average Billed Tariff to Operating-Cost-Recovery
Level and to Average Operating Cost, 2010 43
4.2 Change in Ratio of Average Billed Tariff to Operating-
Cost-Recovery Level, 2003–10 44
4.3 Measures Taken by SERCs to Protect Consumer Rights 48
4.4 Number of Regulations Notified by SERCs 49
4.5 Types of Regulations Notified by SERCs 50
4.6 Action Taken on OA by SERCs 51
4.7 Action Taken on Renewable Energy and Energy Efficiency
by SERCs 52
4.8 Share of SERC Budget from Own Resources 53
4.9 Tenure of Chairperson and Other Commission Members 54
4.10 SERC Budget per Household 55
4.11 SERC Staff Strength 56
4.12 SERC Activities Related to Participation and Transparency 57
4.13 Index of Institutional Design vs. Index of Implementation
of Mandates 61
4.14 Institutional Design Index Scores 62
4.15 Implementation of Mandates Index Scores 62
5.1 Detailed CG Index Score vs. Profit per Unit Excluding
Subsidies 71
5.2 Institutional Design Index and Implementation of Mandates
Index vs. Profit per Unit Including Subsidies 73
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
viii Contents
Tables
3.1 Share of Utilities in Compliance with Indicators That
Constitute the Basic Index 28
3.2 Characteristics of the Top Five Utilities Covered in the
Detailed Index 29
3.3 Utility Performance on the Detailed Index 33
3.4 Correlation among Corporate Governance (CG) Variables 34
4.1 Indexes of SERC Institutional Design and Implementation
of Regulatory Mandates 60
4.2 Correlation among Components of Institutional Design Index 63
4.3 Correlation among Components of Implementation of
Mandates Index 63
5.1 Summary Statistics 68
5.2 Correlation between Corporate Governance Variables and
Performance 70
5.3 Correlation between Regulatory Governance Indexes and
Utility Performance 72
5.4 Regression of Utility Performance on State, Utility, and
Corporate Governance Variables, 2010 75
5.5 Regression of Utility Performance on State, Utility, and
Corporate Governance Variables, 2011 76
5.6 Regression of Utility Performance on State, Utility, and
Regulatory Governance Variables, 2010 77
5.7 Regression of Utility Performance on State, Utility, and
Regulatory Governance Variables, 2011 77
B.1 Coverage of Electricity Utilities 92
C.1 Basic and Detailed Index Scores 95
D.1 Basic Corporate Governance Data 98
D.2 Detailed Corporate Governance Data 101
E.1 Coverage of SERCs 104
F.1 Regulatory Governance Index Scores 106
G.1 Institutional Design Data 108
G.2 Implementation of Mandates Data: Tariffs and Standards
of Performance 109
G.3 Implementation of Mandates Data: Consumer Protection
and Other Regulations 110
G.4 Implementation of Mandates Data: Open Access and
Renewable Energy/Energy Efficiency 111
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Acknowledgments
This review was carried out by the World Bank at the request of the Department
of Economic Affairs of the Ministry of Finance in India under the auspices of the
umbrella work program titled India Power Sector Review, led by Sheoli Pargal
and Sudeshna Ghosh Banerjee.
The report relies on background research and data collected by a consulting
team from PricewaterhouseCoopers, India, led by Ashok Varma and Debasis
Mohapatra and supplemented by information provided by a consulting
team from Deloitte, India, led by Shubhranshu Patnaik and Anujesh Dwivedi.
Amrita Kundu, Pranav Vaidya, and Joeri de Wit provided critical quality assur-
ance. Ian Driscall, Rohit Mittal, Sudeshna Ghosh Banerjee, Mohua Mukherjee,
Mani Khurana, Kavita Saraswat, Praveer Sinha, Luis Alberto Andres, Sebastian
Azumendi, and Ashish Khanna provided essential constructive inputs. The
authors thank Prabhat Mishra and Ashish Vachhani from the Department of
Economic Affairs of the Ministry of Finance for useful conversations while
framing the review, and the members of the Technical Advisory Panel for the
India Power Sector Review, especially J. L. Bajaj, Shantanu Dixit, and Sunil Mitra,
for advice and suggestions throughout. Finally, the authors thank the peer
reviewers, Alex Berg and John Nellis, for substantive, helpful comments.
Financial support from the Energy Sector Management Assistance Program is
gratefully acknowledged.
Bruce Ross-Larson, Jonathan Aspin, and Jack Harlow at Communications
Development Incorporated edited this report.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 ix
About the Authors
Sheoli Pargal is an economic adviser in the World Bank’s Department for
Sustainable Development in the South Asia region. She has worked across infra-
structure sectors on a range of topics including regulation and governance, pri-
vate sector participation, public-private partnerships, and industrial pollution,
with a focus on analytical and technical advisory work. In 20 years at the World
Bank she has had assignments in the research department; the Latin America and
Caribbean, Europe and Central Asia, and South Asia regions; and corporate
policy and operations units. She has also worked in the Planning Commission in
India. Pargal has a PhD in economics from Northwestern University and BA and
MA degrees in economics from St. Stephen’s College and the Delhi School of
Economics, respectively, at Delhi University.
Kristy Mayer is a quantitative analyst with Opower, Arlington, VA. Most recently
she was an energy economist in the World Bank’s Department for Sustainable
Development in the South Asia region, where she focused on electricity tariffs
and subsidies, electricity sector regulation, electricity system financial modeling,
and energy efficiency. She has also worked at the Federal Reserve Bank of
New York and at the U.S. Department of the Treasury. Mayer has an MPA in eco-
nomic policy from Princeton University and a BA in economics from New York
University.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 xi
Executive Summary
By the late 1990s, the technical and financial performance of the power sector in
India had deteriorated to the point where the Government of India had to step
in to bail out the state utilities, almost all of which were vertically integrated state
electricity boards (SEBs). Considering that the dismal performance of state utili-
ties reflected internal and external shortfalls in governance, the new Electricity
Act of 2003 (EA 2003) mandated the unbundling and corporatization of the
SEBs, along with the establishment of independent regulators. This was expected
to bring about a more accountable and commercial performance culture, with
concomitant results in improved utility performance.
Ten years after the passage of the act, this review looks at the quality of
both corporate and regulatory governance in the power sector. It assesses
aspects of corporate governance that would be expected to increase internal
and external accountability of utilities and so improve their performance. It
reviews the institutional design of state-level regulation and assesses the extent
to which regulators have implemented key elements of their mandate, since
both would be expected to impact utility performance. Finally, this review
examines the correlations between the adoption of recommended corporate
governance practices and utility performance (indicated by profit) and between
regulatory governance (including the institutional structure and functioning of
the regulator) and utility performance.
The analysis draws on utility- and state-level data gathered under the
India Power Sector Review. The data for this review are quantitative and quali-
tative information on aspects of corporate and regulatory governance as of
2010 that were collected from interviews, utility and state electricity regulatory
commission (SERC) annual reports, and annual account statements.1 The data
cover 69 utilities in 19 states and all 28 SERCs. This report also draws upon
financial and operational data from the Power Finance Corporation’s Reports
on the Performance of State Power Utilities for selected years. In addition, gross
domestic product data from the Reserve Bank of India were compiled for
each state.
This review finds that the initiatives taken by the government on both corpo-
rate and regulatory governance are steps in the right direction. A handful of
utilities and state regulators are at the forefront of recommended practices,
but implementation varies considerably across the country. For the majority of
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 xiii
xiv Executive Summary
utilities and states, governance clearly has a long way to go, especially if it is to
bring about a more accountable, commercially oriented culture in the sector
and improve the efficiency of service delivery and overall financial and opera-
tional sustainability.
Corporate Governance
The main finding of this review is that, while most state-level power utilities are
substantially in compliance with the basic corporate governance requirements of
the Companies Act (that they are mandated to follow), significantly fewer follow
the more demanding guidelines issued by the Department of Public Enterprises
(DPE) that apply to centrally owned enterprises and are recommended for
state-owned enterprises. For example, though almost all utilities have an audit
committee, only 28 percent have an independent director heading the audit
committee, and only 56 percent have any other specialized board committees.
Utilities tend to have more government and executive directors than recom-
mended and fewer independent directors; in fact, only 14 percent of utilities
have the recommended percentage of independent directors on their boards and
many lack independent directors entirely. Tenure of the chairperson/managing
director was an average of only 2.24 years (as opposed to the recommended
appointment of 3–5 years) in the utilities reviewed.
Boards remain state-dominated, lack sufficient decision-making authority in
practice, and are rarely evaluated on performance. Political interference in
appointments to and by the board and in decision making on business aspects
remains common, and board member training and peer evaluation are conspicu-
ous by their absence. Professionalizing and empowering boards is a key agenda
item for the future.
Finally, few utilities have put the necessary processes and systems in place to
support their boards. Less than half the utilities have an advanced management
information system that would provide real-time information to the manage-
ment and board, and no utility has a corporate performance monitoring system.
Only about one-quarter of utilities consider merit when making promotion deci-
sions, and only half have a well-defined employee training policy. These aspects
suggest that organizational transformation is still a work in progress.
The empirical analysis shows that going beyond the Companies Act and
implementing the governance practices recommended by the DPE is associated
with higher utility profit per unit. An increase in the percentage of indepen-
dent directors on corporate utility boards and a decrease in the percentage of
executive directors are both associated with better financial performance. In
addition, the utilities that have developed information-driven processes,
created sound mechanisms for performance management, and made their
accounts and audits publicly available are the top performers. Thus the poten-
tial rewards of organizational transformation in terms of improved perfor-
mance outcomes are very attractive.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Executive Summary xv
Regulatory Governance
SERCs have been established in all states, though some as late as 2011. They are
expected to prevent political interference in the sector and protect the interests
of different stakeholders by regulating utility operations and tariffs. However,
they face an enormous challenge in that almost all the utilities they regulate are
state-owned. This can limit the effectiveness of standard regulatory mechanisms,
which need to be adapted to the incentive structure of public enterprises.
Key responsibilities of SERCs are that they issue licenses for distribution and
intrastate transmission; ensure nondiscriminatory open access to both transmis-
sion and distribution systems to promote competition and support the develop-
ment of a multibuyer market and power trading; regulate and rationalize tariffs
so as to cover costs; implement multiyear tariff frameworks to reduce uncertainty
and encourage investment in the sector; establish and monitor standards with
respect to quality and reliability of service by licensees; and safeguard consumer
interests, including by setting up mechanisms to redress grievances. In addition,
SERCs are tasked with drafting, notifying, and implementing a range of other
regulations.
The ability of SERCs to carry out their mandates depends on the technical,
financial, and human resources available to them, their competence, their auton-
omy in decision making (including insulation from political pressures), and,
finally, their accountability, all of which fall under the rubric of institutional
design. The analysis carried out in this review shows that there is a significant
positive association between these features and profit per unit, which underlines
how important a robust regulatory framework is for utility operations.
However, this review finds that most SERCs are still some way from an insti-
tutional design that would permit them to effectively implement their mandates.
Most important, there is no clear accountability mechanism to govern SERCs
themselves. In addition, SERCs have generally struggled to achieve true auton-
omy from state governments, in part because of relationships built into the EA
2003 itself. Many SERCs also lack the resources that might help them perform
their functions—most notably, enough professional staff and appropriate infor-
mation technology systems. Finally, most SERCs have yet to adopt adequate
transparency measures and create frameworks for meaningful public input to the
regulatory process, although a few have institutionalized “best practice” mecha-
nisms for participatory decision making.
This review also examined SERCs’ implementation of their mandates, cover-
ing six key areas identified in the governing legislation: tariffs, standards of per-
formance, protection of consumer rights, open access, renewable energy, and
regulation in other areas. Most SERCs have yet to fully implement the mandates
given them in the EA 2003. While tariffs cover average cost in a majority of
states, very few states issue multiyear tariffs. Most SERCs are nominally comply-
ing with mandates to promote consumer empowerment and to increase trans-
parency to the public, but need to do far more to ensure that consumers are
given opportunities to engage with them and that high-quality information is
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
xvi Executive Summary
available to the public. Also, though most SERCs have notified2 the key regula-
tions necessary to enact the mandates of the EA 2003, many SERCs have yet to
take concrete steps to actually implement these regulations. The review finds
that the key dimensions of institutional design described earlier are significantly
positively correlated with implementation of regulatory mandates.
Recommendations
The agendas on corporate and regulatory governance need further development
and are of urgent importance. Establishing an arm’s-length relationship between
the state and the regulator and between the state and the utility, as intended by
reforms initiated even before the EA 2003, is still a priority for the sector.
The empirical analysis underlines the potential benefits from professionalizing
and empowering utility boards, bringing in more independent directors, and, in
general, implementing corporate governance good practices (for example, the
guidelines issued by the DPE) more fully. One potential mechanism would be to
incentivize utilities to comply with requirements for listing (“shadow” listing),
which could straight away bring greater autonomy and accountability to the
boards of state utilities.
In parallel, all dimensions of the institutional design of regulation (autonomy,
transparency, capacity, and accountability) need to be enhanced. In the absence
of active and interested state legislatures (to which SERCs are technically
accountable), other ideas for increasing regulatory accountability should be
explored. Potential options include extending the mandate of the Appellate
Tribunal to encompass regular monitoring of regulators, monitoring by peers in
the Forum of Regulators with full public disclosure of findings, and periodic
evaluation by the Planning Commission.
Notes
PricewaterhouseCoopers collected the corporate governance and most of the
1.
regulatory governance data. Their data were supplemented by regulatory governance
data collected from SERC annual reports by Deloitte.
2. In India, “notifying” a regulation means the regulation has been published in the
necessary channels and is enforceable.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Abbreviations
ABT availability-based tariff
ARR annual revenue requirement
AT&C aggregate technical and commercial
CG corporate governance
CGRF consumer grievance-redressal forum
CMD chairman and managing director
CPSE central public sector enterprise
CPSU central public sector undertaking
discom distribution company
DPE Department of Public Enterprises
DSM demand-side management
EA 2003 Electricity Act of 2003
ERP enterprise resource planning
FIT feed-in-tariff
GDP gross domestic product
genco generation company
IAS Indian Administrative Service
ID institutional design
IM implementation of mandates
IT information technology
MIS management information system
MoU memorandum of understanding
MYT multiyear tariff
OA open access
PAT profit after tax
RIMS Regulatory Information Management System
RPO renewable purchase obligation
SAC state advisory committee
SEB state electricity board
SEBI Securities and Exchange Board of India
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 xvii
xviii Abbreviations
SERC state electricity regulatory commission
SOE state-owned enterprise
SoP standards of performance
ToD time-of-day
transco transmission company
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Chapter 1
Introduction
The reform of the Indian power sector initiated in the 1990s was largely
motivated by the need to improve the financial performance of the vertically
integrated state electricity boards (SEBs) that had come into being with the
Electricity Supply Act of 1948. A combination of political interference and weak
accountability over the years meant that state-owned utilities had come to have
little incentive to perform well, leading to large and increasing commercial
losses.1
While subject to commercial accounting rules from 1985, SEBs were not
companies under the law and were run by their respective state governments
through “executive instructions” that “eliminated autonomy, accountability and
innovation by SEB employees” and provided no inducement to maximize
efficiency and effectiveness (Ruet 2001). Expert opinion was that commercial-
ization and competition were critical challenges for the sector and that limiting
state government control (exercised without accountability) over SEBs would be
crucial in improving their performance:
The core of reform is better governance. State governments have controlled their
SEBs closely through key appointments, tariff setting, investment approvals and
financing, employment conditions, and bureaucratic processes. Initiatives to
improve governance must address both sector governance and corporate
governance—only thus can the states create an environment in which investors and
operators face reasonable commercial risks and consumers, regulators, and other
stakeholders honor the contractual rights of utilities to recover their revenues
(Besant-Jones 2002).
In line with this thinking, the Electricity Act of 2003 (EA 2003) mandated
both the establishment of independent state electricity regulatory commissions
(SERCs) and the unbundling of SEBs, with the successor entities coming under
the purview of the Companies Act of 1956.2 Structural change was considered a
prerequisite for strengthening utility governance and moving the sector toward
operating on commercial principles. Unbundling SEBs into separate business units
responsible for generation, transmission, and distribution would make transparent
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1 1
2 Introduction
the contribution of each entity to overall performance, and bringing them all
under the purview of the Companies Act would require the preparation and
independent audit of utility accounts, both of which could be expected to increase
accountability; corporatization would insulate them from political interference.3
Establishing regulators that were independent of the government was considered
critical to the creation of a transparent and unbiased governance framework for
the sector that could balance consumer and investor and utility interests.4
Taking this history as its starting point, this review presents the findings of an
empirical examination of utility- and state-level corporate and regulatory gover-
nance practices in the Indian power sector. It also attempts to identify whether
better corporate and regulatory governance is associated with stronger financial
and operational performance of utilities. A key contribution of the review is the
collection and presentation of data on key measures of corporate and sector
governance for a large sample of utilities and for all states in the country. In
addition, this is one of the first attempts to systematically explore the relation-
ship between governance structures and utility-level performance outcomes by
exploiting interstate and interutility variations across India.
To bring utilities to a more commercial orientation and thus achieve efficient
service delivery, efforts need not only to focus on strengthening the utility’s
management and internal operations—people, systems, and processes (Ruet
2001)—but also on improving the governance framework and institutional envi-
ronment in which the utility operates. The utility will, after all, have to respond
to external stakeholders such as government (as owner), consumers, regulators,
and lenders.
Utilities are subject to two main sets of accountability relationships: account-
ability to external stakeholders, which is conditioned by the institutional
environment in which the utility operates; and internal accountability for results,
which looks at how management and staff are held accountable for effectiveness
and efficiency. Key indicators of external accountability include whether the
utility is subject to well-defined performance targets, uses external auditors, can
secure financing from external sources on its own credentials, and is subject to an
independent regulator—and whether external groups are represented on the
utility’s advisory or oversight bodies. Indicators of internal accountability include
the responsiveness of the chief executive to the board; whether performance
targets are well defined and provide incentives, sanctions, or both; whether staff
are subject to annual performance evaluations; whether they have incentives for
achieving performance targets; and whether staff receive training to perform
their jobs (Baietti, Kingdom, and von Ginnekin 2006).
While ownership, corporate oversight, and service provision are not neces-
sarily separated in public utilities that are organized as a ministry or depart-
ment, they are generally separated in state-owned companies, in accordance
with company law. As public corporations, a board of directors is appointed for
the utility, executive management is placed in charge of day-to-day opera-
tions, and the accounts are separated from those of other state organizations
(Baietti, Kingdom, and von Ginnekin 2006). Well-run public utilities tend to
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Introduction 3
be insulated from political interference, exhibit managerial autonomy (notably
over personnel, investment, and procurement decisions), have a degree of
financial autonomy in that they generate revenues that at least cover operating
costs, and are accountable and responsive to key stakeholders.
This analysis draws on utility- and state-level data gathered under the India
Power Sector Review. The data for this review are quantitative and qualitative
information on aspects of corporate and regulatory governance and on the func-
tioning and management of utilities and state regulators as of 2010. The data
were collected in interviews, and from utility and SERC annual reports and
annual account statements.5 The data cover 69 utilities in 19 states and all 28
SERCs. The report also draws on financial and operational data from the Power
Finance Corporation’s Reports on Performance of State Power Utilities for
selected years. In addition, gross domestic product (GDP) data from the Reserve
Bank of India were compiled for each state.
The rest of this review is organized as follows. Chapter 2 summarizes the
institutional context and relevant developments over the past two decades.
Chapter 3 focuses on the corporate governance agenda adopted by the gov-
ernment and its implementation, specifically relating to the structure and
functioning of utility boards of directors. Chapter 4 reviews SERC regulatory
governance. Chapter 5 analyzes the correlation between key indicators of the
quality of regulatory and corporate governance and utility financial perfor-
mance. And chapter 6 concludes.
Notes
1. See Report of the Shunglu Committee 2011 (annex 10); Prayas Energy Group 2003;
Ruet (2001): “As far back as 1996 the Government of India was concerned about poor
management in SEBs and political interference in the day-to-day affairs of the board.
Not only were investment decisions not subject to financial evaluation, but the state
government interfered in recruitment, promotion, and transfers and undermined
efforts to limit theft of power”; Bhatia and Gulati (2004): “In India, electricity theft
leads to annual losses estimated at US$4.5 billion, about 1.5 percent of GDP. … What
stops governments from eliminating electricity theft? Vested interests of such stake-
holders as politicians, bureaucrats, labor unions, utility employees, and consumers.
Because of political interference and weak accountability, state-owned utilities have
little incentive to improve their performance.”
2. EA 2003, Part X, Part XIII. As is evident from the content of the EA 2003, the
Government of India’s incentives were quite different from the incentives of state
governments.
3. Ruet 2003. The promoters of reform also argued for unbundling or de-integration of
the former SEBs into generation, transmission, and distribution companies: “The
aim was to assess the results and responsibilities among the various activities by
de-
integration.” Also, Vete n.d.: “The Electricity Act of 2003 envisaged the “functional
disaggregation of generation, transmission, and distribution with a view to creating
independent profit centers and accountability.”
4. As countries have moved away from the traditional public sector model and intro-
duced private participation in infrastructure, it has become important to establish
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4 Introduction
credible regulatory frameworks—including regulatory rules and institutions—to
protect the interests of consumers but also those of the public and private parties to
infrastructure arrangements. See, for example, Bertolini (2004).
5. PricewaterhouseCoopers collected the corporate governance and most of the regula-
tory governance data. Their data were supplemented by regulatory governance data
collected from SERC annual reports by Deloitte.
References
Baietti, Aldo, William Kingdom, and Meike von Ginnekin. 2006. “Characteristics of Well
Performing Public Water Utilities.” Water and Sanitation Supply Working Note 9,
World Bank, Washington, DC.
Bertolini, Lorenzo. 2004. “Regulating Utilities: Contracting Out Regulatory Functions.”
Public Policy for the Private Sector Note 269, World Bank, Washington, DC.
Besant-Jones, John. 2002. “Power for India: Strategy for Reform of State Level Power
Distribution.” Unpublished manuscript.
Bhatia, Bhavana, and Mohinder Gulati. 2004. “Reforming the Power Sector: Controlling
Electricity Theft and Improving Revenue.” Public Policy for the Private Sector Note
272, World Bank, Washington, DC.
Prayas Energy Group. 2003. “A Good Beginning but Challenges Galore: A Survey Based
Study of Resources, Transparency, and Public Participation in Electricity Regulatory
Commissions in India.” Prayas Occasional Report –1/2003. Pune, India.
Ruet, Joël. 2001. “Winners and Losers of the SEB Reforms: An Organizational Analysis.”
French Research Institutes in India, 1.
———. 2003. “The Entreprisation of the State Electricity Boards.” In Against the Current:
Organizational Restructuring of State Electricity Boards, edited by Joël Ruet. New Delhi:
CSH-Manohar Publishers.
Shunglu Committee. 2011. Report of High-Level Panel on Financial Position of Distribution
Utilities. New Delhi: Planning Commission, Government of India.
Vete, Anay. n.d. “Review of the Electricity Act 2003.” Working Paper 11, Department of
Economics, University of Mumbai.
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Chapter 2
Institutional Context
Over the past two decades, the Indian power sector has moved decisively toward
independent regulation of unbundled and corporatized utilities in a process
largely led by the states. Orissa led the way by creating an electricity regulator
and unbundling—and not just corporatizing but actually privatizing—its distri-
bution utilities (figure 2.1). The Orissa Electricity Reform Act was passed in
1995; the Orissa Electricity Regulatory Commission was established in 1996, at
which point the state government initiated the unbundling of the Orissa state
electricity board (SEB). Several states followed.1 Partly in recognition of the
need for a consistent approach across the country, the Electricity Regulatory
Commission Act was passed in 1998. This Act established the Central Electricity
Regulatory Commission and provided the legal basis for creating independent
state electricity regulatory commissions (SERCs), which had a mandate to set
electricity tariffs, monitor the quality of service, adjudicate disputes, and redress
grievances in their states (Tongia 2003).
The Electricity Act of 2003 (EA 2003), which replaced the Electricity
Regulatory Commission Act, gave regulators a central role in supporting competi-
tion in the power sector, regulating tariffs, promoting open access to the network
infrastructure, and specifying standards for quality of service. In addition, the EA
2003 mandated that states unbundle and corporatize their electricity utilities.
As of 2011, all the states and Delhi had created electricity regulators
(some jointly with other states—Manipur with Mizoram and Goa jointly with
the Union Territories). Of the 29 states (including Delhi) in India, 18 have
unbundled their power sectors—some as early as 1996 (Orissa) and others only
as recently as 2010 (Meghalaya, Tamil Nadu, Himachal Pradesh, and Punjab)
(figure 2.2).2 Eight of the states that unbundled their SEBs have a holding com-
pany, of which the unbundled utilities are subsidiaries (see figure 3.1). All but
three states have fully unbundled the generation, transmission, and distribution
functions,3 and nine states have more than one distribution company. The
remaining 11 states have yet to unbundle their power sectors, and most still have
state-run SEBs or power departments. The one exception is Tripura, which has
corporatized its utility (as in the unbundled states) but kept it as a bundled entity.
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6 Institutional Context
Figure 2.1 Timeline—Establishment of SERCs
1999
Andra Pradesh
Delhi
Karnataka
Maharashtra 2001
Punjab Assam 2003 2005
1996 Tamil Nadu Himachal Pradesh Jharkhand Bihar 2010
Orissa West Bengal Uttarakhand Electricity Act Manipur/Mizoram Other
1998 2000 2002 2004 2008 2011
Central ERC Rajasthan Chhattisgarh Meghalaya Goa Other
Gujarat Kerala Tripura Nagaland Sikkim
Haryana
Madhya Pradesh
Uttar Pradesh
Electricity Regulatory
Commission Act
Source: World Bank compilation.
Note: ERC = electricity regulatory commission; SERC = state electricity regulatory commission. Indian states are in orange; policy is in black.
Figure 2.2 Timeline of Power Sector Unbundling (Orange) and Central Electricity Acts and Policies (Green)
2010
Himachal Pradesh
2004 Meghalaya
1996 1999 2002 Assam 2007 Punjab
Orissa Karnataka Delhi Uttarakhand West Bengal Tamil Nadu
1998 2003 2009
Haryana Electricity Act Chhattisgarh
Electricity Regulatory 2005
Commission Act Gujarat
Madhya Pradesh
2000 Maharashtra
Andhra Pradesh National Electricity
Rajasthan Policy
Uttar Pradesh
Source: World Bank compilation.
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Institutional Context 7
Notes
1. Haryana was next with its Electricity Reform Act in 1997 and the establishment of its
SERC in 1998. Andhra Pradesh, Karnataka, Uttar Pradesh, Madhya Pradesh, Delhi,
and Rajasthan also passed their own state Electricity Reform Acts, which paved the
way for setting up SERCs and subsequently unbundling their SEBs. See Dubash and
Rajan (2002) and Prayas Energy Group (2003).
2. Bihar in fact unbundled in November 2012 and now has a holding company with four
subsidiaries—Bihar State Power Generation Company Ltd., North Bihar Power
Distribution Company Ltd., South Bihar Power Distribution Company Ltd., and
Bihar State Power Transmission Company Ltd.—but as this review uses data from
2010 and 2011, Bihar is included as bundled.
3. Punjab, Tamil Nadu, and Himachal Pradesh still have a combined generation company
and distribution company.
References
Dubash, Navroz K., and Sudhir Rajan. 2002. “India: Electricity Reform under Political
Constraints.” In Power Politics: Equity and Environment in Electricity Reform, edited by
Navroz K. Dubash, 51–74. Washington, DC: World Resources Institute.
Prayas Energy Group. 2003. “A Good Beginning but Challenges Galore: A Survey Based
Study of Resources, Transparency, and Public Participation in Electricity Regulatory
Commissions in India.” Prayas Occasional Report –1/2003. Pune, India.
Tongia, Rahul. 2003. “The Political Economy of Indian Power Sector Reforms.” Working
Paper, Program on Energy and Sustainable Development, Stanford University,
Stanford, CA.
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CHAPTER 3
Corporate Governance of State
Power Utilities
Corporate governance (CG) is “the system by which companies are directed and
controlled” (Cadbury Committee 1992). More broadly, it deals with mechanisms
by which stakeholders of a corporation exercise control over corporate insiders
and management such that their interests are protected (John and Senbet 1997).
It specifies the rights, responsibilities, and accountabilities of the different stake-
holders in a corporation (namely, the board, management, and shareholders) and
key attributes of the processes for corporate decision making. In doing so, it
defines a structure for setting a company’s objectives, the means for attaining
those objectives, and a framework for monitoring performance.1
The rise of equity shareholding and the need to protect the rights of investors
and equity owners has led to a renewed focus on the quality of board oversight,
role of auditors, accountability of management, and transparency of decision
making in recent years. Particularly following well-publicized cases of corporate
malfeasance in the United States in the late 1990s and early 2000s, there has
been greater attention to the quality of CG and independent oversight of firms
and renewed efforts internationally, as well as in India, to strengthen the frame-
work regulating their operations.2
Indian power sector utilities at state level are insulated from some of the
accountability pressures that firms are generally subject to from equity owners
and even creditors. Most are publicly owned, with ownership vested in the state
(rather than central) government, and unlisted, so not subject to the discipline of
stock markets. At the same time, being utilities, their operational performance
is shaped by the framework of tariffs, performance standards, and the like
established by regulators. Public ownership, moreover, means that the interests
of owners may differ from the typical objectives of profit maximization or
maximizing shareholder value over time associated with a private corporation.
In state-owned enterprises (SOEs), the financial objective is typically one of
sustainability, and it may be coupled with distributional equity and other public
policy objectives that conflict with the financial objective, since the set of
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10 Corporate Governance of State Power Utilities
stakeholders is broadened to include employees, consumers, suppliers, and the
government. Thus SOEs can be subject to the whims of a shifting group of stake-
holders that may not prioritize financial performance or may not even have a
public-good objective. In a public utility, therefore, the board has to ensure not
only that managerial and staff incentives are aligned with the utility’s public
policy goals but also that the utility is sufficiently insulated from political
pressures.
Stylized results from the empirical literature on CG point to the impor-
tance of board size and composition, as measured by the “insider-outsider”
ratio (directors associated with the firm vs. independent directors), in affecting
company performance. Other key indicators of CG considered likely to affect
entity performance include turnover or tenure and stability of the CEO; qual-
ity of board members (having robust processes for board selection and evalu-
ation); board access to information and hence the quality of its discussions;
and the extent to which it is insulated from government interference. Box 3.1
summarizes findings from the literature on CG practices, notably in SOEs.
Box 3.1 Literature on Corporate Governance
A significant body of work exists on corporate governance (CG) and boards of directors,
primarily investigating the effect of board composition, structure, and behavior on the role the
board performs and the effect on firm performance. Several papers provide comprehensive
surveys of different aspects of the CG literature. John and Senbet (1997) survey the empirical
and theoretical literature on CG mechanisms with a focus on internal mechanisms (such as
boards of directors) and their role in ameliorating firms’ agency problems. Fields and Keys
(2003) review the empirical research on the role outside directors play in monitoring managers;
the impact of board diversity; incentives for corporate executives to manage firm earnings;
and managerial incentives to bear risk. They find that an independent, diverse board is
associated with better performance, reduced earnings management, and reduced risk-taking
activity by management.
Hermalin and Weisbach (2003) survey the economic literature on boards, looking at board
composition, board size, specific board tasks (CEO hiring and firing, executive compensation),
and factors that affect boards’ makeup. They find that board composition is not related to
performance, while board size is negatively related to it. Composition and size appear related
to the quality of the board’s decisions on CEO replacement, acquisitions, “poison pills,” and
executive compensation. Adams, Hermalin, and Weisbach (2009) survey the literature with an
emphasis on research done after the Hermalin and Weisbach survey. They find that the two
most commonly asked questions are: What determines boards’ makeup? And what determines
their actions?
Wong (2004) and Vagliasindi (2008) both focus on state-owned enterprises (SOEs). They
identify the key differences between SOEs and private-sector firms and make recommenda-
tions to improve the governance of SOEs and bring their governance closer to that of the
box continues next page
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Corporate Governance of State Power Utilities 11
Box 3.1 Literature on Corporate Governance (continued)
private sector. They include recommendations for how the government should conduct itself
as the SOE owner and recommendations for structuring SOE boards to improve performance
and increase accountability. In its 2005 OECD Guidelines on Corporate Governance of State-
owned Enterprises, the OECD proposes similar recommendations to those made by Wong and
Vagliasindi. The recommendations are generally similar to India’s CG guidelines as well.
A few studies have focused on the impact of CG in India. Black and Khanna (2007) and
Fagernas (2006) report on the impact of the CG regulations issued by the Securities and
Exchange Board of India (SEBI). Black and Khanna find that firms covered by SEBI experienced
larger stock price gains than other firms in the days following the announcement of the new
regulations, while Fagernas finds that the introduction of the regulations was associated with
an increased tendency for firms to explicitly tie CEO pay to the firm’s performance. Ghosh
(2006) finds a negative association between board size and firm performance and a small,
positive association between firm performance and the number of nonexecutive directors.
Objectives of Unbundling and Corporatizing State Utilities
Unbundling State Electricity Boards (SEBs) to create distinct corporate bodies
(companies) with independent accounts and staff was expected to lead to greater
transparency in the operational performance of each element in the service
delivery chain, in turn creating incentives for each element to achieve a profit
(Tongia 2003). Corporatization itself was intended to create an arm’s-length
relationship between the state government and the utility, thus creating space for
commercial operation of the latter.
Despite being unbundled, it is relatively common for the unbundled utili-
ties to remain under a single holding company with powers delegated to the
holding company (figure 3.1). It is questionable whether such unbundled
companies are actually run as distinct entities, as the chairperson of the board
of the holding company and of the boards of the successor companies is often
the same person and, indeed, there may be partial or full overlap in board
membership. In many cases, this structure thus undermines the main reason
unbundling and obfuscates the lines of accountability.3 The system is also
for
potentially expensive because it creates an additional layer between the
government (owner) and the companies—though it may insulate companies
from government interference.
Establishing holding companies—initially an interim measure to handle staff
pension liabilities—has been used to address staff concerns about their pen-
sions once they are assigned to a successor company. However, inherited staff
and human resource policies requiring staff to be absorbed by the successor
companies restrict companies’ freedom to manage themselves as commercial
entities. Perhaps as a result, only half of the states that unbundled their
SEBs have finalized staff transfer and created separate cadres for each of the
unbundled entities.
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12 Corporate Governance of State Power Utilities
Figure 3.1 Power Sector Structures, 2010
11
Tripura Corporation
Bundled or unbundled with 4+5
Sikkim holding/residual company
Nagaland Unbundled without Uttar Pradesh
Power departments
holding company
Mizoram Rajasthan
Other 4+2 Orissa
Other West Bengala Madhya Pradesh
Goa Uttarakhand Karnataka
1+2
Manipur Meghalaya Haryana
Jharkhand Tamil Nadu Maharashtra Gujarat
Bihar Punjab Chhattisgarh Delhi
SEBs
Kerala Himachal Pradesh Assam Andhra Pradesh
Bundled Transco separate; All unbundled: All unbundled:
genco and discom one discom multiple discoms
bundled
Source: Based on Government of India data.
Note: Discom = distribution company; genco = gemeration company; transco = transmission company.
a. West Bengal’s hydro generation is still bundled with its discom, but thermal generation is in a separate company.
Even after unbundling, several states still follow practices that limit com-
pany separation and potentially inhibit independent functioning, suggesting
that utilities in unbundled states do not always function independently. Where
multiple utilities still depend on a holding company, decision making remains
centralized across them. Other aspects that undermine separation include the
continued existence of a single staff cadre for all utilities in the state, as
described above, centralized cash flows, lack of autonomous cash management,
lack of independence in financing decisions, and absence of independent
power procurement.
Unbundling is therefore perhaps better thought of as a continuum
rather than a discrete state. Utilities may be separate entities legally but
may still make operational decisions—procurement, human resources,
information technology (IT), and regulatory responses—together, receive
common direction from a holding company, and make financial decisions as
a single entity. The closer a utility is to having financial and operational inde-
pendence, the more likely it is that the impacts that are thought to come
from unbundling—accountability, transparency, and, ultimately, stronger
performance—will be observed. This may explain why, in a simple categori-
zation of unbundling, unbundled utilities represent both some of India’s
worst and best performers.
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Corporate Governance of State Power Utilities 13
Corporate Governance Requirements for State Utilities in India
Indian state-owned power utilities are exempt from many of India’s CG require-
ments, as those only apply to centrally owned or listed companies. Instead, they
are required to follow the Companies Act, which stipulates only basic provisions
on board size and meeting frequency; the total number of directorships any
director can hold and the remuneration directors may receive; the constitution
and composition of an audit committee; and guidelines for preparing annual
reports, financial statements, and audited accounts.4
India has, though, extensive guidelines on CG developed over the past
15 years or so. In 1998, driven by the conviction that good CG was necessary for
Indian firms to be able to access global and domestic capital at competitive rates,
the Confederation of Indian Industry developed a voluntary code of CG. The
code was well received, and some progressive companies adopted it; however, it
was felt that a statutory code would be more purposeful and meaningful in the
Indian context.
Thus in 2000, the Securities and Exchange Board of India (SEBI) made the
provisions of the Confederation’s code mandatory for listed companies through
Clause 49 of its Listing Agreement. SEBI emphasized the importance of share-
holder rights and the role of the board as an agent of the owners: CG relies on
the “acceptance by management of the inalienable rights of shareholders as the
true owners of the corporation and of their own role as trustees on behalf of the
shareholders” (SEBI 2003, 1). In 2007, the Department of Public Enterprises
(DPE) created similar guidelines for central public sector enterprises, which
became mandatory in 2010. The guidelines set out by SEBI and the DPE go well
beyond the Companies Act and, while generally considered recommended prac-
tices for Indian state-owned firms, are not mandatory for utilities owned by state
governments.
The DPE guidelines are most applicable to state-owned utilities, as they cover
government-owned companies (albeit central rather than state). This review,
therefore, uses them as the benchmark for recommended practices. Their main
provisions are as follows:
• Board Composition. Executive or “full-time” directors5 should constitute no
more than 50 percent of the board. There should be no more than two govern-
ment representatives, and such directors should constitute less than one-sixth
of the board. If the chair is a nonexecutive (executive) director, at least one-
third (50 percent) of the board should be independent directors.6 Neither
the DPE nor SEBI provides guidance on the number of “promoter” directors
(box 3.2).
• Board Functioning. Boards should meet at least four times a year, with no more
than three to four months between any two meetings. They should conduct
peer evaluations of nonexecutive board members.
• Audit Committee. Every board should have an audit committee with at
least three members, two-thirds of whom, including the chair, must be
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14 Corporate Governance of State Power Utilities
Box 3.2 Types of Directors
Executive Director: Director who is a utility employee.
Government Director: Director who is a government employee.
Independent Director: Director not associated with utility, government, or owner.
Promoter Director: Director who represents the interests of the promoters—that is, controlling
shareholders or owners (of private holding company, for example).
independent directors. All members should be able to read and understand
basic financial statements.
• Government-Board Relationship. There should be clarity about where the
government
board has decision-making powers and where the board must seek
approval.
Appendix A lists the CG requirements specified by SEBI and the DPE in
more detail.
In 2011, the Shunglu Committee, set up by the Planning Commission to iden-
tify steps to improve the performance of SEBs and distribution companies, recog-
nized that deeper restructuring of the sector was warranted.7 Making the same
link as earlier with utility performance, its recommendations made explicit refer-
ence to improving regulatory and corporate governance in states, albeit in the
context of the organizational changes necessary to modernize the sector (box 3.3).
Most recently, perhaps acknowledging the benefits of bringing other stake-
holders formally into the governance framework for state utilities, the Government
of India’s Scheme for Financial Restructuring of State Distribution Companies
(October 2012) has suggested bringing lenders’ representatives on to boards of
directors as nominees. To avoid rekindling concerns about the opposing interests
of debt and equity holders, lenders might benefit from, instead, nominating an
independent director to the board. Currently, there are no nominees of financial
institutions on the boards of state utilities in India.
Findings—Corporate Governance in Practice
This review of CG is based upon basic data obtained from a large sample of
utilities and detailed qualitative data obtained from a smaller set of utilities. The
detailed data were obtained from management of 21 utilities in 14 states, as well
as from the regulators and relevant government departments in those states.8 The
detailed sample comprises 12 distribution companies (discoms), 7 transmission
companies (transcos), 1 generation company (genco), and 1 holding company.
It takes a close look at the relationship between state governments and utility
boards, the composition and functioning of the boards, and the utilities’ manage-
ment practices. As data availability varies across questions, with utilities often
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Corporate Governance of State Power Utilities 15
Box 3.3 Shunglu Committee Recommendations on Corporate and
Regulatory Governance
• Board Composition and Function
– CEO who also serves as full-time chair for fixed 3–5 year term
– CEO/chair and full-time board members selected transparently by a selection committee
under merit-based open competition from across India
– Two independent directors (at least) with relevant experience from the power sector
• New Organizational Culture
– Human Resources
°° Encourage voluntary retirement to reduce overstaffing and allow recruitment of
professional staff with appropriate skills and training
°° Provide strong support, from top management down, for in-house information
technology (IT)
°° Bring in modern management and IT skills (especially among senior and middle
management)
– Finance and Audit
°° Finance department staffed with professionals with appropriate certifications
°° Computerized accounts enabling automatic inter-unit reconciliation
°° Accountability for actual recovery of arrears with close monitoring and penal actions
specified
°° Work toward private participation through distribution franchises or minority flotation
• State Government
– Political and administrative support for loss reduction; Planning Commission to monitor
progress
– Transparent agricultural subsidies: reduction in subsidies over time if state does not pay
utility what is due
• Regulator
– Independent from state government
– Performance to be independently monitored
– Utility boards to closely monitor quality and timeliness of utility submissions to regulators
more forthcoming with positive than negative data, the sample size for the dif-
ferent variables changes, and some measures may be upwardly biased.
The basic CG data were obtained from an additional 48 utilities in the original
14 and 5 additional states: 25 discoms (including 2 joint discom–gencos), 8 trans-
cos, 14 gencos, and 1 corporation that performs all three electricity functions.9
Overall, data were collected for 69 of the 89 utilities that the Power Finance
Corporation covered in its 2010–11 report. Appendix B lists all of the utilities
included in the review—including the full name of each utility as well as relevant
abbreviations.10 Sample sizes are indicated in the figures or text; when not stated,
the sample comprises all 69 utilities.
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16 Corporate Governance of State Power Utilities
The main finding of this review is that, while most utilities are in compli-
ance with the basic governance requirements of the Companies Act, signifi-
cantly fewer follow the guidelines laid out by the DPE or the Shunglu
Committee that would be considered good practice for Indian utilities. For
example, though almost all utilities have an audit committee, only 28 percent
have an independent director heading it. Similarly, almost all have boards of
between 3 and 12 members,11 but less than one-third follow the suggested
restriction on government directors, less than one-fourth have a chairman and
managing director (CMD) lasting on average more than three years, and only
14 percent have the recommended percentage of independent directors on the
board. Also, only 56 percent have any other specialized board committees.
Finally, few boards have put the necessary processes in place to support their
governance structures. Fewer than half the utilities have an advanced manage-
ment information system (MIS), and no utility has a corporate performance
monitoring system. Only about one-quarter of utilities consider merit when
making promotion decisions, and only half have a well-defined employee
training policy.
External Accountability
External accountability covers features of the relationships of the government (as
owner), the regulator, and the general public with the utility represented by its
board.
As noted, for state-owned corporatized enterprises, the role of the board is
delicate. On the one hand, as the owner’s agent it monitors management; on the
other, it has a fiduciary responsibility to insulate management from political pres-
sures and ensure that business decisions are taken on their merits. The history of
state control of SEBs means that the autonomy of the board and its ability to
operate without government interference is particularly important for corpora-
tized state power utilities. However, state governments often continue to exert
informal influence over utility decisions even after corporatization, and, in many
cases, there are significantly more government directors on utility boards than
recommended. As a natural consequence of the latter, there are often fewer than
recommended independent directors on the boards to mitigate government
influence.
The regulator is the other major external entity holding the utility account-
able for performance. This relationship, too, must be managed appropriately,
including addressing the legitimate interest of the public in key utility informa-
tion that should be disclosed, such as basic company data, organization charts,
company rules, budget allocations, and accounts.
By 2011, all states had established independent state electricity regulatory
commissions (SERCs), technically separating the government’s ownership and
regulatory roles. However, as discussed in chapter 4, state governments select the
SERC chair and members, have approval authority over hiring additional SERC
staff, can issue “directions” to the regulator, and often exert informal influence
over SERC decisions—all of which blur the limits of the state’s role.
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Corporate Governance of State Power Utilities 17
Government and Board
All state governments have consolidated utility ownership: utilities report to
each state’s Department of Power or Energy, which acts as the nodal department
for all other interactions between the utility and the state government. Generally
the government, as owner, oversees a nominations committee that approves
every appointment to the board and has the sole power to remove directors. In
every state, however, the government also selects and removes utility CEOs,
rather than leaving this to the board, which is the common practice in most
private firms. Political interference in utility appointments and decision making
is more likely in these circumstances.
State governments directly appoint government officials (“government direc-
tors,” typically members of the state power department) to utility boards—the
DPE guidelines limit centrally owned companies to two such directors and
recommend that they represent no more than one-sixth of a board’s strength.
Only about a quarter of the electricity utilities reviewed follow this practice
(figure 3.2): 49 of 69 utilities have more than two government directors, and
government directors make up over one-sixth of the board in all but 2 utilities
(West Bengal’s discom and Maharashtra’s discom). Three utilities (Chhattisgarh’s
discom, genco, and transco) have boards composed entirely of government direc-
tors. On average, government officials constitute 48 percent of electricity
utilities’ boards.
Utilities’ articles of association generally specify the areas where the board has
independent decision-making powers. However, informal consultations often
occur on a range of issues in different states, sometimes even covering areas in
Figure 3.2 Utilities with More than Two Government Directors
60
50
Number of utilities
40
30
20
10
0
Two or less More than two
Number of government directors
Holding companies Transcos Gencos Discoms
Source: World Bank compilation.
Note: Discom = distribution company; Genco = generation company; Transco = transmission company.
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18 Corporate Governance of State Power Utilities
which the board should act independently. In addition, some utilities’ articles grant
the state government explicit rights to issue directives.12 Most of the 22 utilities
interviewed indicated that the government participates—formally and i nformally—
in key decisions and policy matters, including the filing of tariff petitions,
recruitment and promotion decisions, and other routine matters (such as procure-
ment and decisions on enforcement) (figure 3.3).13 Only Tata Power in Delhi (the
only private company in the sample of utilities interviewed in detail), DGVCL
discom) and GUVNL (a holding company) in Gujarat, and the three utilities in
(a
West Bengal reported no government involvement in any of these areas.
A few utilities in the sample are joint ventures between a state government
and a private entity, including Tata Power Delhi (TPDDL), BSES Rajdhani Power
Limited (BRPL), and BSES Yamuna Power Limited (BYPL), all of which are
jointly owned by the Delhi government and private holding companies, as well
as three of the four distribution utilities in Orissa, which are joint ventures
between the government of Orissa and a private entity. In all these cases, the
promoters—that is, controlling shareholders or owners (here, the private holding
companies)—directly appoint directors to the board to represent their interests
as promoter directors. As with government directors, these directors represent
the interests of the owner, but they are unlikely to have the same interest in state
government policy priorities as government directors do.14 Promoter directors
represent 27 percent of board strength in TPDDL, 14 percent in BRPL and
BYPL, and 44 percent in each of the three Orissa utilities.
Active independent directors—ideally from the private sector and with repu-
tations to protect—can help bring new ideas and awareness of external develop-
ments to the board. Having no material interest in the utility, they are likely to
be unbiased and unmotivated by self-interest in their role of strategic advisors
and vigilant monitors of management.15 They also usually have a commercial
orientation that is more focused on performance than on government loyalties.
Recommendations on the number and share of independent directors on
the board vary, from a minimum of two in the Cadbury and Shunglu
Committee reports to a minimum of between one-third and one-half of the
board in the DPE guidelines. About 39 percent of sampled utilities have at
Figure 3.3 Government Involvement in Different Utility Decisions
a. In recruitment and promotion b. In other routine matters
Government Government Government Government
does not participates, does not participates,
participate, 11 utilities participate, 16 utilities
11 utilities 6 utilities
Source: World Bank compilation.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Corporate Governance of State Power Utilities 19
least two independent board members, but only 14 percent of utilities have
enough independent d irectors to comply with the DPE guidelines, including
utilities in Assam, Gujarat, Haryana, Madhya Pradesh, Orissa, and Uttarakhand.
Among utilities that comply with the DPE guidelines, independent directors
account for 39 percent of the board (figure 3.4). Surprisingly, 31 utilities
(45 percent of the sample) do not have any independent directors on their
boards, including those in Chhattisgarh, Gujarat, Haryana, Karnataka,
Maharashtra, Orissa, Punjab, Rajasthan, Tripura, and Uttar Pradesh.
State governments track utility performance as well as progress in achieving
key goals such as the level of village or household electrification. Achievement of
goals is assessed through parameters like power supply position, utilization of
funds from government programs, technical and commercial losses, commission-
ing and implementation of transmission projects, and overall profit and loss.
These parameters are typically monitored through periodic meetings conducted
by the Chief Minister or Minister for Power or Power Secretary, though in some
cases governments have established mechanisms for utilities to submit this infor-
mation themselves. Most states have much scope for improving the reliability
and timeliness of the information they submit.
Regulator and Board
An effective utility board also needs to have a strong relationship with the regula-
tor (who sets utility tariffs among other things). This ensures that the utility
understands and meets the regulator’s expectations in its annual revenue require-
ment (ARR) and tariff filings and that the regulator understands the financial
data in those filings. An initial indication of the seriousness with which the board
Figure 3.4 Utilities with Board Share of Independent Directors Meeting
DPE Guidelines
35
30
Number of utilities
25
20
15
10
5
0
No independent directors Some independent Meeting DPE guidelines
directors; not meeting
DPE guidelines
Holding companies Discoms Gencos Transcos
Source: World Bank compilation.
Note: DPE = Department of Public Enterprises; Discom = distribution company; Genco = generation
company; Transco = transmission company.
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20 Corporate Governance of State Power Utilities
takes its relationship with the regulator is whether the board has a dedicated
regulatory cell: only 13 do not (figure 3.5).
Accountability to the Public
The Companies Act mandates the use of an external auditor; all 69 utilities in
the sample comply. The DPE guidelines encourage, though do not require, utili-
ties to make their annual accounts and audit reports public. Slightly more than
half of the sample publish their accounts on their websites (over half of discoms,
almost all gencos, and just under half of transcos), but only 42 percent of the
sample publish audit reports on their websites.
The Companies Act also requires firms to finalize their annual accounts
within six months of the end of the fiscal year. Of the 57 utilities that answered
this specific question, 49 (86 percent) do so (figure 3.6).16
Internal Accountability
Boards of directors have two major roles: setting the company’s strategy and
policies and monitoring managers’ performance. The primary focus of board
deliberations is on the business merits of decisions on investment, human
resources, and commercial and strategic aspects (Clarke 2005). With state-
owned utilities, boards also seek to insulate management (and decision making)
from political interference. To really improve performance, however, the board
needs to be able to hold management accountable, and thus requires information
systems that generate data for monitoring management in real time and that
create incentives for improving performance. In addition, as managerial account-
ability for performance increases, utilities can be expected to re-engineer
business processes to improve management control and c ustomer services.
Figure 3.5 Utilities That Have a Dedicated Regulatory Cell
No,
13
Yes,
53
Source: World Bank compilation.
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Corporate Governance of State Power Utilities 21
Figure 3.6 Utilities That File Their Accounts on Time and Make Accounts and
Audit Reports Public
60
50
40
Number of utilities
30
20
10
0
Accounts on time Accounts public Audit public
Holding companies Discoms Gencos Transcos
Source: World Bank compilation.
Note: Discom = distribution company; Genco = generation company; Transco = transmission company.
The rest of this chapter presents findings, from the utilities studied, on board
functioning; features of the relationship between the board and management;
and management practices.17
Board Composition and Internal Processes
Board effectiveness in its monitoring role is determined by its independence, size,
and composition, with independence closely related to composition, particularly
the number and percentage of board members accounted for by outside (inde-
pendent) directors. Effectiveness also depends on the discipline imposed on top
management by CEOs, with CEO turnover an important indicator of the ability
to bring such discipline to bear (John and Senbet 1997).
A longer tenure for the board chair is recommended to provide stability in
direction and the ability to see through the implementation of initiatives.
The Shunglu Committee, for example, recommends that the chairs have fixed
3–5-year tenures. Data on tenure were available for 41 utilities; of those, 9 have
average tenures (measured since utility inception) within the Shunglu
Committee’s 3–5-year range, 24 have average tenures of 1.5–2.5 years, and the
remaining 8 have average tenures of less than 1.5 years. The average chair tenure
over the past 5 years over all utilities sampled is 2.2 years (figure 3.7).
The fact that the chairpersons of most utility boards are Indian Administrative
Service (IAS) officers who move frequently from post to post may be one
reason for lower than optimal tenures. Such IAS presence may well have
led to short-termism and a disinclination to take on difficult projects with
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
22 Corporate Governance of State Power Utilities
Figure 3.7 Average Chairperson/Managing Director Tenure
5
4
3
Years
Average tenure: 2.2 years
2
1
0
ip (T :
: W : TP CL
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W esh APS CL (
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ra an: CL
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Al : W CL
:U L
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DH O
NL
M ng lh TS
PP ad
Ha her TC
T
D
P D
M Pr
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es : M P
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n:
ad
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an
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ga
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Ut jas
ra
ry
a P ad
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Source: World Bank compilation.
Note: (D) = discom; (G) = genco; (T) = transco.
longer-term payoffs. Another possible drawback is that IAS officers tend to be
generalists and operate in a network and culture likely to impede development
of a true business orientation (Tongia 2003). This is potentially exacerbated by
the political sensitivity of the bureaucracy, borne out of its close interaction
with the political class.18 However, a broad strategic vision and practical imple-
mentation experience are arguably more important in a chief executive than
deep technical expertise, so the generalist nature of IAS officers may actually
be an advantage.
Of 44 utilities with data, 38 have a chair from the IAS.19 Commentators have
noted that the predominance of IAS officers as heads of utilities, chairpersons of
regulatory commissions, and, of course, government functionaries makes the
separation of roles and the emergence of truly independent entities (both regula-
tory and, potentially, corporate) difficult.20
The board is more likely to be effective if the board itself is not too large
so that all members have a voice.21 The Companies Act requires that boards
have at least three directors. Beyond that, guidelines do not specify specific
sizes but recommend that smaller is better. Other documents held up as best
practice (such as the West Bengal Articles of Association) specify a limit of
12 board members. Among India’s state power utilities, board size ranges from
four (in all three of Chhattisgarh’s utilities and Uttar Pradesh’s discom—
MVVNL) to 15 (in Karnataka’s transco), with just over half of the 69 utilities
concentrated in the 7–9 range (figure 3.8). The average board size across all
utilities sampled is 8.2.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Corporate Governance of State Power Utilities 23
Figure 3.8 Number of Directors on Utility Boards
40
35
30
Number of utilities
25
20
15
10
5
0
4–6 7–9 10–12 More than 12
Number of directors
Holding companies Discoms Gencos Transcos
Source: World Bank compilation.
Note: Discom = distribution company; Genco = generation company; Transco = transmission company.
The board is best able to do its job if members understand their roles and
responsibilities, share a common strategic vision, and operate in the firm’s best
interest. For this, training is important, as are peer review and transparency in
procedures. None of the 21 electricity utilities surveyed conducts training for
their directors, despite strong recommendations from the DPE, OECD, and
others. No utilities in the “detailed” sample conduct appraisals or peer evaluations
of their board members, nor are utility boards explicitly evaluated by state-
government owners. West Bengal’s transco and TPDDL both have codes of
conduct for directors, and West Bengal’s discom was preparing one when this
review was written. Data on other utilities are unavailable.
The Companies Act and the DPE specify a minimum number of board
meetings per year—generally four, with no more than three months between any
two. Of the 13 utilities for which data are available, all meet the minimum
requirement, with meetings per year ranging from four (Uttar Pradesh’s discom—
MVVNL—and transco) to 16 (Rajasthan’s discom—JVVNL) (figure 3.9). On
average, the 13 utilities have 7.85 meetings annually.
Board and Management
The literature on CG emphasizes the benefits of separating the board’s
monitoring and strategic/advisory functions—often by using specialized com-
mittees for each function (Adams and Ferreira 2005). Of the 55 utilities that
provided these data, 44 percent do not have any specialized committees (other
than the mandated audit committee). The remainder indicated that they have
some specialized committee(s), covering, for example, procurement/purchases,
human resources and recruitment, project appraisal and monitoring, technical
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
24 Corporate Governance of State Power Utilities
Figure 3.9 Average Number of Board Meetings per Year
18
16
14
Meetings per year
12
10
Average: 7.85 meetings
8
6
4
2
0
D)
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nj
at
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de
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ry
rn
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sh
ja
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ta
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Source: World Bank compilation.
Note: (D) = distribution company; (G) = generation company; (H) = holding company; (T) = transmission company.
aspects, operations review, borrowing/finance/balancing and settlement, risk
management/revenue protection, power coordination and trading, and business
ethics.
The Companies Act requires all companies, including utilities, to have an
audit committee as a key mechanism of internal accountability. Of the 69
utilities for which we have data, 93 percent have established audit committees
(figure 3.10). Five utilities (all three of Chhattisgarh’s utilities, Tripura’s state
corporation, and Uttar Pradesh’s UPJVNL genco) do not have audit committees.22
The academic literature on CG and the DPE CG guidelines recommend that
the audit committee be headed by an independent director. Fewer than one-
third of utilities reporting (10 of the 36 for which data are available) have an
independent director chairing the audit committee (figure 3.11). This includes
three of Andhra Pradesh’s four discoms, Assam and Orissa’s gencos, DGVCL in
Gujarat, Haryana’s transco, and all three of West Bengal’s utilities.
The DPE guidelines suggest that no more than half of all board members
should be executive directors, as boards with a preponderance of executive direc-
tors function de facto as a management committee. Of the 69 utilities in the
sample, 80 percent comply with this, with executive directors constituting 27
percent of the board on average among utilities that comply (figure 3.12). For
the rest—primarily discoms in Andhra Pradesh, Himachal Pradesh, Karnataka,
Maharashtra, Punjab, Tamil Nadu, Tripura, and Uttar Pradesh—executive direc-
tors constitute 68 percent of the board on average.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Corporate Governance of State Power Utilities 25
Figure 3.10 Utilities with Audit Committees
No,
5
Yes,
64
Source: World Bank compilation.
Figure 3.11 Utilities with an Independent Director
Chairing the Audit Committee
No, Yes,
26 10
Source: World Bank compilation.
Management Practices
As noted, to make well-informed decisions, boards need to have accurate
information, ideally coming from utility-wide IT-enabled systems. Whether
utilities have an enterprise resource planning (ERP) system or advanced MIS
is a reasonable proxy for whether a board has access to adequate information.
Of the 46 utilities that answered this question, about 40 percent have an ERP
system or advanced MIS (figure 3.13), including all four of Andhra Pradesh’s
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26 Corporate Governance of State Power Utilities
Figure 3.12 Utilities with Executive Directors Constituting Less or More than
Half of Board Members
60
Number of utilities 50
40
30
20
10
0
Less than 50% More than 50%
Percentage of board that is executive directors
Holding companies Discoms Gencos Transcos
Source: World Bank compilation.
Note: Discom = distribution company; Genco = generation company; Transco = transmission company.
Figure 3.13 Utilities with an ERP System or Advanced MIS
No, Yes,
27 19
Source: World Bank compilation.
Note: ERP = enterprise resource planning; MIS = management information system.
discoms, all six of Delhi’s utilities, Gujarat’s DGVCL discom and its hold-
ing company (GUVNL), Himachal Pradesh’s SEB, Karnataka’s transco,
Maharashtra’s discom, and one of Madhya Pradesh’s discoms.23 The central
government’s Restructured Accelerated Power Development and Reform
Programme to increase efficiency of distribution provides significant support
for adoption of IT for key functions and has been instrumental in prompting
progress in this area.
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Corporate Governance of State Power Utilities 27
Well-run corporations use corporate performance management systems to
monitor organizational performance according to predetermined key perfor-
mance indicators. The process is linked to organizational mission, vision, and stra-
tegic objectives. None of the utilities surveyed has a corporate performance
management system. The West Bengal discom stands out as the one utility that has
tried to institute one, initially on a manual basis with a vision of later tying it to an
IT system. However, the pace of implementation has suffered from lack of staff
interest and little management commitment.
It is generally recommended that boards establish a policy on hiring and
promotion that encourages staff performance in furthering the utility’s goals.
DGVCL and GUVNL in Gujarat (a discom and holding company, respectively)
and Delhi’s Tata Power (a private discom) stand out as the only utilities surveyed24
that have instituted performance-linked incentives for employees. Six utilities
have a promotion policy based at least in part on merit, though TPDDL is the
only one whose promotion policy is primarily merit-based (others also heavily
weigh seniority). Finally, 11 utilities have well-defined employee training policies.
Only three have performance-linked incentives, merit-based p romotion policies,
and training policies—TPDDL, DGVCL, and GUVNL—a feature that may be
partly responsible for these utilities’ relatively strong performance.
Overall
The indicators collected for this review can be aggregated into two CG indexes—
a “basic” index, with coverage of 67 of the 6925 utilities, which indicates the
degree to which utilities have adopted eight standard CG good practices; and a
“detailed” index across 18 indicators including the eight standard practices as well
as indicators on internal processes and relationship with the government. The
detailed index is only available for the 21 utilities giving detailed qualitative
information. Index scores are calculated as the percentage of total indicators for
which the utility complies with the recommended practice.
Consistent with the broad findings above, utilities score relatively well on the
basic index, but almost all of those in both indexes score much less well on the
detailed index. Appendix C shows each utility’s compliance with the indicators
included in the basic and detailed (if available) indexes, and Appendix D presents
the data points underlying the indexes.
The indicators included in the basic index, with recommended practice indi-
cated in parentheses, are (table 3.1): number of government directors on the
board (≤ 2), independent directors as share of total number of directors on the
board (≥ 33 percent, or ≥ 50 percent if the chairperson is an executive member
of the board), executive directors as share of total number of directors on the
board (≤ 50 percent), board size (≤ 12), having an audit committee, and follow-
ing recommended audit practices (publishing accounts publicly, publishing audit
reports publicly, and using an external auditor).
The 67 utilities covered by the basic index on average comply with 61 percent
of the DPE and other recommended practices included in the index. The lowest
compliance is 38 percent (Tripura’s corporation, Uttar Pradesh’s UPJVNL genco,
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28 Corporate Governance of State Power Utilities
Table 3.1 Share of Utilities in Compliance with Indicators That Constitute the Basic Index
Utility receives a Share of sample Sample Number of utilities
Indicator 1 if… meeting this (%) size meeting criterion
External accountability
Independent directors >= 33% or ≥ 50%
if chairperson
is executive 15 67 10
Government directors ≤2 28 67 19
Audit made public Yes 45 67 30
Accounts made public Yes 58 67 39
Use an external auditor Yes 100 67 67
Internal accountability
Executive directors ≤ 50% 81 67 55
Board size ≤ 12 97 67 65
Have an audit committee Yes 93 67 62
Overall (basic index) 61 67
Source: World Bank compilation.
TANGEDCO in Tamil Nadu, and Karnataka’s MESCOM discom), while two
utilities (Assam’s discom and Gujarat’s holding company) achieve full compli-
ance. Twelve utilities—about 18 percent of the sample—comply with all but one
of the indicators (all 12 miss the same indicator: they all have more than two
government directors).
The detailed index includes, in addition to the basic indicators listed above,
indicators on internal processes and the relationship with the government—in
particular, the existence of other specialized board committees, having an inde-
pendent director heading the audit committee, preparing annual accounts on
time, having an average CMD tenure of at least three years, lack of government
influence over routine and recruitment decisions, existence of an ERP system or
advanced MIS, use of performance-linked incentives, consideration of merit in
promotion decisions, and existence of a clearly defined employee training policy.
Among the 21 utilities with detailed information, five stand out as following
at least two-thirds of recommended CG practices: Gujarat’s discom (DGVCL)
and holding company, West Bengal’s discom and transco, and Tata Power in Delhi
(table 3.2).
These five utilities are also among the stronger financial or operational per-
formers in India. For example, DGVCL and Tata Power are among the five dis-
coms with the lowest aggregate technical and commercial losses in India, and
DGVCL, Tata Power, and West Bengal’s discom are among the six discoms with
the highest profit per unit of energy purchased.
This connection between strong CG and performance could be due to a variety
of factors, including the positive impact of strong governance practices on profit
and efficiency, or that more profitable firms tend to adopt better CG measures for
a range of reasons. Boxes 3.4–3.6 look in more detail at West Bengal’s utilities, Tata
Power, and Gujarat’s utilities to highlight good practices and lessons.26
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Corporate Governance of State Power Utilities 29
Table 3.2 Characteristics of the Top Five Utilities Covered in the Detailed Index
Gujarat Gujarat West Bengal West Bengal Delhi (Tata
(DGVCL) (GUVNL) (WBSEDCL) (WBSETCL) Power)
Holding
Discom company Discom Transco Discom
Board- % of board that is executive
management directors 14 33 50 50 9
relationship Audit committee Y Y Y Y Y
Other committees Y Y Y Y Y
Independent head of audit
committee Y N Y Y N
Audit on time Y Y Y Y Y
Public Audits made public Y Y Y Y N
accountability Accounts made public Y Y Y Y N
Board Number of directors on
effectiveness board 7 6 12 8 11
Average CMD tenure (years) 2.3 2.8 4.0 3.0 5.0
External Number of government
accountability directors 3 2 2 2 5
% of board that is
independent directors 43 33 33 25 18
Government influences
routine matters N N N N N
Government influences
recruitment N N N N N
Use an external auditor Y Y Y Y Y
Management ERP/MIS Y Y N N Y
practices Performance-linked
incentives Y Y N N Y
Employee training policy Y Y Y Y Y
Merit-based promotions Y Y Y Y Y
Source: World Bank compilation.
Note: CMD = chairman and managing director; Discom = distribution company; ERP = enterprise resource planning; MIS = management
information system; N = no; Transco = transmission company; Y = yes.
Box 3.4 Corporate Governance as an Instrument of Change in West Bengal
By 2002, years of inefficient operation of transmission and distribution had led to annual losses
of around US$300 million in West Bengal’s power sector. The state government decided to
restructure the sector and implement measures to enhance accountability, anticipating that
this would lead to improved performance outcomes and a lower burden on the exchequer. By
2007, it had unbundled its state electricity board (SEB) into separate generation, transmission,
and distribution utilities (though hydropower generation remained with the discom).
As in many states, the government took on SEB liabilities in the unbundling process. But,
unique to West Bengal, the government mandated utility compliance with India’s corporate
governance (CG) requirements for listed companies (Clause 49 of the Securities and Exchange
box continues next page
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30 Corporate Governance of State Power Utilities
Box 3.4 Corporate Governance as an Instrument of Change in West Bengal (continued)
Board of India’s Listing Agreement) as a condition of the transfer scheme. The new utilities
were to be run by their boards of directors without interference by the state so long as they did
not request budget support from the government. This meant, for example, that recruitment
and procurement would not require the state government to sign off, and this remains the
agreement today. (With state governments currently faced with bailing-out utilities, there is a
valuable opportunity to follow West Bengal’s model.)
These agreements established utilities with robust governance practices and gave them
the space needed to establish core operating principles under the guidance of strong
independent directors brought on to the utility boards at their inception. Once the utilities
were observed to work with financial and operational efficiency,a these operating principles
became firmly entrenched and have remained largely undisturbed—despite a major change
in the state’s political governance.
The articles of association of state utilities in West Bengal mirror these agreements. They set
out a clear process for director selection and removal, give specific direction on the board’s
powers, establish a fixed tenure (a minimum of three years) for directors, and limit the board to
12 members. Other advantages: having a well-defined director selection process helped pre-
vent the board being stacked with political appointees who might have lacked business acu-
men and the necessary technical background (though this could have been strengthened by
defining selection criteria); specifying tenures provided stability and certainty, ensuring that
directors would be present long enough to have an impact; and limiting board size protected
against a lack of focus.
West Bengal also used to good effect its government officers’ knowledge of global best
practices in power reform. While it was obvious that “one size does not fit all,” reformers pre-
sented examples of the success of new operational models to advocate for change with
employee organizations and political executives. This is considered to have enabled reforms
such as putting in place objective employee performance assessments and performance-
linked promotion and compensation. Employee resistance was also low because a long hiring
freeze meant that the reorganization would lead to better prospects for career growth. In addi-
tion, this allowed the utilities to re-skill fairly painlessly.
Importantly, West Bengal’s state electricity regulatory commission is one of the few to
consistently raise tariffs to cover the cost of supply, increasing tariffs each year from FY08 to
FY11. Tariff increases came to a halt in FY12 under a new state government but resumed more
recently, reportedly in part because the state utilities made a compelling case to the new
government that its constituents were willing to pay more for the consistent and reliable
power that higher tariffs enable.
a. Significant operational changes included implementation of computerized billing, 100 percent feeder metering, strict
monitoring and vigilance to prevent theft, and near-100 percent consumer metering.
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Corporate Governance of State Power Utilities 31
Box 3.5 Corporate Governance in a High Performing Joint Venture—Tata Power
(Delhi)
Before 2002, Delhi had a power system that suffered from aggregate technical and commercial
(AT&C) losses of 50–60 percent and rampant power cuts under a vertically integrated State
Electricity Board (SEB) that required heavy government subsidies each year to meet revenue
shortfalls. To improve performance, the state government unbundled the SEB in 2002, divid-
ing the distribution function into three companies. It then entered into joint ventures with
private parties, who bid for 51 percent of the equity of each of these new companies with the
winner selected on the basis of promised loss reductions.
Tata Power was awarded one of these companies—North Delhi Power Limited, later
renamed Tata Power Delhi Distribution Limited (TPDDL). A variety of technological (meter
replacement, automated meter reading, outage management systems, network planning
software) and social interventions (publicity on the need to pay for electricity, corporate
social responsibility initiatives) were implemented by the joint venture. The utility greatly
improved its operational and financial performance: AT&C losses fell from 53 percent in 2002
to 11 percent in 2012; average system availability increased by nearly 42 percent; and the
transformer failure rate came down to less than 1 percent.
On corporate governance, the near-equal public and private ownership of TPDDL is largely
reflected in its board composition (five nominee directors from the government of Delhi and
three promoter directors from the holding company, Tata Power). The board rates highly on
measures of effectiveness and has a raft of supporting board committees (such as Operations
Review Committee, Remuneration Committee, Business Review Committee, and Long-Term
Loans and Borrowings Committee) in addition to an Audit Committee. The utility has an exter-
nal auditor and the board follows a code of conduct and ethics. Every director has access to all
the utility’s financial and operational information and, despite its being a joint venture, there
has been no government influence on the utility’s functioning, management, or decision mak-
ing. The tenure of the chairman and managing director is five years.
Box 3.6 Organizational Transformation and a Turnaround in Performance in
Gujarat
In 2000, Gujarat Electricity Board (GEB) was one of the worst performing power utilities in
India, a drag on the government’s finances and on the state’s development. A decade later, in
2010, the GUVNL group, comprising seven interlocked companies, is a model public utility,
winning awards for innovation and customer service. It is efficient, agile, and profitable.
New political leadership initiated the turnaround. While power purchase remained central-
ized even after GEB was unbundled, there was real decentralization of authority and decision
making to the unbundled companies, each with its own corporate office and a professional
board. Politicians were replaced by bureaucrats and professionals on the boards of GUVNL,
box continues next page
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32 Corporate Governance of State Power Utilities
Box 3.6 Organizational Transformation and a Turnaround in Performance in Gujarat (continued)
the holding company, as well as its constituent units, while the very best generalist-
administrators were appointed to the top management of the unbundled utilities. Strong
political backing was given to discom staff, including in matters such as preventing power
theft by the politically connected.
A multipronged change management strategy was put in place. It involved a campaign
of information, education, and communication with all staff and stakeholders reminding
them about the goal, how the organization was progressing, and how the staff and stake-
holders could contribute to it; using dialogue to jointly develop solutions to issues raised
by staff; incentivizing improved housekeeping practices to increase revenues and cut
costs; and implementing initiatives to improve utility finances by cutting transmission and
distribution losses and theft. The government neutralized employee apprehensions by
signing a tripartite agreement with GEB management and employee unions that working
conditions would be no worse, that no jobs would be shed, nor any employee relocated
without consent. Starting off the new entities with a clean balance sheet also made achiev-
able the financial sustainability of the new structure. A transformation of work culture was
accomplished by investing heavily in training and capacity building of all staff from the
chairman and managing director to the lineman.
The management of the GUVNL group also set about strengthening driving forces for
change—implementation of e-Urja, an enterprise resource planning platform, for example,
became instrumental in developing a strong information and communications technology
culture, that has, in turn, empowered staff to develop homegrown solutions to their prob-
lems. Decentralized decision making empowered even junior field staff; competition among
discoms contributed to galvanizing employees around corporate goals, and a culture of
performance management around key performance indicators further enhanced staff partici-
pation. For instance, to curb farmers stealing power from single-phase supply by using phase-
splitting capacitors, distribution company engineers designed special transformers that trip
whenever the load exceeds a given limit.
Source: Shah and others 2012.
On the detailed index, the 21 utilities on average follow recommended
ractices for only 46 percent of the indicators included. In contrast, these utilities
p
complied, on average, with 67 percent of the indicators in the basic index.
Table 3.3 presents performance on this index, overall and by subtopic. Also
included in the table, for comparison, is each utility’s score on the basic index.
Table 3.4 presents the correlation between different CG variables. As would
be expected, the share of the board accounted for by different types of directors
is significantly correlated: a higher percentage of independent directors is quite
naturally related to lower levels of executive and government directors, and a
strong negative relationship is observed between the shares of government and
executive directors as well.
Chapter 5 takes a closer look at the possible link between strong CG practices
and utility financial and physical performance.
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Table 3.3 Utility Performance on the Detailed Index
Detailed Basic Board- Public Board External Management
State Utility Type index (%) index (%) management (%) accountability (%) effectiveness (%) accountability (%) practices (%)
Gujarat GUVNL Holding company 89 100 88 100 50 100 100
Gujarat DGVCL Discom 89 88 100 100 50 75 100
West Bengal WBSEDCL Discom 78 88 100 100 100 75 50
West Bengal WBSETCL Transco 78 88 100 100 100 75 50
Delhi Tata Power Discom 67 50 83 0 100 50 100
Maharashtra MSPGCL Genco 61 75 75 100 100 50 50
Maharashtra MSEDCL Discom 56 75 83 100 50 25 25
Madhya Pradesh MPMKVVCL Discom 56 63 63 0 50 50 50
Karnataka KPTCL Transco 56 63 88 100 0 0 75
Assam APDCL Discom 44 100 63 100 50 50 0
Assam AEGCL Transco 44 88 67 100 50 25 0
Andhra Pradesh APCPDCL Discom 44 75 63 100 50 25 25
Madhya Pradesh MPPTCL Transco 44 63 67 0 100 50 25
Delhi DTL Transco 44 50 67 0 50 25 50
Rajasthan RVPNL Transco 33 63 63 100 50 0 0
Rajasthan JVVNL Discom 33 50 63 0 50 0 0
Punjab PSPCL Discom 33 50 50 0 50 25 0
Haryana UHBVN Discom 28 50 50 0 50 0 0
Uttar Pradesh UPPTCL Transco 28 50 38 0 50 25 0
Uttar Pradesh MVVNL Discom 22 50 25 0 50 25 0
Tamil Nadu TANGEDCO Discom 22 38 38 0 50 0 0
Source: World Bank compilation.
Note: The bold values are scores on the indexes that have been created. Discom = distribution company; Genco = generation company; Transco = transmission company.
33
34 Corporate Governance of State Power Utilities
Table 3.4 Correlation among Corporate Governance (CG) Variables
% of board % of board % of board
that is that is that is
Number of CMD Basic CG Detailed CG independent executive government
directors tenure index index directors directors directors
Number of directors 1
CMD tenure −0.0865 1
Basic CG index 0.0458 0.1113 1
Detailed CG index 0.1671 0.4858** 0.6999*** 1
% of board that is
independent directors 0.1689 0.2077 0.5915*** 0.5556*** 1
% of board that is
executive directors −0.0904 −0.0407 −0.0268 0.4282* −0.2514** 1
% of board that is
government directors −0.0788 0.278* −0.2870** −0.0934 −0.4196*** −0.6680*** 1
Source: World Bank analysis.
Note: CG = corporate governance; CMD = chairman and managing director. The CMD tenure row and column only show correlations for the 41
firms covered; the Detailed CG index row and column only show correlations for the 21 firms covered.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Notes
1. OECD 2005. Also see “Overview of the Corporate Governance ROSC Program,”
World Bank, www.worldbank.org/ifa/rosc_cgoverview.html.
2. Major corporate scandals, such as Enron and WorldCom’s accounting frauds, highlight
the importance of strong corporate governance (CG) practices—independent over-
sight, the avoidance of conflicts of interest around accounting procedures, accurate
and transparent reporting to both directors and shareholders—in ensuring that
companies are run in accordance with shareholders’ interests (Coffee 2002; Elson and
Gyves 2003; Rosen 2003; Clarke 2005).
3. In Assam, the chairs of the transco and discom sit on each other’s boards.
4. Key Companies Act requirements used in this review are that companies must have
a minimum of three members on their boards; there should be an audit committee,
with a minimum of three members, two-thirds of whom must not be executive or
managing directors; and the board must meet at least once every three months.
5. Sometimes known as “functional” directors, executive directors are typically drawn
from senior management of the company (such as directors of finance or of human
resources).
6. An independent director is one who, apart from receiving director’s remuneration,
does not have a financial relationship with the company; is not related to persons
occupying high-level management positions; has not been a senior executive or
managerial personnel of the utility in the preceding three years; is not a partner of
the utility’s statutory audit firm, legal firm, consultants, or other experts that have
material associations with the utility; and is not a substantial shareholder of
the utility.
7. http://planningcommission.nic.in/reports/genrep/index.php?repts=hlpf.html.
8. The 14 states were selected to ensure a range of locations and sizes. Utilities within
the states were selected to include at least one discom and at most one other utility.
Within that, selection was based upon ease of access to senior management and
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Corporate Governance of State Power Utilities 35
likelihood of data availability. These decisions were all made in view of the difficulty
and time intensity of obtaining CG data.
For simplicity, when statistics are given by utility-type, Tripura State Electricity
9.
Corporation Ltd. is categorized as a discom. In addition, detailed reviews were under-
taken of practices in six distribution utilities: Assam Power Distribution Company Ltd.,
Dakshin Gujarat Vij Company Ltd., West Bengal State Electricity Distribution Company
Ltd., Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Ltd., Jaipur Vidyut
Vitaran Nigam Ltd., and Andhra Pradesh Central Power Distribution Company Ltd.
10. Combining the detailed sample and the additional utilities for which basic data were
collected, the full sample comprises 37 discoms, 15 transcos, 15 gencos, 1 corporation,
and 1 holding company.
11. The upper limit of 12 is taken from the Articles of Association of the West Bengal
utilities, commonly considered a good model.
12.
For example, the Articles of Association of Uttarakhand Jal Vidyut Nigam Ltd.
(UJVNL) state: “The Govt. of Uttarakhand may from time to time issue directive(s)
to the company as to the exercise and performance of its functions in matters involv-
ing the security of the State or substantial public interest and to the finances and
conduct of business and affairs of the company. … The company shall give immediate
effect to the directive(s) so issued” (https://www.upcl.org/wss/downloads/RtiManuals
_pdfs/Manual-4.pdf, accessed July 15, 2013).
13. Information on this aspect was obtained for one utility from the broader sample in
addition to the set of 21 utilities covered in the detailed sample.
14. In the case of state-owned utilities, a promoter director (such as an appointee or
employee of the holding company) is unlikely to have different incentives or interests
from a government director, so the analysis does not differentiate between the two.
15. Another view is that independent directors tend to have poorer information than
insiders, so may be unable to monitor management as effectively as government or
executive directors. See Adams and Ferreira (2005) and Harris and Raviv (2008).
16. Utilities that do not include Assam’s discom and genco, Chhattisgarh’s discom and
transco, Kerala’s SEB, Tripura’s state corporation, and Uttar Pradesh’s transco and one
of its discoms.
17. The information presented is oriented toward governance structures due to the diffi-
culty of obtaining what is often considered confidential information on internal com-
pany practices.
18. Sunil Mitra, former Secretary Power West Bengal, private communication.
19. The few data do not permit an unequivocal answer on the impact on utility financial
performance of having an IAS officer as CMD.
20. Dubash and Rao 2006. In some cases, the state’s Energy Minister is appointed board
chair, which makes the utility particularly susceptible to political influence. We are
indebted to Shantanu Dixit for this observation.
21. In addition, documents need to be prepared and circulated to all members in advance,
and the agenda needs to be kept to important issues.
22. This is technically a violation of the Companies Act associated with penal provisions;
however, companies usually apply for and obtain waivers granting additional time for
compliance.
23. Madhya Pradesh’s two other discoms and Orissa’s transco were adopting such systems
at the time of writing this review.
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36 Corporate Governance of State Power Utilities
24. Of the 21 utilities surveyed in depth.
25. Two transcos (GRIDCO in Orissa and PSTCL in Punjab) lacked sufficient data for
inclusion in the index.
26. While deeper analysis of the political economy of change would be required to
come to a definitive conclusion, it is instructive that the initial impetus for change
in these three states (including the privatization of distribution in Delhi) appears to
have come from the government/political leadership. In all three cases, the fiscal
burden of a poorly performing power sector and consumer unhappiness with con-
stant power cuts seems to have created the political will to take steps not only to
improve the situation but to turn the sector into a source of comparative advantage
for the state.
References
Adams, Renee B., and Daniel Ferreira. 2005. “A Theory of Friendly Boards.” Finance
Working Paper 100, European Corporate Governance Institute, Brussels.
Adams, Renee B., Benjamin E. Hermalin, and Michael S. Weisbach. 2009. “The Role of
Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.”
Journal of Economic Literature 48 (1): 58–107.
Black, Bernard, and Vikramaditya Khanna. 2007. “Can Corporate Governance Reforms in
Increase Firms’ Market Values: Evidence from India.” Journal of Empirical Legal Studies
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Cadbury Committee on the Financial Aspects of Corporate Governance. 1992. Report of
the Committee on the Financial Aspects of Corporate Governance. London: Burgess
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Clarke, Thomas. 2005. “Accounting for Enron: Shareholder Value and Stakeholder
Interest.” Corporate Governance: An International Review 13: 598–612.
Coffee, John C. Jr. 2002. “Understanding Enron: It’s about the Gatekeepers, Stupid.”
Columbia Law and Economics Working Paper 207, New York.
Dubash, Navroz K., and Narasimha Rao. 2006. “Emergent Regulatory Governance in
India: Comparative Case Studies of Electricity Regulation.” Presented at “Frontiers of
Regulation: Assessing Scholarly Debates and Policy Challenges,” University of Bath,
U.K., September 7–8.
Elson, Charles M., and Christopher J. Gyves. 2003. “The Enron Failure and Corporate
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Fields, M. Andrew, and Phyllis Y. Keys. 2003. “The Emergence of Corporate Governance
from Wall St to Main St: Outside Directors, Board Diversity, Earnings Management,
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Level Evidence for India.” Applied Economic Letters 13 (7): 435–43.
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Financial Studies 21 (4): 1797–832.
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Endogenously Determined Institution: A Survey of the Economic Literature.”
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CHAPTER 4
Regulatory Governance
The establishment of state electricity regulators under the 1998 Electricity
Regulatory Commission Act, and, subsequently, the Electricity Act of 2003
(EA 2003) (which superseded it) was intended to reduce government control
over the power sector and to d e-link it from electoral politics.1 The EA 2003
aimed to create an independent, unbiased, and transparent governance frame-
work that balanced consumer and investor interests, specifically by removing
regulation and tariff determination from the purview of the government.2
However, the performance of the sector has remained lackluster, leading to
questions about the de facto accountability and independence of the state elec-
tricity regulatory commissions (SERCs) and their role in developing and main-
taining an operating environment that creates incentives for long-term efficient
operation while meeting service delivery targets:
Most state governments have approached the reform of the sector in a half-hearted
fashion. For example, they have been reluctant to grant autonomy to their power
utilities, contriving to retain management control or influence through top level
appointments, even where they are unbundled and corporatized. … Similarly, most
state governments have met the federal legal requirement to establish regulatory
commissions, but have given them very limited jurisdiction. Even in states where
regulators have been given a wider mandate, questions arise about their indepen-
dence, process of appointment, and powers of enforcement (Lal 2006, 11).
Another issue is that almost all state-level power utilities in India remain state
owned, removing the market context for independent regulation and raising
questions about the extent to which a regulator can even influence the actions
of a state-owned utility, since “to have effective regulations, you must have utili-
ties that can, in fact, be regulated” (Berg 2013). Berg notes that “[b]oth sector
regulators and state-owned water utilities are formal organizations embedded
in a social structure. The fundamental problem is whether one governmental
entity (a regulatory commission or a municipal council) can influence the
actions of another governmental entity that delivers water services (which may
be at the national or subnational level). In particular, the utility might ‘bypass’
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40 Regulatory Governance
the regulator, by drawing upon an alliance with the line ministry responsible for
the water services sector.”3 Also, regulators can only infrequently apply sanctions
to utilities because they generally have less political weight than utilities.
The institutional framework determines whether the regulator can have a
positive impact on performance, but state ownership may limit the effectiveness
of standard regulatory mechanisms, which would need to be adapted to the
objectives and incentive structure of public enterprises. For state-owned utilities,
economic sustainability is balanced against stated social objectives and (generally
unstated) political objectives (Berg 2013). In privately owned utilities, sharehold-
ers are concerned about the impact of regulatory decisions on the return to their
equity and the board holds management accountable for performance through
bonuses, salaries, hiring, and firing. But in state-owned utilities, there is often little
concern about return on equity; bonuses are rare as are penalties for poor perfor-
mance. While it is entirely possible for state-owned utilities to link incentives or
penalties to performance, such a commercial orientation requires professionalism
in the utility and insulation from political intervention—governance arrange-
ments and associated managerial incentives are central to achieving high
performance. In fact, “unless the internal governance of the utility focuses on
performance (via pressure from the board of directors)” the regulator is unlikely
to be able to improve performance (Berg 2013). Thus sound regulatory and cor-
porate governance are reinforcing elements in utilities’ operating environment.
In addition, the ability of SERCs to carry out their mandates depends on the
technical, financial, and human resources available to them, their competence,
their autonomy in decision making (including insulation from political pres-
sures), and, finally, their accountability. The credibility, legitimacy, and, indeed,
effectiveness of SERCs are enhanced to the extent that their mandate is well
defined and they are transparent and participatory in their functioning.
The rest of this chapter reviews the structural and institutional features of
SERCs across India in recognition of the importance of these arrangements in
creating a stable and effective regulatory environment, with concomitant impli-
cations for utility performance (Stern and Holder 1999). It describes the man-
dates given to SERCs under the EA 2003 and the extent to which SERCs have
implemented them, as well as key institutional design (ID) aspects such as SERC
autonomy, capacity, transparency, and accountability, which are expected to
boost their effectiveness.
Mandates of SERCs
SERCs are mandated with multiple roles: to prevent political interference in the
sector and to protect the interests of different stakeholders by regulating the
operations of power utilities and the tariff chargeable to consumers (Prayas
Energy Group 2003). Key responsibilities are to issue licenses for distribution
and intrastate transmission; ensure nondiscriminatory open access (OA) to both
the transmission and distribution systems in order to promote competition and
support the development of a multibuyer market and power trading; regulate
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Regulatory Governance 41
and rationalize tariffs so as to cover costs; implement multiyear tariff (MYT)
frameworks to reduce uncertainty and encourage investment in the sector; estab-
lish and monitor standards with respect to quality and reliability of service by
licensees; and safeguard consumer interests, including by setting up mechanisms
to redress grievances (see box 4.1 for a full list). In addition, SERCs are tasked
with drafting, notifying, and implementing a range of additional regulations to
enact the mandates of the EA 2003.
Implementation of Regulatory Mandates
This section reviews the performance of SERCs grouped around the following
elements of their mandates: tariffs, standards of performance, protection of con-
sumer rights, and implementation of certain other regulations. Data were col-
lected for all 28 SERCs, though data for three small states were patchy. In
addition, in-depth reviews of regulatory practices were carried out for Andhra
Pradesh, Assam, Delhi, Gujarat, Madhya Pradesh, and Maharashtra. Appendix E
lists the SERCs covered in this review.
There has been solid progress, but most SERCs have not yet fully implemented
the mandates given them in the EA 2003. For instance, tariffs cover average cost
in the majority of states, but increases in tariffs have generally not kept pace with
cost increases and very few states issue MYTs (despite issuing MYT regulations).
Most SERCs are nominally complying with mandates to promote consumer
empowerment and increase transparency to the public, but need to do far more
to ensure that consumers are given opportunities to engage and that high-quality
information is available to the public. Finally, though most SERCs have notified
the key regulations necessary to enact the mandates of the EA 2003, in many cases
they have yet to take concrete steps to actually implement these regulations.
Tariffs
In line with their most important mandate, most SERCs appear to set tariffs that
would allow utilities to cover their costs, though the share of SERCs that accom-
plish this has declined over time. Delays in issuing tariff orders are common,
there have been several years when many SERCs have not issued a tariff order at
all, and tariff increases have generally not kept pace with cost increases. Only a
few SERCs have notified an MYT framework and issued tariff orders under that
framework (Delhi Electricity Regulatory Commission [DERC], for example).
Cost Recovery
In 2010, most SERCs set tariffs at a level that allowed utilities to recover their
costs.4 While cost recovery basically requires the tariff to equal or exceed average
cost, a more stringent requirement is used in this review. Cost recovery is defined
as the tariff level that covers (equals) average cost plus a premium to account for
“normal” distribution losses, which are set at 10 percent for this analysis. Under
this framework, an efficiently operating utility (one with normal distribution
losses and 100 percent collection) that has a tariff equal to cost recovery, as
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42 Regulatory Governance
Box 4.1 SERC Responsibilities
The State Commission shall discharge the following functions, namely:
• determine the tariff for generation, supply, transmission, and wheeling of electricity,
wholesale, bulk, or retail, as the case may be, within the State: Providing that where open
access has been permitted to a category of consumers under section 42, the State
Commission shall determine only the wheeling charges and surcharge thereon, if any, for
the said category of consumers;
• regulate electricity purchase and procurement process of distribution licensees including
the price at which electricity shall be procured from the generating companies or licensees
or from other sources through agreements for purchase of power for distribution and supply
within the State;
• facilitate intrastate transmission and wheeling of electricity;
• issue licenses to persons seeking to act as transmission licensees, distribution licensees, and
electricity traders with respect to their operations within the State;
• promote cogeneration and generation of electricity from renewable sources of energy by
providing suitable measures for connectivity with the grid and sale of electricity to any
person, and also specify, for purchase of electricity from such sources, a percentage of the
total consumption of electricity in the area of a distribution license;
• adjudicate upon the disputes between the licensees, and generating companies and to
refer any dispute for arbitration;
• levy fee for the purposes of this Act;
• specify a State Grid Code consistent with the Grid Code specified under clause (h) of
subsection (1) of section 79;
• specify or enforce standards with respect to quality, continuity, and reliability of service by
licensees;
• fix the trading margin in the intrastate trading of electricity, if considered, necessary; and
• discharge such other functions as may be assigned to it under this Act.
The State Commission shall advise the State Government on all or any of the following matters,
namely:
• promotion of competition, efficiency, and economy in activities of the electricity industry;
• promotion of investment in electricity industry;
• reorganization and restructuring of electricity industry in the State;
• matters concerning generation, transmission, distribution, and trading of electricity or any
other matter referred to the State Commission by that Government.
Source: Electricity Act 2003, Section 86.
defined above, would break even.5 “Operating cost recovery,” similarly, is the
tariff level that covers (equals) average operating cost plus a premium to account
for “normal” distribution losses (10 percent here).
In 2010, 19 states had an average billed tariff high enough to cover their costs
if utilities had sold all the energy purchased, while 17 of those states had an
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Regulatory Governance 43
verage tariff high enough to cover their costs even if utilities sold only 90 percent
a
of energy purchased.6 In reality, many of the 17 states with tariffs set at cost recov-
ery, as defined above, did not generate enough revenue to cover their costs, either
because their distribution losses were higher than 10 percent (they billed for less
than 90 percent of input energy), they did not collect all the revenue they billed,
or a combination of the two. In 10 states, tariffs were so low that utilities could
not have recovered their costs even if they had sold all the energy purchased.
The analysis just above focuses on recovery of total costs, although the results
are nearly identical if operating costs are considered instead (figure 4.1). While
covering total costs is important, covering operating costs with tariff revenue is
even more critical to operational sustainability. In 2010, 20 states had a tariff
equal to or exceeding average operating cost and 18 states had tariffs equal to or
exceeding operating-cost-recovery levels.
The number of states with tariffs achieving operating cost recovery has
declined since 2003. Further, the ratio of the average billed tariff to the operating-
cost-recovery level (the “operating-cost-recovery ratio”) fell in the majority of
states in 2003–10, suggesting that tariff increases generally failed to keep pace
with cost increases (figure 4.2). In 2003, 25 states had tariffs above operating-
cost-recovery levels, and 19 states had tariffs above total cost recovery levels. In
21 states, the operating cost-recovery ratio declined from 2003 to 2010. SERCs
raised tariffs frequently (three or four times between 2007 and 2010, the period
for which utility tariff revision data were available) in several of the states in
which tariffs failed to keep pace with cost increases.
Figure 4.1 Ratio of Average Billed Tariff to Operating-Cost-Recovery Level and to Average Operating Cost,
2010
Average billed tariff/Operating-cost-recovery level Average billed tariff/Average operating cost
Meghalaya Meghalaya
Sikkim Sikkim
Orissa Orissa
Other Other
West Bengal West Bengal
Chhattisgarh Chhattisgarh
Delhi Delhi
Tari is Maharashtra Maharashtra
greater Uttarakhand Uttarakhand
than cost Madhya Pradesh Madhya Pradesh
measure Kerala Kerala
Gujarat Gujarat
Karnataka Karnataka
Assam Assam
Himachal Pradesh Himachal Pradesh
Uttar Pradesh Uttar Pradesh
Goa Goa
Tripura Tripura
Bihar Bihar
Other Other
Manipur Manipur
Tari is Haryana Haryana
Nagaland Nagaland
less than Andhra Pradesh Andhra Pradesh
cost Punjab Punjab
measure Jharkhand Jharkhand
Tamil Nadu Tamil Nadu
Mizoram Mizoram
Rajasthan Rajasthan
0 0.5 1.0 1.5 2.0 2.5 0 0.5 1.0 1.5 2.0 2.5
Source: World Bank compilation.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
44 Regulatory Governance
Figure 4.2 Change in Ratio of Average Billed Tariff to Operating-Cost-Recovery Level, 2003–10
Average billed tariff/
operating-cost-
recovery level
4.0 Cost recovery of tariffs Cost recovery of tariffs decreased
increased from 2003 to 2010
3.5 from 2003 to 2010
3.0
2.5
2.0
1.5
1.0
Average tari = Operating-cost-
0.5 recovery Level
0
Ot m
W Tr er
t B ra
Ot l
Or r
M Sik sa
eg kim
Ta jast ya
il n
ar du
dh P and
Pr jab
ga sh
Ha and
an a
Bi r
m ar G r
ha ad a
ra h
A sh
rn m
Gu aka
hy K rat
Ut ra la
M rak sh
ar nd
Ch D tra
tti hi
h
ga
he
u
ha
M an
ac Pr o
m ha
l P es
ar
a P era
ha el
es ipu
h
ra
Ka ssa
is
ip
Ra ala
Na de
de
ta de
Jh Na
ah ha
ja
h
en
ra un
sg
at
ry
kh
l
izo
as
a
h
M
Hi tt
U
ad
An
M
2010 2003
Source: World Bank compilation.
Tariff Revisions
From 2001 to 2010, only two state regulators (Andhra Pradesh and Haryana)
issued a tariff order each year.7 During this period the median share of years for
which a tariff order was issued was 53 percent.8 Eight SERCs (of the 25 with
data) had one or more years in which they did not receive a tariff filing from
every utility. Twenty SERCs failed to issue the tariff order within 120 days of
receiving the utilities’ annual revenue requirement (ARR) petitions (per EA
2003 requirements) at least once during 2008–10. The average delay in issuing a
tariff order over the same three years was 213 days, with a minimum average
delay of 30 days (Andhra Pradesh Electricity Regulatory Commission [APERC],
which in most years issued the tariff less than 120 days after ARR receipt) and a
maximum of 365 days (Goa, Nagaland, Punjab, and Tripura). The delays often
arise because there are too few staff to handle the workload, sometimes because
the workload itself is high on account of the large number of licensees to regu-
late. For example, Maharashtra Electricity Regulatory Commission (MERC)
often faces delays in issuing its tariff orders as it handles the largest number of
licensees and petitions of any state, and therefore requires far more discussion
between the regulator and the licensees before finalizing the tariff.
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Regulatory Governance 45
Regular revisions in tariffs avoid the shock to consumers from having to adjust
to a sudden large jump in the tariff. And they enhance the general acceptability
of tariff increases and help prevent receivables, such as “regulatory assets,” from
building up in utility accounts.9 Mounting regulatory assets in states such as
Delhi, Haryana, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal have exac-
erbated their discoms’ cash-flow problems, forcing them to borrow heavily to
cover the deficit of revenues over costs (box 4.2).
SERCs have the leeway to determine the tariff on a suo moto basis even if the
utility does not file an ARR; however, few SERCs actually take up cases in this
manner, due to a combination of a lack of legislative clarity on when SERCs
should initiate suo moto action and a lack of initiative among SERCs. Madhya
Pradesh Electricity Regulatory Commission (MPERC) stands out as being proac-
tive and has suo moto taken action in a number of cases. For example, MPERC
passed the ARR and tariff order in FY06 even though none of the utilities in
Madhya Pradesh had submitted tariff applications.
Tariff decisions can be challenged in the Appellate Tribunal, but this is
relatively uncommon as seen in the fact that, although the average number of
orders challenged for an SERC is just over five, the median is only three and
the mode zero. Among the 20 SERCs that have had tariff orders challenged, only
38 percent of challenges have been successful, indicating that the Tribunal gener-
ally considers SERC orders satisfactory.10
Fifteen SERCs have issued MYT regulations, but only 10, including DERC
and APERC, have actually issued an MYT order. (This is primarily due to a
lack of historical data to provide a basis for projections and utilities’ inability
to accurately monitor and provide reports on key parameters necessary for
updating the tariff.) The MYT framework provides greater certainty to poten-
tial investors since it specifies the path that tariffs will follow over time.
By allowing utilities to retain a portion of the cost savings earned by “over-
achieving” transmission and distribution losses relative to the targets set by
the Commission, the MYT framework also creates an incentive for licensees
to improve performance.
On average, SERCs increased tariffs 1.5 times from 2008 to 2010. Six states
increased tariffs each year over that period (Andhra Pradesh, Himachal Pradesh,
Maharashtra, Meghalaya, Punjab, and West Bengal).11 Nine states (Goa, Haryana,
Jharkhand, Manipur, Mizoram, Nagaland, Rajasthan, Tamil Nadu, and Tripura)
did not increase tariffs at all.
To properly set tariffs, SERCs need to conduct a cost of supply study to
understand how much it actually costs to supply electricity to different catego-
ries of end-users; however, only five SERCs have ever conducted one—Himachal
Pradesh, Gujarat, Delhi, Bihar, and Andhra Pradesh.12 Such a study is also neces-
sary to understand how much particular categories of consumers are being sub-
sidized or are cross-subsidizing other categories of consumers. Without a detailed
cost of supply study, SERCs must base the retail supply tariff on other estimates
of cost.
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46 Regulatory Governance
Box 4.2 The Cost of Regulatory Assets
The tariff-setting mechanism, as currently worked out by the state electricity regulatory
commissions (SERCs), is based on the annual revenue requirement (ARR), which includes a 16
percent post-tax return on equity as assured profit. An ARR is a detailed statement of
expenditure in which a distribution company (discom) lists its proposed expenditure on
network upgrades, purchase of equipment, and administrative and general expenses. The
SERC scrutinizes each discom’s ARR and fixes the tariff accordingly. Once the regulator has
accepted the expenses leading to an agreed ARR, there is an implied tariff hike to be borne by
consumers. At this point, the regulator may exercise discretion to create a so-called “regulatory
asset”: if it recognizes that a discom needs to be paid Rs 100 but feels this will burden
consumers who can pay just Rs 60, Rs 40 is classified by the regulator as a regulatory asset,
which is an outstanding receivable owed to the discoms on which 13–14 percent interest will
be paid the following year as a carrying cost.
In 2013, the regulatory assets of the three Delhi discoms stood at Rs 70 billion (US$1.5
billion) with the interest on the principal mounting. If these regulatory assets are not liquidated,
the interest burden will continue to rise and the utilities’ financial position will become
untenable, with an increasingly remote chance of recovering the full amount due since this
would require unrealistically high tariff hikes. Government subsidies are likely to be required. If
a solution to this problem is not found, there is a possibility of the discoms becoming cash-
flow constrained to the point where, in cases like Delhi, private players could simply walk away
from their investments.
While the Appellate Tribunal has said the carrying cost of regulatory assets should be paid
to utilities every year to avoid cash-flow problems,a regulatory assets continue to pile up. In
fact, regulatory assets have increased so sharply that utilities are unlikely to be able to retire
them in three years. Delays in “truing up” add to the size of the regulatory assets—retail tariffs
are always specified at the start of the year on the basis of the discom’s expected operating
costs, but if the costs and revenues are different from what is projected, these additional gaps
are fixed by truing up the following year.
The regulatory assets problem is not confined to Delhi. Nationwide it is estimated that
regulatory assets have reached over Rs 700 billion (US$15 billion) and that just the interest cost
adds up to around Rs 95 billion (US$2 billion) each year. Discoms with mounting regulatory
assets are facing increasing cash-flow problems, jeopardizing their functioning. Borrowing
against regulatory assets is becoming less feasible: because commercial banks are unsure how
to value regulatory assets that may not be worth their face value, discoms can no longer
borrow up to the full amount of the regulatory assets they own. Other sources are required for
funding discoms and there appears to be a strong case for providing them some relief, or at
least liquidity.
a. Appellate Tribunal Order of 11 November 2011. The recovery of the regulatory asset should be time bound and within a
period not exceeding three years at the most and preferably within the control period. The carrying cost of the asset should
be allowed to the utilities in the ARR of the year in which the regulatory assets are created to avoid cash-flow problems for
the distribution licensee.
Sources: ICRA 2012; Nair 2013; Sethi 2013.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Regulatory Governance 47
Standards of Performance
All but two SERCs have notified regulations covering standards of performance
(SoP). SoP typically cover aspects such as the time taken to release new connec-
tions, to restore supply after an interruption, and to resolve complaints over
metering, billing, voltage fluctuations, and so on. All the notified regulations have
clearly defined penalties for noncompliance,13 but there is no monetary incentive
for utilities to go beyond the minimum SoP.
About 80 percent of SERCs that have notified regulations report SoP results
online. However, this approach does not necessarily imply the SERC is actively
monitoring compliance. In some cases, SERCs publish performance reports
received from utilities without verifying the authenticity of the data; moreover,
there is no evidence of action taken on such reports, and only 75 percent of
SERCs actually monitor compliance with the standards. Monitoring compliance
is a challenge because licensees often do not have a system for measuring perfor-
mance against the SoP.
SERCs in Madhya Pradesh, Gujarat, Delhi, Maharashtra, and Andhra Pradesh
have been particularly successful in monitoring the compliance of distribution licens-
ees with the SoP. These SERCs measure performance quarterly and publish annual
compliance reports (in their local languages and English) in newspapers and online.
Low awareness of SoP among consumers and a limited ability to petition for
compensation mean there is relatively little consumer pressure on utilities to
perform. Some regulators have been proactive in attempting to overcome this
barrier; for example, MERC publishes a Consumers’ Rights Statement on its
website. Possibly as a result of low consumer awareness, only two SERCs have
ever issued penalties for noncompliance. Even in states with successful monitor-
ing such as Madhya Pradesh, utilities have not generally compensated affected
consumers when they have failed to meet the SoP.
Protection of Consumer Rights
Measures to protect consumer rights include establishment of consumer griev-
ance-redressal forums (CGRFs), appointment of a consumer ombudsman, and
creation of a state advisory committee (SAC). These requirements are nominally
complied with by all SERCs. With the exception of a few stand-out SERCs (such
as MERC, DERC, and Gujarat Electricity Regulatory Commission [GERC]),
however, SERCs have put little effort into promoting consumer awareness and
use of the CGRF and ombudsman (figure 4.3).
Consumer Grievance Redressal and Consumer Ombudsman
All but one SERC (Sikkim) have issued guidelines for utilities on setting up
CGRFs. Utilities in all states but three have established CGRFs and all but four
SERCs have a consumer ombudsman. GERC, which stands out in this area, has
a four-tier system for redressal of consumer grievances, comprising consumer
redressal committees at the division and circle levels, CGRFs at the corporate
utility level, and a consumer ombudsman at the SERC level. GERC also recruits
members of the CGRF from the public.
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48 Regulatory Governance
Figure 4.3 Measures Taken by SERCs to Protect Consumer Rights
28
Number of SERCs 24
20
16
12
8
4
0
CGRF guidelines CGRF established Consumer Consumer State advisory
ombudsman advocacy cell committee
Source: World Bank compilation.
Note: CGRF = consumer grievance-redressal forum; SERC = state electricity regulatory commission.
These steps are only preliminary, however, and SERCs need to make more
effort to ensure that consumers are aware and able to leverage the benefits of these
tools. Such steps can include establishing a consumer advocacy cell d edicated to
increasing consumer awareness and assisting consumers in complaint redressal,
and to putting online the status of complaints to the CGRF or ombudsman.
Ten SERCs have reported establishing consumer advocacy cells: Tamil Nadu,
Orissa, Maharashtra, Madhya Pradesh, Kerala, Karnataka, Jharkhand, Delhi,
Chhattisgarh, and Assam. This goes beyond what is mandated by the EA 2003.
DERC, which stands out in this area, has appointed a dedicated Grievance
Redressal Officer for consumers. Each year, around 400 grievances are received
and resolved. This number indicates high awareness of regulatory issues among
consumers in the state relative to others. In MPERC, the consumer advocacy cell
consists of one person responsible for preparing and disseminating information
for consumers, ensuring representation of consumers before the Commission,
responding to and resolving consumer complaints, and advising in the case of
wrong billing, noncompliance with performance standards, tariffs, and other
related matters. MPERC stands out as one of the few electricity regulators to put
online complaints made to the CGRF and ombudsman.
State Advisory Committees
All SERCs have established SACs that represent the interests of consumers and
other stakeholders in the state and that advise SERCs in that respect. For example
(among SERCs surveyed in detail), SACs in Delhi, Madhya Pradesh, Punjab,
Gujarat, and Maharashtra represent the interests of agriculture, industry, com-
merce, nongovernmental organizations, academics, and individual consumers. SACs
in Madhya Pradesh and Punjab also have representation from organized labor.
Suggestions from its SAC that the DERC has accepted include conducting
consumer satisfaction surveys, regulating energy consumption of street lights,
reducing cross-subsidies from industrial and other high-value consumers, and
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Regulatory Governance 49
benchmarking the performance of Delhi against other states on distribution
company costs. In Madhya Pradesh, some suggestions from the SAC that
MPERC has accepted include establishing a separate tariff category for power-
intensive industries, limiting the increase in minimum guaranteed consumption
for nondomestic consumers, and introducing a formula for pass-through of unan-
ticipated fuel price and other power procurement cost increases.
Other Regulations
Most SERCs have taken the first step of notifying key regulations mandated
by the EA 2003—on average, SERCs have notified 8 of 11 key regulations. But
few SERCs have fully implemented these regulations. For example, some
states have yet to determine the tariffs for OA, despite having passed OA
regulations. Perhaps as a consequence, only half the states have even received
an OA application, and only 10 states have actually implemented OA for an
applicant. Similarly, on renewable energy and energy efficiency, most states
have notified basic renewable purchase obligation (RPO) regulations, but only
18 monitor compliance and only 4 have issued penalties for noncompliance.
Far fewer states have passed demand-side management (DSM), feed-in-tariff
(FIT), or time-of-day (ToD) metering regulations.
From the EA 2003 and related policies, SERCs need to notify regulations in
the following 11 key areas: supply code, SoP, OA, metering, CGRF, trading, MYT,
availability-based tariff (ABT), DSM and other energy efficiency promotion, ToD
metering, and RPOs. On average, 7.8 regulations have been notified (the median
and mode are both 8) (figure 4.4). No SERC has notified all 11, but five SERCs
have notified 10 (Chhattisgarh, Gujarat, Himachal Pradesh, Maharashtra, and
Rajasthan). Two SERCs have only notified one regulation; however, they became
functional only one year before these data were collected.
The three most commonly notified regulations are OA, SoP, and RPOs,
which have been notified by 27 of the 28 SERCs (figure 4.5). The least notified
Figure 4.4 Number of Regulations Notified by SERCs
16
14
12
Number of SERCs
10
8
6
4
2
0
0–2 3–5 6–8 9–11
Number of regulations notified
Source: World Bank compilation.
Note: SERC = state electricity regulatory commission.
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50 Regulatory Governance
Figure 4.5 Types of Regulations Notified by SERCs
28
Number of SERCs 24
20
16
12
8
4
0
Os
OA
P
e
RF
g
g
g
YT
EE
T
AB
od
So
in
in
in
CG
M
RP
er
er
er
ad
c
th
et
et
ly
Tr
/o
pp
M
m
M
D
Su
DS
To
Source: World Bank compilation.
Note: ABT = availability-based tariff; CGRF = consumer grievance-redressal forum; DSM = demand-side management;
EE = energy efficiency; OA = open access; SERC = state electricity regulatory commission; SoP = standards of performance;
MYT = multiyear tariff; RPO = renewable purchase obligation; ToD = time-of-day.
regulations are intrastate ABT, DSM and other energy efficiency promotion
measures, and MYT, which have been notified by only 10, 11, and 15 SERCs,
respectively.
Most SERCs face significant challenges in ensuring that utilities comply with
regulations and other directives (as noted for SoP, for example). MERC stands
out here and, unlike other regulators, has ensured that licensees at least initiate
action on its directives and regulations. In 2010–12, licensees initiated action on
all the directives MERC issued.
The following subsections provide more detail on the development and
implementation of the framework for OA and RPOs.
Open Access
OA remains poorly implemented, particularly at the distribution level.14 SERCs
have a critical role in putting in place the framework for OA, as they must notify
OA regulations, establish an OA cross-subsidy surcharge to compensate the util-
ity for the loss of paying consumers who choose an alternate supplier, determine
wheeling and transmission charges, and notify a roadmap for the reduction of the
OA cross-subsidy surcharge over time (and facilitate implementation).
Twenty-six SERCs have issued OA regulations, 24 have determined the OA
surcharge, 22 the OA wheeling charge, and 25 the OA transmission charge
figure 4.6). Nineteen SERCs have issued the approach regulations and deter-
(
mined all the necessary charges for OA; of these 19, however, only 11 have also
reduced the OA cross-subsidy surcharge since 2006 (13 SERCs in total have
reduced the surcharge).
Beyond putting the structure for OA in place, SERCs also receive and approve
OA applications. As of 2012, only 15 SERCs had received any OA applications.
Of these, only 12 SERCs had approved any applications; and in only 10 states
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Regulatory Governance 51
Figure 4.6 Action Taken on OA by SERCs
28
24
Number of SERCs
20
16
12
8
4
0
Issued OA Determined Determined Determined Received an OA Approved an Implemented an
regulations OA surcharge OA wheeling OA transmission application OA application OA application
charge charge
Source: World Bank compilation.
Note: OA = open access; SERC = state electricity regulatory commission.
had any applications been implemented. The SERCs that have started receiving
applications have received an average of 17, approved an average of 14, and seen
an average of 11 implemented.
Renewable Energy and Energy Efficiency
Twenty-six SERCs have notified RPO regulations (figure 4.7); however, only 18
SERCs actually monitor compliance with the regulations, and only 4 SERCs
issue penalties for noncompliance (Madhya Pradesh, Kerala, Jharkhand, and
Haryana).
Five state regulators have defined RPO targets for the next five years (Andhra
Pradesh, Delhi, Himachal Pradesh, Kerala, and West Bengal), but most SERCs
(12) have only defined targets two years into the future. Compliance as of 2012
with solar RPO targets for 2012–13 varied widely: six states (Gujarat, Karnataka,
Orissa, Punjab, Rajasthan, and Uttarakhand) had already met 100 percent of the
target, but nine states had made no progress. On average, states had achieved
about 44 percent of the target.
Twenty-one SERCs have established incentives for consumer DSM, though
only 11 SERCs have issued regulations for energy efficiency and DSM. Measures
taken include introducing a ToD tariff, directing utilities to develop programs to
promote use of energy-efficient appliances, and conducting consumer awareness
campaigns on energy efficiency and conservation.
Twenty-two SERCs have determined FITs for at least one type of renewable
energy, but only 3 states have notified FITs for all the kinds of energy (other than
solar) for which renewable potential exists (Delhi, Orissa, and Punjab). Another
5 states have notified FITs for 75–80 percent of the forms of energy for which
they have potential (Gujarat, Kerala, Madhya Pradesh, Maharashtra, and Uttar
Pradesh).15 Twenty SERCs have issued ToD metering regulations, and 17 SERCs
have provisions for a differential or ToD tariff. Twenty-four SERCs have notified
renewable energy certificate regulations (that is, regulations that facilitate trading
of such certificates).
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
52 Regulatory Governance
Figure 4.7 Action Taken on Renewable Energy and Energy Efficiency by SERCs
28
24
Number of SERCs
20
16
12
8
4
0
er re
fo tio ng
M st t egu ns
r c ye n s
e
es
M
ns
ab fo I T
io le
f
rif
nc
lat ab
F
en o
DS
lti
io
tio
ito ee tio
on la ri
gy
ta
om ars
r T ns
ns
le r m
en F ned
ia
isi gu ete
na
at
gu w
la
on hr la
e
oD
pl
re e
ul
ot
pe
gu
ov re m
e en
i
m
g
om
s
re
re
ue
D
at d r
er
ew IT
ea r
To
M
O
t l PO
Pr
et
Iss
fic ie
RP
l r ed
DS
d
f
d
ra R
rti ti
ie
ve
ia ifi
ce no
de ve fied
fo e d
d
tif
nt ot
Ha
ie
i
g y ve
no
f
te e n
tif
ti
ed o t i
pr
no
er Ha
no
ve
po v
fin n
ve
a
ve
Ha
of H
ve
Ha
Ha
Ha
Ha
en
%
75
an
th
Source: World Bank compilation.
Note: DSM = demand-side management; FIT = feed-in-tariff; RPO = renewable purchase obligation; SERC = state electricity regulatory
commission; ToD = time-of-day.
Institutional Design: SERC Autonomy, Capacity, Transparency, and
Accountability
The review finds, first, that SERCs have struggled to achieve true autonomy from
state governments, in part because of relationships built into the EA 2003.
Second, many SERCs appear to lack the resources that might assist in performing
their functions—most notably, enough professional staff and appropriate IT
systems. Third, despite some major innovations in this area, most SERCs have yet
to implement adequate transparency measures and create frameworks for mean-
ingful public input to the regulatory process. Finally, perhaps most importantly,
there is no clear accountability mechanism to govern SERCs themselves.
Autonomy
Many SERCs have struggled to achieve key benchmarks of autonomy: ensuring
the SERC chairperson and other members complete full terms of five years (also
key for instilling stability and predictability in the regulatory process), and
obtaining assured funding that is not dependent on the vagaries of annual budget
appropriations.
Financial Autonomy
Over half the SERCs still depend primarily on state grants for their budgets, and
over 40 percent of the 23 SERCs with exact numbers available derive their entire
budgets from the state (figure 4.8). One-quarter of SERCs depend mainly on
their own revenue, and the rest are mixed commissions in Gujarat, Maharashtra,
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Regulatory Governance 53
Figure 4.8 Share of SERC Budget from Own Resources
100
90
80
70
60
Percent
50
40 Average share: 36%
30
20
10
0
ha ram
As h
m
Ha a
Ka ana
eg ka
an akh h
d
h
la
Ot i
er
sh
l P sa
ad G r
M rad t
ar h
a
Pu a
an U Pra a
Ut Tri b
tB n
l
lh
ga
ha
a P ra
Go
Ra htr
y
r
s
ar
s
ah es
a
an
a
ra
ta pu
h
sa
s
de
de
M ata
ip tta de
la
De
W asth
nj
hy uja
ha Ori
en
sg
Bi
ry
Ke
Ch izo
ha
as
ra
ra
rn
tti
j
aP
M
r
es
r
d
r
dh
ac
An
ur
m
M
Hi
M
Source: World Bank compilation.
Note: Five states, including Jharkhand and Tamil Nadu, did not have data on budget shares; Jharkhand State Electricity Regulatory Commission
indicated that it funds itself from a mix of its own revenue and state grants, and the other four primarily from state grants.
Madhya Pradesh, Rajasthan, Bihar, and West Bengal stand out as the only SERCs
that fund themselves entirely from their own revenues.
Financial autonomy often depends on the individual SERC’s licensee base.
Many of the SERCs that have achieved full financial autonomy, including
MPERC, GERC, and MERC, have established comprehensive fee regulations
with a detailed schedule of fees and charges levied for submission of petitions,
requests for review of an order, renewal of annual license, and so on.16 The
success of these regulations in bringing in revenue probably stems from the
states’ high numbers of licensees, independent power producers, OA consumers,
and high-value (generally industrial) consumers.
Member Tenure
Member tenure is an indication of SERC autonomy and is important for enhanc-
ing SERC effectiveness. Adequate tenure is necessary for a SERC member to
understand the sector context and the states’ utilities sufficiently to regulate the
sector well. A short tenure may reflect tension between SERC members and the
state government, possibly over government influence that can cause a SERC
member to resign prematurely, or from the appointment of members less than
five years before the mandatory retirement age of 65, which may occur when the
state government appoints officials who are close to retirement or retirees from
government service. In these ways, member tenure is indicative of the degree of
influence the government exerts over the SERC.
The tenure of the chairperson and other members of the commission is typi-
cally five years, but actual tenure is much shorter in some states (figure 4.9).
From 2000 to 2010 (or since the SERC was created), 16 states have had aver-
age chairperson tenures of under five years, and 8 have had less than the group
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
54 Regulatory Governance
Figure 4.9 Tenure of Chairperson and Other Commission Members
6
5
Average tenure: 4 years
4
Years
3
2
1
0
m
eg sam
Ha ya
tti a
an rkh a
M and
hy Ke r
ra a
a
n
ar lhi
An am htra
Ch Trip h
Ut Pu a
sh
ac G arh
ra t
rn d
Or a
r P ab
l
ja r
Pr u
ar h
t B sh
ga
ha
Ra the
l P ara
ha ur
ur ta an
a P ral
Go
ak
iss
ha
ra ad
es
Jh des
Ka han
ra
la
de
es e
ah De
ta nj
en
Bi
sg
at
ad
W rad
ip Ut ry
st
dh il N
ha uj
izo
ha
T as
As
O
k
M
d
M
ad
m
M
Hi
an
M
Source: World Bank compilation.
average of four years. Of the four SERCs supplying data on the tenure of other
members, average tenures tended to be about the same as, or slightly longer
than, average chairperson tenures.
Relationships Built into the EA 2003
Finally, built into the EA 2003 are clauses that seemingly contradict the principle
of SERC autonomy. Most significantly, under section 108 the EA 2003 gives
state governments the ability to provide binding “directions” to the SERCs in
matters of policy involving the public interest, with the determination as to
whether any specific direction is eligible being made by the state government
itself. The Shunglu Committee report notes that some state governments have
even issued directions to the regulator on specific aspects of tariff setting, includ-
ing, in one case, to prevent it from issuing a tariff order.
The EA 2003 also gives state governments the power to select SERC mem-
bers, with room for some subjectivity in these decisions. The pool of candidates
for SERC positions is often the same as that for government and utility manage-
ment positions; for example, outgoing state power secretaries are made SERC
chairpersons on their retirement. Commissioners who have previously held posi-
tions of authority in government departments can find it difficult to exercise true
independence from the government. The state government also generally
approves the SERC’s choices over the number, nature, and categories of SERC
officers and other employees, and their remuneration.
As an instance of good practice, Gujarat has state legislation that specifies
criteria for selecting SERC members. The Gujarat Electricity Industry
(Reorganization and Regulation) Act of 2003 specifies that the two SERC mem-
bers and chairperson must include one person with a background in engineering
and electricity supply and two with experience in finance, industry, law, or
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Regulatory Governance 55
management. In addition, all member appointees must be under 62 years of age
to ensure they can serve at least three years before retirement.17
Commission Capacity
Budget
SERC annual budgets cover a wide range (from Rs 1 million in Tripura to Rs 96
million in Maharashtra). To compare budgets across SERCs, SERC budgets are
normalized by the number of households with electricity access, a proxy for the
size of the system the SERC must regulate. On this basis, SERC budgets range
from about Rs 1 per household connection (Tripura and Kerala) through Rs 18
(the Manipur and Mizoram Joint Electricity Regulatory Commission [JERC] and
Himachal Pradesh), to Rs 32 in the JERC for Goa and the union territories
(figure 4.10). The median budget is about Rs 4.3 per household connection.
Staffing
Staffing levels and quality vary across SERCs, but all SERCs have difficulty
attracting and retaining enough professional staff. SERCs average 38 staff in all
but only 13 professional staff, less than the Forum of Regulators’ recommended
benchmark of 15 (figure 4.11). MERC exhibits by far the largest cadre of
staff—50, of whom 40 are professional—which is commensurate with its scale
of operations, including 10 licensees, one state generating company, and several
independent power producers.
As SERCs offer limited career opportunities, they are generally restricted to
hiring staff on a deputation or contract basis.18 Relying on deputations (which
requires permission from the releasing entity, usually another state government
agency or even the utility itself) means SERC staffing numbers are under
Figure 4.10 SERC Budget per Household
35
30
Rs per household connection
25
20
15
10
Median SERC budget: Rs 4.3
5
0
Ke a
An Kar rala
ad Pr a
Ut Pra h
r P sh
Gu sh
t
A r
eg m
ar ya
ra
t B jab
Or l
Ra issa
tti n
h
an rad i
M esh
m
a
ur al P elh
ga
he
ra
ur
M ra tak
Go
es
ha tha
ar
ht
M ssa
ra
ta de
de
ah la
ja
en
W un
ip
sg
Ot
hy ad
D
izo
M ha
as
dh na
Ch jas
ra
Tr
P
es
a
d
an ach
m
ip
Hi
M
Source: World Bank compilation.
Note: SERC = state electricity regulatory commission.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
56 Regulatory Governance
Figure 4.11 SERC Staff Strength
80
70
60
Forum of Regulators
Number of staff
50 recommended
benchmark:
40 15 professional staff
30
20
10
0
Ke a
m ya
As u
la
ar oa
d
m
M ar
W Pu m
t B ab
O l
U rn r
a
d
ac Pr sh
ra h
ja h
Ha an
Ch O a
tti a
h
dh uj i
t
ar h
ra
ga
lh
e
ra ara
ur
M tta atak
an
ha riss
ad
l P es
Ra des
ar
ah es
M han
a P an
ra
d Bih
ht
Ka th
sa
ra
Ta hala
e
De
Jh G
h
es nj
en
ip
sg
Hi tta rad
ha ad
M rad
ry
st
il N
hy kh
izo
as
k
Tr
G
ad ra
eg
P
m r
an
U
An
ur
ip
an
M
Professional staff Other staff
Source: World Bank compilation.
Note: SERC = state electricity regulatory commission. SERCs that appear to have no “other staff” did not have data on number of nonprofessional
staff. The figure shows full-time staff only and therefore excludes consultants.
government control; many governments have simply not provided adequate
human resources to SERCs. For example, in Assam, the state government has not
approved the hiring of new staff proposed by Assam Electricity Regulatory
Commission over the past five years.
Some SERCs have addressed this challenge by relying heavily on long-term
consultants, whose appointment does not require specific approval from the state
government. For example, MPERC has contracted professional consultancy firms
for tasks including training, capacity building (supported by the UK Department
for International Development), drafting of regulations, and issuing tariff orders.
In practice, few states have hired long-term consultants due to insufficient fund-
ing or lack of action to create appointments and set aside a budget. However, the
use of consultants means that the commission does not build up the requisite
expertise, “leaving a sense of disempowerment among staff, and a lack of institu-
tional memory within the regulator.”19
An exception to this pattern is MERC, which prefers to meet its requirement
consultants.
through direct recruitment rather than through deputation or by hiring
This is helped by the presence of internal promotion avenues, which attracts more
qualified candidates.
Information Management and IT
Few SERCs have installed Regulatory Information Management Systems (RIMS).
Only 7 (of 26) SERCs report having one—Andhra Pradesh, Delhi, Gujarat,
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Regulatory Governance 57
Maharashtra, Orissa, Tamil Nadu, and Uttar Pradesh. SERCs can use a RIMS for
compilation and analysis of data, including tariff norms, expense and revenue
trends, and utilities’ performance trajectories. Without RIMS, it is a challenge
for a SERC to properly track utility performance (necessary for holding utilities
accountable and providing appropriate incentives for future improvement), main-
tain adequate information for issuing MYTs, or even issue tariffs on time. SERCs
without RIMS often collect data piecemeal from utilities, making data inconsis-
tencies and collection delays more likely.
Transparency and Participatory Decision Making
Open public hearings with adequate notice, provision of information, including
discussion papers, in the public domain, and “letting sunshine in on the process”
of decision making are all critical to the legitimacy, and thus, ultimately, the power
of the regulator, while also making the regulator accountable to its key constituen-
cies, particularly consumers. Transparency also enables the regulator to hold both
itself and its licensees to meeting the commitments it makes to consumers.
All but two SERCs (West Bengal and Sikkim) report holding public hearings
before issuing a new tariff order, but only two-thirds of SERCs have updated hear-
ing schedules on their websites, a critical tool for ensuring consumers can actually
take advantage of the hearings (figure 4.12). In addition, the number, accessibility,
and other qualities of hearings vary by state and can have a large impact on
consumer participation (box 4.3). For example, GERC holds only a single
two-to-three hour session and only publishes the notice of the hearing in one or
two major daily papers, which may be why there is little public participation at
Figure 4.12 SERC Activities Related to Participation and Transparency
28
24
Number of SERCs
20
16
12
8
4
0
gs
s
ed
te
ge
e
e
te
le
lin
in
a
da
in
ua
ish
du
nl
-d
on
ar
-
so
ng
-to
to
he
bl
he
n
pu
p-
la
te
sc
up
io
ic
u
u
al
ut
g
rts
bl
in
rts
es
c
in
tit
lo
Pu
m
po
ut
ar
po
ns
in
C
in
he
re
re
co
SA
m
rts
al
d
al
C
nu
C
te
po
nu
SA
SA
da
An
re
An
Up
al
nu
An
Source: World Bank compilation.
Note: SAC = state advisory committee; SERC = state electricity regulatory commission.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
58 Regulatory Governance
Box 4.3 Involving Consumers as Stakeholders: Selected SERC Experiences
Delhi Electricity Regulatory Commission (DERC) and Maharashtra Electricity Regulatory
Commission (MERC) stand out as state electricity regulatory commissions (SERCs) that have
developed innovative mechanisms to ensure public opinion is taken into account in regulatory
proceedings, and Madhya Pradesh Electricity Regulatory Commission (MPERC) stands out for
its efforts in increasing consumer awareness of standards of performance (SoP).
DERC began conducting consumer surveys in 2007, and Delhi is the only state in which
surveys are carried out regularly, with the results used to measure licensee performance. The
survey asks 10,000–15,000 domestic consumers about their preferences along seven macro
parameters (supply continuity, supply quality), their satisfaction with their distribution
companies (discoms) along several micro parameters, and the relative importance to them of
each one. Survey findings are published in DERC’s annual reports, along with the scores of the
three discoms and the best and worst performing areas of each discom.
MERC is the only SERC to have formed a panel of Authorized Consumer Representatives to
represent the interests of consumers in Commission proceedings. The panel also recommends
capacity building for consumer groups, takes steps to improve the efficacy of the Commission’s
regulatory processes, educates consumers on demand-side management and on their service
rights, and provides advice to the Commission on safeguarding consumers’ interests in
Commission orders and regulations.
MPERC is one of the few SERCs that have taken significant steps to increase consumer
awareness of SoP, a real challenge to successful implementation of these regulations. It
monitors utilities’ compliance with the standards and publishes an annual compliance report
in newspapers, in English and Hindi, and on its website. It has also directed licensees to publish
the SoP in key subdivision offices.
the hearings; only eight objections were received for the last petition. In contrast,
DERC conducts three days of hearings, each lasting a full day and focusing on a
different set of consumers, and publishes notices in seven daily papers. Likely in
consequence, Delhi has seen a high degree of public participation: in 2012, 405
stakeholders submitted their objections to and comments on the tariff petition.
DERC issues news bulletins (in newspapers and other media) on topics such
as calculation of aggregate technical and commercial (AT&C) losses, tariff deter-
mination, the need for additional capital expenditure, safety hazards in the instal-
lation of electrical equipment, and promotion of energy efficiency. It also issues
press notes on key orders and decisions made, including changes in tariff design
and rates, and it undertook a special drive for the redressal of consumer com-
plaints. To ensure wider participation of stakeholders and the public, MPERC
ensures publication of ARR petitions, draft regulations, minutes of public hear-
ings, and other discussion papers through various media (in the local language
and in English) and invites suggestions on these.
Most SERCs have websites (except Sikkim), though quality varies tremendously.
Nagaland’s does not work. All but two SERCs publish regulations online.20
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Regulatory Governance 59
Information about the functioning of the SAC is also published on the SERC
website, including the list of members and the minutes of their meetings.
Twenty-three SACs have their constitutions published online, but only 13 pub-
lish the minutes of their meetings online, and in only 8 are these up to date.
Twenty of the 26 SERCs providing data publish annual reports (online
and often in other forums), though only one-third publish those reports in the
local language. However, for 13 of the 20 SERCs that publish annual reports, the
most recent is from 2011 or 2012; for the others, from 2008, 2009, or 2010.
Their contents vary widely: for example, DERC and APERC’s do not include
important information about the functioning of the SERC, including any break-
down of Commission expenses, profile of key Commission staff, or training and
capacity building by the Commission.
Accountability
All SERCs are technically accountable to the state legislature, in that prior to
issuing rules or regulations they submit them for review to it. SERCs also file
their audited accounts and annual reports with it. However, in practice, the state
legislature rarely interferes with SERC functioning, asking few questions about
rules and regulations, and rarely taking proactive steps. Even SERC budgets are
usually passed with little debate.
An additional accountability channel is the Appellate Tribunal, established
under the EA 2003 to hear appeals by those aggrieved by SERC orders and sub-
jecting SERCs to judicial scrutiny. However, since the Tribunal is not mandated
to routinely monitor or review SERC performance, its mandate would need to
be modified for it to function as a proper mechanism for accountability.
The consumer protection measures that SERCs are required to put in place
are an additional device for accountability. However, the lack of full public
transparency and follow-through on noncompliance with SoP, as noted,
constrains consumers’ ability to hold SERCs accountable.
Likely in recognition of this, the Shunglu Committee recommended that
steps be taken to monitor the performance of the SERCs and, in early 2013,
the Government of India initiated discussion on a possible amendment to the
EA 2003 to strengthen the framework of accountability for SERCs.
Indexes on Institutional Design and Implementation of Mandates
To organize the information under different heads and analyze the relative per-
formance of SERCs, simple indexes (unweighted aggregates) were created
(table 4.1).21 Each index is composed of the components in the table, with the
scoring noted. All SERCs (other than those in three small states, where data are
very spotty) are included.22 Appendixes F and G present the data points for the
indexes as well as the scores for each SERC by subcomponent.
Two “overall” indexes were created as simple aggregates of these indexes to
measure: aspects of Institutional Design (ID) together—that is, autonomy, trans-
parency, and capacity of the regulator (in the absence of quantitative benchmarks,
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Table 4.1 Indexes of SERC Institutional Design and Implementation of Regulatory Mandates
SERCs receive Average score
Index Component a 1 if… of all SERCs (%)
SERC institutional design (average score = 48.5%)
Autonomy • Average chairperson tenure over past 10 years >= 5 years 42
• If budget is from own revenues or a mix of own revenues Yes
and state grants
Capacity • RIMS Yes 28
• Number of professional staff >=15 (per Forum
of Regulators
recommendation)
Transparency • Regulatory decisions online Yes (1 point per 75
• Hold public hearings before tariff order item)
• Updated hearing schedule online
• Publish annual reports on website
• Publish annual report in local language
• SAC constitution online
• SAC minutes online
Implementation of regulatory mandates (average score = 74%)
Tariffs • From FY08 to FY10, number of years SERC published tariff 47
order more than 120 days after receiving utilities’ ARR filings 0 or 1 years
• Share of years in existence (or years since FY01, whichever
is less) in which SERC published a tariff order > 66%
• 2010 average billed tariff equals or exceeds operating
cost recovery level Yes
• Conducted cost of supply study Yes
• Issued MYT order Yes
Protection of • SERC has ombudsman Yes (1 point per 99
consumer • State advisory committee established item)
rights • CGRF guidelines notified
Standards of • SERC has issued SoP regulations Yes (1 point per 70
performance • Penalties for noncompliance clearly defined item)
• SERC monitors compliance with standards
• SERC issues penalties for noncompliance
Other SERC has issued regulations on: Yes (1 point per 71
regulations • Supply code item)
• Trading
• Metering
• MYT
• Intrastate ABT
Open access • Issued OA regulations Yes 82
• Determined OA surcharge Yes
• Determined OA wheeling charge Yes
• Determined OA transmission charge Yes
• Received OA applications Received >= 1
Renewable • Notified renewable energy regulations Yes (1 point per 75
energy • RPOs are technology-specific item)
and energy • SERC monitors compliance with RPOs
efficiency • SERC issues penalties for noncompliance
• Determined an FIT
• SERC has measures or incentives to promote consumer DSM
• SERC has provision for ToD tariff
• Issued energy efficiency/DSM regulations
• Issued ToD metering regulations
Source: World Bank compilation.
Note: ARR = annual revenue requirement; CGRF = consumer grievance-redressal forum; DSM = demand-side management; FIT = feed-in-tariff;
MYT = multiyear tariff; OA = open access; RIMS = regulatory information management system; RPO = renewable purchase obligation;
SAC = state advisory committee; SERC = state electricity regulatory commission; SoP = standards of performance; ToD = time-of-day.
60
Regulatory Governance 61
an index could not be developed to measure regulator accountability); and imple-
mentation of key regulatory mandates (on tariffs, protection of consumers, SoP,
OA, renewable energy, and notification of other regulations).23
The two indexes are significantly (at 1 percent) positively related with a cor-
relation of 0.59, indicating that implementation of mandates (IM) moves in line
with desirable ID (figure 4.13).
On ID, Gujarat, Orissa, Delhi, and Maharashtra are the highest-scoring
SERCs overall (figure 4.14). Among the subcomponents the SERCs with the
best scores are:
• Autonomy: Gujarat, Himachal Pradesh, Jharkhand, Orissa, and West Bengal.
• Capacity: Gujarat, Orissa, Maharashtra, Delhi, and Andhra Pradesh.
• Transparency: Gujarat, Delhi, and Maharashtra.
On IM, Andhra Pradesh, Himachal Pradesh, and Karnataka are the highest
ranking (figure 4.15). By subcomponent:
• Tariffs: Delhi, Andhra Pradesh, Chhattisgarh, Himachal Pradesh, Karnataka,
Kerala, Orissa, West Bengal, and Madhya Pradesh have the strongest
scores (100 percent).
• Consumer Protection: All SERCs but one score 100 percent.
• SoP: Only Jharkhand scores 100 percent; many have 75 percent.
Figure 4.13 Index of Institutional Design vs. Index of Implementation of
Mandates
100
Index of implementation of mandates (%)
80 R2 = 0.3279
60
40
20
0
20 40 60 80 100
Index of institutional design (%)
Source: World Bank analysis.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
An Implementation of mandates index score (%) Institutional design index score (%)
62
Hi dhr
m aP
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
ac r Gu
ha ad ja
l P esh ra
r Or t
M K ade
ad a s iss
a
hy rna h M
a P ta An ah De
M rad ka dh ara lhi
ah e ra sh
ar sh t
Source: World Bank compilation.
Source: World Bank compilation.
as Ch Prad ra
Tari s
ht Hi
r m hat esh
ac tis
Or a ha ga
iss l P rh
W a
es De Jh rade
t lh a
Ch Be i Ut rkh sh
ha ng ta an
tti al r
sg W akh d
a es an
Note: OA = open access; SoP = standards of performance.
Gu rh tB d
e
Figure 4.14 Institutional Design Index Scores
Jh jar Ka nga
ar at
k rn l
Consumer protection
Ra han M at
a
ja d ad
st hy Ke ka
Transparency
ha a P ra
Figure 4.15 Implementation of Mandates Index Scores
As n ra la
SoP
sa Ra des
m ja h
Ut Ke st
ta ra ha
ra la n
OA
kh
Capacity
Ot
an he
Ut d P
ta Bi Ta un r
r P ha m jab
Ta rad r il N
m es M ad
il N h an u
ip
ur B ih
a
Autonomy
Ha adu
r
Clean energy
ry an
M a d
an Pu na M Go
ip M n M izor a
ur e ja eg am
an gh b ha
d ala
M ya la
izo Tr ya
ip
ra
m u
Ot Ha ra
he ry
an
r
Other regulations
G Ut Ass a
ta am
Tr oa ra
ip kh
ur an
Average score: 48.5%
a Average score: 74.0% d
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Regulatory Governance
Regulatory Governance 63
• OA: Andhra Pradesh, Chhattisgarh, Himachal Pradesh, Karnataka, Madhya
Pradesh, Gujarat, Orissa, Maharashtra, Jharkhand, West Bengal, Rajasthan,
Uttar Pradesh, and Punjab all score 100 percent.
• Clean Energy: Himachal Pradesh, Orissa, and Jharkhand have the strongest
scores (100 percent).
• Other Regulations: Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Delhi,
and Rajasthan have the top scores (100 percent).
Consistent with intuition, the length of time the SERC has been in existence
(“SERC years”) is significantly correlated with the capacity of the regulator as
well as with the aggregate ID index (table 4.2). The average SERC score on ID
is 48.5 percent.
On IM, the subindex on OA is correlated with several of the other
subindexes—SERCs that are active on OA are likely to be active in other areas
as well (table 4.3). The subindexes on consumer protection and SoP tend not
to be correlated with the other subindexes. Thus there appears to be consider-
able variation across SERCs in areas of activity—a SERC that is active on one
topic may do very little on others. Again, the length of time the SERC has been
Table 4.2 Correlation among Components of Institutional Design Index
Overall
SERC years institutional design Autonomy Capacity Transparency
SERC years 1
Overall institutional design 0.4869** 1
Autonomy 0.3264 0.7231*** 1
Capacity 0.5527*** 0.7524*** 0.1771 1
Transparency 0.0143 0.6548*** 0.3356* 0.3149 1
Source: World Bank analysis.
Note: SERC = state electricity regulatory commission.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Table 4.3 Correlation among Components of Implementation of Mandates Index
Overall
implementation Consumer Other Clean
SERC years of mandates Tariffs protection regulations SoP OA energy
SERC years 1
Overall implementation
of mandates 0.6592*** 1
Tariffs 0.4012** 0.70*** 1
Consumer protection 0.5246*** 0.29 0.18 1
Other regulations 0.4360** 0.67*** 0.25 0.11 1
SoP 0.2321 0.59*** 0.22 0.27 0.28 1
OA 0.7212*** 0.83*** 0.40** 0.14 0.53*** 0.42** 1
Clean Energy 0.1843 0.60*** 0.39* 0.05 0.24 0.27 0.34* 1
Source: World Bank analysis.
Note: OA = open access; SERC = state electricity regulatory commission; SoP = standards of performance.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
64 Regulatory Governance
in existence is significantly correlated with the IM. The average SERC score on
IM is 74 percent.
Since 2012, the Independent Power Producers Association of India has pro-
duced a ranking of regulators that includes elements of ID as well as implementa-
tion performance. It covers regulatory assets as a share of ARR and cost-recovery
ratio for the utilities regulated, notification of various regulations (OA, RPOs,
SoP), the average delay in issuance of tariff orders, and frequency of tariff revi-
sions. An independent jury selects an award winner each year based on the rank-
ing of SERCs along these parameters and an assessment of performance on
aspects such as initiatives to combat power shortages, introduction of innovative
mechanisms for cost recovery, introduction of ToD tariffs, diversity in profes-
sional origin of SERC members, independence shown in tariff setting (including
through setting FITs and preferential tariffs), and how much the regulator moni-
tors compliance with its directives. In 2012, the award was given to the Andhra
Pradesh Electricity Regulatory Commission and in 2013 to the Kerala Electricity
Regulatory Commission.
Notes
1. “Regulation of electricity industry is not new in India. But new regulatory arrange-
ments for the industry are different in two important ways. First, the relevant Acts of
1998 and 2003 reduce direct control of the industry, and second, regulatory bodies
have definite objectives that are not linked to electoral politics” (Kodwani 2009, 7).
2. Prior to the establishment of separate electricity regulators, the government fixed
tariffs for state electricity boards.
3. Although the context of Berg’s work is water, the issues arising from state ownership
of utilities are also relevant to power.
4. The tariff considered in this analysis is the average billed tariff, defined as revenue
billed divided by energy billed (that is, sold).
5. Clearly this tariff level would exceed average cost. With this tariff, however, the utility
would make a profit as long as it had less than 10 percent distribution losses even as
it maintained 100 percent collection.
6. In the remaining two states, if utilities had sold all the energy they purchased, their
revenues would have covered their costs, but if they had lost even 10 percent of
energy purchased (such as through technical distribution losses), thus not billing for
that energy, their revenues would not have covered their costs.
7. Issuing a tariff order does not mean that tariffs were revised.
8. For SERCs created since 2001, we consider the percent of years for which the SERC
was in existence that it issued a tariff order.
9. Regulatory assets are dues to the discoms, typically on account of tariff increases that
the regulator accepts as justified but does not allow the discom to pass through to
customers via the tariff in the year they are incurred. This is done to avoid a sudden
jump in tariffs on the presumption that the dues will be recovered through gradual
tariff increases in the future.
10. Unsuccessful challenges have included cases in which the appeal lacked legal ground
(for example, some appeals reflect general consumer resistance to tariff hikes).
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Regulatory Governance 65
11. Meghalaya had one of the largest percentage increases of all states in the ratio of aver-
age billed tariff to operating-cost-recovery level during 2008–10. Two other states
(Punjab and West Bengal) improved cost recovery somewhat, and the remaining three
states actually saw a drop in cost recovery despite frequent tariff increases.
12. Cost of supply studies are usually carried out by independent agencies and cover a
particular year. They are updated (rather than redone) in subsequent years.
13. For example, performance standards would include penalties for not restoring supply
soon enough following a distribution transformer failure. One SERC’s standard is for
supply to be restored within 24 hours of such a failure in an urban area; failing this,
utilities must pay each affected consumer Rs 100 per day of delay up to a maximum
of Rs 3,000 per consumer.
14. The Electricity Act of 2003 defines open access as “nondiscriminatory provision for
the use of transmission lines or distribution system or associated facilities with such
lines or system by any licensee or consumer or a person engaged in generation.”
15. Data obtained from the Ministry of New and Renewable Energy.
16. These fees are deposited in the SERC Fund (which states are required to establish).
The SERC Fund enables easier accounting of funds used for the SERC and increases
the transparency of SERC funding. Only eight states have established these funds:
Assam, Chhattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Nagaland,
Orissa, and Uttar Pradesh.
17. GERC’s chairperson is a retired IAS officer with experience in field organization and
policy making, including for the power sector; one member is an electrical engineer
with 34 years of experience in the Central Electricity Authority; and the other has an
MBA in finance, a PhD in management, and 30 years of experience with Gujarat’s
electricity utilities.
18. Partly due to the fact that pay scales and benefits are in line with government norms,
SERCs cannot easily attract qualified personnel from the private sector. In addition,
most SERCs are small and have few avenues for promotion of staff within the orga-
nization, which makes them less attractive to public sector personnel as well.
19. J. L. Bajaj, former chairperson, Uttar Pradesh Electricity Regulatory Commission,
2012, private communication.
20. SERC websites also commonly include names and contact information for the chair
and members, organization charts, utility average revenue requirement filings, tariff
orders, other orders (such as dispute resolution orders, tariffs for renewable energy
sources), schedules of tariff and other hearings, annual accounts, and contact informa-
tion for utility CGRFs and SERC ombudsmen. Better websites include greater detail
on each (such as profiles of SERC members, information about past SERC members),
archives of past annual reports and other publications, and right to information and
other key documents. Lower quality websites often lack updated annual accounts or
audits, updated hearing schedules, key contact details, organization charts, and other
basic information.
21. The benchmarks in table 4.1 are taken from legislation or recommended practices,
apart from standards for publishing tariff orders annually and on time, which are as
specified in the table.
22. The exclusion of these three states may skew average scores upward, as they had
generally not achieved the benchmarks considered in this review for which data were
available.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
66 Regulatory Governance
23. Other papers focusing on regulatory governance have followed similar strategies for
benchmarking regulators; see Andres and others (2007), for example. Similarly, the
Electricity Governance Initiative has created a toolkit for assessing regulators, bench-
marking best practice, and promoting accountability among electricity governance
bodies; see Dixit and others (2007).
References
Andres, Luis, Jose L. Guasch, Makhtar Diop, and Sebastian L. Azumendi. 2007. “Assessing
the Governance of Electricity Regulatory Agencies in the Latin American and
Caribbean Region: A Benchmarking Analysis.” Policy Research Working Paper 4380,
World Bank, Washington, DC.
Berg, Sanford V. 2013. Best Practices in Regulating State-Owned and Municipal Water
Utilities. ECLAC Project Document. Santiago: Economic Commission for Latin
America and the Caribbean.
Dixit, Shantanu, Navroz K. Dubash, Crescencia Maurer, and Smita Nakhooda. 2007.
“Benchmarking Best Practice and Promoting Accountability in the Electricity Sector.”
The Electricity Governance Initiative, World Resources Institute, Washington, DC.
ICRA. 2012. State-Owned Electricity Distribution Companies: Some Positives, Though
Several Concerns Remain. New Delhi: ICRA Limited.
Kodwani, Devendra. 2009. “Regulatory Institution and Regulatory Practice: Issues in
Electricity Tariff Determination in Reformed Electricity Industry in India.” http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1517180.
Lal, Sumir. 2006. “Can Good Economics Ever Be Good Politics? Case Study of India’s
Power Sector.” Working Paper 83, World Bank, Washington, DC.
Nair, Viraj. 2013. “Discoms Weighed Down by Rs 70,000-Crore Dues.” The Indian
Express, June 24.
Prayas Energy Group. 2003. A Good Beginning but Challenges Galore: A Survey Based
Study of Resources, Transparency, and Public Participation in Electricity Regulatory
Commissions in India. Prayas Occasional Report –1/2003. Pune, India.
Sethi, Aman. 2013. “The Price of Power.” The Hindu (accessed October 28, 2013), http://
www.hindu.com.
Stern, Jon, and Stuart Holder. 1999. “Regulatory Governance: Criteria for Assessing the
Performance of Regulatory Systems—An Application to Infrastructure Industries in
the Developing Countries of Asia.” Utilities Policy 8 (1): 33–50.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
CHAPTER 5
Relationships between Governance
and Utility Performance
This chapter examines the links between specific corporate governance (CG)
practices and utility performance, as well as the link between state electricity
regulatory commission (SERC) design (indexes of capacity, autonomy, and trans-
parency) and implementation of mandates (IM), both key elements of regulatory
governance, and utility performance.
Utility performance is measured by three separate variables—profit after
tax (PAT)1 per unit of power,2 PAT per unit of power net of subsidies booked,3
and aggregate technical and commercial (AT&C) losses (which is applicable
only to distribution utilities). The analysis looks separately at the set of all
utilities for which financial performance data were available,4 and at the set
of utilities for which CG data were obtained in addition to the financial per-
formance data. There are too few distribution companies (discoms), genera-
tion companies (gencos), and transmission companies (transcos) in the dataset
to perform robust disaggregated analysis by group, although correlations
among only discoms are reported below. As noted earlier, the governance data
collected are for 2010 only, so this is a cross-section analysis. Summary statis-
tics are in table 5.1.
International and India-specific recommendations on CG consistently empha-
size the importance of a core set of CG structures and practices, such that the
expected relationship between utility performance and the governance variables
is as follows:
• A higher share of independent directors will be associated with stronger
performance.
• Unclear relationship between share of executive directors and performance,
though the fact that the Department of Public Enterprises restricts the share
would indicate a negative expected relationship.5
• Chairman and managing director tenure is expected to be positively related to
firm performance since it not only means stability in direction and ability to
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68
Table 5.1 Summary Statistics
Number of Standard
Unit observations Minimum Maximum Mean deviation
Measures of utility AT&C loss rate (2011) % 53 7.20 72.86 30.91 14.79
performance AT&C loss rate (2010) % 53 7.76 70.44 31.28 13.54
Profit/Unit without subsidy (2011) Rs/kWh 84 −4.50 0.44 −0.61 1.01
Profit/Unit without subsidy (2010) Rs/kWh 83 −4.03 0.60 −0.63 0.98
Profit/Unit without subsidy (discoms only, 2011) Rs/kWh 53 −4.50 0.35 −0.99 1.11
Profit/Unit without subsidy (discoms only, 2010) Rs/kWh 53 −4.03 0.38 −0.96 1.02
Profit/Unit with subsidy (discoms only, 2011) Rs/kWh 53 −4.50 0.35 −0.56 1.05
Profit/Unit with subsidy (discoms only, 2010) Rs/kWh 53 −4.03 0.38 −0.50 0.85
State-level variables GDP per capita (2010) Rs 29 16,119.42 132,715.90 50,477.64 25,686.33
GDP per capita (2009) Rs 29 13,980.14 119,272.5 44,340.71 22,600.76
Holding company/bundled dummy Categorical 29 0.00 1.00 0.66 0.48
Utility-level variables Discom dummya Categorical 85 0.00 1.00 0.62 0.49
Profit/Unit without subsidy (2007) Rs/kWh 84 −5.68 3.08 −0.34 0.92
Net fixed assets (2010) Rs Crore 82 250.00 167,194.80 26,801.22 28,887.07
Net fixed assets (2009) Rs Crore 82 10.00 150,915.30 24,080.65 25,083.49
Corporate governance Number of directors Number 68 4.00 15.00 8.15 2.35
variables (2010) Average CMD tenure Years 41 0.80 5.00 2.24 1.05
Basic CG indexb Number 66 0.38 1.00 0.65 0.16
Detailed CG index Number 21 0.22 0.89 0.49 0.20
% of board that is independent directors % 67 0.00 0.57 0.15 0.16
% of board that is executive directors % 67 0.00 0.83 0.35 0.22
% of board that is government directors % 67 0.17 1.00 0.48 0.22
Regulatory governance ID index Number 26 0.10 1.00 0.48 0.24
variables (2010) IM index Number 26 0.47 0.93 0.74 0.13
Source: World Bank compilation.
Note: AT&C = aggregate technical and commercial; GDP = gross domestic product; CG = corporate governance; CMD = chairman and managing director; ID = institutional design; IM = implementation of mandates.
a. For this analysis, we use “discom” to refer to any utility directly serving consumers (the same distinction made by the Power Finance Corporation when reporting data by utility type). Thus “discoms” includes
distribution companies, state electricity boards, power departments, and bundled corporations.
b. The Basic CG index is the mean of compliance (0,1) with the following: having independent directors represent at least 33 percent of board strength (or 50 percent if the chair is an executive director); having two
or fewer government directors; having executive directors represent no more than 50 percent of board strength; board size less than or equal to 12; having an audit committee; using an external auditor; publicly
publishing audits; and publicly publishing annual accounts. See Chapter 3 for more detail.
Relationships between Governance and Utility Performance 69
conceive and implement strategic change but also is an indicator of the absence
of state interference in the utility.
• Board size is expected to be negatively related to performance (since larger
boards are less likely to be efficient or focused in their decision making) or
might have an inverted U-shaped relationship with performance, with a “mid-
size” board being optimal.
• As the broad “basic” CG index reflects an aggregation of “recommended
practices,” it is expected to be positively related to performance.
• The two indexes of regulatory governance (institutional design [ID] and
implementation of mandates [IM]) are expected to be positively related to
utility performance.
The following sections present Pearson correlations between the measures of
performance and (a) the variables measuring aspects of CG and (b) regulatory
governance. This is followed by exploratory regression analysis in which varia-
tions in performance are related to these factors, controlling for basic character-
istics of the utilities and aspects of the environment they operate in.
Corporate Governance
The basic CG index is not correlated with either measure of profit (table 5.2).
The relatively tight distribution around a high mean score indicates that there is
generally high compliance with the recommendations on CG by utilities.
On the other hand, the detailed index is strongly positively correlated
(significant at the 1 percent level) with profit excluding subsidies for all utili-
ties and for discoms only (table 5.2; figure 5.1). This index only covers 20 utili-
ties,6 making the significance of these results all the more striking. The
observed correlation is consistent with the idea that the more demanding
implementation-related aspects of CG captured in the detailed index strongly
company performance. The basic index focuses on board size and struc-
affect
ture, which may be somewhat superficial—the real impact on performance
depends on more meaningful attributes of processes and management within
the organization. Higher-quality boards are likely to induce internal organiza-
tional and process changes in response to their demands for better information
and their interest in holding management accountable for delivery of results.
It is this that creates the pressure to perform better in the institution. This
reasoning is consistent with the idea that measures of CG practices should go
beyond simply ticking boxes and for boards to be strategic and demanding
when fulfilling their mandates.
Another explanation consistent with the observed lack of correlation
between the basic index and utility profits comes from the evidence—much of
qualitative—that the state government remains a big presence in these utilities
it
and has a say in critical decisions, despite the formal creation of a board to insu-
late management from state interference. This means the state as owner can
undermine the board, so the fact that the board structure and size are consistent
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70
Table 5.2 Correlation between Corporate Governance Variables and Performance
% of board that is % of board that % of board that is
Number of CMD Basic CG Detailed CG independent is executive government
directors tenure index index directors directors directors
Performance State GDP per capita, 2010 0.050 0.122 –0.051 0.254 0.007 0.043 –0.080
variables Profit/Unit without subsidy (2011) 0.066 0.220 0.039 0.621*** 0.170 –0.222* 0.016
Profit/Unit without subsidy (2010) 0.104 0.370** 0.072 0.621*** 0.258*** –0.220* –0.060
Profit/Unit without subsidy (discom only, 2011) 0.067 0.285 –0.068 0.751*** 0.149 –0.358** 0.024
Profit/Unit without subsidy (discom only, 2010) 0.086 0.523** –0.059 0.791*** 0.238 –0.406** –0.502
Profit/Unit with subsidy (discom only, 2011) 0.339** –0.202 0.052 0.507* –0.025 –0.297* 0.191
Profit/Unit with subsidy (discom only, 2010) 0.456*** 0.166 –0.090 0.612* –0.124 –0.210 0.124
AT&C loss rate, 2011 –0.059 –0.143 –0.216 –0.314 –0.131 –0.311* 0.206
AT&C loss rate, 2010 –0.066 –0.134 –0.159 –0.117 –0.058 –0.397** 0.262
Source: World Bank analysis.
Note: AT&C = aggregate technical and commercial; CG = corporate governance; CMD = chairman and managing director; GDP = gross domestic product. CMD Tenure row only shows correlation for the 41 firms for
which data on CMD tenure are available; Detailed CG index row only shows correlation for the 20 firms that it covers and that have performance data.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Relationships between Governance and Utility Performance 71
Figure 5.1 Detailed CG Index Score vs. Profit per Unit Excluding Subsidies
a. 2010 b. 2011
1.0 1.0
R2 = 0.4177
Profit per unit excluding subsidies, 2011
Profit per unit excluding subsidies, 2010
0.5
0.5 R2 = 0.3805
0
0
–0.5
–1.0 –0.5
–1.5 –1.0
–2.0
–1.5
–2.5
–2.0
–3.0
–3.5 –2.5
0 0.2 0.4 0.6 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0
Detailed CG index score Detailed CG index score
Source: World Bank analysis.
Note: CG = corporate governance; R2 = coefficient of determination. Profit per unit is measured in Rs/kWh.
with recommended practices or statutory requirements would not necessarily be
associated with better performance.
The correlation between the indexes of CG and state gross domestic product
per capita is not significant; this is somewhat surprising since demand for good
governance is generally felt to increase with the level of development. All else
equal, one would expect quality of governance to be higher in higher income
jurisdictions. The correlation with AT&C loss rate is also not significant.
Regulatory Governance
Correlations between the two aggregate regulatory governance indexes (ID and
IM) and measures of utility performance are in table 5.3. The level of observation
is the utility, not the SERC, as performance is at the utility level.
The ID index is highly positively correlated with utility profits, measured
across all utilities and for the discom-only sample. The autonomy and capacity
subindexes are also highly correlated with profitability. One inference is that
these features of the regulatory commission are important indicators of the qual-
ity of the regulatory framework in the state, which is a critical determinant of the
operating environment and thus performance of the utilities. The correlation
with AT&C losses is not significantly different from zero, possibly because the
latter is almost completely under the control of the utility and not affected by
regulatory actions.
The index measuring the implementation of regulatory mandates is signifi-
cantly correlated with profit per unit net of subsidies, as are the tariff and
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72
Table 5.3 Correlation between Regulatory Governance Indexes and Utility Performance
Discoms only
Profit/Unit Profit/Unit Profit/Unit Profit/Unit Profit/Unit Profit/Unit
State GDP per without subsidy without subsidy without subsidy without subsidy with subsidy with subsidy AT&C losses AT&C losses
capita (2010) (2011) (2010) (2011) (2010) (2011) (2010) (2011) (2010)
ID index 0.136 0.398*** 0.365*** 0.532*** 0.471*** 0.429*** 0.397*** −0.138 −0.143
Autonomy −0.174 0.315*** 0.246*** 0.411*** 0.349*** 0.328** 0.276* 0.078 0.051
Capacity 0.315 0.383*** 0.392*** 0.453*** 0.400*** 0.381*** 0.338** −0.221 −0.216
Transparency 0.162 0.114 0.089 0.244* 0.249* 0.168 0.242* −0.164 −0.149
IM index −0.051 0.412*** 0.327*** 0.484*** 0.360** 0.607*** 0.534*** −0.367*** −0.305**
Tariffs 0.030 0.454*** 0.482*** 0.559*** 0.548*** 0.448*** 0.469*** −0.292** −0.177
Consumer protection 0.149 0.064 0.109 0.186 0.175 0.292** 0.306** −0.449*** −0.45***
Other regulations 0.213 0.159 0.041 0.179 0.066 0.440*** 0.410*** −0.562*** −0.38***
SoP 0.002 0.091 0.043 0.154 0.087 0.337** 0.304** −0.087 −0.267*
OA −0.177 0.395*** 0.199* 0.428*** 0.209 0.672*** 0.488*** −0.162 −0.128
Clean energy −0.281 0.175 0.221** 0.182 0.190 −0.009 −0.030 0.048 0.000
Source: World Bank analysis.
Note: Discom = distribution company; GDP = gross domestic product; AT&C = aggregate technical and commercial; ID = institutional design; IM = implementation of mandates; R2 = coefficient of determination
SoP = standards of performance; OA = open access. The bold values are of the two regulatory indexes, and the non-bolded values are the components of each index.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Relationships between Governance and Utility Performance 73
Figure 5.2 Institutional Design Index and Implementation of Mandates Index vs. Profit per Unit Including
Subsidies
a. Institutional design index vs. profit per b. Implementation of mandates index vs.
unit including subsidies, 2010 profit per unit including subsidies, 2010
1.0 1.0
Implementation of mandates index
0.8 0.8
Institutional design index
0.6 R2 = 0.2853 0.6
R2 = 0.1578 0.4 0.4
0.2 0.2
0 0
–4 –3 –2 –1 0 1 –4 –3 –2 –1 0 1
Profit per unit including subsidies, 2010 Profit per unit including subsidies, 2010
c. Institutional design index vs. profit per d. Implementation of mandates index vs.
unit including subsidies, 2011 profit per unit including subsidies, 2011
1.0
1.0
Implementation of mandates index
0.8
Institutional design index
0.8
0.6 R2 = 0.3779 0.6
R2 = 0.185 0.4 0.4
0.2 0.2
0 0
–4 –3 –2 –1 0 1 –4 –3 –2 –1 0 1
Profit per unit including subsidies, 2011 Profit per unit including subsidies, 2011
Source: World Bank analysis.
Note: Distribution companies only; R2 = coefficient of determination. Profit per unit is measured in Rs/kWh.
open access (OA) subindexes (figure 5.2). However, the IM index and subin-
dexes other than clean energy have a greater (positive) correlation with
profit/unit including subsidies and a significant negative correlation with
AT&C loss levels—both as one might intuitively expect. The latter are both
measures of discom performance and the regulatory mandates, particularly
protection of consumer rights, tariffs, standards of performance, and OA, are
particularly applicable to discoms. This may therefore be a reflection of the
strength of the link between the functioning of the regulator and utility
performance.
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74 Relationships between Governance and Utility Performance
Governance and Performance
This section reports on the results of an exploratory analysis of the relationship
between utility performance and governance structures and practices, controlling
for other factors that are expected to affect performance. Ordinary least squares
regressions are used to test the following stylized model of the determinants of
utility performance:
Utility Performanceij = α + β1CGi + β2UTILi + β3REGj + β4STATEj + εij
for utility i in state j, where CG denotes corporate governance, REG denotes
regulatory governance, UTIL is a set of utility-specific controls, STATE is a set of
state-level controls, and ε is a random error term assumed to follow a standard
normal distribution.
Utility performance, controlling for utility specific structural features, is
expected to be affected by the utility’s external operating environment,
which includes factors such as state characteristics and the regulator and its
actions, as well as internal accountability factors that affect the efficiency of
the utility’s own operations.
Utility size (proxied by the log of net fixed assets from the previous year),
profit per unit for 2007, and a dummy for whether the utility performs distribu-
tion functions are the three utility controls used in the analysis. The first is
included to capture scale effects and the second to control for starting values that
are likely to act as a drag on current performance. The discom dummy is included
to control for the significant difference in performance of discoms and all other
types of utilities. State per capita income of the year before is used as an indica-
tor of level of development, general capacity, and expectations of good service
which might be expected to translate into higher performing utilities. Finally, the
regulatory governance indexes measuring institutional development (ID) and
degree of implementation of mandates (IM) are included as controls for the
institutional quality and functioning of the regulator.
Tables 5.4 and 5.5 present the results of this regression, which are consistent
with intuition in many respects: state gross domestic product per capita is
strongly positively related to performance; profits per unit are positively related
to per unit profits in 2007 and are significantly lower for discoms. Discoms are
well known to have higher losses than the upstream businesses of generation and
transmission that are subject to cost-plus regulation or can pass through their
costs. However, there appear to be diseconomies of scale, with larger utilities
(measured by net fixed assets) generally being less profitable, although the result
is not consistently significant.
The coefficients on the regulatory governance index ID are significantly posi-
tively related to profit per unit, as expected. As noted above, the ID index cap-
tures the features of the regulatory framework, including predictability, certainty,
and quality of regulatory decisions that are expected to impact utility strategic
and operational choices, while the IM index goes to the heart of how active the
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Relationships between Governance and Utility Performance 75
Table 5.4 Regression of Utility Performance on State, Utility, and Corporate Governance Variables, 2010
Dependent variable: Profit per unit excluding subsidies (2010)—All utilities
State-level GDP per capita, 2009 0.454 0.463 0.416 0.421 0.442
controls (0.167)*** (0.154)*** (0.147)*** (0.151)*** (0.146)***
Regulatory governance ID index 0.898 0.751 1.031 0.865 0.948
(0.255)*** (0.243)*** (0.284)*** (0.275)*** (0.277)***
Regulatory governance IM index 0.358 0.391 −0.267 0.372 −0.233
(0.731) (0.753) (0.701) (0.675) (0.777)
Utility-level Discom dummy −0.666 −0.695 −0.57 −0.619 −0.634
controls (0.195)*** (0.180)*** (0.186)*** (0.191)*** (0.181)***
Net fixed assets, 2009 −0.199 −0.072 −0.078 −0.094 −0.064
(0.084)*** (0.065) (0.076) (0.08) (0.068)
Profit per unit, 2007 0.393 0.303 0.31 0.365 0.265
(0.179)** (0.169)* (0.168)* (0.172)** (0.16)
Corporate Basic CG index 0.274
governance (0.467)
variables
Share of board that is executive directors −0.83 −0.688
(0.347)** (0.346)*
Share of board that is independent 1.279 1.088
directors (0.566)** (0.550)*
Number of directors on board 0.026
(0.027)
Constant −3.994 −4.794 −4.422 −4.731 −4.509
(1.444)*** (1.491)*** (1.488)*** (1.463)*** (1.480)***
R2 0.48 0.48 0.49 0.47 0.51
N 61 62 62 63 62
Source: World Bank analysis.
Note: CG = corporate governance; Discom = distribution company; GDP = gross domestic product; ID = institutional design; IM = implementation
of mandates; N = number of observations; R2 = coefficient of determination. Values in parentheses are White standard errors.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
regulator has been (and, potentially, is likely to be going forward). Some areas
of regulatory action would likely improve the utility’s operational viability (such
as regular tariff revisions to cover costs), while others may have a negative impact
on profits (such as clean energy mandates or OA that would draw away large
industrial or commercial consumers) so the net effect is not necessarily positive
(or, indeed, predictable). Thus the lack of significance of the IM index is not
entirely unexpected.
The indicators of CG enter the regression as anticipated. For the regres-
sion of utility profits per unit in 2010, both the share of the board that is
independent directors and the share of the board that is executive directors
are significant, separately and together, with signs consistent with intuition
and with the broad findings of the literature and relevant Indian recommen-
dations. Board size and the basic CG index are not significantly different
from zero. While the result on executive directors is robust in that the coef-
ficient remains negative, though at a lower level of significance than earlier,
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76 Relationships between Governance and Utility Performance
Table 5.5 Regression of Utility Performance on State, Utility, and Corporate Governance Variables, 2011
Dependent variable: Profit per unit excluding subsidies (2011)—All utilities
State-level GDP per capita, 2010 0.288 0.318 0.289 0.278 0.313
controls (0.143)** (0.137)** (0.140)** (0.138)** (0.136)**
Regulatory governance ID index 0.638 0.621 0.77 0.701 0.697
(0.232)*** (0.222)*** (0.256)*** (0.216)*** (0.263)**
Regulatory governance IM index 1.197 0.93 0.745 0.972 0.743
(0.885) (0.82) (0.898) (0.829) (0.864)
Utility-level Discom dummy −0.68 −0.704 −0.654 −0.664 −0.689
controls (0.126)*** (0.123)*** (0.123)*** (0.125)*** (0.122)***
Net fixed assets, 2010 −0.095 −0.081 −0.094 −0.103 −0.081
(0.058) (0.054) (0.055)* (0.058)* (0.054)
Profit per unit, 2007 0.254 0.206 0.228 0.251 0.196
(0.122)** (0.118)* (0.116)* (0.116)** (0.114)*
Corporate Basic CG index −0.183
governance (0.372)
variables Share of board that is executive directors −0.522 −0.461
(0.264)* (0.289)
Share of board that is independent 0.507 0.327
directors (0.39) (0.428)
Number of directors on board 0.02
(0.024)
Constant −3.376 −3.536 −3.315 −3.337 −3.457
(1.694)* (1.549)** (1.661)* (1.601)** (1.555)**
R2 0.52 0.54 0.53 0.53 0.55
N 65 65 65 66 65
Source: World Bank analysis.
Note: CG = corporate governance; Discom = distribution company; GDP = gross domestic product; ID = institutional design; IM = implementation
of mandates; N = number of observations; R2 = coefficient of determination. Values in parentheses are White standard errors.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
the coefficient on the share of the board that is independent directors com-
pletely loses significance when the regression is repeated for 2011 with
updated utility controls but the same corporate and regulatory governance
variables (as these are features that tend to change minimally over time).
Because utility profits are highly correlated over time, this result will need
investigation over a longer timeframe than permitted by the data we have. In
any event, the relatively small size of the sample means these results should
be taken as indicative rather than definitive.
Tables 5.6 and 5.7 present the results of an ordinary least squares regression
rofits per unit on the set of independent variables used above, exclud-
of utility p
ing the measures of CG. This permits an increase in sample size to 80. The signs
on variable coefficients are generally unchanged, although significance varies. The
ID index is positive and significant as in the regressions including CG variables,
but the IM index of regulatory governance is now significant, separately and, in
the regression for 2011, when included with the ID index.
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Relationships between Governance and Utility Performance 77
Table 5.6 Regression of Utility Performance on State, Utility, and Regulatory
Governance Variables, 2010
Dependent variable: Profit per unit excluding subsidies (2010)—All utilities
GDP per capita, 2009 0.483 0.48 0.535
(0.144)*** (0.141)*** (0.150)***
Discom dummy −0.564 −0.563 −0.568
(0.169)*** (0.168)*** (0.169)***
Net fixed assets, 2009 −0.107 −0.104 −0.126
(0.069) (0.068) (0.066)*
Profit per unit, 2007 0.371 0.388 0.377
(0.142)** (0.147)** (0.146)**
Regulatory governance ID index 0.714 0.853
(0.243)*** (0.268)***
Regulatory governance IM index 0.724 1.53
(0.707) (0.752)**
Constant −5.218 −4.73 −5.796
(1.328)*** (1.340)*** (1.429)***
R2 0.52 0.51 0.49
N 80 80 80
Source: World Bank analysis.
Note: Discom = distribution company; GDP = gross domestic product; ID = institutional design;
IM = implementation of mandates; N = number of observations; R2 = coefficient of determination.
Values in parentheses are White standard errors.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Table 5.7 Regression of Utility Performance on State, Utility, and Regulatory
Governance Variables, 2011
Dependent variable: Profit per unit excluding subsidies (2011)—All utilities
GDP per capita, 2010 0.265 0.251 0.329
(0.144)* (0.140)* (0.145)**
Discom dummy −0.582 −0.575 −0.591
(0.128)*** (0.129)*** (0.128)***
Net fixed assets, 2010 −0.089 −0.074 −0.108
(0.051)* (0.052) (0.050)**
Profit per unit, 2007 0.388 0.425 0.387
(0.138)*** (0.148)*** (0.141)***
Regulatory governance ID index 0.668 0.95
(0.223)*** (0.250)***
Regulatory governance IM index 1.495 2.262
(0.843)* (0.824)***
Constant −3.595 −2.57 −4.301
(1.457)** (1.323)* (1.489)***
R2 0.59 0.57 0.57
N 80 80 80
Source: World Bank analysis.
Note: Discom = distribution company; GDP = gross domestic product; ID = institutional design;
IM = implementation of mandates; N = number of observations; R2 = coefficient of determination.
Values in parentheses are White standard errors.
Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
78 Relationships between Governance and Utility Performance
Notes
1. Profit is measured as the difference between average revenue and average cost.
2. In this analysis, “power” is defined differently for different types of utilities. For dis-
coms, it is the amount of power input into the distribution system; for gencos, the
amount of power generated; and, for transcos, the amount of power wheeled by the
transmission system. We use power input (that is, purchased) for discoms since that
determines the cost they incur.
3. This is because revenues include subsidies booked by the utility in anticipation of
being paid by the government for supplying power to specified groups at a price
below the cost of supply. With some notable exceptions, subsidies received are almost
the same as subsidies booked. Subsidies are generally only received by companies
supplying power directly to consumers.
4. As noted, utility and state-level (including regulatory governance) data were collected
under the India Power Sector Review.
5. Government “nominee” directors receive relatively less attention in recommendations
or the broader CG literature, and it is less clear what relationship we should expect
to observe between such directors and performance. Government directors are,
broadly, employees of the owner and may thus better represent the o wners’ interests;
however, as literature focusing on state-owned enterprises has noted, government
owners often have conflicting interests and may not prioritize efficiency or financial
performance. India’s CG guidelines (Department of Public Enterprises, Securities and
Exchange Board of India Clause 49) limit such directors to two, or one-sixth of board
strength, which supports an expectation that a greater share of government directors
will be associated with weaker performance.
6. Though the detailed index is available for 21 utilities, one of those utilities is a holding
company (GUVNL in Gujarat) and so does not have performance data available. Thus
in table 5.2 the only detailed index correlation that includes this data point is the one
with gross domestic product per capita.
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CHAPTER 6
Conclusions
This review has presented one of the first in-depth empirical analyses of corpo-
rate and regulatory governance of Indian power utilities at the state level. Several
welcome findings emerge, including the overarching sense that the initiatives
taken by the government on both fronts are steps in the right direction. However,
while implementation has varied across the country, for the majority of utilities
and states and the country as a whole, governance needs to improve, especially if
it is to bring about a more accountable, commercially oriented culture in the
sector, improve the efficiency of service delivery, and contribute to the sector’s
overall financial and operational sustainability.
Corporate Governance
Unbundling the state electricity boards has progressed quite well on paper,
although actual separation and functional independence of the unbundled entities
are considerably less than appears. While unbundling per se would not necessarily
be expected to result in a commercial orientation, the objective of being able to
clearly identify the contributions of individual entities in the service value chain
and hold them accountable for their performance remains unmet to the extent
unbundling is incomplete.
Boards remain state dominated, lack sufficient decision-making authority in
practice, and are rarely evaluated on performance. Utilities tend to have more
government and executive directors than recommended and fewer independent
directors. In fact, only 16 percent of utilities have the recommended share of
independent directors, and several lack independent directors entirely. The data
analysis, while preliminary, strongly supports the idea that fewer executive direc-
tors (that is, separation of management from the board) is desirable because it
tends to improve performance—consistent with both international and Indian
corporate governance (CG) guidelines. A slightly weaker but still positive result
is that an increase in the share of independent directors on corporate utility
boards is associated with better performance. Thus many utilities may benefit
from adding more independent directors.
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80 Conclusions
Political interference in board appointments and decision making on business
aspects remains common. The chairman and managing director (CMD) and
board’s autonomy is constrained by the state government’s involvement in key
recruitment, personnel, procurement, and enforcement decisions, underlining
the fact that the desired arm’s-length relationship between the utility and gov-
ernment has not been achieved. In addition, CMD tenures are often so limited
that many CMDs are unlikely to be able to see through implementation of their
agendas. Finally, board member training and peer evaluation are conspicuous by
their absence. Professionalizing and empowering boards should hence be a key
priority going forward.
The analysis shows that going beyond the Companies Act requirements
and implementing the practices recommended by the Department of Public
Enterprises (DPE) (and even going beyond those to effect organizational
transformation) is associated with significantly higher profits per unit, indi-
cating a potential win-win. Few utilities have put the necessary processes in
place to support their governance structures. For example, only about one-
third have an advanced management information system, and no utility has
a corporate performance monitoring system. The limited set of utilities
that have developed information-driven processes and sound mechanisms
for performance management and that make their accounts and audits pub-
licly available tend to be the top financial performers with high operational
efficiency.
As pointed out by an experienced observer and former regulator, the internal
governance agenda has to be a priority going forward: “The sector today faces
significant challenges. Backlog of investments and inadequate increase in tariffs
are often cited as the key reasons for such trends. However, acute deficiency in
managerial and organizational capacity is an equally important and often ignored
cause of the present problems. Reforms at the state levels should have been
accompanied by an organizational transformation of unbundled entities that
aims to equip them with adequate systems and processes to cope with the
changes witnessed by the sector” (Bajaj 2012).
Regulatory Governance
State electricity regulatory commissions (SERCs) have been established in all
states, though some as late as 2011. They are expected to prevent political inter-
ference in the sector and protect the interests of different stakeholders by regu-
lating the operations of power utilities and the tariff chargeable to consumers,
but they face an enormous challenge in that almost all of the utilities they regu-
late remain state owned. This can limit the effectiveness of standard regulatory
mechanisms, which need to be adapted to the incentive structure of public
enterprises.
The ability of SERCs to carry out their mandates depends on the technical,
financial, and human resources available to them, their competence, their
autonomy in decision making (including, most importantly, insulation from
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Conclusions 81
political pressures), and their accountability. The analysis carried out in this
review shows that there is a significant positive association between these fea-
tures of institutional design and utility profits per unit, which underlines how
important a robust regulatory framework is for utility operations.
However, this review also finds that most SERCs are still some way from an
institutional design that would permit them to effectively implement their
mandates. Most importantly, there is no clear accountability mechanism to
govern SERCs themselves—the state legislatures, to whom SERCs nominally
report, do not play an active monitoring role, and the Appellate Tribunal,
which arguably brings SERCs under the purview of the judicial system, does
not have a mandate to routinely monitor regulatory activity or hold SERCs
accountable. In addition, SERCs have generally struggled to achieve true
autonomy from state governments, in part because of relationships built into
the Electricity Act of 2003 (EA 2003) itself. Many SERCs also lack the
resources that might assist in performing their functions—most notably,
enough professional staff and appropriate information technology systems.
Finally, most SERCs have yet to implement adequate transparency measures
and create frameworks for meaningful public input to the regulatory process,
although a few have institutionalized mechanisms for participatory decision
making that are best practice. All these aspects of institutional design have
knock-on effects in terms of SERCs’ perceived legitimacy, their willingness to
take initiative, and the soft power they are able to wield.
The study has also reviewed SERC performance on implementation of their
mandates as of 2010, covering six key areas identified in the governing legisla-
tion: tariffs, standards of performance (SoP), protection of consumer rights,
open access (OA), renewable energy, and regulation in other areas. It found that
aside from a few standouts, most SERCs have not yet fully implemented the
mandates given them in the EA 2003.
Tariffs cover average cost in a majority of states, but increases in tariffs
have generally not kept pace with cost increases and very few states issue
multiyear tariffs. Only five SERCs have ever conducted a cost of supply
study. SoP have been notified by almost all SERCs—but only 75 percent
monitor compliance, and only two have ever imposed a penalty for default.
Most SERCs are complying with mandates to promote consumer empower-
ment and increase transparency to the public but need to do far more to
ensure that consumers are given opportunities to engage and that high-
quality information is available to the public. Going beyond the EA 2003,
10 SERCs have reported establishing consumer advocacy cells—a bright spot
on the landscape.
Finally, though most SERCs have notified most of the key regulations
necessary to enact the mandates of the EA 2003, many SERCs have yet to take
concrete steps to actually implement these regulations. For example, only half of
states have even received an OA application, and only 10 states have actually
implemented OA for an applicant. On renewable energy and energy efficiency,
most states have notified basic renewable purchase obligation regulations,
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82 Conclusions
but only 18 monitor compliance, and only 4 have issued penalties for
noncompliance. Significantly fewer states have passed demand-side manage-
feed-in-tariff, or time-of-day regulations.
ment,
Recommendations
The agendas on corporate governance and regulatory governance are urgent
and need substantial further action. Establishing an arm’s-length relationship
between the state and the regulator and the state and the utility, as intended by
the reforms initiated decades ago, is still a priority for the sector. Examples of
state-owned utilities in West Bengal and Gujarat show that this is possible even
with state ownership.
Complete financial and operational unbundling is a critical step in improving
the accountability of each unit in the sector value chain.1 This can help identify
where inefficiencies or performance shortfalls occur and, by thus increasing
accountability, improve incentives for performance. Full vertical unbundling
with separation of accounts, staff, and decision making is also a necessary step
toward competition in supply. Since unbundling on its own will not lead to
commercialization, it is also important to consider other ways of bringing in
efficiencies—for example, divesting an ownership share to central public sector
undertakings such as the National Thermal Power Corporation or the Power
Grid Corporation of India, which are recognized for strong results and which,
as equity owners, might have both an interest in pushing for better performance
and the ability to do so. Another option is to start with hardwired limits
(through articles of association or other mechanisms) that specify CMD terms
and areas in which the board is solely responsible for decisions and restrict
interference in both. Of course, the efficacy of any such mechanism depends on
the extent to which it can be enforced.
The stock market can be an effective monitoring and enforcement mechanism
for governance of listed companies—and has been used with some success in the
case of minority-listed central state-owned enterprises. By making the utility
transparently answerable to entities other than the state government, stock
market listing can limit the state government’s ability to interfere with utilities’
commercial operations. A first step toward minority listing is to mandate that
utilities comply with requirements for listing (“shadow” listing) as a precondition
for central or other support.2 This would imply compliance with the DPE or
Securities and Exchange Board of India CG guidelines, which would bring greater
autonomy and accountability to boards of state utilities.3 This would also pave
the way for listing if utility performance improves to the requisite level down the
road. West Bengal has used “shadow” listing (see box 3.4); the i mprovement in
operational and financial performance of its utilities has been ascribed to the
ensuing arm’s-length distance between the utility and the state government.
Even in the absence of listing, it will be important to insulate utility operations
from state interference: professionalizing and empowering utility boards,
reducing the number of executive directors, and bringing in more independent
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Conclusions 83
directors, as prescribed in guidelines for CG of central public sector undertakings
issued by the DPE, would be a good start. Further, independent directors should
be appointed by a committee that includes entities such as the Central Electricity
Authority or other representatives of the public interest to avoid capture by the
state government.
The use of a memorandum of understanding (MoU) between the utility and
the state government that establishes performance targets for the utility along
with indicators of achievement can provide a mechanism for the state govern-
ment to monitor progress toward those targets. The central government currently
has MoUs with central public sector enterprises, and though there is considerable
room for improvement, MoUs can be a useful tool for motivating performance
(World Bank 2006). Beyond India, MoUs or other performance contracts have
been used to improve accountability and performance of state-owned enter-
prises. For MoUs to work, though, appropriate performance targets with well
defined, measurable indicators, a transparent means of monitoring progress, and
clear and credible consequences for nonachievement are all necessary. Box 6.1
reviews international experience with performance contracts, the characteristics
of MoUs in India and key areas for improvement in their implementation.
Regulatory initiative will only arise when regulators are held accountable for
their actions. It appears that SERCs do not always take actions necessary to pro-
mote long-term sector viability unless they are compelled to. For example, most
SERCs have the leeway to determine the tariff on a suo moto basis even if the
utility does not file an annual revenue requirement; however, few SERCs have
actually taken up cases in this manner, partly due to a lack of legislative clarity
on when SERCs should initiate suo moto action but largely due to a lack of initia-
tive among SERCs. Thus autonomy, while important, is unlikely to be sufficient
on its own for achieving results.
One idea is to extend the mandate of the Appellate Tribunal to include a
provision for regular monitoring of regulators; another is to use the Planning
Commission for periodic evaluation of state regulators, as proposed in the
Shunglu Committee report. Regular monitoring by peers in the Forum of
Regulators, with full public disclosure of findings, is also worth exploring. In
this vein, there is a need for greater public involvement and debate on regula-
tory issues. Social accountability institutions can play an important role in
scrutinizing regulatory performance, especially if quality data on SoP, quality,
reliability of service, and so on is regularly collected, analyzed, and made easily
accessible. For instance, the Electricity Governance Initiative has developed a
toolkit to assess policy and regulatory processes, benchmark best practice, and
promote accountability among electricity governance institutions that could be
used to develop a comprehensive monitoring framework for regulators (Dixit
and others 2007).
In the end, the real challenge is to improve service delivery, for which the link
between good service and utility earnings needs to be strengthened. This is likely
to require action beyond the governance environment of the utilities, as has been
noted: “In hindsight, the weakness of the Indian power reform program has
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84 Conclusions
Box 6.1 MoUs
Memorandums of understanding (MoUs) or other performance contracts between state-
owned enterprises (SOEs) and governments have been used to enhance firm performance in
several countries, including India, where MoUs are negotiated between all central public sec-
tor enterprises (CPSEs) and the government as owner. These set performance targets for SOE
boards (forming the basis for a performance management framework and monitoring system)
and define the roles, responsibilities, and accountability of the board and entity management.
Similar practices are followed in South Africa, Bulgaria, Indonesia, Turkey, and Bangladesh
(World Bank 2006).
Historically, performance agreements have had limited success. One common issue has
been inappropriate objectives. Certain targets, such as revenue growth and some other finan-
cial targets, can create perverse incentives if not thought through. In addition, firm managers
typically have greater knowledge of the firm than their government counterparts, which
enables them to negotiate easy—and therefore less meaningful—targets. Another issue limit-
ing the success of performance contracts is the introduction of the contracts in isolation, with-
out the accompaniment of wider SOE governance reforms (World Bank 2006). Research has
posited that effectively designing and enforcing a performance contract can be as politically
costly as well-executed privatization and that performance contracts are therefore not likely to
be successful in countries that lack the political will to privatize (Shirley 1998).
Internationally, successful performance contracts appear to be ones that feature sensible
targets and sufficiently strong incentives to achieve the targets, set longer terms, and are
negotiated with SOEs in relatively more competitive industries (Shirley and Xu 2001).
Compared with most other countries, India has a relatively sophisticated performance
contract system that has become a key tool for ensuring accountability of CPSEs and their
directors. MoUs are negotiated and signed annually between all CPSEs and the relevant
administrative ministry (World Bank 2006). MoU contents follow the Department of Public
Enterprises (DPE) guidelines and include a mission statement, the objectives of the CPSE, areas
where power has been designated to the CPSE, performance targets, and commitments from
the government to the CPSE. In practice, the performance targets are the primary focus of
system participants, and DPE guidelines go so far as to specify particular financial and
nonfinancial or dynamic targets.
There is, however, room for improvement (World Bank 2010). Targets could be more
ambitious, and the DPE task forces that facilitate negotiation of the MoUs could have stronger
financial and management skills. In addition, social objectives and service delivery targets
could be factored in more prominently, and compliance with corporate governance
guidelines could also be included as a criterion for evaluating performance.
been that while it has focused appropriately on sorting out distortions in the
relationship between the owner-government and power utilities through the
unbundling and regulation model, it has failed to carry credible assurances that
this will improve the equation between the reformed utilities and their
consumers” (Lal 2006, 24).
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Conclusions 85
Notes
1. Separate distribution from transmission if the utility (state utility board) is large
enough to warrant this and if managerial capacity is not a constraint (EA 2003 man-
dates separation of generation from transmission).
2. It is unlikely that there would be much appetite or take-up in a flotation of shares for
minority listing of most state-level utilities now.
3. While the existence of CG guidelines differentiates India from many other developing
countries, there is still room to strengthen them. For example, the guidelines could
specify the principles governing the relationship between the government ministries
and the covered companies, and include a system to monitor compliance with the
guidelines and clarify which are mandatory and which are voluntary. See World Bank
(2010) for more elaboration.
References
Bajaj, Jagmohan L. 2012. “Suggestions for Reforming the Indian Power Sector.”
Unpublished manuscript.
Dixit, Shantanu, Navroz K. Dubash, Crescencia Maurer, and Smita Nakhooda. 2007.
“Benchmarking Best Practice and Promoting Accountability in the Electricity Sector.”
The Electricity Governance Initiative, World Resources Institute, Washington, DC.
Lal, Sumir. 2006. “Can Good Economics Ever Be Good Politics? Case Study of India’s
Power Sector.” Working Paper 83, World Bank, Washington, DC.
Shirley, Mary. 1998. “Why Performance Contracts for State-Owned Enterprises Haven’t
Worked.” Viewpoint Note 150, World Bank, Washington, DC.
Shirley, Mary, and Lixin Colin Xu. 2001. “Empirical Effects of Performance Contracts:
Evidence from China.” Journal of Law, Economics, and Organization 17 (1).
World Bank. 2006. Held by the Invisible Hand: The Challenge of State-Owned Enterprise
Corporate Governance for Emerging Markets. Washington, DC: World Bank.
———. 2010. Corporate Governance of Central Public Sector Enterprises. Washington, DC:
World Bank.
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Appendix A
Corporate Governance
Requirements in India
The guidelines set out by the Securities and Exchange Board of India (SEBI) and
the Department of Public Enterprises (DPE) go well beyond the requirements
of the Companies Act (which are mandatory) and are generally considered
recommended practice for Indian state level public enterprises. The guidelines
cover board composition, policies, and training; g eneral board functioning;
detailed requirements for audit committees; the government-board relationship;
and disclosure. Their provisions are as follows:
Board Composition. Executive or “full-time” directors1 should comprise no
more than 50 percent of the board. There should be no more than two govern-
ment representatives, and such directors should be less than one-sixth of the
board. If the chair is a nonexecutive (executive) director, at least one-third
(50 percent) of the board should be independent directors.
Directors cannot be members of more than 10 committees on a single board
and cannot hold more than five committee chairs across all of their directorships.
Chairpersons should retire by age 62. Independent directors’ tenure should be
limited to a total of nine years. They should have graduate degrees, at least 10
years of relevant, high-level experience, and should ideally be between 45 and 65
years old (though as old as 72 may be acceptable).
Board Functioning. Boards should meet at least four times per year, with no
more than three to four months between any two meetings. They should have a
code of conduct that is published online. They should conduct peer evaluations
of nonexecutive board members. The company should have procedures to
inform board members about risk assessment and minimization policies. They
should train board members in the company’s business model, the risk profile of
its business parameters, and the directors’ responsibilities and the best way to
discharge them. Boards should have a formal charter that clarifies the roles
and responsibilities between individual directors and between the board and
management.
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88 Corporate Governance Requirements in India
Audit Committee. Every board should have an audit committee with at least
three members, two-thirds of which, including the chairperson, must be indepen-
dent directors. All members should be able to read and understand basic financial
statements and at least one member should have accounting or related financial
management expertise. The audit committee should meet at least four times a
year, with no more than four months between any two meetings. Both SEBI and
the DPE also define appropriate powers and roles for the audit committee.
Government-Board Relationship and Disclosure. Companies should include a
corporate governance (CG) section in their annual reports, which should cover
compliance with CG recommended and mandatory practices. SEBI also provides
a lengthy set of items recommended for inclusion in this section. There should
be clarity about where the board has decision-making powers and where the
board must seek government approval.
Although the DPE guidelines are optional for state electricity utilities, they are
mandatory for Indian central public sector undertakings (CPSUs), which include
centrally owned public sector electricity utilities. Central and state utilities are
differentiated not only by such ownership but also by such legal requirements—
most notably, CPSUs have to comply with the DPE’s CG guidelines—and their
market participation (many of the CPSUs are minority-listed on the stock
exchange). They also have memorandums of understanding (MoUs) with their
government owners, which set performance targets for the utility boards (form-
ing the basis for a
performance management framework and monitoring system)
and define the roles, responsibilities, and accountability of the board and the
utility management. Perhaps as a result, CPSUs tend to exhibit stronger financial
performance.
CG has been a key aspect of the Government of India’s efforts at CPSU
reform, aimed at improving the companies’ performance and competitiveness,
giving them easier access to capital markets, and making them more transparent
and accountable, while also transitioning the state’s role from d ay-to-day
manager to a more traditional owner operating through strong CG principles
(World Bank 2010). Consistent with the DPE’s CG guidelines, the CPSUs follow
many of the same CG practices as India’s private sector firms, including having
independent board members—some with private sector experience—and pro-
viding extensive information to the public. The CPSUs’ MoUs with the govern-
ment serve to both monitor and motivate performance.
Potentially as a result of these reforms, performance of CPSUs has strength-
ened in recent years; for example, NTPC Ltd. (a power generation company),
India’s largest CPSU, was the second-most profitable central public sector
enterprise in 2009, generating about Rs 83,096 million in profits. In 2010, it
became one of only four companies to be awarded “Maharatna” status, a title
that gives public-sector companies greater autonomy over their investments
and participation in global capital markets. NTPC is notable for its high effi-
ciency levels (particularly relative to other generation companies in India),
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Corporate Governance Requirements in India 89
which lead it to generate 27 percent of India’s power despite representing only
18 percent of the total national generation capacity.2
Broad reviews of India’s centrally owned enterprises suggest, however, that
there is still room for CG improvements (World Bank 2010). As with the state
level utilities, a complex ownership relationship means that the ownership and
policy-making roles are combined in some Ministries, which enables political
interference in board composition and operational decision making. In addition,
CPSE boards are rarely evaluated on their performance (perhaps suggesting a
need to strengthen their MoUs) and, in several cases, it has been recommended
that they strengthen their internal audit and control functions.
Notes
1. Sometimes known as “functional” directors, they are typically drawn from senior man-
agement of the company (such as directors of finance, human resources, and so on).
2. See http://www.ntpc.co.in/index.php?option=com_content&view=article&id=42&Ite
mid=75 &lang=en, accessed May 5, 2013.
Reference
World Bank. 2010. Corporate Governance of Central Public Sector Enterprises. Washington,
DC: World Bank.
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Appendix B
Coverage of Electricity Utilities
Table B.1 shows all of the utilities covered in the corporate governance review,
including their full name, the abbreviation employed in this review, their “type”
(discom, transco, genco, or holding company), and if they are covered in the basic
dataset and in the detailed dataset.
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Table B.1 Coverage of Electricity Utilities
92
State Utility name Abbreviation Type Basic data Detailed data
Andhra Pradesh Andhra Pradesh Central Power Distribution Company Ltd. APCPDCL Discom Y Y
Andhra Pradesh Andhra Pradesh Eastern Power Distribution Company Ltd. APEPDCL Discom Y N
Andhra Pradesh Andhra Pradesh Northern Power Distribution Company Ltd. APNPDCL Discom Y N
Andhra Pradesh Andhra Pradesh Southern Power Distribution Company Ltd. APSPDCL Discom Y N
Assam Assam Electricity Grid Corporation Ltd. AEGCL Transco Y Y
Assam Assam Power Distribution Corporation Ltd. APDCL Discom Y Y
Assam Assam Power Generation Company Ltd. APGCL—Assam Genco Y N
Chhattisgarh Chhattisgarh State Power Distribution Company Ltd. CSPDCL Discom Y N
Chhattisgarh Chhattisgarh State Power Generation Company Ltd. CSPGCL Genco Y N
Chhattisgarh Chhattisgarh State Power Transmission Company Ltd. CSPTCL Transco Y N
Delhi BSES Rajdhani Power Ltd. BRPL Discom Y N
Delhi BSES Yamuna Power Ltd. BYPL Discom Y N
Delhi Delhi Transco Ltd. DTL Transco Y Y
Delhi Indraprastha Power Generation Company Ltd. IPGCL Genco Y N
Delhi Pragati Power Corporation Ltd. PPCL Genco Y N
Delhi North Delhi Power Ltd. TP-DDL Discom Y Y
Gujarat Dakshin Gujarat Vij Company Ltd. DGVCL Discom Y Y
Gujarat Gujarat Energy Transmission Corporation Ltd. GETCL Transco Y N
Gujarat Gujarat State Electricity Corporation Ltd. GSECL Genco Y N
Gujarat Gujarat Urja Vikas Nigam Ltd. GUVNL Holding company Y Y
Gujarat Madhya Gujarat Vij Company Ltd. MGVCL Discom Y N
Gujarat Paschim Gujarat Vij Company Ltd. PGVCL Discom Y N
Gujarat Uttar Gujarat Vij Company Ltd. UGVCL Discom Y N
Haryana Dakshin Haryana Bijli Vitran Nigam Ltd DHBVNL Discom Y N
Haryana Haryana Power Generation Corporation Ltd. HPGCL Genco Y N
Haryana Haryana Vidyut Prasaran Nigam Ltd. HVPNL Transco Y N
Haryana Uttar Haryana Bijli Vitran Nigam Ltd. UHBVN Discom Y Y
Himachal Pradesh Himachal Pradesh State Electricity Board Ltd. HPSEB LTD Discom Y N
Other Other State Power Development Corporation Ltd. Other SPDCL Genco Y N
table continues next page
Table B.1 Coverage of Electricity Utilities (continued)
State Utility name Abbreviation Type Basic data Detailed data
Karnataka Chamundeshwari Electricity Supply Company Ltd. CESCOM Discom Y N
Karnataka Gulbarga Electricity Supply Company Ltd. GESCOM Discom Y N
Karnataka Hubli Electricity Supply Company Ltd. HESCOM Discom Y N
Karnataka Karnataka Power Transmission Company Ltd. KPTCL Transco Y Y
Karnataka Mangalore electricity Supply Company Ltd. MESCOM Discom Y N
Madhya Pradesh Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Ltd. MPMKVVCL Discom Y Y
Madhya Pradesh Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Ltd. MPPaKVVCL Discom Y N
Madhya Pradesh Madhya Pradesh Power Generation Company Ltd. MPPGCL Genco Y N
Madhya Pradesh Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Ltd. MPPoKVVCL Discom Y N
Madhya Pradesh Madhya Pradesh Power Transmission Company Ltd. MPPTCL Transco Y Y
Maharashtra Maharashtra State Electricity Distribution Company Ltd. MSEDCL Discom Y Y
Maharashtra Maharashtra State Electricity Transmission Company Ltd. MSETCL Transco Y N
Maharashtra Maharashtra State Power Generation Company Ltd. MSPGCL Genco Y Y
Orissa Grid Corporation of Orissa Ltd. GRIDCO Transco Y N
Orissa North Eastern Electricity Supply Company NESCO Discom Y N
Orissa Orissa Hydro Power Corporation OHPC Genco Y N
Orissa Orissa Power Generation Corporation OPGC Genco Y N
Orissa Orissa Power Transmission Corporation Ltd. OPTCL Transco Y N
Orissa Southern Electricity Supply Company SOUTHCO Discom Y N
Orissa Western Electricity Supply Company WESCO Discom Y N
Punjab Punjab State Power Corporation Ltd. PSPCL Discom Y Y
Punjab Punjab State Transmission Corporation Ltd. PSTCL Transco Y N
Rajasthan Ajmer Vidyut Vitran Nigam Ltd. AVVNL Discom Y N
Rajasthan Jodhpur Vidyut Vitran Nigam Ltd. JoVVNL Discom Y N
Rajasthan Jaipur Vidyut Vitran Nigam Ltd. JVVNL Discom Y Y
Rajasthan Rajasthan Rajya Vidyut Utpadan Nigam Ltd. RRVUNL Genco Y N
Rajasthan Rajasthan Rajya Vidyut Prasaran Nigam Ltd. RVPNL Transco Y Y
Tamil Nadu Tamil Nadu Generation and Distribution Corporation Ltd. TANGEDCO Discom Y Y
Tripura Tripura State Electricity Corporation Ltd. TSECL Discoma Y N
table continues next page
93
94
Table B.1 Coverage of Electricity Utilities (continued)
State Utility name Abbreviation Type Basic data Detailed data
Uttar Pradesh Kanpur Electric Supply Company KESCO Discom Y N
Uttar Pradesh Madhyanchal Vidyut Vitran Nigam Ltd. MVVNL Discom Y Y
Uttar Pradesh Uttar Pradesh Jal Vidyut Nigam Ltd. UPJVNL Genco Y N
Uttar Pradesh Uttar Pradesh Power Transmission Corporation Ltd. UPPTCL Transco Y Y
Uttar Pradesh Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd. UPRVUNL Genco Y N
Uttarakhand Power Transmission Corporation of Uttarakhand Ltd. PTCUL Transco Y N
Uttarakhand Uttarakhand Jal Vidyut Nigam Ltd. UJVNL Genco Y N
Uttarakhand Uttarakhand Power Corporation Ltd. UPCL Discom Y N
West Bengal West Bengal Power Development Corporation Ltd. WBPDCL Genco Y N
West Bengal West Bengal State Electricity Distribution Company Ltd. WBSEDCL Discom Y Y
West Bengal West Bengal State Electricity Transmission Company Ltd. WBSETCL Transco Y Y
Source: World Bank compilation based on Government of India data.
Note: Discom = distribution company; Genco = generation company; Transco = transmission company; N = no; Y = yes.
a. TSECL is actually a corporation that performs all three functions—generation, transmission, and distribution—but, as noted in the main text, it is categorized as a discom for the purposes of this review.
Appendix C
Utility Performance on Corporate
Governance Indexes
Table C.1 lists each utility’s score on the basic and detailed (if applicable)
corporate governance indexes.
Table C.1 Basic and Detailed Index Scores
State Utility Type Basic index score (%) Detailed index score (%)
Andhra Pradesh APCPDCL Discom 75 44
Andhra Pradesh APEPDCL Discom 75
Andhra Pradesh APNPDCL Discom 75
Andhra Pradesh APSPDCL Discom 88
Assam AEGCL Transco 88 44
Assam APDCL Discom 100 44
Assam APGCL Genco 88
Chhattisgarh CSPDCL Discom 50
Chhattisgarh CSPGCL Genco 50
Chhattisgarh CSPTCL Transco 50
Delhi BRPL Discom 50
Delhi BYPL Discom 50
Delhi DTL Transco 50 44
Delhi IPGCL Genco 75
Delhi PPCL Genco 75
Delhi TP-DDL Discom 50 67
Gujarat DGVCL Discom 88 89
Gujarat GETCL Transco 75
Gujarat GSECL Genco 75
Gujarat GUVNL Holding company 100 89
Gujarat MGVCL Discom 75
Gujarat PGVCL Discom 50
Gujarat UGVCL Discom 75
Haryana DHBVNL Discom 63
table continues next page
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96 Utility Performance on Corporate Governance Indexes
Table C.1 Basic and Detailed Index Scores (continued)
State Utility Type Basic index score (%) Detailed index score (%)
Haryana HPGCL Genco 63
Haryana HVPNL Transco 75
Haryana UHBVN Discom 50 28
Himachal Pradesh HPSEB LTD Discom 75
Other Other SPDCL Genco 50
Karnataka CESCOM Discom 75
Karnataka GESCOM Discom 50
Karnataka HESCOM Discom 63
Karnataka KPTCL Transco 63 56
Karnataka MESCOM Discom 38
Madhya Pradesh MPMKVVCL Discom 63 56
Madhya Pradesh MPPaKVVCL Discom 88
Madhya Pradesh MPPGCL Genco 50
Madhya Pradesh MPPoKVVCL Discom 88
Madhya Pradesh MPPTCL Transco 63 44
Maharashtra MSEDCL Discom 75 56
Maharashtra MSETCL Transco 50
Maharashtra MSPGCL Genco 75 61
Orissa GRIDCO Transco
Orissa NESCO Discom 50
Orissa OHPC Genco 88
Orissa OPGC Genco 75
Orissa OPTCL Transco 50
Orissa SOUTHCO Discom 50
Orissa WESCO Discom 50
Punjab PSPCL Discom 50 33
Punjab PSTCL Transco
Rajasthan AVVNL Discom 63
Rajasthan JoVVNL Discom 63
Rajasthan JVVNL Discom 50 33
Rajasthan RRVUNL Genco 63
Rajasthan RVPNL Transco 63 33
Tamil Nadu TANGEDCO Discom 38 22
Tripura TSECL Discom 38
Uttar Pradesh KESCO Discom 50
Uttar Pradesh MVVNL Discom 50 22
Uttar Pradesh UPJVNL Genco 38
Uttar Pradesh UPPTCL Transco 50 28
Uttar Pradesh UPRVUNL Genco 75
Uttarakhand PTCUL Transco 50
Uttarakhand UJVNL Genco 63
Uttarakhand UPCL Discom 50
West Bengal WBPDCL Genco 88
West Bengal WBSEDCL Discom 88 72
West Bengal WBSETCL Transco 88 72
Source: Based on Government of India data.
Note: The detailed index is limited to the 21 utilities for which in-depth corporate governance data was collected. See
chapter 3 for more detail. Discom = distribution company; Genco = generation company; Transco = transmission company.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Appendix D
Corporate Governance Data
Table D.1 displays all of the data points included in the basic corporate
governance index.
Table D.2 displays all of the data points included in the detailed corporate
governance index. All of the data points included in the basic index are also
included in the detailed index, and therefore some of the data from table D.1 is
also included in this table.
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Table D.1 Basic Corporate Governance Data
98
Share of board Number of Share of board that
that is executive government is independent Executive Board Audit External Audit made Accounts
State Utility directors (%) directors directors (%) chairmana size committee auditor public made public
Andhra Pradesh APCPDCL 71 2 0 Y 7 Y Y Y Y
Andhra Pradesh APEPDCL 56 2 22 Y 9 Y Y Y Y
Andhra Pradesh APNPDCL 56 2 22 Y 9 Y Y Y Y
Andhra Pradesh APSPDCL 43 2 29 Y 7 Y Y Y Y
Assam AEGCL 13 3 50 N 8 Y Y Y Y
Assam APDCL 14 2 57 Y 7 Y Y Y Y
Assam APGCL 13 4 38 N 8 Y Y Y Y
Chhattisgarh CSPDCL 0 4 0 N 4 N Y N Y
Chhattisgarh CSPGCL 0 4 0 N 4 N Y N Y
Chhattisgarh CSPTCL 0 4 0 N 4 N Y N Y
Delhi BRPL 14 3 29 N 7 Y Y N N
Delhi BYPL 14 3 29 N 7 Y Y N N
Delhi DTL 50 3 13 Y 8 Y Y N N
Delhi IPGCL 43 3 14 N 7 Y Y Y Y
Delhi PPCL 43 3 14 N 7 Y Y Y Y
Delhi TP-DDL 9 5 18 Y 11 Y Y N N
Gujarat DGVCL 14 3 43 N 7 Y Y Y Y
Gujarat GETCL 14 5 14 N 7 Y Y Y Y
Gujarat GSECL 13 6 13 N 8 Y Y Y Y
Gujarat GUVNL 33 2 33 N 6 Y Y Y Y
Gujarat MGVCL 17 5 0 N 6 Y Y Y Y
Gujarat PGVCL 10 8 10 N 10 Y Y N N
Gujarat UGVCL 11 7 11 N 9 Y Y Y Y
Haryana DHBVNL 50 4 0 N 8 Y Y N Y
Haryana HPGCL 33 4 22 N 9 Y Y N Y
Haryana HVPNL 33 4 33 N 12 Y Y N Y
Haryana UHBVN 43 4 0 N 7 Y Y N N
table continues next page
Table D.1 Basic Corporate Governance Data (continued)
Share of board Number of Share of board that
that is executive government is independent Executive Board Audit External Audit made Accounts
State Utility directors (%) directors directors (%) chairmana size committee auditor public made public
Himachal Pradesh HPSEB LTD 71 2 0 Y 7 Y Y Y Y
Other Other SPDCL 30 6 10 N 10 Y Y N N
Karnataka CESCOM 18 9 0 N 11 Y Y Y Y
Karnataka GESCOM 18 9 0 N 11 Y Y N N
Karnataka HESCOM 23 10 0 N 13 Y Y Y Y
Karnataka KPTCL 27 10 7 N 15 Y Y Y Y
Karnataka MESCOM 60 2 0 Y 5 Y Y N N
Madhya Pradesh MPMKVVCL 11 5 33 N 9 Y Y N N
Madhya Pradesh MPPaKVVCL 33 2 33 Y 6 Y Y Y Y
Madhya Pradesh MPPGCL 33 3 33 Y 9 Y Y N N
Madhya Pradesh MPPoKVVCL 33 2 33 Y 6 Y Y Y Y
Madhya Pradesh MPPTCL 17 3 33 N 6 Y Y N N
Maharashtra MSEDCL 44 3 22 Y 9 Y Y Y Y
Maharashtra MSETCL 80 1 0 Y 5 Y Y N N
Maharashtra MSPGCL 83 1 0 N 6 Y Y Y Y
Orissa NESCO 11 4 0 N 9 Y Y N N
Orissa OHPC 33 4 33 N 12 Y Y Y Y
Orissa OPGC 50 3 0 N 6 Y Y Y Y
Orissa OPTCL 36 3 36 Y 11 Y Y N N
Orissa SOUTHCO 11 4 0 N 9 Y Y N N
Orissa WESCO 11 4 0 N 9 Y Y N N
Punjab PSPCL 78 2 0 Y 9 Y Y N N
Rajasthan AVVNL 33 6 0 N 9 Y Y N Y
Rajasthan JoVVNL 33 6 0 N 9 Y Y N Y
Rajasthan JVVNL 50 4 0 Y 8 Y Y N N
Rajasthan RRVUNL 44 5 0 Y 9 Y Y N Y
Rajasthan RVPNL 57 3 0 Y 7 Y Y Y Y
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100
Table D.1 Basic Corporate Governance Data (continued)
Share of board Number of Share of board that
that is executive government is independent Executive Board Audit External Audit made Accounts
State Utility directors (%) directors directors (%) chairmana size committee auditor public made public
Tamil Nadu TANGEDCO 56 4 0 Y 9 Y Y N N
Tripura TSECL 60 2 0 Y 5 N Y N N
Uttar Pradesh KESCO 20 4 0 N 5 Y Y N N
Uttar Pradesh MVVNL 75 1 0 N 4 Y Y N N
Uttar Pradesh UPJVNL 25 6 0 Y 8 N Y N N
Uttar Pradesh UPPTCL 78 2 0 N 9 Y Y N N
Uttar Pradesh UPRVUNL 30 6 10 Y 10 Y Y Y Y
Uttarakhand PTCUL 40 5 10 N 10 Y Y N N
Uttarakhand UJVNL 27 4 36 N 11 Y Y N N
Uttarakhand UPCL 42 5 17 N 12 Y Y N N
West Bengal WBPDCL 44 2 33 Y 9 Y Y Y Y
West Bengal WBSEDCL 50 2 33 Y 12 Y Y Y Y
West Bengal WBSETCL 50 2 25 N 8 Y Y Y Y
Source: Based on Government of India data.
a. “Y” indicates if the utility’s chair is an executive director, “N” otherwise. This variable was not directly included in the index but was used to determine the threshold for best practice for share of independent
directors.
Table D.2 Detailed Corporate Governance Data
Board-management relationship Public accountability Board effectiveness
Share of board that
is executive Audit Other Independent chair Audit on Audit made Accounts Board Average CMD
State Utility directors (%) committee committees of audit committee time public made public size tenure (years)
Andhra Pradesh APCPDCL 71 Y N N Y Y Y 7 1.67
Assam AEGCL 13 Y N N Y Y Y 8 1.69
Assam APDCL 14 Y N N N Y Y 7 1.92
Delhi DTL 50 Y N N Y N N 8 1.05
Delhi TP-DDL 9 Y Y N Y N N 11 5.00
Gujarat DGVCL 14 Y Y Y Y Y Y 7 2.33
Gujarat GUVNL 33 Y Y N Y Y Y 6 2.83
Haryana UHBVN 43 Y N N Y N N 7 1.32
Karnataka KPTCL 27 Y Y N Y Y Y 15 2.33
Madhya Pradesh MPMKVVCL 11 Y Y N Y N N 9 2.00
Madhya Pradesh MPPTCL 17 Y N N Y N N 6 5.00
Maharashtra MSEDCL 44 Y Y N Y Y Y 9 2.00
Maharashtra MSPGCL 83 Y Y N Y Y Y 6 3.50
Punjab PSPCL 78 Y Y N Y N N 9 2.25
Rajasthan JVVNL 50 Y Y N Y N N 8 1.30
Rajasthan RVPNL 57 Y N N Y Y Y 7 1.75
Tamil Nadu TANGEDCO 56 Y N N Y N N 9 2.00
Uttar Pradesh MVVNL 75 Y N N N N N 4 2.00
Uttar Pradesh UPPTCL 78 Y Y N N N N 9 1.30
West Bengal WBSEDCL 50 Y Y Y Y Y Y 12 4.00
West Bengal WBSETCL 50 Y Y Y Y Y Y 8 3.00
Source: Based on Government of India data.
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102
Table D.2 Detailed Corporate Governance Data (continued)
External accountability Management practices
Number of Share of board that Government Government Performance Employee
government is independent External influence influence ERP or linked training Merit-based
State Utility directors directors (%) auditor (Routine) (Recruitments) MIS incentives policy promotion
Andhra Pradesh APCPDCL 2 0 Y Y Y Y N N N
Assam AEGCL 3 50 Y Y Y N N N N
Assam APDCL 2 57 Y Y Y N N N N
Delhi DTL 3 13 Y Y N Y N Y N
Delhi TP-DDL 5 18 Y N N Y Y Y Y
Gujarat DGVCL 3 43 Y N N Y Y Y Y
Gujarat GUVNL 2 33 Y N N Y Y Y Y
Haryana UHBVN 4 0 Y Y Y N N N N
Karnataka KPTCL 10 7 Y Y Y Y N Y Y
Madhya Pradesh MPMKVVCL 5 33 Y Y N Y N Y N
Madhya Pradesh MPPTCL 3 33 Y Y N N N Y N
Maharashtra MSEDCL 3 22 Y Y N N N Y N
Maharashtra MSPGCL 1 0 Y Y N Y N Y N
Punjab PSPCL 2 0 Y Y Y N N N N
Rajasthan JVVNL 4 0 Y Y Y N N N N
Rajasthan RVPNL 3 0 Y Y Y N N N N
Tamil Nadu TANGEDCO 4 0 Y Y Y N N N N
Uttar Pradesh MVVNL 1 0 Y Y Y N N N N
Uttar Pradesh UPPTCL 2 0 Y Y Y N N N N
West Bengal WBSEDCL 2 33 Y N Y N N Y Y
West Bengal WBSETCL 2 25 Y N Y N N Y Y
Source: Based on Government of India data.
Note: CMD = chairman and managing director; ERP = enterprise resource planning; MIS = management information system.
Appendix E
Coverage of State Electricity
Regulatory Commissions
This review covers all of the state electricity regulatory commissions (SERCs)
that were established in India as of 2013. Table E.1 lists those SERCs and their
abbreviations.
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104 Coverage of State Electricity Regulatory Commissions
Table E.1 Coverage of SERCs
State SERC
Andhra Pradesh APERC
Other Other SERC
Assam AERC
Bihar BERC
Chhattisgarh CSERC
Delhi DERC
Goa (joint with Union Territories) JERC (for Goa and UTs)
Gujarat GERC
Haryana HERC
Himachal Pradesh HPERC
Other Other SERC
Jharkhand JSERC
Karnataka KERC
Kerala KSERC
Madhya Pradesh MPERC
Maharashtra MERC
Manipur and Mizoram JERC (for Manipur and Mizoram)
Meghalaya MSERC
Nagaland NERC
Orissa OERC
Punjab PSERC
Rajasthan RERC
Sikkim No name given
Tamil Nadu TNERC
Tripura TERC
Uttar Pradesh UPERC
Uttarakhand UERC
West Bengal WBERC
Source: World Bank compilation.
Note: SERC = state electricity regulatory commission; UT = Union Territory.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Appendix F
SERC Performance on Regulatory
Governance Indexes
Table F.1 lists state electricity regulatory commission scores on the overall
regulatory governance indexes and their subcomponents.
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106
Table F.1 Regulatory Governance Index Scores (%)
ID Autonomy Capacity Transparency IM Tariffs Consumer protection SoP OA Clean energy Other regulations
Andhra Pradesh 62 0 100 86 93 75 100 100 100 86 100
Assam 10 0 0 29 76 50 100 75 80 71 80
Bihar 31 50 0 43 71 25 100 75 80 86 60
Chhattisgarh 62 50 50 86 82 75 100 50 100 86 80
Delhi 83 50 100 100 84 75 100 75 80 71 100
Goa 29 0 0 86 54 25 100 75 20 43 60
Gujarat 100 100 100 100 81 50 100 50 100 86 100
Haryana 26 0 50 29 64 25 100 50 80 71 60
Himachal Pradesh 62 100 0 86 88 75 100 75 100 100 80
Other 40 50 0 71 56 25 67 50 60 71 60
Jharkhand 62 100 0 86 81 25 100 100 100 100 60
Karnataka 45 50 0 86 87 75 100 75 100 71 100
Kerala 45 50 0 86 76 75 100 75 80 86 40
Madhya Pradesh 45 50 0 86 86 75 100 75 100 86 80
Maharashtra 83 50 100 100 85 50 100 75 100 86 100
Manipur and Mizoram 29 0 0 86 57 25 100 50 20 86 60
Meghalaya 29 0 0 86 63 25 100 75 60 57 60
Orissa 95 100 100 86 85 75 100 75 100 100 60
Punjab 40 50 0 71 63 25 100 50 100 43 60
Rajasthan 45 50 0 86 76 25 100 75 100 57 100
Tamil Nadu 36 0 50 57 68 0 100 75 80 71 80
Tripura 29 0 0 86 47 50 100 50 20 43 20
Uttar Pradesh 62 50 50 86 70 25 100 75 100 57 60
Uttarakhand 10 0 0 29 75 50 100 75 80 86 60
West Bengal 52 100 0 57 83 75 100 75 100 71 60
Source: World Bank compilation.
Note: ID = institutional design; IM = implementation of mandates; OA = open access; SoP = standards of performance.
Appendix G
Regulatory Governance Data
Table G.1 lists the data points included in the regulatory governance institutional
design index.
Tables G.2 through G.4 list the data points included in the implementation of
regulatory mandates index.
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108
Table G.1 Institutional Design Data
Autonomy Capacity Transparency
Number of SERC Annual Annual Annual SAC
SERC budget Chair tenure professional Regulations Public tariff reports reports (local reports constitution SAC minutes
State source (years) staff RIMS online hearings (Public) language) (online) online online
Andhra Pradesh State 4.40 28 Yes Yes Yes Yes No Yes Yes Yes
Assam State 1.75 8 No Yes Yes No No No No No
Bihar Own Rev. 3.30 8 No Yes Yes No No No Yes No
Chhattisgarh Mixed 5.00 22 No Yes Yes Yes Yes Yes Yes No
Delhi Mixed 4.30 25 Yes Yes Yes Yes Yes Yes Yes Yes
Goa State 4.00 5 No Yes Yes Yes No Yes Yes Yes
Gujarat Own Rev. 5.00 25 Yes Yes Yes Yes Yes Yes Yes Yes
Haryana State 2.40 15 No Yes Yes No No No No No
Himachal Pradesh Mixed 5.00 14 No Yes Yes Yes Yes Yes Yes No
Other Mixed 4.00 11 No Yes Yes Yes No Yes Yes No
Jharkhand Mixed 5.00 5 No Yes Yes Yes Yes Yes Yes No
Karnataka State 5.00 11 No Yes Yes Yes No Yes Yes Yes
Kerala Mixed 3.50 4 No Yes Yes Yes No Yes yes Yes
Madhya Pradesh Own Rev. 3.75 12 No Yes Yes Yes Yes Yes Yes No
Maharashtra Own Rev. 4.30 40 Yes Yes Yes Yes Yes Yes Yes Yes
Manipur and Mizoram Mixed 3.00 8 No Yes Yes Yes No Yes Yes Yes
Meghalaya State 2.05 6 No Yes Yes Yes No Yes Yes Yes
Orissa Mixed 5.00 18 Yes Yes Yes Yes No Yes Yes Yes
Punjab State 5.00 8 No Yes Yes Yes No Yes Yes No
Rajasthan Own Rev. 4.20 14 No Yes Yes Yes No Yes Yes Yes
Tamil Nadu State 4.30 6 Yes Yes Yes No No No Yes Yes
Tripura State 4.50 3 No Yes Yes Yes No Yes Yes Yes
Uttar Pradesh State 5.00 12 Yes Yes Yes Yes Yes Yes Yes No
Uttarakhand State 2.67 11 No Yes Yes No No No No No
West Bengal Own Rev. 5.00 8 No Yes No Yes No Yes Yes No
Source: World Bank compilation.
Note: SERC = state electricity regulatory commission; SAC = state advisory committee; RIMS = Regulatory Information Management System.
Table G.2 Implementation of Mandates Data: Tariffs and Standards of Performance
Tariffs SoP
Tariff order delays Percent of years of
(number of years SERC existence tariff Tariff at operating- MYT order SoP Penalties for SoP Compliance SoP penalties
State with delay) order issued cost-recovery level issued regulations noncompliance monitored issued
Andhra Pradesh 1 100 No Yes Yes Yes Yes Yes
Assam 2 60 Yes Yes Yes Yes Yes No
Bihar 0 33 No No Yes Yes Yes No
Chhattisgarh 0 44 Yes Yes Yes Yes No No
Delhi 1 60 Yes Yes Yes Yes Yes No
Goa 2 0 Yes No Yes Yes Yes No
Gujarat 2 50 Yes Yes Yes Yes No No
Haryana 2 100 No No Yes Yes No No
Himachal Pradesh 3 70 Yes Yes Yes Yes Yes No
Other 1 22 No No Yes Yes No No
Jharkhand 0 25 No No Yes Yes Yes Yes
Karnataka 2 70 Yes Yes Yes Yes Yes No
Kerala 0 78 Yes No Yes Yes Yes No
Madhya Pradesh 0 80 Yes No Yes Yes Yes No
Maharashtra 2 50 Yes Yes Yes Yes Yes No
Manipur and Mizoram 1 0 No No Yes Yes No No
Meghalaya 2 43 Yes No Yes Yes Yes No
Orissa 0 70 Yes No Yes Yes Yes No
Punjab 2 80 No No Yes Yes No No
Rajasthan 2 20 No Yes Yes Yes Yes No
Tamil Nadu 2 10 No No Yes Yes Yes No
Tripura 0 29 Yes No Yes Yes No No
Uttar Pradesh 2 60 Yes No Yes Yes Yes No
Uttarakhand 0 56 Yes No Yes Yes Yes No
West Bengal 2 80 Yes Yes Yes Yes Yes No
Source: World Bank compilation.
Note: MYT = multiyear tariff; SERC = state electricity regulatory commission; SoP = standards of performance.
109
110 Regulatory Governance Data
Table G.3 Implementation of Mandates Data: Consumer Protection and Other Regulations
Consumer protection Other Regulations
CGRF Supply MYT
State Ombudsman SAC regulations code Trading Metering regulations ABT
Andhra Pradesh Yes Yes Yes Yes Yes Yes Yes Yes
Assam Yes Yes Yes Yes Yes Yes Yes No
Bihar Yes Yes Yes Yes Yes Yes No No
Chhattisgarh Yes Yes Yes Yes Yes Yes Yes No
Delhi Yes Yes Yes Yes Yes Yes Yes Yes
Goa Yes Yes Yes Yes Yes Yes No No
Gujarat Yes Yes Yes Yes Yes Yes Yes Yes
Haryana Yes Yes Yes Yes No Yes Yes No
Himachal Pradesh Yes Yes Yes Yes Yes Yes Yes No
Other No Yes Yes Yes No Yes Yes No
Jharkhand Yes Yes Yes Yes Yes No Yes No
Karnataka Yes Yes Yes Yes Yes Yes Yes Yes
Kerala Yes Yes Yes Yes No No Yes No
Madhya Pradesh Yes Yes Yes Yes Yes Yes No Yes
Maharashtra Yes Yes Yes Yes Yes Yes Yes Yes
Manipur and Mizoram Yes Yes Yes Yes Yes Yes No No
Meghalaya Yes Yes Yes Yes Yes Yes No No
Orissa Yes Yes Yes Yes No Yes No Yes
Punjab Yes Yes Yes Yes Yes Yes No No
Rajasthan Yes Yes Yes Yes Yes Yes Yes Yes
Tamil Nadu Yes Yes Yes Yes Yes Yes Yes No
Tripura Yes Yes Yes Yes No No No No
Uttar Pradesh Yes Yes Yes Yes Yes Yes No No
Uttarakhand Yes Yes Yes Yes No Yes No Yes
West Bengal Yes Yes Yes Yes No Yes No Yes
Source: World Bank compilation.
Note: ABT = ability-based tariff; CGRF = consumer grievance-redressal forum; MYT = multiyear tariff; SAC = state advisory committee.
Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Table G.4 Implementation of Mandates Data: Open Access and Renewable Energy/Energy Efficiency
OA Renewable energy/energy efficiency
OA OA Number of OA Technology- RPO Energy efficiency ToD Provision
OA OA wheeling transmission applications RPO specific compliance and DSM FIT metering for ToD
State regulations surcharge charge charge received regulations RPOs monitored regulations regulations regulations tariff
Andhra Pradesh Yes Yes Yes Yes 11 Yes Yes Yes No Yes Yes Yes
Assam Yes Yes Yes Yes 0 Yes Yes No No Yes Yes Yes
Bihar Yes Yes Yes Yes 0 Yes Yes Yes No Yes Yes Yes
Chhattisgarh Yes Yes Yes Yes 16 Yes Yes No Yes Yes Yes Yes
Delhi Yes Yes Yes Yes 0 Yes Yes No No Yes Yes Yes
Goa Yes No No No 0 Yes Yes Yes No No No No
Gujarat Yes Yes Yes Yes 44 Yes Yes Yes No Yes Yes Yes
Haryana Yes No Yes Yes 2 Yes Yes Yes Yes Yes No No
Himachal Yes Yes Yes Yes 3 Yes Yes Yes Yes Yes Yes Yes
Pradesh
Other Yes Yes No Yes 0 Yes Yes Yes Yes Yes No No
Jharkhand Yes Yes Yes Yes 1 Yes Yes Yes Yes Yes Yes Yes
Karnataka Yes Yes Yes Yes 11 Yes Yes Yes No Yes Yes Yes
Kerala Yes Yes No Yes 1 Yes Yes Yes No Yes Yes Yes
Madhya Pradesh Yes Yes Yes Yes 33 Yes Yes Yes No Yes Yes Yes
Maharashtra Yes Yes Yes Yes 64 Yes No Yes Yes Yes Yes Yes
Manipur and Yes No No No 0 Yes Yes Yes Yes Yes Yes No
Mizoram
Meghalaya Yes Yes No Yes 0 Yes No Yes Yes No Yes No
Orissa Yes Yes Yes Yes 1 Yes Yes Yes Yes Yes Yes Yes
Punjab Yes Yes Yes Yes 4 Yes No No Yes Yes No No
Rajasthan Yes Yes Yes Yes 33 Yes No Yes No Yes Yes No
Tamil Nadu Yes Yes Yes Yes 0 Yes No Yes No Yes Yes Yes
Tripura Yes No No No 0 Yes No No Yes No Yes No
Uttar Pradesh Yes Yes Yes Yes 29 Yes Yes No No Yes No Yes
Uttarakhand Yes Yes Yes Yes 0 Yes Yes Yes No Yes Yes Yes
West Bengal Yes Yes Yes Yes 4 Yes Yes Yes No Yes Yes Yes
Source: World Bank compilation.
111
Note: OA = open access; RPO = renewable purchase obligation; DSM = demand-side management; FIT = feed-in-tariff; ToD = time-of-day.
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Governance of Indian State Power Utilities • http://dx.doi.org/10.1596/978-1-4648-0303-1
Governance of Indian State Power Utilities: An Ongoing Journey presents a systematic examination of the
quality of corporate and regulatory governance in the Indian power sector a decade after the passage of the
2003 Electricity Act, which mandated the unbundling and corporatization of the vertically integrated state
electricity boards and the establishment of independent state electricity regulators. The review assesses
three important aspects of sector governance at the state level: elements of corporate governance that
would be expected to increase the internal and external accountability of utilities, the institutional design of
state-level regulation, and the extent to which regulators have implemented key components of their
mandate. In addition, the book examines the correlation between the adoption of recommended corporate
governance practices and utility performance, and between regulatory governance and utility performance.
This review finds that while unbundling the electricity boards has progressed quite well on paper, actual
separation and functional independence of the unbundled entities is less than it appears. Furthermore,
corporatization has generally been unable to insulate utilities from state interference because electricity
boards remain state-dominated. While state electricity regulatory commissions have been established in all
states, most are still some way from desired levels of transparency, autonomy, and capacity. The lack of a
clear accountability mechanism has limited the regulators’ effectiveness even as their task is made more
challenging by the fact that almost all the utilities they regulate are state owned. The review emphasizes
that establishing an arm’s-length relationship between the state and the regulator and between the state
and the utility should be a priority for the sector.
ISBN 978-1-4648-0303-1
SKU 210303