Let them use their financial resources from other group companies to set up power projects anywhere. Under no circumstances, power utility companies may be allowed to diversify into non-electricity generating activities. The reason is simple. It will put undue pressure on electricity consumers in terms of tariff rates and undue opportunity to the promoters of power companies to fulfill their corporate ambition at the expense of such companies.

Since power tariff fixation is linked with capital cost of power projects, diversion of funds from a power company in one state to another electricity generation project in another state or non-electricity business anywhere is bound to have a bearing on the power tariff set for a set of consumers in a distribution area by local regulatory authorities. Profits of utility companies carry several concessional components or government incentives, which are not allowed to other industries. The companies also enjoy competition-free distribution rights in most locations. Therefore, power companies cannot be treated on par with other companies where corporate governance is primarily focused on shareholder value creation.

Governments all over the world, including in the United States of America, exercise control over power companies, especially in the areas of pollution, distribution and tariff. There are several instances of governments even taking over private utility companies for violation of various benchmark restrictions in these three areas. It happens even in capitalist America, where erring power companies had in the past been taken over by state government. In Europe, Japan, South Korea and China, power utilities operate under much stricter regulatory environment than they do in India. Unfortunately, the Union government and state administrations have been rather soft on power utility companies despite showering several incentives on the industry to attract investment in this vital sector.

The power generation industry, comprising mainly thermal, hydro-electric, nuclear, solar, wind power and bio-gas, is highly capital intensive. Mass distribution of power is getting as expensive as mass generation. The gestation period for thermal, nuclear and hydro-electric power generation projects are long and so is the time taken to reach the financial break-even stage by each of them. A guaranteed return on investment works out as a key incentive to induce fresh investment in this sector. While the lure of incentives has lately induced cash-rich Indian business houses across industry to make a foray into the power sector, some private power utilities are misusing their special status to expand and diversify to promote stockholder interest at the cost of their consumers'.

West Bengal-based CESC Limited's diversification into retailing (Spenser's) and textile (export-oriented spinning mill), in the past, can be cited as the best example of how the income from the government-subsidized power utility was diverted to enhance the promoters' group business interest at the expense of the interest of its millions of domestic and high-tension industrial consumers in the state. CESC is now planning to invest some 15,000 crore to set up hydro-electric power projects in Himachal Pradesh. Such investment may bring big gains to CESC and its future subscribers in northern India, and, of course, the RPG group as a whole, but it is of no value to the company's domestic or industrial subscribers in West Bengal who patronised CESC's financial prosperity over the years by helplessly agreeing to its monopoly tariff rates and their periodical hikes.

While CESC's diversification into a totally unrelated grocery business may be interpreted as even illegal by many, there is no legal bind against the use of its corporate fund for expansion in another state or region in similar business. Other established players such as Tata Power and Reliance Energy too are doing it. If rules are uniform for all power utilities irrespective of their ownership pattern, tomorrow some enterprising state power corporations (earlier state electricity boards) should also be allowed to set up power projects outside their state of origin, in case they so desire, no matter if such actions affect the interest of existing consumers. But, will that be approved by any state government? Or, will such an action be in the interest of any state government?

Government incentives to industry are not revenue neutral. In the ultimate analysis, taxpayers are made to bear the cost. Therefore, governments, as taxpayers' trustees, must see that incentives are not misused or misdirected by their recipients. It is true that the Union Government had struggled long to lure global and local private investment in the power sector. The exercise started in the 1980s when the late Rajiv Gandhi was at the helm of the government. It continued through the Narasimha Rao government, when the power sector reform was accorded top priority in its economic agenda. Apart from offering some 16 per cent guaranteed return on the capital cost of a power project, the Government went up to the extent of giving international bank guarantee through escrow account for income repatriation by foreign investors. Surprisingly, few foreign firms, barring Enron (Dhabol Power) and AES Engineering, showed any deep interest in the Government offer. Both disappeared under different circumstances but not before inflicting big losses to their Indian investors, including banks and shareholders.

The latest craze among domestic business houses to invest in the lucrative power sector is, no doubt, a happy sign. The Government has been extremely liberal in allotting foreign exchange to these Indian entrepreneurs for the import of capital goods and labour and technical personnel from foreign suppliers for erection and commissioning jobs. However, the Government must ensure that the promoters do not indulge in such practices which will compromise with the basic purpose of the power sector reform — that is to make adequate electric energy available to people at affordable rates. And, this can be done by making sure that the entrepreneurs do not use dubious means to inflate the capital cost and siphon out funds from one project to another or to diversify into other businesses. (IPA Service)