Unshackling of discoms will take away the leverage parties enjoy to serve their populist goal of giving cheap/free power to people at election time
Since last year, there have been several announcements regarding the reformation of power distribution companies (discoms). They include the Electricity (Amendment) Act, 2020,Reforms-Linked, Result-Based Scheme for Distribution (RLRBSD), and a special loan of Rs 90,000 crore(subsequently raised to Rs 130,000 crore)to discomsin 2020, and the new draft National Electricity Policy, 2021.
The key reform measures included (i) developing an efficient market for electricity distribution; (ii) de-license the distribution business, bring in competition, and give the consumer power to choose supplier (or “open access”); (iii) direct benefit transfer (DBT) of subsidy; (iv) putting a cap on the hike in power tariff; (v) linking payments by discoms to letter of credit (LoC); (vi) denying grants or loan to loss-making discoms, etc.
An overwhelming share of power generated by PSUs such as the National Thermal Power Corporation (NTPC), etc., independent power producers (IPPs), besides generating stations of State electricity boards (SEBs) is procured by discoms (these are mostly owned and controlled by State governments) under power purchase agreements (PPA). Most of these PPAs are long-term contracts up to 25 years. A mere five per cent of the electricity is traded.
The State governments order discoms to sell electricity to some preferred consumers, viz., poor households and farmers, either at a fraction of the cost of purchase, transmission, and distribution, or even free. On the units sold to these groups, they incur colossal under-recovery. This is aggravated by aggregate technical and commercial (AT&C) losses – most of it is plain theft. In flated tariff allowed to IPPs/PSUs under a cost-plus formula (under the PPAs) adds to the revenue shortfall.
A deadly cocktail of these three factors contributes to persistent and increasing losses of discoms. In 2015-16 it was Rs 52,000 crore, Ts. 17,000 in2017-18 (this reduction has to do with a massive bail-out given in November 2015 under Ujwal Discom Assurance Yojana), Rs 30,000 crore in 2019-20, and Rs 58,000 crore in 2020-21.
In this backdrop, let us analyze the reform measures: (i) A pre-requisite for the development of an efficient market for electricity distribution is that a major chunk of power should be available for sale in the open market. But, with 95 per cent of electricity tied to PPAs, that too long-term, this is unthinkable.
About (ii), considering that the entire distribution network — transmission lines, feeder lines, transformers (that caters to households), industries, etc. — is owned and controlled by discoms, any talk of letting in private entities is a misnomer.
As for ‘open access’, a provision was made even under the amended Electricity Act (2003). Under this policy, to be implemented within five years of its enactment, i.e., by 2008, the choice was given to the bulk consumers (having consumption more than 1 megawatt) to choose their supplier. But another provision in the Act required such customers to pay an ‘open access surcharge (OAC)’ to the concerned SEB they wanted to leave.
State governments used this lacuna to the hilt to shield the SEBs who are prone to charging exorbitant tariffs from industries. By fixing the surcharge at a high level and not bothering to reduce it (as mandated under the Act), they ensured that post-switch, the effective cost of power to the consumer — tariff charged by the new supplier plus OAC — is higher than what they pay to SEBs. That rendered the switch uneconomical.
They have not even spared the Railways which spends over Rs 12,000 crore annually on the purchase of electricity. Under the Railways Act, it is allowed to distribute and supply power and is a “deemed” licensee as it is buying electricity for its consumption and is exempt from payment of the surcharge. Yet, it has to pay OAC as States will not give’ NOC’ – a requirement for availing exemption.
Coming to (iii), under DBT, the State Government gives subsidies directly to the target beneficiaries, even as discoms fix tariff in a manner as to fully recover their cost of purchase, wheeling, and distribution, thereby avoiding any under-recovery on such sale. They also need not charge more from industries and businesses which they have to do under the present regime to cross-subsidize supplies to preferred users. With direct cash transfer, discoms can be freed from state control which will help them reduce costs including by reining in theft. Under this regime, it will also be easier to implement “open access”.
Despite these positive spin-offs, the Union Government has not shown the gumption to implement the DBT. In fact, following strong protests from farmers’ leaders on its inclusion under the Electricity (Amendment) Act, 2020, it has even promised that the status quo will continue. If the existing system of supplies at heavily subsidized tariff or even without charge to farmers has to continue, then, logically, the same should apply on supplies to households as you cannot have two different methods of delivering subsidy to different sections of the society. So, there is no hope of the DBT ever seeing light of the day.
As for (iv), discoms can recover only up to 15 per cent of under-recovered power supply cost from other consumers. Simply put, if their under-recovery from supplies to farmers/households is say, ‘X’, then they will be allowed to recover only 0.15X by hiking tariff on supplies to industries and businesses. This will end up further bloating the losses of discoms (though industries will face a modest hike in tariff vis-à-vis the existing scenario of no cap). But this will not prompt them to set their house in order all the more when they know that eventually, the Government will bail them out.
As for (v), under the LC arrangement, the banks guarantee that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to pay, the bank will be required to cover the full or remaining amount, which, in turn, it will recover from the buyer using all available legal means. Here, the buyer being the discom – owned by the State -it will be a daunting challenge for the bank. As for (vi), denial of loan to loss-making discoms will not make them feel the heat as experience shows that help reaches them by hook or crook.
To conclude, measures such as those mentioned under (iv), (v), and (vi) are merely cosmetic while the political brass does not have the gumption to act on other measures —as discussed under (i), (ii), and (iii) — which are real reforms. This is because it will require the unshackling of discoms and that will take away the leverage that all parties currently enjoy to serve their populist goal of giving cheap/free electricity to the people who matter at election time. No wonder that we hear proclamations about reforms only to justify mammoth capital infusion whenever discoms need salvaging.
Under UDAY (2015), discoms were given a package worth Rs 400,000 crore but are still saddled with under-recovery of Rs 0.42 on every unit of electricity sold and a debt of about Rs 450,000 crore as on March 31, 2021.Under RLRBSD, the government will be spending another Rs 300,000 crore but with no hope of trimming under-recovery. The vicious cycle will continue.
(The writer is a policy analyst. The views expressed are personal.)
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