THIS MEMORANDUM OF UNDERSTANDING is made between Ministry of Power, Government of India GOI), and Government of Madhya Pradesh (GOMP)to affirm the joint commitment of the two parties to reform of the power sector in Madhya pradesh State, and to set out the reform measures which Madhya Pradesh State will implement, and the support that the Government of India will provide.

I. PREAMBLE:

Madhya Pradesh has initiated the process of implementing Power Sector Reform and GOMP is committed to a time-bound reform and restructuring of the power sector in the State. The objectives of its reform programme are to promote the development of an efficient, commercially viable and competitive power supply Industry, which will provide reliable and quality power at competitive process to all consumers in the State and which will support industrial development in the State. The Government of Madhya Pradesh in enacting its own Reform Act.

GOI is committed to support the process of reform of the power sector in the State of Madhya Pradesh. The Government of India believes that reforms in the power sector are now imperative. Unless reforms are implemented quickly, it may be difficult to even maintain the present quality of power supply leave alone improve it.

GOI and GOMP are of the view that the Power Sector Reform should be carried out and implemented on a sustainable basis taking into account the realities of the State and the interest of different shareholders viz the utilities, consumers, general public, employees and the State.

This Memorandum of Understanding between GOI and the GOMP sets out the steps that the GOMP will undertake in the process of reform and restructuring and the support which the GOI would give to the GOMP.

1. REORGANISATION OF MADHYA PREADESH ELECTRICITY BOARD:

To have a sustainable power sector development and to provide quality power on demand to all consumers, Govt. of Madhya Pradesh would undertake

• Segregation of the generation, transmission and distribution functions.
• Corporatisation of the utilities i.e. formation of limited companies under the Companies Act, 1956;
• Rationalisation of tariffs;
• Limiting role of State government to issue of policy directives.
• Review of the working of the reorganized utilities/companies and taking measures to restructure them to achieve

a) Commercial viability

b) Reduction and elimination of power theft within a specified time frame.

If achievement of (a) & (b) requires sufficient disinvestments for professional sing management and fully distancing it from Government, the same would be undertaken.

2. RURAL ELECTRIFICATION PROGRAMME:

GOMP would work to achieve 100% electrification of villages and hamlets and extensive coverage of rural households.

3. ENERGY AUDIT:

GOMP will undertake energy audit at all level taking the sub station as the unit as per the programme to be mutually agreed upon in order to reduce system losses. This would include metering of all supplies by dec.2001.

4. STATE ELECTRICITY REGULATORY COMMISSION

SERC has already been set up. The State Govt. would provide full support to the Commission to enable it to discharge its statutory responsibilities.

5. RATIONALISATION OF TARIFFS

GOI and GOMP agree that rationalsation of tariffs and progressive elimination of cross subsidization are essential for restoring financial health and commercial viability. In the absence of such rationalization, all measures towards reform and general development will fail. While needy consumers will have to be protected by provision of subvention of State Government, all classes of consumers should be made to pay a price which should cover at least 75% of the cost of supply of electricity to that class subject to decision, if any, of SERC. GOMP should incorporate a provision in the Reform Act to the above effect so that there is a statutory mandate to reduce cross subsidization. GOMP will provide for achieving the above in a progressive manner within a period of 5 years.

1. SUPPLY OF ADDITIONAL POWER:

Immediate steps will be taken by the Ministry of Power to allocate an additional 100 MW from Central Generating Stations. CEA will operationalise the technical and commercial arrangements for supply of this power. According to MPEB, a 400 KV line from Rourkela to Raipur was required for evacuation of surplus power from the Eastern region. Powergrid would complete this line on priority. Further allocation from Central Stations would be considered on the basis of progress in implementation of this Memorandum of Understanding.

2. TO STRENGTHEN AND IMPORVE THE TRANSMISSION NETWORK AND ENABLE SUPPLY OF ADDITIONAL POWER TO MADHYA PRADESH.

Powergrid and MPEB will identify areas where transmission lines have to be built and/or strengthened. Powergrid and MPEB/successor entities will discuss and finalise the nature of participation between them in such transmission lines as well as possibilities of involving others in the projects. While Powergrid normally does not invest in intra-state transmission lines, it would be willing to do so for Madhya Pradesh in recognition of its being a reforming state. Such investment would take place on the basis of mutually satisfactory commercial arrangements. MPEB has identified the following areas as critical for Madhya Pradesh:

a) 400 KV Korba Katni Bina (550 Kms. Transmission line)

b) 400 KV Bina Gwalior(230 Kms. Transmission line)

c) 400 KV Nagda Sardar Sarovar (215 Kms. Transmission line)

d) 400 KV Bina Nagda(37550 Kms. Transmission line)

e) 220 KV Nagda Ratlam(40 Kms. Transmission line)

3. STRENGTHENING OF SUB-TRANSMISSION AND DISTRIBUTION SYSTEM:

Financial support would be extended to enable Madhya Pradesh to upgrade its sub-transmission and distribution net-work in a phased manner.

4. REDUCTION IN T&D LOSSES:

· Technical consultancy assistance would be provided for studies for system loss reduction programme, which would include appropriate technology including a high voltage distribution system in a phased manner.

· Financial assistance would be provided for executing the system loss reduction programme.

· Assistance will be provided from Central Government Companies such as NTPC, NHPC, PFC, PGCIL on adoption of best commercial practices including accounting policies by the restructured entities.

5. RURAL ELECTRIFICATION PRGORGAMME:

The Ministry of Power would assist GOMP in obtaining funding for 100% electrification of villages and hamlets.

6. FINANCING

In recognition of Madhya Pradesh being a reforming State, Power Finance Corporation wold be prepared to finance the investment needs in relaxation of normal conditionalities relating to exposure limited, ROR and DSCR.

Wherever necessary, studies for reforms and restructuring would be funded by PFC through grants and interest free loans.

7. FINANCIAL RESTRUCTURING PLAN

GOMP needs to properly structure the successor entities of MPEB as commercially viable units. GOI and GOMP accept that the reorganized successor entities may not be able to assume all liabilities of MPEB and discharge the same immediately. These include the liabilities of MPEB to employees towards pension, provident fund etc. appropriate measures will be discussed and finalized to evolve suitable financial restructuring plans for the successor entities.

8. STRUCTURAL ADJUSTMENTS:

Taking note of the need for structural adjustment financing for successful completion of reforms, Ministry of Power would fully assist Madhya Pradesh in raising funds for this purpose from financial institutions and other sources.

9. NEW GENERATION

GOI will support proposals relating to additional investment in power generation in Madhya Pradesh by processing such proposals expeditiously.

10. DIRECT ALLOCATION OF POWR TO DISTRIBUTION COMPANIES:

GOI would allocate additional power from new central sector generating stations directly to the commercially viable distribution companies in Madhya Pradesh that emerge through the reform process and which demonstrate their capacity to pay for the power they need.

11. HYDRO ELECTRIC POWER DEVELOPMENT:

Indira Sagar Project and Omkareshwar Project would be completed through a joint venture between the Government of MP and the National Hydroelectric Power Corporation (NHPC). The commercially viable distribution companies of MP which emerge through the reform process and demonstrate their capacity to pay for the power they purchase would have prior claim on the power at the disposal of the Central Government from these projects.

• The above is the broad understanding reached between GOI and GOMP. The modalities of detailed implementation shall be worked out jointly.
• Implementation of the MOU would be monitored every three months.

This Memorandum of Understanding will be for a period of five years, and will be subject to review annually.

Through this Memorandum of Understanding, both parties affirm their commitment to fulfill the reform activities and achieve the objectives agreed upon in this Memorandum.

Signed this day the 16th May, 2000 at New Delhi.