Pre-reform stage:

Confronted with unprecedented economic crisis in 1991, Government of India embarked upon a massive clean up exercise encompassing all policies having financial involvement of Governments- both at the level of Union and States.

Since after Electricity (supply) Act 1948, the power sector was mainly under the government control which owned 95 % of distribution and around 98% of generation through states' and central government utilities, the power sector was chiefly funded by support from government budgets in the form of long term, concessional interest loans. These utilities were made to carry forward the political agenda of the ruling parties of the day and the cross- subsidization i.e. charging industrial and commercial consumers above the cost of supply and to charge agricultural and domestic consumers below cost of supply, was an integral part of the functioning of the utilities.

What ailed the Power sector, rather interestingly, is summarized in a communication sent from the Union Power Minister to stake holders:

" As you are all aware, India has always been short of power and our entire populace, including the industrial sector has faced power cuts adversely affecting our welfare and national productivity. …..The supply side constraints in the power sector have arrested our economic growth and crippled our industry to an extent where recovery in future would be a cumbersome process.

….Serious doubts have been raised whether the power sector will be able to support a national plan of achieving an eight to nine percent rate of growth for the economy. We have reached a stage where the State Electricity Boards (SEBs) are depleted of resources and are in no position to pay for the power they buy from the generating stations. The total outstanding dues of the SEBs have crossed Rs. 27,000 crore. This, in turn, has affected the liquidity of the Central Public Sector Undertakings (CPSUs) for investment purposes for future projects.

The problems of the power sector are many. While the liquidity crunch is one major problem, we also have other issues to tackle like :
  Unacceptably high levels of transmission and distribution losses
  An inadequate transmission and distribution system
  Lack of adequate metering
  Drop in the tempo of rural electrification
  Fast rate of obsolescence of existing generating capacity
  Declining share of hydro-thermal mix etc.

The subject of Power is in the Concurrent list and the responsibility for distribution i.e. for supplying electricity to consumers lies exclusively with the State Governments. Due to weaknesses in distribution, the sector is facing financial bankruptcy. This is due to

   Theft estimated to cost over Rs. 20,000 crores annually
  Avoidable technical losses of about 10% of the total power generated due to poor   distribution system.
  Tariffs which are even lower than the cost of generation for many categories of
  consumers."

Another presentation of the Union Ministry of Power concedes that endemic problems of the power sector in India had been because of :

§ Un-metered supply - only 50% supply metered
§ No comprehensive energy audit/accounting
§ Theft and pilferage - Theft roughly estimated over Rs. 20,000 crores (US$ 4000 mill.)
§ Cross Subsidy in favour of agriculture and domestic sectors thereby adversely affecting industrial competitiveness

How rotten the State Electricity Boards had become could be summarized in the findings of 'High Power Committee' constituted by Hon'ble Supreme Court to investigate the largest Board- the UPSEB. The findings are telling:

"Upto 1988, the selection and posting of Chairman, UPSEB appears to have been based on criteria of merit. Unfortunately, a trend started from 1988-89 of blatant political and High level interference in selection and posting of Chairman, UPSEB. Subsequently, with every political change of U.P. Chief Minister, the Chairman of UPSEB was changed ; the post of chairman since became highly politicised. Thre has been change of Chairman of UPSEB with change of political leadership is evident from the fact the tenure of some of the Chairman during the last 10 years which has been as short as less than 4 months. A strange practice was adopted by Govt. of U.P. that some of the appointments were made not for any particular tenure. Taking full advantage of somewhat ambiguous provision in section 8 of Electricity Supply Act, 1948, which provides that "the Chairman and other Members of the Board shall hold office for such periods, as may be prescribed", the Govt. intentionally issued orders with the clause "appointed till further orders" in the case of many Chairman. (The government, presently in place is following this not only in policies of chairman but that of directors too.)"

Political interference from this point onward made in-roads in the working of the Board in a big way. It was allowed to go unchecked. Corruption in transfers, postings, purchases, favour to influential consumers became the order of the day. Deterioration in moral fiber creeped-in in amongst officers and staff also, and the work culture changed fast. The Chairman adjusted and cooperated with the political interference not only in administrative but in technical matters also.

The report assessed the adverse effect of political interference as follows :

· Autonomy of the board as provided in electricity (Supply) Act 1948 was on paper only but not in practice. Power (Minister) and Power (Secretary) Govt. of U.P. exercised real power in day to day working, treating Chairman as a tool.

· Chairman and Chief Engineers adopted policy of appeasement by surrendering power of discretion in transfers, postings, promotions and other personnel matters. Transfers became an industry. Nexus of politicians, Ministers, bureaucrats, influential consumers, industrialists and suppliers, exploited the Board. Dishonest officers received protection and managed postings on lucrative posts. Honest and conscientious officers could not fight vested interests and received harassment by their transfers to insignificant posts or by getting punishments.

· Large & Heavy consumers managed favours at all levels under political pressure or on their own, even if it caused damage to the interests of the Board, technically or financially. Influential consumers managed violation of long standing Norms & Regulations of the Board in getting supply and other favours.

· Persons of doubtful integrity, involved in cases of theft of electricity or other serious irregularities got promotions even to senior posts. Senior officers avoided decision making and kept status quo to pass on their time. Since the persons selected and appointed as Chairman, were not based on criteria of merit, they lacked vision, foresight, commitment, and therefore, were not bold and enterprising.

· Chairman devoted their attention not to improve working of the Board but more on their survival. Since the Chairmen were more concerned with their survival, all the time, they avoided any controversy or confrontation by not taking measures of modernisation, technological updating, computerisation, mechanisation or automation, or initiating new Projects or plans, or for that matter solving labour problems to motivate the employees and inculcate work culture.

· Para 6.0 (2-3) of Vol. III of the report of the aforesaid committee records the root cause of the illness and are reproduced as under :-

"The survey does establish that high level political interference and also bureaucracy are formidable obstacles to the efficient functioning of the UPSEB. As told to us, the most disturbing area of concern, expressed unequivocally, borders on the quality of management at the top level, which, in turn, creates administrative slacks (and hence, lack of accountability) within the various divisions of the organisation. Several Board Members, past and present, have said this - some bluntly commenting - as much as 70% of this is a managerial problem."

Owing to all these factors, the combined losses of State Electricity Boards reached to unmanageable proportions crossing 1% of the GDP. Even if political parties wished maintaining the status quo and dithered hard decisions, reforms became indispensable.