The annual losses of Indian power distribution companies (Discoms) are inching toward $10 billion, a figure which is likely to head north with the impact of Covid-19. The average AT&C (aggregate technical and commercial) losses of Discoms in India is over 20 per cent, which is likely to go up this year due to subdued commercial and industrial demand. The average AT &C losses of Discoms may be 20 per cent plus, where the losses of some Discoms are as high as 40 per cent, while those of others are in single digits.
We must understand that the impact of just one per cent AT&C loss to the power sector is as high as $1.15 billion. India consumes about 1,400 billion units of power every year and if we take one per cent of that at the average billing rate of Rs 5.5 per unit, it comes to Rs 7,700 crore, or a little over $1 billion. The average level of losses of discoms will need to come down by 10 per cent if we have to achieve break- even levels. It is hard to believe that this can be achieved without involving the private sector in one form or the other. By the way, it must be noted that the Discoms with AT&T losses in single digits are all managed by private companies.
Privatisation undoubtedly is the last resort of the Indian power sector if it has to be saved from succumbing to its losses. Recognising this, the central government has been advocating privatisation of distribution companies and in fact, has demonstrated its seriousness by taking a decision to privatise all the Union territory Discoms. Privatising the state-run discoms is not finding favour within the state political systems, however. In some states, the bureaucracy is not too keen to lose power, despite being aware of its economic benefit to the state exchequer.
A case in hand is Delhi, where distribution companies were privatised in 2002. Prior to 2002, the state government subsidised the discoms to the extent of Rs 12 billion annually which was moving up every year. Post privatization, not only did the government receive cash in terms of the sale of 51 per cent stake in the Discoms to the Tatas and Reliance, but started earning dividend income from the Discoms as well. The Tata discom even issued bonus shares to the Delhi government.
This was a total turnaround in the financial position of the state of Delhi, which made it spend good money on good causes rather than supporting ailing discoms who would have perennially needed support. This could not have been possible without the strong political will shown by the Sheila Dixit government at the helm then, who believed that it would eventually be a wise decision, not only economically but also politically. And so, it turned out to be. Many of her party leaders ascribed the main factor for Sheila Dixit led government’s three consecutive wins in the Assembly elections to the power reforms. Not many know that the privatisation of the Discoms run by the Delhi state (not being a full state) did need the approval of the Central government, which it is understood, was given promptly by the Union Ministry of Power, then under the leadership of Mr Suresh Prabhu, with the concurrence of the then Prime Minister, the late Atal Bihari Vajpayee. The Bharatiya Janata Party (BJP), which was in power at the Centre, fully supported the reform proposal of a Congress run state, without indulging in any politics at all.
To make privatisation of the Discoms politically palatable, the model will need to address certain issues ‒ the major one being protecting the social tariff structure or rather its elements ‒ taking into consideration the limited capability of weaker sections of society to pay the full cost of electricity. One could consider segmenting the power purchase agreements (PPAs) into two parts. The older, cheaper PPAs could be allocated to fix the tariff for the weaker segment of consumers on a full cost basis. The remaining PPAs could form the basis of cost to fix the tariff for the remaining consumers. In one sense the lower tariff so worked out for poor consumers would be justified, as most of the incremental demand in the last decade or so can be attributed to the lifestyle of the well-to-do section of society and to industrial and commercial establishments.
The new PPAs contracted by Discoms in recent decades would mostly be the expensive ones, whereas the older ones with fully depreciated plants have lower power costs. So, allocating only the older PPAs with lower cost to the Discoms to match the base demand of the poor, cannot or need not, be considered cross subsidy.
Further, the Amendment Bill of 2020 gives a very useful lever to the political system to attain the much higher loyalty of the poorer sections. The Amendment Bill provides for direct subsidy by the state government to electricity consumers. So, in case the lower tariff worked out as per the above segmental approach is still considered by the state government as not so affordable for certain consumers that it wishes to subsidise it, the state will do so now only through DBT (direct benefit transfer) mechanism. The method was different so far.
Hitherto, the state government was required to pay the aforesaid subsidy to the Discoms on a quarterly basis in lump sums as per section 65 of the Act. It would not be wrong to assume that individual consumers would not either know of it or realise that he or she gets this subsidy from the incumbent government. The proposed direct benefit transfer will be a transfer straight into the bank account of the consumer. And with tele density being very high even amongst poor people, the monthly alert on their mobile phone would remind them of the generosity being shown by the government on a monthly basis, thus giving a big political mileage to the incumbent government.
There could be several other such structures to make a compelling political case as well as improve the attractiveness of the privatisation proposal. For example, the government can be made a single aggregate buyer for all the consumers of the weaker section. Most of the agri feeders have already been segregated by now. So, the tariff payable can be at the feeder metering point where ever separate agri feeders exists and for the remaining, the billing can be the aggregate of consumers’ metre readings of a specified consumer category. The government is free to charge whatever subsidised tariff it intends to collect from such consumers. This will ring fence the weaker section of consumers, who will be dealt with by the government, while electricity supply and other customer services continue to be provided by the privatised Discoms.
Service Level Agreements (SLAs) can be imposed on Discoms with penalties. Such a concept of cluster billing already exists in many Discoms when the electricity consumption, say in large housing complexes, are billed at the DT (distribution transformer) level to the estate agency who then make and distribute individual bills based on sub meters. One of the reasons why private players hesitate to take over state Discoms is the hassle around collections from agri and rural domestic consumers. The mentioned scheme will mitigate that risk as well, improve the attractiveness of the Discom for potential suitors and enhance its equity value to the benefit of the state.
When the quality of supply also improves simultaneously ‒ which is highly probable ‒ it will go a long way in making the residents of the state happier and improve their quality of life. The effect of the improved power situation will also have a multiplier economic impact on industrial and commercial activity in the state. For example, the sale of electrical appliances in Delhi, especially air conditioners and other white goods went up manifold (except for gensets) with reliable power supply and ease of load enhancements. All in all, if the privatisation model is structured well the political system will have a win-win situation from all political and economic viewpoints.
Lastly, the privatised Discoms would still be overseen by government nominees on its board, which is not only a plus plus point from the consumers’ perspective, but also helps Discoms in many of their functions that need government approvals. The state governments now need to seriously get into taking a Stop Loss mode and bite the bullet which has almost become a bomb!
