Power divide — Privatization of DISCOMs in India

In India, DISCOMs are the last mile connection with the power consumers (Retail, Industrial, Commercial). DISCOMs are responsible for sourcing power from generation companies, which is then transmitted and wheeled to consumers. Transmission can be inter-state as well as intra-state. Most DISCOMS in India are state owned and regulated at State level by SERCs however, there are few private players such as Tata Power Distribution. Private ownership can be through different models with varying powers as discussed in detail later. SERCs determine the tariff that each DISCOM can charge its customer in form of fixed and energy charges basis a methodology and all the information is released in form of Tariff orders. DISCOMs are meant to be the most vital link however, have turned out to be a weak link with annual losses of INR ~30,000 Cr. However, not all DISCOMs are losing money. Privatization of DISCOMs has been the front running solution and been in news especially due to recent developments

It might turn out to be the solution, as seen with the arrangement in Delhi where a distribution franchise model (explained later in Figure 4) brought about a significant reduction in the AT&C losses. However, before ascertaining the usefulness of a solution, it is important to understand the current challenges that DISCOMS are reeling with.

As with any profit / loss equation, DISCOM losses can be classified into two buckets — Revenue and Cost related. ARR (Revenue) is calculated over Gross input energy and includes the revenue from power sale to customers and some subsidies under DISCOM programs. ACS, Cost of supply is calculated over Gross input energy and contains power purchase cost, manpower cost, finance cost and other costs. ACS-ARR Gap (over gross input energy) is the gap in Average revenue per unit of electricity sold to consumer and the cost at which the power is sourced. As can be seen in a report by PFC, this gap is ~0.3 / unit including the subsidies that the DISCOM receives.

Figure 1: Gap in ACS — ARR over the last 3 years

Let’s first evaluate the gap from revenue side. There are primarily three reasons — a) tariff restrictions, b) AT&C losses c) Consumer movement to OA. As mentioned earlier, tariff restriction are imposed by the State Electricity Regulatory bodies capping the tariff that a DISCOM can charge its consumer which leads to under-recovery of fixed costs as captured in this report. Under-recovery of fixed costs (of regulatory assets) which are not built into tariff and inadequate tariff hikes primarily attribute to DISCOM woes. An increase of 1% in the tariff can reduce the overall DISCOM losses by ~20%. However, tariffs for industries is already on the high side as compared to other nations.

Secondly, Aggregate Technical & Commercial (AT&C) losses though have come down over the years but still hover around ~20% leading to massive losses to DISCOM. They constraint the already low revenue collections due to technical losses such as transmission losses, billing inefficiencies, power theft etc. For e.g. Power theft essentially means that DISCOM will receive money for only 80 units of electricity from a consumer while they have input 100 units of electricity into the grid for the consumer.

“The first challenge for some state DISCOMs is the inability to bill all the customers efficiently. One of the reasons for that is estimated and provisional billing done rather than having regular meter reading. This is made worse because power is being siphoned off in many areas as well by consumers. The second challenge for the DISCOMs is the ability to collect billed amounts from the customer on time.”

Finally, movement of consumers from DISCOM regime to Open Access market (OA) can potentially impact revenue collections for DISCOM. OA enables consumers to source power from any generation unit at competitive prices. However, additional regulatory charges such as Cross subsidy surcharge (CSS) are levied for such consumers. Additional regulatory charges, challenges with permissions have led to low uptake of OA. Hence, it is not an immediate cause for concern. Also, even if a consumer moves to OA, DISCOM continue to receive wheeling charges, which are paid to use the DISCOM power lines.

Figure 2: Share of Open Access in the India Power market

On the cost side, inability to source cheaper power from short term market either due to long-term Power Purchase Agreements (PPAs) as seen in Figure 3 or lower cash flows (as a result of subsidizing certain section of power consumers) leads to higher power purchase cost. Lower cash flows result in DISCOM borrowing adding to the finance costs for DISCOM.

Figure 3: Share of Long term PPA in the power capacity of DISCOMS

Finally, operational inefficiencies leading to high manpower cost is a potential reason for higher power purchase cost.

Now that we have established the potential reasons for the DISCOM losses, let’s assess if privatization can tackle these challenges. Privatization of DISCOMs can be primarily achieved through three models as laid out here.

Figure 4: Potential privatization models

Though privatization models exist in India …“Distribution franchisee models currently exist in states like Rajasthan, Maharashtra, Odisha, UP that have private players appointed as electricity distribution franchisee for certain areas to help improve the high AT&C losses in those areas. Jharkhand is also likely to operationalize this model”…but, there are studies which indicate that utility ownership may not impact AT&C losses and customer service.

“…most of the distribution utilities are public-owned, especially in Asia and the Middle East. Privatisation is prevalent in Western countries. (ii) Globally, distribution utilities, regardless of their ownership, are improving their efficiency to provide new connections. However, securing a new grid connection is equally cumbersome from public and private-owned utilities. (iii) Utility ownership has little correlation with power outages and commercial tariffs”

The three models have varying power when it comes to addressing the potential challenges that DISCOM face. For e.g. Privatization can impact AT&C losses positively in any model, however, can’t impact tariff / high power purchase cost in a distribution franchisee model as it is governed by regulations.

Figure 5: Impact of privatization on potential DISCOM loss factors

Privatization may not be the answer to all the challenges that DISCOM faces today but can alleviate operational challenges, customer service challenges if approached with the right model. Also, modifications to current regulatory framework that can work well with privatization.

Management Consultant