Distribution is the tail that wags the power dog. The power dog may bark and bite about tariffs, coal availability, and transmission bottlenecks, but it's the speedy and sustainable recovery of the distribution sector that will determine whether the power sector will turn around to operate under rational economic principles. You cannot keep pouring water into a bucket leaking like a sieve. While tariffs can be handled by political, policy and regulatory dispensations, it is the nitty-gritty management of millions and millions of customers - honestly and efficiently - that is the key to unlocking the gates to India's power paradise.
Even after 10 years of enactment of the Electricity Act, 2003, the financial health of distribution companies has not improved. In fact, it has worsened in most states. Out of 40 unbundled discoms, only a few make a surplus, while most are deep in the red.
The central government has been trying hard to reform this sector. Although a host of measures have been taken in the recent past (the single most impactful being the Rs 2 lakh crore financial restructuring plan for discoms), the real action lies within the jurisdiction of the states. (Click for table)
Currently, the net effect of the push for profitability and publicised ratings is that discoms are aggressively using load management (power cuts) to control purchases since realisations are below the cost of procurement. This is a huge step backward in time and economic development. Power assets are being under-utilised - just when we were able to up the ante in capacity addition. CRISIL has come up with an eye-opening research report that "effective" power demand growth in the 12th Plan period may only be 6.2 per cent, casting a long shadow on all talks of huge latent demand.
Five distribution issues need to be resolved on a war footing:
One, addressing the accumulation of "regulatory assets" on account of inadequate tariff revision, which has created huge liquidity pressures in distribution entities;
Two, ensuring the implementation of regular and "cost-reflective" tariff, including, if required, suo motu (as ordered by appellate tribunal recently) as a function of the state electricity regulatory commissions (SERCs);
Three, mandating "power purchase cost adjustment recovery" as the "distributor", is merely the aggregator of power inputs for consumers, and has to be reimbursed its cost of procurement;
Four, ensuring that regulators be mandated to review not just the financial aspect of distribution utilities, but also on the supply position with no power cuts being allowed other than for reasons of technical constraints;
Five, implementing the recommendations of the high-level panel, headed by V K Shunglu, that SERCs should be made independent financially as well as in their functioning.
It is clear that a large part of the solution lies in involving the private sector in distribution. In fact, the discoms reform package mandates PPPisation (public-private partnership) in distribution as one of the key conditions to be fulfiled.
There are two basic models for private participation in distribution:
Distribution licensee: This is a firm that been authorised by the relevant SERCs, under the Electricity Act, to own, operate and maintain a distribution system for supplying electricity to consumers in its area.
Distribution franchisee: It is an "agent" of a licensee who is duly authorised under a contract to undertake some or all distribution-related activities on behalf of the licensee. Incidentally, the Shunglu panel has recommended introducing "input-based franchisee models" in about 255 towns in its report.
Generally, the "franchisee" model has had easier acceptance on account of the perception of it not being "privatisation", i.e. involving sale of assets.
The table shows the progress made in private participation in electricity distribution.
Progress has been slow in terms of newer areas coming up for PPP intervention. The states wanting to move ahead on reform have traditionally faced resistance from the entrenched unions. In May-end, the Uttar Pradesh government gave in to pressure from the unions on privatising distribution in an additional four cities. Yet, surprisingly, the areas that have been given out for private management have done well. Distribution efficiency parameters in Bhiwandi (under Torrent) and Jalgaon (under Crompton Greaves) have shown significant upsides.
The biggest case study is, of course, Delhi, that has had the highest visibility in this matter. An agreement on the privatisation of power distribution in Delhi was signed between BSES, Tata Power and the Delhi government on May 31, 2002. This was, politically, a very bold step. The deal had its share of opponents. Petitions were moved in the Delhi High Court against the Delhi government for the method followed for "privatisation" of Delhi Vidyut Board. One of them was by Gajendra Haldea, then with the National Council of Applied Economic Research. Very recently, Arvind Kejriwal organised rallies and went on hunger strike exhorting Delhities not to pay "inflated" electricity bills. On net balance of consideration, most would agree today the move has worked well. Power purchase costs of Delhi power utilities rose 300 per cent in the last decade, but the tariff revision was limited to 65 per cent. This was possible largely because of the unprecedented reduction in commercial losses from the time of privatisation to now. Various other operational factors and efficiencies also helped.
In another development, that will push the PPP format, the government is mulling a new model where a power supplier will not manage the electricity distribution network. In a separate "carriage and contract" model, like the UK, the network would be owned by one company while the suppliers of electricity could be more than one.
India has 5,545 urban agglomerations and towns, of which 12 per cent are class-I - with a population of 100,000 and above. That means there are 665 class-I urban clusters waiting to get their electricity distribution act together. At least 100 class-I towns should be brought into the PPP distribution net every year, so that over a seven-year period, we have a clear reform agenda and action plan. This needs to be put on "mission mode".
The author is the Chairman of Feedback Infra
vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
