Finding a Solution

Government floats the idea of a national discom

In the past few years, the government has taken significant initiatives to address the challenges in the distribution segment. It is now looking to set up a National Electricity Distribution Company (NEDC). Considering the poor payment records of state-owned discoms, the proposed NEDC is expected to support state discoms in power distribution, procure electricity at competitive rates and help deal with stressed assets. Industry experts comment on the viability of this proposal…

What are your views on the proposal to set up an NEDC for the power sector? What could be the NEDC’s possible roles and responsibilities? How can the proposed entity be a success?

Sabyasachi Majumdar, Senior Vice-President, ICRA Limited

Sabyasachi Majumdar

The state electricity distribution companies are the weakest link in the power sector value chain. Inefficient operations with higher-than-approved distribution loss levels, the absence of cost-reflective tariffs and the high dependence on subsidy support from state governments all contribute to this. This has impacted their ability to offtake power from power generation companies, leading to limited progress in the signing of long-term power purchase agreements over the past four-five years, and delays in the payment of power purchase dues to the power generating companies. This has led to a large portfolio of stressed assets in the power sector, and in turn, rising non-performing assets (NPAs) for the banking sector. In this context, the Government of India is exploring the idea of setting up an NEDC. However, the government is yet to clarify the objective of such a company, that is, whether such a company would obtain a distribution licensee, act as a power aggregator for the state distribution utilities, or just be an adviser to the state distribution utilities for the implementation of the various central government schemes.

If such a company obtains a distribution licensee and acts as a second source of electricity supply for consumers across the country, it would encourage competition in the distribution segment and be a positive for consumers. This would also improve the counterparty profile for the power generation companies. However, the implementation of such a mechanism would require the segregation of infrastructure and supply business in the distribution segment, which is being proposed in the draft amendments to the Electricity Act, 2003.  Moreover, this would require the support of the state governments and state discoms. Some of the challenges in implementing this measure include segregating losses between wires and supply business; subsidy transfers; and the cross-subsidisation impact due to transition of consumers between the existing state discoms and the national discom.

Dr S.L. Rao, Former Chairperson, CERC

Dr S.L. Rao

Electricity is a concurrent subject as per the Constitution, wherein the responsibility of electricity distribution rests with the state government and therefore, the central government cannot do much in this area. This has resulted in political tariffs, that is, free power in the agricultural sector and below-power tariffs for various industries.  There was practically no state utility that made a profit because the state government expected the utility to subsidise tariffs by charging proportionately higher tariffs to those who could afford it; this meant that the industry and consumers that were relatively better off paid a great deal. In essence, the idea of an NEDC is something that is certainly needed but that will face challenges, as it cannot undertake activities contradictory to the constitution.

If the proposal is approved by the court, there must be very strict limitations on what the NEDC can and cannot do. It certainly cannot interfere with the state governments on the question of ownership. However, to the extent that the power used in the state is interstate (that is, the power supplied comes from other states), the centre obviously has full authority over that supply. Hence, what the centre can do in all cases where the state imports power is to demand a much higher price from the state. It can then use the earnings to reimburse the state for the subsidies being provided to it. Obviously, there are accounting complications here to be dealt with. However, the principle should be that the centre uses its authority to make the state governments more responsible in power distribution so that the state utilities do not remain loss-making entities.

Further, the NEDC could certainly ration the external power supply to the state in relation to the profitability of the local discoms, at least to the extent that the discoms can break even. Whatever is proposed and formulated, the centre must be very careful not to take away the power of the state government as under the Constitution. At the outset, it must discuss with each state government ways to improve the efficiency of the discoms. The incentive to make the state perform would be the reimbursement that the centre could provide.

Sanjeev Seth, CEO, India Power Corporation Limited

Sanjeev Seth

The government’s proposal to set up an NEDC is a welcome and long-awaited move. So far, distribution has been the weakest link in the electricity value chain. The central government has a presence in most of the power sector segments (generation, transmission and financing) but a very limited presence in the distribution space, which is a key necessity today. The need for last mile connectivity, distribution losses that are much above the world average, service reliability, an enabling competitive environment, privatisation and technology adoption calls for a well-coordinated and uniform approach to create a policy framework for the development of the distribution segment. It is also a step forward in providing a structural framework for the segregation of the distribution side of the business into wires and supply, which, in essence, is the functional separation of technical and commercial responsibilities.

The formation of an NEDC will help in the judicious use of central funds for standardisation and revamping of networks. This would lead to better quality supply, reduced network downtime and minimisation of technical losses, spurring growth in electricity demand. Creating an NEDC will integrate the country for optimum network usage. In a true sense, consumers will have the freedom to choose their supplier. This will also reduce electricity theft as suppliers will remain vigilant, thereby weeding out corruption. Such a move will open up huge job opportunities.

The formation of an NEDC will bring down the cost of electricity networks. Economies of scale will lead to significant cost savings for components, lower project costs and lower tariffs. Procuring power centrally at competitive prices and making it available to discoms will help address the issue of non-performing assets (NPAs) in generation and improve the poor payment records of discoms. An NEDC will also facilitate non-discriminatory open access. The real competition, as envisaged in a multi-buyer, multi-seller environment, will lead to the availability of power at cheaper rates for the end consumer.

The NEDC will be an apex body governing all entities (licensees and non- licensees, non-government organisations, etc.) engaged in the distribution (wires) function, particularly with guidance, policy formulation for power purchase agreements (PPAs), open access, enabling a competitive environment, and developing various business models for distribution in coordination with state discoms. The roles of the NEDC can be as follows:

  • Policy formulation – It can formulate policies and plans pertaining to licensing, power procurement, tariff determination, metering, billing, collection and supply reliability. It can also review the demonstrated success of public-private partnerships and the reasons for slow implementation. It can help improve the government’s approach to partnering in franchises and review distribution franchisee agreement clauses to ensure it is beneficial for all stakeholders.
  • Adoption of new technologies – The NEDC will oversee the implementation of new technologies such as smart grids, electric mobility, artificial intelligence and blockchain technology uses in distribution.
  • Increasing financial interest – The NEDC would be responsible for improving the financial attractiveness of the power sector. This involves focusing on the following
  • PPA and contract standardisation.
  • Bankability of franchisee agreements for easier loan syndication.
  • Operating as a nodal point to approve investment plans for network expansion in states, either funded by the state or the centre.
  • Standardisation of procedures – The NEDC will be responsible for maintaining a standard operating procedure in terms of maintaining technical efficiency, by attending to fuse calls, replacing burnt transformers and ensuring system availability and safety.
  • Standardisation of central schemes – All rural electrification programmes could be brought under the ambit of the NEDC, so that low voltage complaints, etc. are addressed properly.

Political consensus followed by proper legislation is a prerequisite for ensuring the NEDC’s success. The roles and responsibilities of various entities have to be clearly defined. Just as the Goods and Services Tax Council comprising all states was formed to develop a plan for  GST implementation, similarly, an NEDC council should be set up, wherein all states agree to a milestone-based approach. This will iron out any differences and ensure a uniform approach. The role of the central and state governments should also be clearly delineated. The state load despatch centre should operate as a separate entity and not under the state transmission utility. The jurisdiction of regulatory bodies on such an entity in terms of tariff determination (transmission charges/wheeling charges/ surcharges) by region or state, etc. must be determined. In light of the huge accumulated losses of the discoms, it is necessary that a decision is taken regarding the treatment of such losses. The same may be parked in a holding company and serviced through a charge over a period of 30 years. There has to be a robust internal dispute resolution mechanism, either at the Central Electricity Regulatory Commission or the state electricity regulatory commission level so that litigation is kept to a minimum.

In the cases of areas under multiple licensees, the formation of the NEDC will mean a merging of physical networks, limiting the existing distribution licensees to supply licensees with a loss of capital assets. This issue needs to be clarified.

The various policies proposed to be introduced by the government must be aligned. For instance, the draft amendments to the Tariff Policy, 2016 contain a proposal for the cross-subsidy surcharge to remain in effect for a period of one year. Similarly, based on the draft renewable purchase obligation (RPO) trajectory paper, it is envisaged that RPO compliance by the obligated entities would be 21 per cent (10.5 per cent each for solar and non-solar), which would require connectivity of renewables to the distribution grid. The impact of such connectivity would also have to be factored in.

Dr Rahul Tongia, Fellow, Brookings India

Dr Rahul Tongia

Electricity distribution companies have long been viewed as the weakest link in India’s plans to achieve universal, accessible, and clean energy. On average, they lose Re 0.65 per kWh, according to PFC’s 2016 Discom Performance Report; but this figure may understate the problem – it is based on supply to discoms, not sales.  As the July 2018 discom ratings showed, the problem isn’t universal. A number of discoms are doing reasonably well; not just in terms of profitability but also in meeting their social contract of availability, access, etc.

The inspiration for a national discom possibly comes from a view that some states or discoms are laggards. After all, there are many things all discoms can and should be doing but sometimes don’t – implementing regular tariff petitions (which also requires regulator effort), procuring enough power from suppliers (which are aplenty), reducing cross-subsidy surcharge, fulfilling RPOs, etc.  If we did have a national discom, it could certainly pull laggard areas up. The first question that needs clarity is whether this is to be a new entity competing with existing discoms, or is this to be a replacement for them? The former may or may not be a licensee. If this is an aggregator (buying power at a reasonable price from suppliers that appear to have “surplus” capacity temporarily) or franchisee, then how much would they fix problem areas as opposed to take advantage of them, especially for segments that are sound?  A national discom would inherently be under central government control, and that precisely is where there is a gap. States, perhaps with reason, stake claim to discoms, as the Constitution makes electricity a concurrent subject between states and the centre. Even if the idea is sound hypothetically, they would resist. At a technical level, how would a single entity handle heterogeneity? Would it impose the same rules, practices, staff incentives, key performance indicator (KPI) metrics everywhere?  India is closer to the US with its federal structure than China, where a single entity (rather, two, but one dominates geographic coverage) runs the grid. If India keeps its underlying heterogeneity intact, it loses some of the envisaged benefits of a national discom.

We might draw some insights from Coal India, a behemoth that produces some four-fifths of India’s coal, and is the largest coal miner in the world. It has multiple operating subsidiaries, with operational independence, but pricing decisions are taken centrally.  What does this mean? It means some are profitable, and some are struggling.  To simplify it – they cross-subsidise each other. This isn’t to claim one is less or more efficient per se – there are underlying structural issues such as coal seam quality (“geotechnicals”) that strongly determine cost structures. The same thing applies for discoms. The consumer mix, local sources of power (including “cheap” hydro or renewables), etc. all matter, not just their operational efficiency and political will.   Instead of trying to bring discoms together, what if we try the exact opposite? Sharpen the differences, allowing different KPIs and targets across India? Even more ambitiously, what if we recognise economic divergence and stop trying to blend losses across discoms, especially within a state? It’s no surprise (and may even be natural to allow) that some discoms perform better than others. On the flip side, we have to be willing to call out some discoms when they are failing.  People say that in passing, but what does it really mean in practice? Often, it just means more funding being allocated to them. If they are failing through no fault of their own or for legacy reasons that is one thing, but if they aren’t taking the necessary steps to fix the situation, we should be willing to take them away, just like some regions in the world where entire cities or municipalities go into receivership (aka administration).

A fear of consequences is what discoms need.  For one-time fixes and legacy fixes, we already have a number of instruments (including Ujwal Discom Assurance Yojana) with possibilities for more.  However, at the end of the day, discoms may muddle along as long as they are allowed to. Enforcement, new instruments, business/regulatory innovation, etc. are all the need of the hour. Within such a framework, a national discom should be discussed as an option, although not necessarily the default one. It may be a good option for the vehicle to take over failing discoms, but its mandate should be clear at the outset. Or else, market forces left to themselves may lead to cherry-picking only.

If we wanted to amalgamate all the discoms, operationally, this would take many years. Many things would change in that time frame. At the supply level, renewable energy would get much cheaper. On the demand side, electric vehicles may actually arrive en masse. We may have policy updates such as carriage and content separation, policy-speak for wires and retail separation to create competition. If we have a national discom, it will make competition much harder. The idea of a national discom is interesting, and the conversation it should spark is especially needed. What is it trying to achieve? Are there alternatives for achieving the same goals? Can we make this an ambition-type programme, equivalent to the Maharatnas – where if you perform as per a criterion, you get more autonomy (and/or funding)? I guess the only constant is change, because business as usual certainly isn’t working.

 

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