Powering distribution reform

The focus should be privatising existing discoms rather than bringing in more licensees.

This was repeated just before the beginning of the ongoing Parliament session also, and there were reports that 34 Bills are going to be tabled including the Electricity (Amendment) Bill 2022.
This was repeated just before the beginning of the ongoing Parliament session also, and there were reports that 34 Bills are going to be tabled including the Electricity (Amendment) Bill 2022.

By Somit Dasgupta

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Before every session of Parliament, the speculation that the Electricity (Amendment) Bill is going to be tabled gathers momentum and gets considerable traction in the media. This was repeated just before the beginning of the ongoing Parliament session also, and there were reports that 34 Bills are going to be tabled including the Electricity (Amendment) Bill 2022.

What the status of this Bill is at present, is not known—though there were some reports in the media describing some of the provisions of the Bill. The main provision that has been reported in the press with arguably the largest frequency relates to a move to allow more than one distribution licensee to operate in a given geographical area.

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It is apparent that the bug of competition in retail supply and giving the consumer a choice on her retailer is still doing the rounds. The present Electricity Act 2003 (Act) does allow more than one distribution licensee in an area, except that each has to lay down its own set of wires. This, of course, is against the basic tenet of natural monopoly, and therefore this concept of each distribution licensee having its own set of wires needs to be dispensed with.

With the aim of ushering in competition in retail supply, several models have been proposed ever since 2014. First, the government introduced the concept of separation of ‘content and carriage’, which means that there would be several retailers but only one entity—which, crucially, won’t take on the role of a retailer—would be the owner of the distribution wires. The owner of the wires will provide non-discriminatory, open-access to all retailers, and consumers would be free to choose their retailer.

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The fact that this is impossible to implement in India given our high commercial losses, regime of cross-subsidies, defective/non-installation of consumer meters, problem of amortisation of regulatory assets, etc, finally seems to have dawned on the government. The alternative model then posited by the government last year was delicensing the distribution sector. The operational details of this model were never elucidated, so, not much is really known how this model was to operate. The basic point that comes to mind, however, is that if the distribution sector is delicensed, then how will the electricity regulatory commissions govern the sector?

Now, the government seems to have disbanded this concept also, and the latest model says that there would be several distribution companies (discoms) in any geographical area. This is not really a segregation of ‘carriage and content’ and is similar to the provisions of the existing Act, except that the distribution licensees do not need to have their own set of wires. The implication is that the existing distribution licensee will have to provide non-discriminatory, open-access to any other licensee(s) who may be granted a licence to operate in the area.

Here again, not much can really be said till the time operational details are made available. We do, however, have the case of Mumbai where two licensees are in operation, and how difficult and contentious it has been is known to all. The less said the better.

This frequent change of the structure of the distribution sector shows that there is some degree of confusion, and that the government has not been able to make up its mind.

At this juncture, one wonders as to what is the government’s thinking on privatisation of the distribution business. Have we junked the model of privatisation that was announced in 2020 when it was stated that the distribution business in all the Union Territories will be privatised? A beginning has already been made in the case of Chandigarh and Dadra & Nagar Haveli. This move was not really smooth as it went into litigation over a technicality regarding the wordings of Section 131 of the Act.

Besides, the fact that privatisation has been successful in Delhi cannot be ignored where commercial and technical losses have come down from 50% to about 7% today. The quality of supply has also improved as compared to the erstwhile Delhi Vidyut Board (DVB) regime.

This author has repeatedly written against the concept of giving the choice of retailer to the consumer. A consumer in India, as of now, does not need a choice; she needs a retailer who can provide stable, high-quality supply at an affordable price.

By bringing in more retailers or distribution licensees, the quality of service—or, for that matter, price—is not going to be any different. After all, about 80% of the cost of supply is on account of power-purchase, which will be the same for all distribution licensees operating in an area. Besides, having different retailers will open a plethora of operational issues, and governance of the sector will collapse.

One would like to cite the example of the UK where retail competition has not helped the small consumer. Consumers don’t really make a change in their retailer since the gain, if any, is minuscule compared to the transaction costs that one has to incur. In the UK, after introducing full retail competition by 1998, today, about 70% of the power is being sold through vertically integrated utilities, and there are six utilities (called the ‘Big Six’) which are managing the major part of the business.

To conclude, our efforts should be directed at how to strengthen the existing discoms. Privatisation of the existing discoms with limited hand-holding by the government is the key. It does not make sense to introduce confusion in the sector by bringing in more distribution licensees or retailers, for the present at least. There are enough problems plaguing the sector that will only get compounded by this ill-advised move.

The author is Senior visiting fellow, ICRIER and former member (Economic & Commercial), CEA.

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First published on: 04-08-2022 at 04:30 IST