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Power play: Stage set for more private funds in power distribution business

Anupam Chatterjee
Power play, discoms, AT&C, UDAY scheme, distribution entities , public sector entities

Leading private power companies have pledged interest in state-run distribution entities (discoms), which could come their way under a new government policy, but added a few caveats: payment guarantee in terms of timely release of government subsidies and receipt of dues from public sector entities, performance incentives and long-term contracts that gel with the long-gestation nature of the power distribution business.
The government is framing a new scheme for discoms to finance infrastructure upgrade.

ccording to this scheme, discoms with more than 18% aggregate technical and commercial (AT&C) losses will have to involve private players in their operations.
State government owning the discoms can choose between allowing full freedom to private players to run discoms under appropriate public private partnership model, or issue franchisee licences to non-government entities to execute specific, segregated operations.

As reported by FE earlier, the UDAY scheme launched in November 2015 resulted in a blip in their performance but the improvement proved to be short-lived and behind targets. Financial losses of state-run discoms rose 89% on year to Rs28,369 crore in FY19. In addition, these discoms’ outstanding dues to power generation companies jumped 50% to Rs88,600 crore on year as at December-end 2019. Also, the AT&C losses of the discoms stood at 21.3% in September, 2019, while the target was to reduce these to 15% by March 2019.

"One of the critical support required from the government is a robust and stable regulatory mechanism which assures the private participants of recovery of normative cost and prescribed regulated returns through tariffs in a timely manner," Jayesh Desai, executive director at Torrent Power told FE. The company currently runs power distribution businesses in Ahmedabad, Surat, Gandhinagar and Dahej SEZ in Gujarat and operates as a discom franchisee in Bhiwandi, Maharashtra and Agra, Uttar Pradesh.
Demanding an escrow arrangement for payment mechanism, Devtosh Chaturvedi, managing director, Feedback Energy Distribution Co (Fedco) stressed the importance of implementing the tenets of ease of doing business.

"The transactions should be as simple as possible by making these performance-driven. It is important to avoid multiple scrutiny of performance parameters," Chaturvedi said, adding that there was a need to optimise and rationalise the investment caps for private players so that investors could be assured of scalability. Fedco has distribution franchisee in parts of Odisha and Meghalaya where its role includes metering, billing and revenue collection on behalf of discoms.

The company also is tasked with installing smart meters, adding new connection and curb power theft in its allotted areas. Ganesh Srinivasan, chief executive officer, Tata Power Delhi Distribution Ltd (TPDDL) believes that the private public partnership (PPP) model would be more effective than the franchisee model when it comes to reducing AT&C losses. "It (franchisee model) does not incentivise private firms to make large-scale investments in technology under no long-term plans," Srinivasan said, adding that "the way we detect theft involves a lot of capital-intensive technological intervention to track meter anomalies".

Though the franchisee model has been tried in states like Maharashtra, Odisha and Rajasthan, it hasn't made much headway. Cities where the franchisee model is currently operational include Bhiwandi, Nagpur, Agra, Ajmer, Kota, Bikaner, Cuttack, Puri and Khurda.

"Our experiences have proved that poor quality of supply and service including irregular and incorrect metering and billing are some of the problems plaguing the sector. These problems have led to lower consumption and collections, thereby impacting discom revenues," Jaideep Mukherji, CEO at Smart Power India said. "This sustained narrative on the non-viability of rural electrification has resulted in low participation of private players in the distribution business," Mukherji added. Smart Power India runs various discom operations under the franchisee model in rural areas of Bihar, Odisha, Madhya Pradesh and Meghalaya.

Citing the example of his own company, which reduced AT&C losses in north and northwest Delhi to 7.9% from 53% which it entered the business in 2002, Tata Power’s Srinivasan pointed that "higher loss areas give more scope to reduce losses and it is easier to detect theft in such places and the real challenge begins after the losses come below 10%".

As the chart shows, Uttar Pradesh, Bihar, Odisha, Madhya Pradesh, West Bengal and Rajasthan are among the major states where AT&C losses are much higher than 18%.
Introducing competition in distribution is seen as the groundwork to separate 'content and carriage'-a project which has been in the back burner for quite some time-which would segregate the business of operating local power transmission systems from distribution of electricity. It would effectively allow end-consumers to choose who they want to buy electricity from, similar to the way telecom and direct to home television operators work.