Powering distribution reforms

Updated: Dec 30 2013, 09:14am hrs
It is well known that the power distribution segment is the weakest link in the entire power sector value chain. Unless structural reforms take place in this segment, long-term prospects of the overall sector would be in jeopardy. High AT&C losses, unsustainable cross-subsidy levels and pile up of regulatory assets have been a bane for the sector for a long time. Distribution company (discom) restructuring alone cannot be a magic wand to solve the sectors inherent problems. Serious structural reforms in the Indian power distribution segment are the need of the hour to obviate another round of restructuring in the next decade. The best way to undertake these reforms is to allow gradual transformation of present monolithic, monopolistic and opaque discom structure into a multi-buyer, multi-seller model for retail supply of power coupled with separation of the wire business.

However, before allowing this, certain serious anomalies need to be corrected in a phased manner. Currently, the distribution segment suffers from high AT&C losses (as shown in the accompanying figure), which can be reduced to normative levels of 15% across the country by elimination of theft, improvement in billing and collection efficiency and improvement of T&D infrastructure at every voltage level. Secondly, unsustainable cross-subsidy, i.e. industrial/commercial consumers subsidising agricultural and retail consumers, is also a key anomaly. More importantly, cross-subsidies in India are grossly under-estimated as its calculation itself by discoms is grossly inaccurate. Ideally, cross-subsidy should be calculated voltage-wise/category-wise to reflect actual cost of servicing any consumer. However, the lack of baseline data on voltage-wise consumption gives an incomplete picture of actual cross-subsidy levied. Hence, it is pertinent to gradually phase-out cross-subsidy prior to introducing retail competition. To give fillip to this process, a surcharge like universal charge (UC), as adopted by the Philippines, could be introduced across all consumer categories and its collection could go towards formation of a state-wide/national fund to reduce the extent of cross-subsidy in retail supply. A combination of declining AT&C losses and UC mechanism may reduce overall cross-subsidy entailing cost reflective tariffs across consumer categories.

Critics would argue that removal of cross-subsidy would lead to an increase in agricultural and domestic tariffs which may not be practical due to socio-political compulsions. However, phased state government subsidy introduction for limited period to these cross-subsidised consumers and gradually increasing their tariffs, thereby reducing overall cross-subsidy, could be a far superior option than bearing of a large cross-subsidy by high-paying consumers. This would help make tariffs truly cost-reflective. Thus, a decline in industrial tariffs would result in enhanced competitiveness auguring well for the subsidising consumers through a meaningful growth in their consumption pattern.

Another anomaly that exists in the power distribution segment is accumulated financial losses, i.e. regulatory assets. To correct this, a special purpose vehicle (SPV) could be proposed to take over all the existing financial losses and regulatory surcharge could be levied on all consumers till the regulatory assets are fully recovered, thus isolating the consumers from a tariff-shock.

International experience (that of the UK, Australia and Argentina) shows that successful introduction of retail supply competition is possible only after elimination of cross-subsidies and ownership segregation of wire and retail power supply businesses. Further, most of the countries have introduced retail competition in a phased manner starting with large industrial consumers finally moving down to domestic/residential consumers.

At present, discoms in India comprise a single entity laying last-mile distribution lines and ensuring power supply to the end-consumers. There is, thus, no clear demarcation between the wire and the retail supply business. While the wire business, by its very nature, is a monopolistic and regulated-return earning business, retail supply is more conducive to provide consumer a choice in the form of multiple suppliers, as it involves purchase of electricity in bulk from generators and selling it to consumers, apart from customer services, billing and collection of charges from consumers. In the present market structure where the wire business as well as retail business is handled by a single distribution company, conflict of interest makes discoms wary of losing the retail segment to competition.

Moreover, wire businesses could serve as common carriers and could be paid reasonable regulated return on their investments. The retail business could be opened to multiple companies operating in the same area, with an option to consumers to choose their retailers based on price, reliability and quality of service.

Before rolling out phased competition in retail supply of electricity, it is important to have efficient supply infrastructure in place. This entails setting up an advanced metering infrastructure (AMI) for consumers in the competitive segment of the market. Further, discoms may be directed to ensure that all consumers connected to a feeder supply from the retailer and any consumer wishing to opt for a different retail supplier may make arrangements to be shifted to an independent/dedicated feeder. The creation of new metering infrastructure involves a capital subsidy for a state. However, it will ensure improvement in baseline data resulting in accurate estimation of cost of supply at different voltage levels.

Initially, the introduction of competition in retail power supply could be limited to commercial and industrial consumers (HV/EHV). Currently, these consumers have to pay open-access charges for sourcing power directly from generators. Over a period of time, with reduction in cross-subsidy, open-access charges could be minimised to create a level playing field for all the consumers. At this stage, it is very critical to establish adequate and matching transmission capacity to optimise flow of electricity across regions, vibrant short-term power market, accurate baseline data for voltage-wise consumers, and regulatory compulsions for ownership separation of wire and retail supply business and transfer PPAs to these supply licensees (present discoms).

Subsequently, the retail supply counterparts (currently a part of discoms) could invite competitive bids/purchase power from the power market for various distribution circles to ensure healthy competition in retail power supply across the country.

Retail supply competition could enhance operational and cost efficiencies, and give the end-consumer more choice. Cost efficiency could be achieved as competitors will try to reduce the input costs, and operational efficiency could get focussed as performance (reliable and quality supply of power) becomes a major criterion for consumers exercising their choice amongst various suppliers. Therefore, by introducing competition in retail supply and ascertaining that the market functions well within the defined set of rules, market competition is expected to ensure service quality as well as appropriate pricing. Bringing in user choice through competition also helps in redefining the regulators role from being a price-setter to that of a monitoring body and arbitrator. In a competitive framework, the regulators role would be to establish guidelines/rules for the competitive retail market and to strictly monitor the market for compliance, instead of fixing tariffs for every service.

Revati Kasture & Piyush Nimgaonkar

Revati Kasture is head, CARE Research & Grading Services; Piyush Nimgaonkar is manager & sector specialist.

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