UNCLAS SECTION 01 OF 04 MUMBAI 000195

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E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV ENRG EPET PGOV IN
SUBJECT: BHARAT BALLOT 09: WILL POWER SECTOR POLITICS IN MAHARASHTRA
HURT CONGRESS-NCP CHANCES IN NATIONAL AND STATE ELECTIONS

REF: 05 MUMBAI 1155

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Summary: (SBU) Maharashtra's struggle to bridge the energy
supply gap symbolizes India's energy crisis, where politics and
poor planning have left many states chronically short of power.
Maharashtra is India's leading industrialized state. However,
all districts in Maharashtra, excluding Mumbai, suffer from four
to twelve hours of daily, scheduled power outages. Innovative
models where the residents of a district pay more for the
expediency of uninterrupted power have failed. Maharashtra's
power woes were exacerbated by the collapse of the Dabhol power
project and the state government's populist election promise to
provide free power to farmers, which was retracted after one
year following the unprecedented surge in demand. In office
since 1999, the Congress-Nationalist Congress Party coalition
government is largely responsible for the widespread failure to
build new power plants in the state, a big factor in
Maharashtra's deteriorating business and investment environment.
However, it is unclear whether voters in the national and
upcoming state elections will make this an issue, given most
voters' low expectations for governance. As past experience
indicates, election victories are driven not by good or bad
policies (especially since all political parties are guilty of
both), but by a mix of caste factors, and the marketability and
appeal of future populist deliverables. End Summary.



Energy Shortage in Maharashtra Forces Rationing of Power Through
Scheduled Power Outages

--------------




2. (U) According to the Central Electricity Authority (CEA),
Maharashtra, India's largest industrialized state with the
second highest population, leads almost all of the states in

India in terms of energy shortages. In 2008-09, the state faced
a 21 percent energy shortage and a peak demand deficit of 24
percent or 4,283 MW, as compared to the all-India power deficit
of 11 percent and peak demand deficit of 12 percent. The
anticipated energy shortage in Maharashtra is expected to
increase to 31 percent or 42.3 billion kilowatt hours in
2009-10. This shortage is caused both by increasing demand by
residents, businesses, and industrial units, but also because
the state's Congress-Nationalist Congress Party (NCP) coalition
government has added so few units of power generating capacity
since it came to office in 1999.




3. (U) In India, the federal and state governments both have
jurisdiction over building and operating power generation
plants. This dual responsibility for power generation has made
it very difficult to co-ordinate, launch, and implement reforms
needed to attract private, especially foreign, investment to
build power plants in Maharashtra and most other Indian states.
The federal government also owns and operates several power
plants which allocate power to the different states in India.
However, the task of purchasing and supplying power to the
residents of India is entrusted to the state governments who
manage these operations either through state government-owned
companies or through licensed private domestic or foreign
companies. Most electricity generation distribution companies
in India are state government-owned with a few exceptions like
the Tata and Reliance groups in Mumbai and the Torrent
group-owned Ahmedabad Electricity Company in Gujarat. Each
state can also frame policies to encourage foreign investors to
participate in power generation and distribution.




4. (U) The crippling power shortage in Maharashtra has forced
the state's electricity distribution company to ration energy
supply to residents. All cities, towns and villages in
Maharashtra, with the exception of Mumbai, face four to twelve
hours of scheduled rolling power outages each day. The
commercial capital of Mumbai is protected from power shortages
through a unique islanding system which allows private
electricity suppliers in the city to isolate themselves from the

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western grid in the event of any system disturbance, thereby
preventing the collapse of the power system in Mumbai. (Note:
Admittedly, consumers in Mumbai pay higher power tariffs to
enjoy the assurance of continuous, uninterrupted power. While
consumers, depending on the type and amount of power consumed,
pay less than 1 cent-15 cents per kilowatt-hour (kWh) of power
outside Mumbai, consumers in Mumbai pay between 3 cents to 22
cents per kWh. End Note).



Dabhol and Free Power Election Sop Behind Maharashtra's Energy
Crisis

--------------




5. (SBU) Maharashtra's energy woes were greatly exacerbated by
the ill-fated Dabhol power project. In 1993, the state
government-owned Maharashtra State Electricity Board (MSEB)
signed a power purchase agreement with the Dabhol Power Company,
jointly owned by three U.S. companies, Enron Corporation,
Bechtel Corporation and General Electric, to develop a 2,184 MW
natural-gas fired thermal power plant in the state. (Note: The
MSEB was responsible for the generation, transmission and
distribution of power to all consumers in Maharashtra, excepting
Mumbai. It has subsequently been restructured into three
separate companies which each separately handle the generation,
transmission and the power distribution business. End Note.)
The collapse of the Dabhol project due to a bitter and
"politically loaded" payment contract dispute in 2001 caused a
major contraction in power generation in Maharashtra. (Note:
The Dabhol power project has since been taken over by
government-owned entities but is still not generating at full
capacity due to fuel shortages of naphtha and natural gas, and
technical problems with its turbines. End Note). Power sector
industry experts believe that the Maharashtra state government
expected that the power from the Dabhol project would be
sufficient to meet the power requirements of the state and,
therefore, made no attempt to develop or encourage other power
projects to ramp up generation capacity.




6. (SBU) Three years later, in 2004, another Congress-NCP-led
government in Maharashtra announced free power would be provided
to all farmers in the state ahead of the Maharashtra assembly
elections. The Congress-NCP once again won the state election,
but the election sop caused a massive surge in the demand for
power. (Note: Power sector experts claim that farmers used to
keep their pumps running for the whole day and night since they
got power at zero cost. End Note). According to the
Maharashtra State Electricity Distribution Company, the peak
demand for power increased by 12 percent in 2004-05, as compared
to an earlier average increase of around three percent. This
resulted in a peak demand deficit of around 3,500 MW in 2004-05
which was beyond the reach of the state electricity distribution
company who was left with no choice but to ration power supply
to residents. Faced with the huge surge in power demand, the
Congress-NCP government had to retract its promise of free power
a year later, in 2005, and to instead provide farmers with power
at concessional rates (reftel). However, the peak demand
deficit has remained above 3,000-4,000 MW, and rationing of
power continues in the state even though its entitlement to
power generated by federal government-owned power plants is
second only to Uttar Pradesh.




7. (SBU) Maharashtra government energy officials and
representatives of the ruling Congress party in the state were
unable to explain to Congenoff why the state has not increased
its own power generation capacity to bridge the excess demand
gap. A spokesman for the Congress Party blamed the central
government for the shortfall, and noted that the Congress
pledged to prioritize power in its state campaign for the
ongoing national elections. When Congenoff pointed out that the
Congress also controlled the central government, and that power
production was the responsibility of the state, the Congress

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spokesman admitted that power shortages in the state would
likely continue for "some more years." Only two power plants
with an additional total generating capacity of 500 MW are
expected to be commissioned to in 2009-10, far short of the
state's anticipated annual peak demand deficit of 3,881 MW
predicted by the CEA. In contrast, four power plants with total
generating capacity of 2,050 MW are expected to be commissioned
in the neighboring state of Gujarat in 2009-10. As a result,
the CEA has estimated Gujarat's energy shortage at 4 percent, as
compared to Maharashtra's energy deficit of 31 percent of
expected demand in 2009-10.



Short-lived Success of Zero Power Outage Model

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8. (U) Pune was the first city in Maharashtra to develop an
innovative model to address the power crisis. Under the
initiative of the Confederation of Indian Industries (CII), Pune
city's residents agreed to pay more to enjoy uninterrupted power
supply. The unused power generated by "captive" power plants,
owned by industries to meet their own in-house power
requirements, was used to bridge the demand gap and the
remaining shortfall was met by purchasing power on the energy
exchange. As a result, Pune was spared from rolling power
outages from June 2006 to June 2008.




9. (SBU) According to Pradeep Bhargava, the head of CII's
Maharashtra council and the architect of the zero power outage
model, consumers had to pay around one cent for each additional
unit of power consumed in excess of 300 MW per month -- the
reliability charge for the expediency of continuous power
supply. Only a fraction of Pune's 300,000-400,000 paying
customers (installed meters) had to pay for the benefit of
uninterrupted power supply, he said, because few customers
consumer more than 300 MW per month. The Pune model was also
adopted by several districts outside Mumbai including Thane,
Mulund, Bhandup, and Navi Mumbai. However, this model soon
broke down and planned power outages resumed in these areas.
According to Bhargava, the state electricity boards kept
increasing the amount of power that had to be privately
purchased to prevent scheduled power outages, which the city's
consumers could not meet. The fundamental gap between the
demand and supply of power and, consequently, scheduled power
outages, will continue for another four to five years until
capacity catches up with demand, he admitted.




10. Comment: (SBU) Many Indian states suffer from power
shortages, but Maharashtra - once an industrial leader - has
done more to squander its potential than most other states. The
main reason for this is the widespread belief that the
Congress-NCP coalition has given the state almost a decade of
poor governance, losing traction to other states - such as
Gujarat - that are able to attract businesses and industries
through better governance. This inaction has forced residents
to go without power for four to twelve hours each day in one of
the richest states in India, and driven up energy costs for
industry which is forced to make alternative arrangements for
regular power supply. Subsequent state governments after the
Dabhol debacle have made no attempt to regain foreign investor
confidence and encourage investment in power generation projects
in the state. Indeed, power sector experts often attribute the
lack of U.S. foreign investment in power project development in
India to the failure of Dabhol and erratic state governance.
The failure of Dabhol -- along with shortsighted planning, poor
governance, and transparency issues -- underscores the
reluctance of foreign investors to enter the power sector; this
continuing impasse is a major factor in Maharashtra's -- and
India's -- lagging power production that falls far short of
burgeoning demand. The free power election sop offered by the
Congress-NCP three years after Dabhol collapsed was seen by many
as precipitating the power crisis and placing the state in a

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perpetual state of excess demand for power. While voting
against the Congress-NCP party in the national elections appears
to be an obvious choice for the disgruntled Maharashtra voters
suffering from regular power blackouts, political observers note
that voting in Maharashtra is often driven more by caste factors
and campaign promises rather than bad (or good) state or federal
government decisions and policymaking. End Comment.
KAUFFMAN