2.2 The policy framework 1948 to 1975

The thrust towards the public sector, in the first two decades after independence, resulted in the establishment of State Electricity Boards (SEBs) under the Electricity (Supply) Act, 1948. These entities gradually subsumed the operations of the private licensees, operating at that time under the Indian Electricity Act, 1910, as these licenses expired. SEBs were vertically integrated utilities with a commitment to enlarge the customer base for electric power, particularly in the rural areas. SEBs functioned well during this period. They introduced electric power, which till then was an urban privilege, to an expanded consumer group including farmers, small industry and small consumers in remote areas. However, by the late 1970's investment levels were perceived to be lower than those required to meet the goal of power on demand. SEB's were not able to generate the surpluses required to feed the growing investment needs of the sector focussed on supply side solutions for meeting demand. Direct investment in generation and transmission, by the central government was the solution devised for this problem.

2.3 The policy framework 1975 to 1991

The latter half of the 1970s and the early part of the 1980's saw the creation of generation companies, like NTPC and NHPC, owned by the central government. In 1986 the Power Finance Corporation was created to supplement the budgetary resources of the central government. In 1989 the transmission assets of the NTPC were separated into a new central government owned company, known as POWERGRID today, which is entrusted with the task of developing the regional and national grid. However the need for fiscal discipline and the increasing pressure on budgetary resources of the central and state governments in the 1990's induced a review of the financial viability of the public investment led approach followed till then. While the central government had managed to retain remunerative tariffs for its companies the states were not able to mirror this while setting retail tariffs. Electric power supply was perceived almost as a public good. Several states supplied free power to farmers. Most states did not meter small consumers or control the ever mounting transmission and distribution losses. The growing fiscal burden of subsidies and the constrained budgetary resources set the scene for the dilution of the public investment led growth model. This was as true for the power sector as it was for most infrastructure.

2.4.1 The government identified private investment and management as being necessary partners for sustainable and efficient growth of the power sector. Facilitating policy changes aimed at rapid investment in generation followed which evoked a flood of interest from the domestic and foreign private sector. However the uncertain financial viability of the distribution sector, which was primarily with the SEBs, proved a major barrier in converting the interest of the private sector into projects on the ground. The lack of private investment, despite the existence of facilitating policies, focussed attention on the need for regulatory reform.