An easy solution to improve distribution business is privatisation of discoms, with transitional financial support from the govt and a prescribed commercial loss reduction trajectory
By Somit Dasgupta
A lot has been written about the Electricity (Amendment) Bill 2021, but nothing has generated more discussion than the concept of having multiple distribution companies (discoms) in a given geographical area. The Bill states that anybody desirous of engaging in the distribution business has to ‘register’ with the state electricity regulatory commission concerned, and that the regulatory commission would be obliged to register the new entrant within a period of 60 days. The new discom(s) will use the network of any other discom for wheeling power to their consumers. The power purchase agreements (PPAs) of the original discom will get distributed amongst the new discom(s), and they would also be free to source power from other sources, such as electricity exchange(s).
The Bill only states the intent of the legislation, i.e. to have more than one discom in an area so that consumers can choose their supplier. The nuts and bolts have not yet been spelt out, and as the cliché goes, the devil is in the detail. Conceptually, having multiple discoms in an area is no different from the concept of separation of ‘content and carriage’, which the government had first introduced in the Bill drafted in 2014. This will again throw open issues that were being hotly debated while considering separation of ‘content and carriage’, such as who shall be responsible for losses, how ‘cherry picking’ will be avoided (taking away lucrative consumers like industrial and commercial consumers, and leaving out low-end ones like agriculture and domestic), what would be the modality of declaring ceiling tariffs when there is more than one discom, what would be the system of cross-subsidies, etc. This new concept of using the wires of any other discom (as stated in the Bill of 2021) has brought in other challenges like how will non-discriminatory open access of the distribution wires be ensured, will the original discom still be interested in upgrading its distribution infrastructure if it has to share it with other discom(s) in the area, and so on. It is pertinent to note that two discoms operating in an area using each other’s wires is already happening in Mumbai and has caused considerable friction and litigation. Further, this obsession of giving choice to consumers to choose their supplier is also not understood because it has been seen in the UK (where such choice exists) that small consumers hardly change their suppliers as the transaction cost is very high.
One crucial issue that seems to have been overlooked in this entire exercise is the effect of this Bill on the recent privatisation of discoms undertaken in Odisha and in Chandigarh. When the Odisha discoms were privatised, certain projections were made regarding their commercial losses in the years to come, which the privatised entities are expected to meet. These targets now may become difficult to meet if a part of the clientele shifts to some other discom(s). Their entire calculations will go awry because the consumer base and the consumer mix will undergo a change if more discoms jump into the fray. The same logic will apply to Chandigarh. The government may henceforth find it difficult to undertake privatisation of discoms because no potential investor will be able to project its revenue realistically and no regulatory commission can lay down a trajectory for reduction of commercial losses! Privatisation of discoms and having multiple discoms, therefore, will have to be treated as alternative models and it may no longer be practical to pursue both, assuming that the new Bill is passed.
Although quite a few big consultancy firms are speaking in favour of the provisions of the new Bill, their views need to be taken with a pinch of salt since what they are visualising is a huge potential for consultancy assignments. After all, a roadmap for this entire exercise has to be made that would require revising existing regulations, preparing several reports touching various facets, enough to keep their coffers jingling for the next couple of years. The easiest solution on how to improve the distribution business is perhaps through privatisation of discoms on a public-private partnership (PPP) mode with transitional financial support from the government and a prescribed commercial loss reduction trajectory. This is exactly what was done in Delhi in 2002 and the results are there for us to see.
The author is senior visiting fellow, ICRIER, and former member (Economic & Commercial), CEA