A Major Challenge

Financial sustainability of power distribution

By R.V. Shahi, Former Secretary, Ministry of Power

During the month of August, 2021, I had good opportunities of participating in two important Webinars on issues concerning problems in the Electricity Distribution Sector in India which are creating a very ad­verse impact on the entire power supply chain from fuel to power ge­neration, to transmission and ultimately to a financially unsustainable distribution segment.

The first Seminar, held on 10th August 2021, was organised by TERI where I delivered the Inaugural Address and also chaired the Panel Discussion. The theme was “Resolving the Crisis in Power Distribution in India”. The second Seminar was organised by India Energy Forum, on 27th August 2021, which was Inaug­u­rated by the Power Secretary, Government of India, where I gave the Presidential Address and also coordinated the discussions after a few Expert Presentations. The theme was “Reform Based and Results linked Distribution Sector Scheme of Ministry of Power”. I propose to briefly highlight, in this paper, the gist of what I could cover in both these Seminars.

The TERI Discussion Paper, which formed the basis of the Seminar, looks at the reform efforts in Distribution over the last se­veral years and attempts to explore the possible way forward to address the challenges in Distribution. It brings out that, during a fifteen year period of 2004–2018, the accumulated loss of the Distribution business in different States has been as high as over Rs 5 lakh crores. There could be many issues in the Dis­tri­bu­tion sector which could fall into the category of technical in­a­dequacies, poor quality of consumer services, and serious gaps in governance, etc., but the crisis which the title of the TERI di­scussion paper highlights as “Crisis in Power Dis­tribution” re­fers to the Financial Crisis which makes the working unsustainable.

The Electricity Distribution Sector in India is primarily managed by the State Government controlled Distribution Com­panies – earlier these used to be State Electricity Boards – and the role of the private sector is only marginal, may be less than 10 per cent. While the Electricity Act, 2003, which replaced the erstwhile Electricity Act of 1910 and the Electricity Supply Act of 1945, did open up scope for generation and transmission which got implemented, the provision enabling scope for major institutional and structural changes in Distribution has, by and large, re­ma­in­ed unimplemented. It cannot be denied that Distribution Companies replacing Electricity Boards have come of age, and in many States there are good examples of visi­ble improvements in various performance parameters including their financials, in a large number of States efforts as well as outcomes have been much less than the sector could expect in order to be financially sustainable.

Regulatory Commissions were set up with the objective of distancing commercial issues, such as tariff, from political compulsions, so as to bring about major changes in the business-as-usual approach, and to prescribe and ensure a cost reflective tariff regime. The expectation was to aim at getting rid of distorted cross subsidies and providing a tariff structu­re gradually evolving into a manageable profile, so that while on the one hand, the needs of a certain cross section of con­sumers are met and, at the same time, economic activities in industry and tra­de do not get over burdened with high cost of power, an objective which has remained almost completely unimplemented. There were misaligned political incentives, lack of regular tariff revision to adequately take care of ever increasing cost of input po­wer, and complete disregard, by many States, of their obligations to pay for even government declared subsidies to the Distribution Companies. Besides, several government departments also default on payments to Discoms for power suppli­ed to them. It is relevant to mention that these payments, whi­ch are overdue, as brought out in the TERI Discussion Paper, amount to more than Rs 1 lakh crores. The mounting regulatory assets – an instrument which was conceived and created by some of the Regulatory Commissions, Coal Cess, and Increa­sing Railway Freight for Coal have been some of the other major factors affecting the financials of Discoms. Rural power supply in most states has proved burdensome despite provision of subsidies borne by governments.

In many States however, not only in rural electricity supply, but also in towns and cities, the Aggregate Technical and Com­mer­cial (AT&C) losses continue to be excessively high – in the range of 20 per cent–50 per cent, causing huge financial losses.

A Report on “Turning around the Power Distribution Sector” by RMI (Rocky Mountain Institute of USA) and NITI Aayog, in August 2021 has brought out the issues and problems in Elec­tricity Distribution comprehensively. It also details some of the initiatives that have been taken. But, this Report falls far too short on conclusions and recommendations. It does not bring out what really needs to be done in terms of institutional refor­ms more than merely mentioning the existence of Fran­chisee and PPP, etc. What is expected from such studies is a forthright and specific set of recommendations and the way forward.

It is the financial sustainability issue that is standing in the way of 24×7 power supply throughout the country and not the issue of availability of power, nor even the issue of transmission capability. The urgent need is to fix distribution to achieve this objective.

A very interesting observation was made during the panel discussion in the TERI Seminar about the failure of Discoms in ensuring reliability and quality of power supply. The thrust of the comment was that attention to this aspect should be accorded higher priority than emphasis on tariff. My response was that it was indeed a valid observation; however, sound financial health of Discoms was essential for providing quality service. I recalled my association, during the early nineties, as a Member of the Delhi Power Supply Task Force, set up by the Go­vernment of India, when the Distribution Transformer Failure rate in DESU (Delhi Electricity Supply Undertaking), the earlier name of Delhi Vidyut Board, used to be of the order of 25 per cent, and funds problem made the task even more challenging. A bankrupt entity cannot provide adequate service to customers. There is no doubt that quality of service is also dependent on the skill of the workforce and their attitude toward this vital obligation toward customers.

The recently notified Reform Based and Result Linked Distri­bution Scheme announced by the Ministry of Power was discussed in the Webinar on 22nd August 2021. The Gist of observations that I made include the following:

  • The Distribution segment of the power sector has continued to be the weakest link in the supply chain. The power sector as a whole has done reasonably well in Generation and in Tra­ns­mission, particularly in the last fifteen years, post the Elec­tricity Act, 2003. The primary reason has been de-licensing of generation and opening up of the Transmission sector.
  • Financial sustainability of the Distribution segment has always remained under stress despite several bail-outs. Each bail-out did have conditions, but during implementation the­se got diluted or relaxed. However, it needs to be mentioned that when the UDAY-1 Scheme was introduced, stipulations of the Scheme themselves were such that the concession granted by the Government was obvious and the outcomes were bound to be uncertain, and it is exactly this way that it moved on.
  • The Accelerated Power Development and Reform Program­me (APDRP) introduced in the Tenth Plan did have the con­di­tion of financial benefits flowing to the Distribution Com­pa­nies from the Central Government predicated on demon­s­­­trated outcomes duly audited by designated Auditors. This Scheme did demonstrate positive outcomes.
  • Based on the experiences of the past, the present Scheme which is reform based and results linked does have the potential to make a difference. The Scheme has an elaborate framework with specific areas of improvement and weightages for eva­luation of outcomes. Obviously, it is the meticulous implementation of various provisions that would be the key to the su­ccess of the Scheme. The features of the Scheme which co­uld be expected to deliver desirable results include – (a) Fin­a­n­cial outcome has the highest weightage in determining the eli­gibility for grant of benefit, (b) High Level Monitoring Co­m­mi­ttee headed by the Secretary Power would ensure im­ple­me­n­tation, (c) State specific Action Plan with targets, and be­n­e­f­its to accrue only when the annual targets are met, (d) Ex­pe­c­ted actions on the part of Discoms, the State Regula­tory Co­m­m­ission, and the State Government, for each of the States would have evaluation with reference to the overall weighta­ges assigned to each of these elements, (e) The actions for e­a­c­h­ of these Agencies have also been identified – it needs to be recognised that there have been shortcomings not only on the part of Discoms, but also on the part of State Commiss­ions as well as State Governments which have severely affected the fi­n­­ancial condition of the State owned Distribution Com­panies.
  • Base lines in respect of various performance parameters rela­ting to Discoms, Regulators, and State Governments differ substantially from State to State, to the extent they influence the financial impact hence. It will be important to develop State Specific Action Plans with appropriate weightages for evaluation. Eligibility of only 60 per cent performance marks may defeat the basic purpose of providing financial benefits aimed at a turnaround unless specific action plans, targets and evaluation criteria and weightages are carefully structured in each case. It would be equally important for the Pow­er Ministry to engage reputed Professional Agencies to help evaluate the outcomes with reference to the pre-determined Action Plans and Targets. It would be relevant to mention the example of reputed Agencies having been engaged by the Power Ministry in respect of the implementation of APDRP during the Tenth Five Year Plan.
  • The Power Ministry Scheme does mention about PPP, PSU JV and Franchisees as one of the indicative action agenda poin­ts. While the weightage for such reforms is rather low, under the Financial Parameter, where weightage is high, re­form linked actions could also be covered. It would be desirable that these are seriously pursued. There are very few examples of Privatisation of Distribution and of input based Fran­chisees. We have both good and bad examples in each of these categories. Orissa privatisation threw up a number of lessons which were adequately brought to bear upon the privatisation exercise carried out in Delhi which has been a success. There are, however, experiences in the Delhi initiative which could be incorporated while taking such initiatives in the future. For example, the mechanism of Regula­to­ry Assets developed by the State Regulatory Commission has thrown up serious challenges which would need to be add­ressed appropriately in structuring such initiatives. We have good and bad examples of Franchisees as well, sufficient to restructure this Scheme in future, so as to deliver desirable positive outcomes.
  • While introducing further Privatisation, Franchisee, or JV with Central Public Sector Undertakings, care needs to be un­­dertaken to see that these well intentioned initiatives do not fall into debates whether Public Sector is good or Private Sector is good. The narrative has to be properly conceptualised and disseminated. When we de-licensed generation under the Electricity Act, 2003, we have seen the private sector’s role enhancing from less than 10 per cent to 47 per cent now. It was never meant to convey that the public sector in general was not performing – we have had highly satisfying experiences with NTPC and a number of State owned power plants which we should be proud of. We opened up the sector so that performance benchmarks through competition elevate the levels of efficiency and services. Similarly, when we opened up Transmission, it was not meant to convey that Power Grid and the State owned Transmission entities in general are non-performing. In fact, many of these organisations have demonstrated an outstanding level of efficiency. It has only added to the financial investments to strengthen our Transmission system and has also introduced perfor­man­ce benchmarks through competition. Similar has to be the narrative for the Distribution sector. We have a number of State owned Discoms which are doing very well. There are many others which face challenges. Opening up of the sector is not a reflection or a message that Distribution in the Public Sector in general is not good. We need to create a critical mass of Distribution under different structural dispensations, for example, can we target about 25 per cent of Distri­bution in the Private Sector, JV with PSU and input base Franc­hisee in the next five years, evaluate its outcome and move on based on experiences?
  • The experience of privatisation of Power Distribution in Ori­s­sa – starting from Management Contract in 1998–1999, which did not work, to ownership privatisation in the year 2000–2001 threw up a number of lessons. Many of these were taken into account while structuring the Delhi Model of Privatisation of Distribution. However, one basic difference between Orissa and Delhi was that the rural proportion of electricity supply in Delhi was practically not an issue to the extent of the challenge that was faced in the case of Orissa. Privatisation of Distribution involving also large-sca­le rural supply will continue to remain a challenge in the Indian context of power supply for several years. The compulsions of political considerations would continue to dominate the power supply issues in the rural context. The Orissa example very clearly brought out that the type of concessions including financial grants which a Government can provide to a Sta­te owned entity becomes virtually impossible, if similar be­­­nefits were to be considered for Private sector owned Dis­tri­bution entities, however well deserved this may be. The inevitable consequence of this would be the ru­ral consumers who would be deprived of such benefits. The­re­fore, there is a strong case to consider a structure of rural electricity supply through a different organisational framework.

While introducing further privatisation, franchisee, or JV with central public sector undertakings, care needs to be taken to see that these well intentioned initiatives do not fall into debates whether the public sector is good or the private sector is good. The narrative has to be properly conceptualised and disseminated.

  • It has been projected, quite often, that the poor financial he­al­th of the State owned Discoms is primarily on account of the financial burdens they have to undertake on account of rural and agricultural supply. This may be true to an extent but not entirely. There are a large number of examples in the whole country which indicate that towns and cities do suffer from the inefficiencies of excessive Aggregate Technical and Commercial losses, much beyond 15 per cent, and in the range of 20 per cent to 50 per cent. These are fit cases for privatisation on a priority basis. The Delhi Model adapted with further modifications, based on the experiences of the last twenty years, could be worth considering for reforming Dis­tri­bution in these areas. They may have huge potential of making a significant difference to the financial health of the concerned Discoms. When these are aggregated for the co­un­try as a whole, it could be demonstrated that this initiative along with several other measures to bring about im­pro­vements, including the response of the State Governments to pay their dues and subsidies to the Discoms in time, timely revision of tariff by the Regulatory Commission including suo-moto actions, if such proposals do not come forward, doing away with the instrument of Regulatory Assets and appropriate restructuring and implementation of cross subsidies in the tariff structure, would definitely, in a reasonable time frame, bring about phenomenal changes in the financials of the Distribution sector. We must recognise that it is the financial sustainability issue which is now standing in the way of 24×7 Power Supply throughout the country and not the issue of Availability of Power, nor even the issue of Transmission capability. The urgent need is to fix Distribu­tion to achieve the above objective.

 

 

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