Today's Editorial

18 August 2018

The case for power discom privatization

Source: By Shalabh Srivastava: Mint

Distribution serves the most vital function in India’s power supply chain, yet it is also possibly the weakest link. State discoms continue to make losses despite multiple bailouts. While the government’s Ujjwal Discom Assurance Yojana (UDAY) scheme seeks to reduce discom losses, there is hardly any impact on their financial status. In fact, the combined losses of state-owned power discoms by end FY 2017-18 were 40,295 crore. Discoms continue to face power theft (published aggregate technical and commercial, or AT&C, losses being nearly 20%), billing inefficiencies and regulatory delays in tariff increases, resulting in financial losses. The accumulated debt of power discoms was 45,952 crore. The banking sector still faces the possibility of an estimated 175,000 crore worth of non-performing assets due to the power sector.

Privatization can be a possible solution to overcome the sector’s commercial challenges. Several private utilities (Calcutta Electric Supply Corporation Kolkata, Reliance Mumbai and Torrent Gujarat) were established prior to the enactment of the Electricity Act, 2003, and attempts were made to privatize state-owned utilities. The Act further facilitated private investment, and new private participation models have been developed to reduce losses, increase revenue and improve consumer service. Operational autonomy is one of the biggest potential advantages of privatization. Profit motive also creates a more efficient value chain, and private companies, unlike governments, do not assess investments in five-year windows. The private sector’s ability to strategize and plan for the long term is essential in an area like power distribution.

Private participation in power distribution can follow any of the following models: licensing, distribution franchisee, and gain-share-based outsourcing. Other innovative structures are possibilities as well. Model adoption depends on ownership, assumed risks, expected returns, and other factors. The licensing (or equity-share) model offers majority stake and management control to the private player. In the distribution franchisee model, however, power procurement is retained by the licensee, the discom, ensuring that the franchisee is not exposed to the vagaries of changing power prices or tariffs. There are several different models with this framework, including the revenue-based collection franchisee model and the input-based franchisee model. In the gain-share-based outsourcing model, a private player provides very specific services, infusing utilities with better technologies, management and consumer services without incurring any losses associated with assets and ownership.

Observations from private sector participation in power distribution in India and abroad can help create guidelines for future implementation. First and foremost, the most compelling driver is the private sector’s acumen in reducing losses and building sustainability through profits. Second, it is essential that the licence provider and the state government extend support to the private player. Third, it is important to note that although the licensing model is more effective for large private players who can invest high capital upfront, the franchising and outsourcing models are more scalable as they do not put as much pressure on the private player to invest upfront. Lastly, power distribution companies should adopt a customer-centric approach that showcases the benefits of secure and reliable power, to achieve timely bill payment.

Despite the potential benefits, distribution privatization continues to face scepticism due to mixed results in the past. The Uttar Pradesh and Telangana governments’ privatization proposals met with resistance. In Odisha, all the distribution companies are back in government hands. The Maharashtra department of power, however, is considering privatizing distribution in three more cities after Bhiwandi and Nagpur. This is a welcome development, considering the heavy recovery losses in these cities.

To encourage private sector participation, state governments can introduce certain regulatory measures. They can move beyond bid parameters, shifting focus from aggregate AT&C losses reduction to input rates (above minimum AT&C loss trajectory). Utilities can be incentivized with two-three years of extended moratorium or interest-free loans on sales equivalent to the area they franchise or outsource to a private player. Or private players could be allowed higher return on equity/equity share/profit sharing for innovative capital investments that result in significant reduction in losses or consumer service improvements.

Private companies, for their part, can turn to innovation to improve power distribution. Technology interventions can improve every consumer-facing aspect of distribution. Besides, innovative distribution models can be explored, such as integrating existing decentralized microgrids in remote areas with utilities to assist in pan-India household electrification (as envisaged in the Saubhagya scheme).

Saubhagya scheme efforts can be complemented with rural household solar electrification in a decentralized mode, as undertaken by the Uttar Pradesh government’s Decentralised Distributed Generation Scheme for 25 villages. The project is financed by the Rural Electrification Corporation of the Union ministry of power; 90% of the project cost has been provided as capital subsidy, and the remainder as a loan to the state government. Similar models can provide grid-quality power to consumers in remote areas. Further, after these areas become grid-connected, the private operator can continue distribution services to consumers through the provision of power at specific intervention points and directly collect revenue. The private operator can essentially act as the utility’s mini-grid operator or franchisee, with local presence improving revenue collection as well as consumer services in remote areas. With the right political will, regulatory environment and financial incentives, the gaps in India’s power distribution can be effectively overcome through selective and well thought out privatization models.



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