Electricity reforms shelved

During a review meeting with the bureaucrats of states and UTs and CEOs of power sector CPSUs on December 18, Union Power Minister R K Singh expressed satisfaction over the country becoming power-surplus and increasing the power availability to 22 hours in rural areas and 23.5 hours in urban areas. He opined that “the next step is to take it to 24X7 guaranteed power supply at an affordable price and ensure the viability of power distribution companies (discoms).” The two issues require close examination. 

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% of discoms’ revenue). That goes far beyond what could be termed ‘affordable’; it is a freebie. Such supplies are made possible because the state governments order discoms under their ownership and control to charge low/nil tariff from these preferred consumers, with a promise to reimburse the discoms for it. 

But 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 subsidised power, discoms incur huge under-recovery. This is aggravated by power theft that happens under the patronage of the political class. Inflated tariff, based on a cost-plus formula, allowed to power producers under power purchase agreements (PPAs) increases the under-recovery. 

In a bid to offset the loss, and under instruction from their masters, discoms charge high tariffs on supplies to industries and businesses. Considering that the former are sole suppliers of power, the latter have no option but to pay. It is a different matter that despite this cross-subsidisation, overall discoms continue to incur huge losses. 

When the minister talks of making power affordable, the implied reference is to the exorbitant tariff charged on supplies to industries and businesses. As for the viability and sustainability of discoms, his concern is primarily over their persistent losses (as of March 31, 2021, they had piled up a mammoth debt of over Rs 4.5 lakh crore) which, in turn, has led to high pending dues to power producers, currently over Rs 1 lakh crore.

To tackle the losses of discoms, the power ministry has initiated several measures including denial of extra borrowing limits, non-release of funds to states under ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD), cap on hike in tariff, linking payment by discoms to LoC (letter of credit), etc. But none of these measures have delivered as they don’t address the fundamental factors contributing to their losses.

The way forward is to delink subsidy to preferred consumers from the discoms. The state government should pay subsidy directly to the beneficiary using the DBT mechanism, on the lines of the LPG subsidy, while letting discoms 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 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. 

The discoms should be unshackled from State control by converting them into autonomous entities (preferably, they should be made ‘corporate enterprises’ and allowed to function like any private firm). This will enable them to independently run their operations, including tariff-setting and negotiations with producers for purchase of electricity, in a professional manner.  These steps will reduce the cost of purchase, increase realisation from the 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 subsidised rates (or free), there won’t be any under-recovery, hence no reason to charge more from industries, thereby making power affordable to the latter. 

Pertinently, DBT and de-licensing of the electricity distribution business were included in the draft Electricity (Amendment) Bill, 2021, apart from another crucial reform, namely, the creation of Electricity Contract Enforcement Authority (ECEA) for adjudication of contract disputes (needed to rein in violation of PPAs by states). Unfortunately, all three proposals have been dropped from the draft.  

It seems no political party is in a mood to let go of their populist stance of giving cheap/free electricity to the people who matter in elections (farmers, households) and use State-owned and controlled discoms to achieve it. They know that if these reforms are implemented, the leverage they have hitherto enjoyed will no longer exist. For now, it is abundantly clear that electricity reforms have been deferred indefinitely.

(The writer is a Delhi-based policy analyst)

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