Home >Opinion >Views >Opinion | Electricity distribution business needs bold reforms
Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)
Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)

Opinion | Electricity distribution business needs bold reforms

  • To overcome liquidity and cash flow issues, government of India has announced 90,000 crore financial packages for distribution companies
  • The lockdown led to reduction in power demand of 20% to 25% on account of shutdown of commercial and industrial establishments

Electricity distribution companies are facing huge challenges of maintaining round a-clock electricity supply without fail to all consumers in the ongoing covid-19 crisis. To overcome liquidity and cash flow issues, government of India has announced 90,000 crore financial packages for distribution companies (discoms). Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will infuse the liquidity by raising an amount of about 90,000 crore from the market against the receivables of discoms. This one-time liquidity infusion will be used to pay the central public sector power generation companies, transmission companies, independent power producers and renewable energy generators. The lockdown led to reduction in power demand of 20% to 25% on account of shutdown of commercial and industrial establishments. As power bills fells, discoms ran into trouble and about 7-8 states imposed force majeure absolving themselves from payment of even fixed charges to generators.

But interesting to note there that, even before the covid crisis, discoms dues to generation companies had already touched 87,000 cores. The aggregate technical and commercial (AT&C) losses on average was about 18.94% AT&C and the gap between average cost of supply (ACS) and average revenue realised (ARR), as per UDAY dashboard, was 37 paise per unit, high in comparison to other south Asian countries. The distribution business is heavily burdened with cross subsidy mechanism and highest industrial and commercial tariff with modest collection and billing efficiency. The uses of ICT have started mostly in urban areas but rural areas are still dependent on the traditional log book method. The whole ecosystem of distribution (barring a few including private licencees) is highly unsustainable even after several bailout packages like UDAY announced by the power ministry.

Pending Content and Carriage Bill, Tariff Policy 2016 amendments and amendments to Electricity Act, 2003 has also aggravated the problems. Ministry of Power has again floated amendments in the Electricity Act, 2003 which mostly cover the past problems faced by the distribution sector as well as opening up of the sector to a great extent.

The Draft Amendment Bill to the Electricity Act, proposed to remove the term ‘surcharge’ across different clauses. However, the utilisation of surcharge is to meet the requirement of cross-subsidies and proposed their gradual reduction. Any surcharge may hamper the open access and cross-subsidies will still play a role in increased tariff of commercial and industrial sector and make them uncompetitive. This may be the right time if we can remove the open access ‘surcharge’ and also ‘cross-subsidies’. Some positive moves like sub-distribution and franchise licences not needing licences from the Central Electricity Regulatory Commission will help to strengthen the operations of discoms.

In light of Hon’ble Prime Minister address to nation on 12th May, 2020 -- India needs bold reforms, incremental will not work now. India still awaits holistic, integrated and bold reforms in power sector to create completely open and free electricity market based on demand and supply, most likely based on content and carriage business model of telecom sector.

Creation of open and free electricity market based on demand and supply (like Nord Pool – power market of Europe), removal of cross subsidy mechanism, providing free open access of electricity, diversification in structures of DISCOMs like public private partnership (PPP) model, complete privatization or in-asset monetization, energy storage, ICT uses, smart grid, metering and technology innovation are the areas where more focus are required.

Moreover, short- and long-term structural reforms are needed to create pathway for bold reform, which may be seen as follows:

Short-term structural reforms

a) Amendment in Tariff Policy: As per the current tariff structure, due to cross-subsidization, commercial and industrial sector have higher tariff (varies from Rs9-12/kWh), resulting in high input cost for industries & making them uncompetitive. Our tariff structure is very complex and it has been observed that there exist more than 19 tariff categories in some states. If we compare, tariff structure of developed economies like the US, Japan, European Countries, it is just the opposite. The cross-subsidization mechanism should be abolished. Accordingly, amendment needs to be brought in Tariff Policy 2016 (Clause 8.0).

b) Establishment of Regional Electricity Regulatory Commissions: State Electricity Regulatory Commissions (SERCs) are not functioning as independent regulators due to state government influence and this has resulted in deteriorating health of discoms. It would be pertinent to create regional regulators (5 regional regulators). Accordingly, Electricity Act, 2003 need to be amended.

c) Recovery of dues from local/state governments and departments: Dues from urban local bodies and state government departments to discoms are the starting point of discom revenue shortfalls. Any dues from local government bodies and government bodies/departments, overdue for more than a year, may be considered for payment from the budgetary allocation of the states directly to discoms.

d) Smart Metering: 100 % metering (both in urban as well as rural areas) should be an essential intervention for achieving better operational efficiency of discoms.

Long-term structural reforms: Various options to reform discoms

a) Establishment of national distribution companies: All the recent reforms have gone void in distribution sector and discoms are still financially unsustainable. Some of the states like Delhi, Mumbai, Agra, Kolkata etc have adopted franchise and PPP model for electricity distribution but they are only partially successful. These discoms now face another issue of creation of regulatory assets and Delhi is one of them. Therefore, a new model of national electricity distribution company (NEDC) can be thought of which can take over state discoms thereby forming a separate special purpose vehicle/joint ventures. The overall objective of NEDC should be to bring financial discipline and create commercial business, thereby bringing required technological change & operational expertise

b) City-based discoms: The present business model of discoms is operationally unsustainable. Present discoms need to be broken into smaller entities, which would be quite viable commercially. Measures should be initiated to separate discoms for cities including urban agglomerate areas and industrial areas.

c) Separate rural load/area-based discoms: Rural distribution business should be separated from that of urban areas. The rural scattered load with less remunerative area should be strengthened with government support and subsidy to the agriculture load and BPL (below poverty line) load should be provided through direct cash transfer only.

d) Implementation of structure and business models: Complete privatization, concession-based PPPs and franchise model should be used extensively to reform discoms. The PPP model may be used even in non-remunerative areas, where the current discom losses may be the made the reserved price.

e) Separation of content and carriage model: There is a need to separate content and carriage businesses. The consumer may choose a company providing electricity at the lowest tariff. The tariff may be determined through demand and supply or base price model.

As entire world industrial and commercial sectors are re-originating, therefore, this is high time for bold reforms to attract investments and support Make in India programme.

Disclaimer: The writers are Adviser (Energy) & Senior Research Officer in NITI Aayog, respectively. Their views are purely personal and do not reflect those of Mint.

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