Unclogging Distribution

Experts’ views on ways to reform the segment

The issues of delays in filing tariff petitions, non-revision of retail supply tariffs and rising regulatory assets have long plagued the distribution segment, leading to financial hurdles for discoms. Political interference in tariff fixation and the inability of state regulators to function independently are some of the causes for this. Although various forums have issued directives to ensure regular tariff revisions, including an order from APTEL in 2011, the issues remain unaddressed. In May 2021, the Ministry of Power (MoP) issued a letter to various states, union territories (UTs) and state electricity regulatory commissions (SERCs) directing them to issue tariff orders in a timely manner to ensure discom health. Power Line invited industry experts to delve into the issues and suggest solutions…

What are the key causes of the long-standing issues in the power distribution segment? What steps need to be taken by policymakers, regulators and state governments to resolve these?

Sanjay Kumar Banga, President (T&D), Tata Power Company Limited

Sanjay Kumar Banga

The long-standing issues of high aggregate technical and commercial (AT&C) losses, non-cost-reflective tariffs, inherent cost subsidies in tariffs and the creation of regulatory assets have been plaguing the distribution sector for long. Various forums have issued directions repeatedly, including the recent one from the MoP for timely tariff revisions. The issue was also taken up in Appellate Judgment of OP No. 1 of 2011, which directed SERCs to issue timely tariff orders (suo moto if required) and make sure that regulatory assets are not created unnecessarily. In case necessary, the same should be liquidated within three years. Further, the government has supported the distribution sector through various schemes such as the Accelerated Power Development Programme (APDP), Accelerated Power Development and Reforms Programme (APDRP), Restructured Accelerated Power Development and Reforms Programme (R-APDRP), Integrated Power Development Scheme (IPDS), Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and Ujwal Discom Assurance Yojana (UDAY) since the year 2000.  However, all these schemes have failed to attain the desired objectives.

The fundamental causes behind these issues, in my view, are the continued inefficiency of state discoms with no accountability, lack of private participation, political interference in tariff setting and the inability of regulatory bodies to exercise their powers autonomously. Till date, the national average AT&C losses are above 20 per cent, while the target was to bring these below 15 per cent by March 31, 2019. The reduction in cross-subsidies has been postponed time and again while our industries continue to bear the brunt; this makes them uncompetitive in the global market. At the same time, in developed economies, those who consume in bulk pay less. Despite the success of private players in demonstrating their ability to turn around the sector with Delhi, Kolkata and Mumbai as key examples, the political will to support privatisation has not been forthcoming. All these issues are well known, and it is time for all stakeholders to define steps to address this situation aggressively.

The recent privatisation of Odisha discoms and the decision to privatise UTs is a welcome step. However, the central and state governments should ensure that any discom which has failed to meet its commitment towards the distribution reforms scheme is immediately put up for privatisation to arrest inefficiencies. Moreover, regulatory bodies should be made accountable for timely tariff revisions. The Forum of Regulators should be empowered to come out with an annual rating for SERCs, basis timely issuance of tariff orders, providing cost-reflective tariffs, creation of regulatory assets reduction of cross-subsidies, etc. Central and state government schemes should not fund those discoms that do not submit tariff applications on a timely basis to the regulator and fail to meet commitments in customer service and reduction of losses.

On the policy side, liquidation of regulatory assets should be time-bound as the carrying costs for such assets is an additional burden on end consumers. The reduction in cross-subsidy has to be time-bound to make our industries competitive and move towards the Make in India dream. In addition, the privatisation of non-performing discoms needs to be hastened to ensure viability of the distribution system in the long term.

Dr Pramod Deo, Former Chairperson, CERC

Dr Pramod Deo

Historically, in the mid-1990s, there was a serious concern about the financial condition of the state electricity boards. At that time, the National Development Council constituted a working group led by Sharad Pawar, then chief minister of Maharashtra, to propose an action plan. The recommendations of that group were adopted by the council. It was agreed that tariff determination should be taken out of the purview of the state government and an independent body should decide tariffs and that agricultural tariffs should not be less than 50 per cent of the average tariff – to begin with, it should be 50 paise per unit. This resulted in the enactment of the Electricity Regulatory Commissions Act, 1998. The idea was to take tariff setting outside the political purview and give it to a neutral expert body. Finally, the nation adopted the Electricity Act, 2003. This law amalgamated the three existing acts when it was realised that it is not only tariff but several other issues that need to be comprehensively addressed in one law.

However, consumer tariff fixation remains the main concern of state governments and political considerations drive this process. The state governments are the owners of not only the state distribution companies, but also the state generation companies and state transmission companies, including state load despatch centres. The increased share of independent power producers has resulted in the apparent disappearance of power shortages. But it has made the big picture more complicated. The state governments, for their political interests, want to give favours/concessions to particular interest groups of consumers such as agriculturists, small domestic consumers, powerloom owners, among others. That is why there was no metering for agriculture and powerlooms in Maharashtra initially. Later on, metering was enforced by the Maharashtra Electricity Regulatory Commission (MERC), as mandated under the Electricity Act, 2003, in the face of a lot of resistance – overt from powerloom owners and covert from the state government.

The law allows state governments to give favours/concessions to a selected category of consumers, provided they make an upfront payment of the difference between the ERC-determined tariff and the concessional tariff. In many cases, this payment is delayed, or partially made, or not made at all for years. Discoms are the final link in the value chain of the commodity called electricity. The poor health of discoms is due to such concessions. The discoms need to purchase electricity and power purchase costs account for nearly 70-80 per cent of their budget. These unlawful concessions create problems for the discoms. These cash-strapped discoms do not have adequate financial resources to procure electricity.

Incomplete metering of agricultural consumers is another issue. Despite the orders of the ERCs, agriculturists are not metered (either a meter is not installed or readings are not taken). This creates scope for discoms to pass on this shortfall as “commercial losses”, a euphemism for power theft by high-end consumers in collusion with the staff of the utility. To overcome this problem and also to regulate the supply of electricity to agriculturists, in many states, separate agricultural-feeders have been provided for agricultural consumers.

In the last tariff determination exercise, MERC had appointed a committee comprising experts and consumer representatives to work out the electricity consumption by agricultural consumers. However, despite having separate feeders, the committee found that meter readings on a large number of agricultural feeders were not taken properly. The state utility claimed that its agricultural consumption was quite high and its losses were only 16 per cent. But based on the committee’s report, the MERC determined the utility’s losses as 21.8 per cent. This demonstrated that the agricultural consumption was overstated and the losses were passed on as agricultural consumption. This shows how political interests and discoms’ unscrupulous employees play around with the finances of discoms. It is also important to observe that a large number of agricultural consumers are not even paying the “subsidised tariff”. This further affects MSEDCL’s liquidity. Lastly, there is the issue of mounting regulatory assets, which is essentially the money owed by the consumers to the discoms, which should be paid as early as possible. Otherwise, it burdens high-end consumers as they end up liquidating these arrears.

To sum up, the issues of delays in filing of tariff petitions and non-revision of retail supply tariffs arise due to the political economy of the states and the complicity of unscrupulous employees of discoms, compounded by the lack of independence of state regulators. Hence the MoP issuing a letter to the states directing them to ensure timely revision of tariffs is unlikely to have any salutary effect.

Ann Josey, Fellow, Prayas (Energy Group)

Ann Josey

On an average, the cost of supply for discoms was about Rs 7 per unit in 2018-19, rising at 6 per cent per annum. Focusing on increasing tariffs and ensuring timely revenue recovery without measures to reduce costs is not a sustainable strategy to ensure financial viability. This is especially critical when over 70 per cent of non-agricultural consumers are already paying tariffs higher than Rs 5 per unit, a rate at which alternative options such as captive, grid-connected renewable energy become viable. Since 75 per cent of discom costs are attributable to power purchase and transmission, policymakers should focus on reducing these costs. Necessary measures include:

Solarising agricultural feeders to reduce costs: Using tail-end 1-10 MW solar plants, which are employed for supplying power to dedicated agricultural feeders, would provide daytime reliable power supply to agricultural consumers at a rate less than Rs 3.50 per unit for 25 years. This approach is possible under components A and C of the centrally sponsored KUSUM scheme. With power purchase costs of discoms at Rs 4.50 per unit, rising at 4 per cent per annum, the savings are significant (at Re 1 per unit) and will increase with each year. If all agricultural consumers are supplied power through solar feeders by 2030, cost savings would amount to Rs 130 billion annually. Policymakers should fast-track the adoption of this approach in feasible areas and invest in feeder separation on a priority basis to accelerate uptake.

Avoiding new thermal capacity addition: Given the technological flux, changes in demand and energy availability due to renewable energy, 25-year baseload contracts for thermal capacity along with associated fuel risks would result in resource lock-ins and stranded assets. Such capacity should be contracted only after modelling-based analysis of demand and supply prospects and alternatives. Many states have made “no more coal” announcements and are currently planning to meet growth in demand through renewable energy capacity. Policymakers should adopt  a cautious approach to thermal and large hydro capacity addition given the fact that these sectors are still plagued by high costs, long gestation periods and associated risks.

Discoms to stop planning power procurement for consumers with loads of >100 kW by 2030: Due to non-competitive discom tariffs, 15-20 per cent of consumers are already availing power through alternative competitive options. However, discoms continue to plan procurement for large consumers, who are now reducing their dependence on them. Policymakers should allow consumers with loads of  >100 kW to avail of all power through captive, open access and rooftop solar options in a phase-wise manner by 2030. Such a shift is techno-economically feasible and will allow consumers the freedom to choose their supplier through retail competition. Supply to these consumers, if needed, can be provided by discoms at negotiated rather than regulated rates, provided these are higher than the cost of supply. Such measures will reduce the burden of power procurement and eventually lead to cost reduction. In order to facilitate this, the eligibility threshold for open access must be reduced, sales migration charges should be fixed for a five-year period at a rate to adequately compensate discoms for revenue loss and their  services such as energy banking and peak period power procurement, and standby services should be priced at cost.

Competitive bidding for all new transmission projects with costs over Rs 1 billion: As opposed to cost-plus tariff determination, competitive bidding has transparent selection criteria and pre-specified, contractual provisions to limit time and cost overruns. In fact, projects executed through competitive bidding have 30-40 per cent lower tariffs than those executed under the “cost-plus” approach. To ensure cost efficiency in transmission, policymakers should ensure that all projects with an outlay of over Rs 1 billion should be executed through competitive bidding.

Moving away from cost-plus regulation: In order to reduce costs and improve efficiency in operations, the regulatory framework should move away from cost plus to provide more performance benchmarks and incentives to licensees to undertake cost reduction.

Restrict the life of regulatory assets to three years: Any regulatory asset or cumulative revenue gap should be resolved (through state government takeovers, grants, tariff increases, etc.) within three years of its creation or addition, failing which it is to be disallowed by the regulator. This will ensure there is no build-up of regulatory assets and carrying costs over time, and also ensure that the state government takes over losses in a timely manner.

Tracking working capital borrowing: The trigger for the past two bailouts was the build-up of short-term loans incurred by discoms to meet working capital needs. During the launch of UDAY, such liabilities were at Rs 3,960 billion. The ability to borrow from banks in the short term enables discoms to postpone fundamental efforts required for financial turnaround and, in turn, ends up financing their operational inefficiencies. UDAY aimed to restrict working capital borrowing to 25 per cent of the aggregate revenue requirement.

However, post UDAY, in 2018-19, discoms collectively had Rs 392.83 billion as outstanding short-term debt. This trend, over a five-year period, would mean interest costs of about Rs 186 billion. Thus, policymakers should track the nature and extent of working capital borrowings, restrict such loans from the Power Finance Corporation/Rural Electrification Corporation and take timely, corrective action with increase in debt. Similarly, as delay in subsidy payments also strains working capital requirement, subsidy payments should be tracked and interest costs due to delays should be borne by the state government.

Extending the ToD tariff regime to all >10 kW consumers: Given a fall in metering costs, all consumers with a sanctioned load over 10 kW should be subjected to time-of-day (ToD) tariffs. This will ensure that revenue recovery is reflective of discoms’ procurement costs. Further, the ToD rates and slots should be reflective of availability of renewable power, change in load during the days and seasonal shifts to ensure that discoms are compensated for power procurement planning and correct price signals are in place to incentivise load shifting.

Many of these measures are imminently feasible within the existing legal and decision-making framework, and can be implemented in the medium term.

Professor S.L. Rao, Former Chairperson, CERC, and Member, Advisory Board, Competition Commission of India

Professor S.L. Rao

The power sector is critical for any country to fuel overall economic growth and India is no exception. While the sector is undergoing a massive transformation that is set to move the boundaries of the conventional energy supply channels (changes include a shift to renewable energy, significant storage developments, increased use of electricity in transportation and the installation of charging equipment at multiple locations), it faces a number of challenges that have long plagued a critical segment of the power sector value chain, that is, distribution.

In the current scenario, discoms are a critical, but also the weakest, link in the electricity supply chain. Ailing state-owned power discoms continue to hamper efficient functioning of the power sector (installation of new equipment, frequent and adequate servicing and maintenance, better utilisation of electricity). The biggest problem in the distribution segment in India is complete decentralisation. This delegation of authority regarding distribution to the state government has not worked well. In many cases, power users can buy power only from within the state and are not allowed to buy it from outside by the concerned state government. This has led to tariffs that have not been able to cover costs of distribution utilities, resulting in mounting losses.

Regulators have created regulatory assets to offset the losses of discoms arising due to low tariffs. Regulatory assets are credits that will reflect in a discom’s balance sheet, but not during the flexibility in order to spend except while borrowing. However, this has made the power sector highly insufficient. The key reason for this has been that while generation and transmission are under central government authority, power distribution within the state remains under state jurisdiction and is subject to strong political interference. This has given rise to many challenges.

So, an important task to undertake on an immediate basis is to reduce the state’s authority over power distribution or divide it between the centre and state, just like generation and transmission are controlled interstate by the centre and within a state by the state government. Local users should not be restricted from buying power from outside the state if they deem it fit financially. The regulator could ensure that the sourcing through open access is done in a fair manner by comparing the prices being offered within the state and by the outside supplier, and allow open access where there is a price advantage.

Many states have allowed inefficient power plants to operate, which has added to the problems, resulting in unnecessarily high costs. The regulator should lay down efficiency standards for power plants within the state to ensure the discontinuation of the inefficient ones.

In order to correct this completely imbalanced situation in power distribution, we will need to look at the law that affects it. The present law gives total authority to state governments. It is, therefore, important to ensure that state governments compensate discoms for the loss of revenue due to low tariffs and also for sourcing power from inefficient power plants within the state. This compensation should be in the form of cash instead of regulatory assets.

State regulators should work independently and without any interference from the government. Last but not least, to ensure this independence, state regulators should include meritoriously appointed members with expertise in diverse fields such as law, finance, energy and management. The financial issues of discoms have been simmering for a while now and it is unlikely that they would be resolved overnight. However, with a less restrictive approach to power distribution, it is possible.

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