The tale behind putting off key power reforms

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The tale behind putting off key power reforms

Tuesday, 04 January 2022 | Uttam Gupta

The tale behind putting off key power reforms

DBT and de-licensing of electricity distribution hold the key to extricate the sector from morass and make power available to consumers at affordable rates

In the draft Electricity (Amendment) Bill, 2021, there were four provisions— direct benefit transfer (DBT), de-licensing of the electricity distribution business, creation of the Electricity Contract Enforcement Authority (ECEA) for adjudication of contract disputes, and a single choice committee for appointment of chairman and members of state and central tariff regulators. Reportedly, the Central Government has dropped all four.

While the third and fourth proposals are procedure-oriented aimed at ensuring effective enforcement of contracts, the first two are revolutionary reforms. If implemented in letter and spirit, they have the potential to drastically improve the Indian power landscape. 

Before we get to analyze as to what they can deliver and how and why these have been dropped from the bill, it is necessary to take stock of what is ailing the sector. 

For nearly two decades, four problems have been haunting the Indian power sector namely, inadequate availability and frequent disruption in supply; financially stressed power distribution companies (PDCs); increasing dues of independent power producers (IPPs) and high cost of electricity supplied to industries and businesses. The Government triedto address them but has not succeeded in making any dent.Meanwhile, the problems have assumed menacing dimensions.

Let us look at some harsh facts to gauge their intensity. As of March 31, 2021, discoms had piled up a mammoth debt of over Rs 450,000 crore.This was despite a bail-out package coordinated by the Union Governmentunder UDAY (Ujwal Discom Assurance Yojana) in November 2015 (under it, their outstanding debt of Rs 400,000 crore was extinguished).They also owe a staggering Rs 100,000 crore to power producers - IPPs and other generators in the public sector such as NTPC - despite a Rs 130,000 crore lifeline given last year under Atmanirbhar Bharat Abhiyan (ABA).

In most states, electricity is supplied to industries and businesses at more than Rs 10 per unit. As for the availability, the entire network remains vulnerable due to huge receivables of IPPs/PSU generators from discoms. However, for intervention of the Centre by way of arranging funds- for instance, during 2020/21, Power Finance Corporation  (PFC) and Rural Electrification Corporation (REC) were roped in to give Rs 130,000 crore loan to discoms --to enable them clear dues to IPPs/PSUs, disruption in power supply could happen any time.

What is the root cause or, shall we say, genesis of this perennial mess in the power sector?

A sizeable chunk of electricity is supplied to households and farmers at a fraction of the cost of purchase and distribution or even free (in some states, subsidy accounts for 30-40 per cent of discoms’ revenue). Such supplies are made possible because the State governments order discoms under their ownership and control charge low/nil tariff from these preferred consumers with a promise to reimburse them excess of the cost of supply over it as subsidy.    

Most States either don’t make reimbursements at all or do it partially and that too after considerable delay. As a result, on units sold to the beneficiaries of subsidized power, discoms incur huge under-recovery. This is aggravated by power theft that happens under the patronage of political brass. Inflated tariff allowed to producers under a cost-plus formula increases the under-recovery.

In a bid to offset this under-recovery, and under instruction from their masters (read: the State government), discoms charge high tariffs on supplies to industries. Considering that the former are sole suppliers of power, the latter have no option but to pay. Despite this cross-subsidization, overall, discoms incur huge loss.

The genesis of the problem lies in an uncompromising stance (albeit populist) of all parties irrespective of their political affiliation to give cheap/free electricity to farmers and poor households (this class matter in elections) and use discoms to achieve it. Even now, in the run-up to elections in 5 states, they are competing with each other to offer free power including waiver of unpaid bills.

Successive governments have made no credible effort to address this endemic problem. All that they have done is to give to discoms the so-called financial restructuring package (FRP) - a fancy nomenclature for condoning their debt. In fact, four FRPs (2002/ 2012/ 2015/2020) have been given in the last over two decades involving drain of hundreds of thousand crore from the central and state exchequer.

The way forward is to delink subsidy to preferred consumers from the electricity supplier, namely the discoms. The State Government should pay subsidy directly to the beneficiary using the direct benefit transfer (DBT) mechanism on lines similar to DBT of LPG subsidy (this was done during January 2015 - June 2020), even as discoms are free to fix tariff taking into account the cost of purchase, wheeling and distribution.  Concurrently, private firms should be allowed in the distribution business to give competition to discoms and ensure that consumers are not taken for a ride.

At present, almost the entire infrastructure for transmission, wheeling and last-mile delivery of power is owned and controlled by discoms. To ensure that there is a level playing field, this infrastructure should to be stripped from the discoms and vested in an independent entity. All suppliers should have access to it on ‘common carrier’ principle in a transparent and non-discriminatory manner.

There is also dire need for unshackling discomsfrom state control by converting them into autonomous entities.Preferably, they should be made ‘corporate enterprises’ and allowedtooperatelike any private firm. This will enable them independently glide their operations - including tariff setting and negotiations for purchase of electricity- in a professional manner.

These steps will reduce cost of purchase, increase realization from sale of electricity and help eliminate theft. All three outcomes will combine to turn discoms into profit making entities. Moreover, being under no obligation to supply power to farmers/households at subsidized rates (or free), there won’t be any under-recovery hence no reason to charge more from industries and businesses thereby making power affordable/competitive.              

In short, these twin reforms — DBT and de-licensing of electricity distribution — hold the key to extricate the sector from the current morass and lay the foundation for ensuring the viability of power producers and distributors on one hand and making this most crucial infrastructure input available to consumers at affordable/competitive rates on the other. Their inclusion in the Electricity (Amendment) Bill, 2021 would have been the first major step forward in realizing this goal.

Dropping from the draft now shows that the Government is no longer interested in pursuing them. It also shows that none of the states are willing to let the ‘goose that lays golden eggs’ (read: discoms they use for garnering votes)go out of their hand. However, what prevents states from giving the money directly to farmers or households and still win election? There is a big difference.

Unlike the present dispensation of routing subsidy through discoms wherein, the State government can afford to take things leisurely - not making upfront payment, not paying in full and delaying payment - under DBT, they cannot enjoy any of these luxuries. Hence, they staunchly oppose DBT.Allowing the private sector in electricity distribution business also does not suit them as this has the potential of exterminatingdiscoms.

For now, power reforms are a distant dream.

(The writer is a policy analyst. The views expressed are personal.)

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