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The power sector’s dark spot

According to reports, distribution continues to be the weakest link in the Indian power sector, with customer not being at the centrestage of the delivery process and the fiscal viability. Aggregate Technical and Commercial (AT&C) losses continue to be one of the highest across the globe.

It is estimated that the losses, as a percentage of the nominal Gross Domestic Product (GDP), are likely to reach 1.2 per cent by March 2014.

It is thus imperative to address issues that may jeopardise the growth of an already ailing power sector which, in turn, continues to be one of the key infrastructural challenges coming in the way of achieving a higher rate of GDP growth.

The emphasis of almost all state governments is currently on capacity addition in the generation sector. Capacity addition will not bear fruit unless distribution reforms are taken forward on a war footing.

Any increase in generation capacity is more than offset by inefficiencies and wastage at each stage — production, transmission, distribution and delivery. This is a matter of great concern as the buyers of merchandise have to be solvent and efficient failing which the fiscal health of all associates in the value chain is impacted and this leads to a vicious and unviable circle of uncertainty.

Thus, the foremost challenge is for the Indian power sector to actualise reforms in the distribution segment. Similarly, ensuring that all areas have access to 24×7 electricity supply has been eluding India for long.

The promise of electricity for all by 2012 has fallen flat with such an achievement still miles away.

The combined cash losses of state-owned distribution companies are expanding by nearly Rs 1 trillion a year, of which 35 per cent is due to T&D losses and the remaining because the tariffs have not kept pace with the rising cost of supply.

Distribution companies are tiding over the cash shortfalls by borrowing from commercial banks and repeated borrowings with no commensurate increase in efficiency have seriously undermined the financial health of the sector.

Though the government has come out with financial restructuring schemes, this needs to be viewed only as a short-term benefit required for infusing funds into the ailing distribution sector.

Moreover, the financial restructuring should be done through regulatory commissions and not by the states. That means money should be made available, as a financial support, to regulators who should then set targets and permit restructuring to happen only against the achievement of those targets.

It’s sad that the present day political system is shy of biting the bullet and embracing reforms quite like the Delhi Government led by Sheila Dixit exhibited.

In addition to significant reform-intervention and a combination of tariff increases, going forward, the distribution segment also needs implementation of open access and competition, and enforcement of the ‘obligation to service’ and not just use.

The present policy system is governed by the overarching Electricity Act, 2003. The Act replaced the Electricity (Supply) Act, 1948 (which had earlier effectively nationalised the sector), and introduced a host of reforms such as unbundling of State Electricity Boards (SEBs), open access, competition, development of market mechanisms and independent tariff setting and regulation.

It also paved the way for greater private sector participation in a hitherto public sector-dominated space.

From the experience of distribution sector reforms, so far, public-private partnership (PPP) has helped in the enhancement, effectiveness and discipline in distribution activities.

The pace of PPP depends upon the Government’s will and private sector appetite for distribution assets. Investors, both domestic and international, have shown a declining interest in energy assets in India because of half-hearted moves by key stakeholders.

The problem of making the distribution sector attractive for the private sector is compounded by a number of bottlenecks across the utility. PPP has to be done with an efficient and effective strategy, the main objective being reduction in AT&C losses.

Investors seek an anti-theft legislation and its effective enforcement in addition to access to a legal system for speedy resolution of disputes.

Investors also prefer to have a de-risked regulatory regime with clear tariff policy framework from the regulator so that they can understand the extent of independence, philosophy and the overall direction of regulation. This would, in turn, reduce regulatory risk.

The Electricity Act, 2003 provides for a robust regulatory framework for distribution licensees to safeguard consumer interests.

It also creates a competitive framework for the distribution business, offering options to consumers through the concepts of open access and multiple licensees in the same area of supply.

The Act enables competing generating companies and trading licensees, besides the area distribution licensees, to sell electricity to consumers. The concept of open access has long been there but it has not been implemented in a large chunk of states yet.

If implemented holistically, distribution reforms can provide benefits of competition to consumers. This is the thought behind the Mumbai distribution model. However, artificial barriers such as cross subsidy surcharges and wheeling charges negatively impact consumer’s right to choose and must be done away with immediately.

Public-private partnership accelerates the implementation of modern technology, including Information Technology, in utilities.

This facilitates creation of network information and customer data base which will help in management of load, improvement in quality of customer service, detection of theft and tampering, customer information and prompt and correct billing and collection.

Government commitment for reform in terms of political will, support and implementation capacity is the foremost requirement towards the restructuring of the distribution segment. The political environment is an important factor in influencing the investor’s decision.

Tata Power Delhi Distribution (TPDDL) is one of India’s most remarkable success stories in public-private partnerships.

A joint venture carved out of the government-owned loss making power distribution company, Delhi Vidyut Board, TPDDL has come a long way in the decade of its existence. It is the first power distribution company in India to report profits and present dividend earnings to its joint owners, the state government of Delhi and Tata Power.

TPDDL, earlier named North Delhi Power (NDPL), which services the north and north-west areas of Delhi, began operations in July 2002. In the years since, it has brought aggregate technical and commercial losses down from 53 per cent to 12 per cent, beating the world average of 15 per cent.

Power outages in the region it lights up are down from a regular five hours a day to near zero and revenues are up 60 per cent. Some of the takeaways from the TPDDL success include the Chief Minister’s personal intervention against power theft, theft proofing through tamper-resistant meters and high voltage transmission lines and effective change management especially in terms of employee and expectation management.

It is therefore political will and commitment to keep customers in centrestage of reforms that the country looks forward to — we need more TPDDL-like stories.

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