By Sanjay Banga
A healthy power sector is essential to attain the nation’s vision of becoming a $5-trillion economy. While all three segments of the power sector—generation, transmission and distribution—are important, the distribution sector needs to be established as the strongest link in the value chain. Persistent operational and financial shortcomings in distribution have repeatedly led to central government’s bailouts for the whole sector. Now, the central government is planning to unveil the much-awaited ADITYA scheme—the Atal Distribution Transformation Yojana—which, for the first time, will incentivise states to involve the private sector for improving the efficiency of state distribution companies (discoms).
While most of the developed nations have adopted the privatisation mode and steered in competition for improving the performance standards, the distribution sector in India continues to be dominated by state discoms, with very limited private sector presence. There are many models that can be considered by the states to involve private players and introduce competition in the sector, which will benefit consumers through better service delivery, robust infrastructure and reliable power.
The first such model that can be explored is public-private partnership (PPP), which has been a proven success in Delhi. The Delhi government unbundled Delhi Vidyut Board in 2002, and privatised it through sale of majority stake (51%) in the three carved-out distribution areas, while retaining 49% with itself. The commitment for reduction of aggregate technical and commercial (AT&C) losses in the first five years was the sole bid-evaluation criteria, and 16% return on equity was assured subject to achievement of the committed loss-reduction targets. Further, employees were guaranteed continuation of their existing service terms to allay any apprehension regarding their future. A transition support was also provided in the initial five years to avoid any tariff shock to consumers. The model has turned out to be a grand success for all the stakeholders. Today, consumers have a reliable power supply on a 24×7 basis, new connections are instantly released, dilapidated network has been revamped, and AT&C losses have reduced to 8% from 53% in 2002. As a result of the efficiency in power distribution, the Delhi government has been able to make a saving of Rs 30,000 crore since 2002, against the annual losses that mounted up to Rs 1,200 crore in 2001 (before privatisation). This demonstrates a win-win situation for all.
The second model that has been adopted by a few states as a quick fix for loss reduction is the input-based distribution franchisee model. In this model, bids are invited on the basis of per unit input rate that the bidder is willing to pay to the licensee for the minimum guaranteed power being supplied by them. The bidder who quotes the highest input rate is declared the winner. However, the current form of this model has some inherent deficiencies.
For instance, the model does not provide any incentive to the franchisee to invest more capital in improving the reliability of supply and invest in new technologies that are required to make service delivery reliable and sustainable in the long term. Further, the franchisee does not have the capability to optimise additional power requirement to meet the demands of consumers. Improved power availability is a basic customer expectation with a new private player coming in, and the current model fails to address the same, with the franchisee being dependent on supply from the licensee. In addition, there is limited regulatory oversight in this model. The entire focus vests on realising the short-term commercial gains through better collection and billing, which is not sustainable in the long run.
Hence, there is a need to look at hybrid distribution franchisee models. The key difference in these models would be the ability of the private player to infuse more capital over the minimum capex guarantee in the existing model and earn a regulated return on such investments. The second would be the ability to procure additional power to meet the demands of consumers over and above the supply being given by the existing licensee. Such a model would instil investor confidence to make long-term improvements for sustainability and infrastructure development by shifting their focus from short-term gains.
States could look at various options under the hybrid distribution model. The first could be that they continue to carve out specific areas for franchisees and hand them over with the existing licensee continuing to serve the remaining area, or they could look at retaining only the distribution part, i.e. wires with them, and hand out the entire spectrum of retail services to multiple franchisees. The model will be very much on the same lines as the proposed carriage and content model under the current Electricity Amendment Act. The responsibility for reduction of losses would need to be bifurcated within the existing discom that is responsible for the network and multiple selected franchisees. Another requirement for this model will be to ensure that discoms keep the network healthy and meet the requirements of multiple franchisees for network augmentation. The power purchase agreement of discoms could be distributed amongst the new players in the proportion of their demand. Considering the prevailing ecosystem of discoms, there is little possibility of success of this model, but this model ensures a smooth transition to the proposed carriage and content model.
While the proposed franchisee models can be adopted as an interim measure, long-term sustainability can be ensured only through a PPP model, which needs to be evaluated by all states. The PPP model has a better regulatory oversight and encourages capital investments to transform the sector. To become the utility of the future, which involves investing in smart grid technologies, it is important to harness the ability of private players to invest capital and technology into the sector.
Both the Centre and states need to take cognisance of the fact that bailouts by new schemes cannot be continued. It’s time to take immediate actions through a robust policy framework for the engagement of the private sector—to provide world-class services to our citizens and realising the dream of being amongst the developed nations.
The author is president, T&D, Tata Power
Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.
Source: Financial Express