Wednesday, March 18, 2009

Interview on Unbundling of NEA

1. How do you look at the unbundling idea the government is introducing in the power sector?

In contrast with the extant brouhaha against the very concept of unbundling I am in favor of it as far as the fundamentals are concerned. Because being a student of economics I do believe that introduction of the element of competition in the electricity sector will definitely help the sector in general and the consumers as well as other stakeholders in particular as the very purpose of the exercise is to make the electricity market competitive. Unbundling, as a process, is not undertaken for its own sake rather it is a means to achieve competition in the electricity market. Till a while ago it was drilled into people’s minds that the vertically integrated utilities are natural monopolies and, notwithstanding inherent inefficiencies thereof, we have been forced to tolerate it and even pay for its inefficiencies through our noses.

Technological developments, like wireless in local loop (WLL) and cellular phone, have dispelled the notion that telecom sector too is a natural monopoly. Although no such technologic breakthrough has occurred in the electricity sector and nor is it likely that it will do so in near future, the economic tool of unbundling will bypass the technologic constraint and afford us the benefits of competitive electric market.

The unbundling exercise will begin with the setting up of separate entities for generation, transmission and distribution functions. The transmission function along with the ownership of the high voltage network will be entrusted to a new entity planned to be christened as “National Electricity Transmission Company” by the draft Ordinance, which will initially have to play the role of single buyer and wholesaler. There will be room for multiple generation companies (in addition to current IPPs) and a number of distribution entities. Eventually the transmission company will merely serve as a wholesale market, surviving and/or thriving on “wheeling charges” paid by generators and/or retailers purchasing energy in bulk. Then the owner of distribution network (low tension system) will also start to play a role of facilitating retail market; it too sustaining on wheeling charges paid by retailers.

Finally, when the model for retail competition is fully put in place the consumers will be afforded choice as to which retailer to buy electricity from without having to worry that the connection from her/his home is fixed. There will be no need to change the connection as s/he will have connection to low tension network owned by a different entity that does not buy or sell but only facilitate flow of electricity from any retailer to any consumer. Consumers, for example, in Biratnagar may choose to buy from an efficient retailer in Pokhara at cost effective rate and my neighbor could very well be buying electricity from the retailer in Birgung. Moreover, the consumers will also have the freedom to change the supplier as and when deemed appropriate. Eventually this will pave path even for spot market.

Notwithstanding my enthusiasm at the prospect of getting to choose and change supplier of electricity as a consumer in not too distant future I am apprehensive as to how the whole thing will be implemented. I am not very proud to have to confess that many good plans on paper have been bungled when put to practice. Botched unbundling will result in 3 or more public enterprises horribly sick in the place of one sick public enterprise now (loss in the order of Rs 2 billion/annum).

2. Why is the idea moving, especially by the means of ordinances, at this particular time?

That is a mystery to me too. I also have been wondering why hurry at such a scorching pace particularly at this time of instability? This deprives of wider discussion and also opportunity to receive input from a broad base. Besides, spinning off or (splitting) NEA is a matter of long term implication/impact but an Ordinance is an instrument valid for 6 months only. There is no doubt in my mind that the unbundling should be undertaken such that electricity market in Nepal becomes competitive and unwarranted and unnecessary inefficiencies could be eliminated. But the relevant law should only be promulgated after it is discussed and fully deliberated upon by a popularly elected parliament accountable to the citizenry of Nepal who are both owners of NEA and also consumers.

3. Why was it not introduced or at least moved ahead in a known manner when you (or the team shall we say) were still with the NEA board?

You have caught me there (ha ha ha …)! However, I happen to have valid excuses. One, although the new “Hydropower Development Policy 2001,” promulgated in October 2001, did envisage unbundling of NEA, the then Parliament survived only about 6 months after that. There was no opportunity for the concerned to contemplate and complete the draft law and submit for the deliberation by the Parliament. Two, by the time I was nominated to the board the Parliament had already been dissolved. Lastly, drafting law is not in the jurisdiction of board of directors of NEA.

But I am happy to confide in you that we did initiate necessary work for the internal unbundling of NEA which to an extent has paved path for future unbundling. These steps, designed to cut down on inefficiencies, curtail leakage (particularly non-technical), enhance effectiveness, did start to show positive results while I still was working there. First, in the capacity of the Convener of a committee, I was involved in finalizing necessary regulation for internal unbundling of NEA. This involved readying regulations under which respective General Managers of (a) Generation (b) Transmission and (c) Distribution and Consumer Service Departments were to be granted semi-autonomous status to enhance efficiency resulting in generation of “differential surplus,” a part of which to be shared with the respective teams. Second, we accomplished plan to spin off eighteen urban and semi-urban distribution areas as the semi-autonomous “Distribution Centers” with provision for financial incentive for better performance resulting in “differential surplus,” a part of which to be shared with the respective teams. I recall that people in quite a few distribution centers were already computing the differential surplus that they were entitled to as incentive subsequent to improvements that could be quantified based on composite performance indicators (CPI) by the time I had submitted my resignation the first time (which was not accepted). Three, we also succeeded in designing and implementing a scheme for community participation in rural electricity distribution network which was launched to involve local communities (as cooperatives, users’ groups, non-governmental organizations or widely held companies owned by the consumers) in the construction of distribution networks and management of the same under which the rural entities buy energy in bulk from NEA and retail it amongst the members. This policy was very well complemented by Dr Prakash Chandra Lohani, who made provision for matching 80% of the cost of erecting distribution network if the cooperatives mobilized 20%, in his budget speech of 2060. This has revolutionized the rural electrification work by galvanizing rural communities. NEA even has handed over distribution networks to many a communities in the rural areas and the communities are buying electricity in bulk from it for local distribution. This is a beginning of unbundling of rural distribution work.

4. In the early 80s it was the bundling idea donors including the ADB had conditioned and now it is the same international aid agencies that are pressing for unbundling. Is that not a flip-flop or changing of the horse in the middle of the stream, especially in an underdeveloped and troubled country like Nepal?

Yes, poorer economies like ours have been subjected to the covenants imposed by these multilaterals and many of such conditionalties tend to look capricious. If one looks at this particular concept dispassionately one will be forced to conclude that NEA has too small a system (just about 465 MW of its own and about 149 MW belonging to IPPs – already unbundled) to warrant splitting. The action could very well end up costing more to the poor consumers as the unbundling only increases the number of institutions ending up as an opportunity for powers-to-be to hire more CEOs and leading to unnecessarily high fixed as well as semi-fixed expenses. Besides, post unbundled successors of NEA could still continue to be subjected to interferences from HMGN (bureaucrats, politicians, and the like) – a business as usual scenario – and at that time people could be forced to fondly remember the merits of vertically integrated NEA. In my considered opinion, NEA is not performing badly for lack of unbundling. Rather it is suffering from high dose of interference, leadership problem, lack of corporate governance and other factors which could be redressed without resorting to splitting it in the name of unbundling.

5. Now that they are talking about unbundling the government agencies, what is the guarantee that it would work? If it does not who should take the responsibility?

In Nepal many a sound plans on the drawing board have floundered when put to practice. I too am apprehensive that the economic model that I firmly believe in will be called total failure and people again clamor for reintegration (bundling). This will be very messy. Because the provisions of the Ordinance has single minded focus on splitting the NEA while it is deafeningly silent as to how will competition at both wholesale and retail levels will be instituted. The onus of botched unbundling will have to be shared by those responsible for drafting the necessary law hurriedly, implementing the spin off and regulating it. Factors important are sound framework (founded on well deliberated law – Act, Rules, Regulation and policies), transparent process, accountable agencies for its regulation and so forth. More importantly, current instability is not conducive to take up such work.

6. Do we have the right and adequate infrastructure for the unbundling of, say, distribution and especially if the private sector is allowed in?

Forget the infrastructure which will have to be thought through and created, even its layout is not visible to me (at least are not visible in the draft Ordinances). With due respect to my colleagues in the private sector, they will exploit any loophole available and the whole exercise could boomerang on the economy and the consumers. Aviation sector is a good example. Private aviators were required to provide services in the non-lucrative routes too but this rule has been followed more in breach. On the other hand the very concept of creating competitive market for electricity depends on participation by multiple entities including the private sector. Stronger and stringent regulatory mechanism needs to be placed before allowing private sector to play significant role in the electricity market that is an integral part of human life and important from the perspective of forward linkages vital for the economy.

7. The presumed effectiveness of the unbundling idea seems to hinge almost absolutely on the regulatory board the government is introducing through a separate act. Given the fiasco of the tariff fixation commission, why should one be positive about this regulatory board?

Yes, you are absolutely right. If you look closely there is more regulation in “free economies” than in the ones like ours. One has to complete so many regulatory processes in the developed world to the extent that I have had American friends wondering aloud that it is almost too easy to do things in Nepal like “acquiring land” for project work.

The regulatory work will only be effective and efficacious if the agency reposed with regulatory work is made accountable and answerable. Under current draft the proposed regulatory commission is required to furnish annual report to HMGN and that’s about it. There is no provision for deliberation of such a report and holding the commission accountable.

Besides, there should be provision for recruiting the chair and members of the commission through public hearing so that people will have opportunity to understand their view and extract commitments from them. Unfortunately, current draft Ordinance is oblivious towards this too.

Let us take the case of current Tariff Fixation Commission. Even when I was a board member of NEA we did request the commission for introduction of seasonal tariff in view of the fact that NEA was spilling more than 700 GWh of electricity at that time (even now the spill is in the order of 500 GWh). But one or other excuse was trotted out and the concept has yet to gain currency. Just think of it, even if only Rs 2/kWh is charged for the spill energy NEA would have garnered more than Rs 1 billion/year, reducing NEA’s red ink to that extent, stemming the outflow of hard earned dollars in the import of (e.g.) fossil fuel (LPG), curtailing pollution to that extent, etc. We have already lost spill energy of three wet seasons. But there is no way to hold anyone accountable under current dispensation (nor in the proposed new incarnation). Instead, people resort to finger pointing like by saying NEA should reduce its leakages. There is no disagreement that it is imperative for NEA to get its act together sooner for the purpose. However, it is criminal to spill seasonal energy of that magnitude and impel NEA to incur loss and force the poor country to import more fossil fuel. Coming back to your point, yes regulation work is the fulcrum on which will hinge the success of the unbundling work, otherwise the whole thing will fall flat on its face.

8. At the policy level, they claim that the new ordinances will attract private sector investors both in generation and distribution segments whereas at the bureaucratic level they say that at the distribution level private sector would be allowed to come in only if they agree to prepare the required infrastructure. The intensifying Maoist-establishment conflict is already keeping investors from coming in even in generation sector (the idle sitting World Bank’s Power Development Fund is an effective indicator toward that end). So how would the new plan rope in the private sector?

First of all, private sector does not imply business houses only. Community based entities like, cooperatives, users’ groups, non-governmental organizations, etc. are also private initiatives – with or without profit motive. If you drop by the office of Community Rural Electrification Department (CRED) of NEA you will be amazed by the groundswell of support for NEA’s efforts to involve community based entities in rural electrification. This manifests the attraction of private sector in the distribution business. This modus operandi will eliminate the tragedy of villages having electric poles erected with or without wires lacking electricity for years (even a decade) in many villages.

At the implementation level, the conflict, which, although cannot be ignored, is not having significant adverse impact. Many communities are coming forward to take the responsibility of erecting infrastructure under 80:20 program to the extent that CRED of NEA is overworked. Lack of movement on the part of PDF can be attributed to many other reasons but one main impediment is its policy requiring participating credit institution to be responsible for the money lent to the project by PDF too.

9. The immediate problem in the power sector is load shedding and Ministry of Water Resources officials themselves admit that the unbundling is not the answer to load shedding, so what is its relevance?

I don’t agree with the officials of the Ministry. Of the total leakage of about 25%, more than one-half is due to non-technical reasons like pilferage. Subsequent to unbundling the entity will be forced to be more efficient - the non-technical leakage will be the low hanging fruit in its endeavor to reduce the load shedding. I am sure you will agree with me that one mega watt of leakage plugged is equivalent to addition of one mega watt.

10. Will the unbundling concept tackle the government agencies’ non performances including technical loss, theft, irregularity (like the one we saw in Kali Gandaki A) and the procurement pelf?

Yes, to an extent. In order to survive in the competitive world the unbundled entities will have to be more efficient, effective and economic. They will need to tackle Kali Gandaki A type problem too as there will not be room for time overrun and cost overrun which were the bane of Kali Gandaki.

12. The government has been unable to cash in on the huge local private sector capital and it has squandered the income it receives through royalty from the different power plants across the country. Do you think the power sector reform will be able to address all these effectively?

Actually private sector capital is salivating to enter the sector (looking at the rush for licenses) but for lack of licenses for sites with necessary infrastructure like access road and transmission network. In one decade Rs 5 billion has been invested in the sector from local sources when people were just testing the water and political instability in this period was also not encouraging.

The issue of royalty is a different ball game. It has even generated inequities. Compare two regions: one where hydropower development is taking place and other where it is not. In the former they not only have electricity, but they also get other infrastructure like road and also receive fund to undertake further development work (even purchase vehicles for the bosses instead!) from the proceeds of royalty. But in the latter region they neither have access to electricity nor get any infrastructure built for the hydropower project. And to add insult to injury they also don’t get any money from the royalty. This will have to be addressed outside unbundling.

13. Will the new design enable us to be in a better position to deal with, say, India in power related issues?

On the contrary, it may weaken the position as the splinter NEA negotiating with India (for example with Power Trading Corporation) will be a much weakened institution (very little financial muscle) compared to what we have now. But export of energy to India is a different Pandora’s box and is even entangled with security perception of our friends in the south.

This is the full text of the interview part of which was published by Nepali Times in its issue # 285 in 10-16 February 2006.

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