Purging discoms of dues for an Aatmanirbhar Bharat

New Delhi: The electricity distribution business in the power sector is the only segment in the sector that is placed at the crucial intersection of economy, politics and social development. The act of balancing political outcomes with financial viability and social development is a delicate one. The persistent gap between the Actual Cost of Supply (ACS) of electricity and the Actual Realisable Revenue (ARR) shows that discoms have been supplying power to consumers at a loss, despite receiving subsidies from the government. All attempts to revise power tariffs in the past have faced stiff opposition at the state level because it has political repercussions since the issue of electricity tariff is dire enough for the public to switch allegiance and create new winners during elections. And the case in point is the victory of the Aam Aadmi Party (AAP) in Delhi, where the issue of electricity and water bills, among others, massively swung votes in favour of the party.

And therefore, quite naturally, one of the major reforms that the sector awaits —.that the tariff reflect the cost of supply of power — is yet to see the light of the day. In the meantime, the outstanding dues owed by discoms to power generating companies has risen to Rs 1,19,076 crore (at the end of August), and the AT&C loss, which is a combination of energy loss due to technical loss, theft, inefficiency in billing, a default in payment, and inefficiency in the collection, stands at 22 percent. The various schemes announced as palliative care — UDAY scheme launched in 2015, and the Rs 90,000 crore bailout package for discoms announced in May in the wake of the shock caused by the COVID-19 crisis — are yet to bear their impact on discoms' balance sheet. So, what should reforms for the power distribution sector look like?

What ails the power sector?

Power distribution companies have been under financial stress since before the COVID-19 pandemic broke out. However, the pandemic and the resultant lockdown worsened losses and outstanding dues as there was a sharp drop in industrial activity in March and April. The pricing mechanism in the Indian power sector works is based on cross-subsidy, under which the electricity consumed by household consumers is subsidised, while industrial consumers pay more. This means that the bulk of revenue for discoms comes from industrial consumers.

ALSO READ: 'Aatmanirbhar Bharat's pharma sector must look beyond generics'

According to data sourced from the PRAAPTI portal, the total outstanding dues owed by discoms to gencos stood at Rs 94,001 crore at the end of January this year. And in the immediate aftermath of the lockdown, the overdue amount rose to Rs 1.23 lakh crore in April. A detailed analysis by PFC released in April this year showed that five states — Andhra Pradesh, Tamil Nadu, Madhya Pradesh, Telangana and Uttar Pradesh — accounted for 88 percent of the total discom losses in the country in FY2018-19. 

Delayed subsidy disbursal by state governments, inefficient billing and tariff collection and inadequate tariff hikes were the main reasons behind the power distribution entities' (discoms) financial losses surging 83 percent to Rs 61,360 crore in FY19, the PFC report said. The difference between the cost of power supply and revenue realised (ACS-ARR gap) widened in all these five states in FY19, with them losing more money for every unit of electricity sold amid 7.5 percent growth in supply volumes, resulting in higher losses.

Uttar Pradesh rolls back privatisation of discoms

Uttar Pradesh, which is among the states that owe the largest outstanding dues to gencos, announced its decision to privatise Purvanchal Vidyut Vitaran Nigam Limited (PVVNL) earlier this year. The Purvanchal distribution company accounts for the highest AT&C losses (37.98 percent) among the five discoms owned by Uttar Pradesh Power Corporation Limited (UPPCL). According to the UDAY portal, the company posted a net loss of Rs 1,550 crore in FY2019-20.

PUVVNL is responsible for electricity distribution in eastern UP, where two politically sensitive constituencies are located — Varanasi, which is represented by Prime Minister Narendra Modi, and Gorakhpur, which is the Assembly constituency of UP Chief Minister Yogi Adityanath.

The decision to privatise PUVVNL was taken by the UPPCL management close on the heels of receiving loans under the Rs 90,000-crore bailout scheme announced by the Centre for discoms in May. Since the availability of loans is tied to conditions which require discoms to take active steps towards bringing down AT&C losses, digitising bill collection and metering, and improving efficiency, UPPCL's decision to privatise PUVVNL could have been an attempt to improve the efficiency of it worst-performing discom by inviting the private sector to take control. However, following stiff opposition by power sector employees, the plan was shelved. And with the stalling of the privatisation plan, a much-awaited reform in the state, which has one the highest discom losses on its books, has also been stalled.

Delhi: Tussle between private discoms and DERC

Delhi offers another interesting example of the interplay between politics and reforms in the sector, especially because the issue of the tariff has been ensconced as an electoral issue by the AAP. The power tariff in the capital city has not been increased even once since the AAP government came to power in 2015. In August this year, the Delhi Electricity Regulatory Commission (DERC) conducted a public hearing on the issue of tariff revision, which ultimately ended up turning into a political slugfest between the AAP and the Bharatiya Janata Party (BJP).

ALSO READ: All discoms have to comply with Energy Conservation Act: Power Ministry

The hearing finally ended with the decision that there will be no revision in tariffs for the year 2020-21. Tata Power, which operates Tata Power Delhi Distribution Company Ltd in Delhi, voiced its dissent on the matter, saying, "The tariff declared by the DERC will result in an increase in the regulatory assets (difference between the costs required to serve the customers and the revenue from tariff) which is already at a precariously high level of about Rs 23,139 crore for all discoms in Delhi, as on March 2020." In Delhi, the issue of power bill is so closely intertwined with politics that an increase in tariff is unlikely until the time there is a change in the political narrative.

Reforming discoms

Over the past few years, the government has undertaken several initiatives to reform the distribution sector, starting with the launch of UDAY in 2015. Under this scheme, financial and technical targets were given to states by the Centre. The states took over 75 percent of the debt of discoms and issued bonds that were subscribed to by banks and financial institutions. However, discom losses, which had progressively reduced during the first two years of the rollout of the initiative in 2015, again widened in FY2018-19 to nearly two times the values recorded in FY2017-18. The target to bring down AT&C losses to 15 percent was also not achieved under the scheme.

This year, in May, the government announced a bailout package of Rs 90,000 crore for discoms and entrusted state-run Power Finance Corporation (PFC) and REC Limited with the task of disbursing loans and monitoring compliance with the conditions attached with the sanction of loans. Union Minister for Power RK Singh has said that the government is mulling increasing this package to Rs 1.2 lakh crore. In addition, Singh has also mentioned that the government is considering another package of Rs 3 lakh crore which would span over five years and combine old schemes of the Power Ministry for reducing losses in the sector. The deployment of smart meters is on the roll. The Ministry of Power has floated a draft proposal for lowering late payment surcharge levied by gencos and transcos on discoms and is looking to roll out a tariff policy. So, reforms are on the anvil.

However, even as the government is following a multi-pronged approach, the electricity sector in India is under the concurrent list of the Constitution. Therefore, the implementation of reforms ultimately comes within the purview of the state governments. And the UDAY scheme has gone far enough to show that performance-linked bailout packages alone cannot address the problems faced by the sector, neither can improvement in efficiency dispose of the legacy debt accumulated by discoms over the years. The fact remains that electricity tariffs need to reflect the cost of supply. Other reforms would work only when the issue of tariff revision has been addressed. And the biggest hurdle coming in the way of the most-awaited reform in the sector is politics. Anil Swarup, an IAS officer and a former bureaucrat who has observed the energy sector closely during his years of service, once said, "The solution has to be politically acceptable, socially desirable, technologically feasible, financially viable and administratively do-able." Well, it is time to roll out the red carpet and welcome reforms in that spirit.

(PSU Watch– India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy is now on Telegram. Join PSU Watch Channel in your Telegram and stay updated)