Unbundling of Nepal Electricity Authority

Nepal Electricity Authority

The vertically integrated state-owned Nepal Electricity Authority (NEA) has been responsible for generation, transmission and distribution of electricity in the country for more than two decades. NEA was established in 1985 after three independent government bodies, namely: the Electricity Department, Electricity Board and Nepal Electricity Corporation merged. This intervention was necessary at that time because the generation capacity of the country was small and less human resources was employed in these organisations. In add-ition to this, it was very difficult to find a single responsible body for the development of hydropower in Nepal and the donor communities often faced inconvenience and confusion while working with these different bodies.

There was an implicit belief behind the merger that a utility service body like NEA would enjoy economies of scale, and that it was in the larger public interest that production and gene-ration of electricity remained a government monopoly and the profit did not go to individual pockets. 

Sadly, as is often the case, services provided by government monopolies lead to losses due to inefficient management, overstaffing, institutional corruption, and politicisation with presence of strong unions and misuse of resources. The financial haemorrhage of NEA in the last three decades of its establishment has compelled the government to look for alternative ways of reducing these losses. One of the ways of doing that is unbundling infrastructure services vertically, so that services are provided efficiently and in a competitive manner. 

Poor Policies

After promulgation of Electricity Act 1992, hydropower sector was opened up for national and intern-ational private investments in electricity generation. However, the government retained transmission and distribution services with the state-owned utility. Though there are few explanations about the construction of transmission and distribution lines by private parties in the Act, it is unable to transform them into actions in the absence of effective regulations and guidelines. 

Despite high transmission and distribution losses, rising labour costs and low tariffs hitting the financial viability of NEA, government has persisted with the semi-autonomous body. NEA has an operating loss of more than Rs eight billion annually, while the cumulative loss has reached Rs 27 billion. But all of that was written off by the government to show a healthy financial status of the utility and attract foreign direct investment.

The current structure of NEA is not just unsustainable; it has also created entry barriers for independent power producers (IPPs) with a discriminatory network access. There are more than 13 hydropower projects such as Maya Khola Hydroelectric Project (14.9 MW), Solu Hydroelectric Project (23.5 MW), Tallo Solu Hydroelectric Project (82 MW), and Mewa Khola Hydroelectric Project (50 MW), which have been waiting for construction of transmission lines for several years. Such poor policy has discouraged new entries in the field, which is regarded as a major hurdle in meeting growing demand of energy. 

Lessons to Learn

Realising this, the government came up with a functional unbundling of NEA in three different segments — generation, transmission and distribution. However, it has existed only on paper, and there is a need to have a separate accounting system in all segments, along with functional unbundling to encourage competition for quality services at minimum costs. 

The example of Andhra Pradesh State Electricity Board (APSEB) in southern India, which has unbundled the units into generation, transmission and distribution can suitably be cited here. The Andhra government reduced transmission and distribution losses from about 38 per cent in 1999 to 26 per cent in 2003, and less than 20 per cent in 2008, mainly by controlling power theft. This volume of loss in transmission and distribution sector is taken as normal because of use of less efficient equipments in the region. Similarly, according to report produced by the World Bank in 2009, various countries of European Union have also successfully reduced losses to around 10 per cent after privatising distribution companies. 

Nepal’s non-technical loss of electricity is about 14 per cent, caused mostly due to theft. If it is reduced to around five per cent, millions of rupees can be saved and used for construction of transmission lines or generation of hydro-electricity, according to the need of time. Furthermore, many hydropower projects in Lamjung, Nuwakot and Dolakha are in limbo due to lack of transmission lines. Had the unbundling of NEA been done on time and with serious attention, these bottlenecks would not have existed and losses could 

be reduced.

Challenges and Opportunities

Media has reported that senior officials at NEA are against such reforms because it compromises their position in the changing scenario. Despite strong opposition from its own staff, the government plans to form a new transmission company to resolve problems related to transmission and distribution for efficient evacuation of power. But, the process is hopelessly slow.

If unbundling of NEA is done on time, it will be easier for the government to manage resources and resolve acute problems that exist in hydropower sector of Nepal. The domestic and inter-national private sectors’ trust in these bodies will grow and Nepal’s hydropower development will take a meaningful stride forward. 

(This article was published in The Himalayan Times on 28th July, 2013 and can be seen in the following link

http://www.thehimalayantimes.com/perspectives/fullnews.php?headline=Unbundling+of+Nepal+Electricity+Authority&newsid=MjM0MA==)