Understanding the reasons behind discom stress

By Anura Gupta and Abhishek Tripathi, Sarthak Advocates & Solicitors
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The electricity sector has been waiting since 2003 for the next phase of reform. There was excitement when the power minister hinted before the budget that it might contain important initiatives for the sector. The finance minister did indeed acknowledge the financial stresses that distribution companies (discoms) are under and pushed them to adopt smart meters. However, she stopped short of laying out a vision to remedy the structural issues affecting the sector. Reforms could still happen, but policymakers need to first diagnose the problems correctly.

discom
Anura Gupta
Principal associate
Sarthak Advocates & Solicitors

Discom stress has expanded to cover the entire power sector, with generation companies (genco) increasingly feeling pressure. The amounts owed to gencos has progressively increased and, as at December 2019, stood at over ₹780 billion (US$11.83 billion). That month also recorded the lowest payments in 2019. Delayed payments from discoms is the main reason for defaults by gencos. The government addressed this concern by making the supply of power to discoms contingent on letters of credit being obtained by power purchasers. Although discoms have started complying with this requirement, it seems that it has done little to reduce the amounts outstanding to the gencos.

In its first term the Modi government appeared to adopt a carrot and stick policy through the Ujwal Discom Assurance Yojana (UDAY), a bailout package for the discoms linked to performance. The scheme provided that the average transmission and commercial (AT&C) losses of discoms had to remain below 15%. However, after four years average AT&C losses stand at 21.4%, with most states failing to meet the target. The gap between the average cost of supply (ACS) and the average revenue realized (ARR) for most discoms is still above zero, another target of UDAY. On average, the discoms are still losing ₹0.39 per unit of electricity supplied. Many factors, such as the delayed disbursement of subsidies by state governments, revenue deficits due to low tariffs, and unchecked theft, have led to the failure of UDAY. However, these are merely symptoms; the roots of the disease itself lie elsewhere.

discom
Abhishek Tripathi
Managing Partner
Sarthak Advocates & Solicitors

The stresses and inefficiencies of discoms are also affecting consumers in many ways, most critical being unscheduled load shedding and cross subsidization of some classes of consumers by others. The inefficient practices of discretionary load shedding and cross subsidization are expected to be curbed by the amendments to the National Tariff Policy (NTP), 2016, which are being considered by a group of ministers headed by the home minister. The amendments propose penalizing unexpected power cuts and limiting cross subsidization surcharges on industries to 20%. The new NTP also proposes to cap the AT&C losses that can be passed on to consumers at 15%, to make discoms more accountable. It remains to be seen how such provisions will be implemented without further worsening the financial health of discoms.

The problems that the discoms face stem from their lack of independence, despite having corporate structures. Discoms, which are owned by state governments, are made to bear the subsidy burdens of those states. These need to be shifted to the balance sheets of the state governments. The often proposed solutions of introducing competition in power distribution through the participation of private players and portability will work only when discoms are made fully independent commercial enterprises to compete with private players. That will also end the cross subsidization culture enjoyed by the discoms, that has resulted in their resistance to net metering and open access.

Discoms must be unshackled from state control for there to be any revolution in this sector. Independent discoms may also be able to address the issue of inefficient recoveries and AT&C losses by investing in smart meters, and upgrading infrastructure by the replacement of faulty transformers, transmission lines, and replacing ordinary wiring with insulated wiring. These investments could be made by adopting transparent pricing, where tariffs are no longer hostage to political considerations. Grid separation to reduce power thefts can be more easily implemented if the hands of the discoms are also not tied by political considerations.

With state governments showing reluctance either to loosen control over discoms or to make them efficient, the central government must seize the initiative. It will need a strong political will to make the state governments fall in line by penalizing those not complying with the roadmap and effectively enforcing such penalties. The time for action is fast running out and delay will only increase the likelihood that gencos will suffer the same or even a worse fate than discoms.

Anura Gupta is a principal associate and Abhishek Tripathi is the managing partner of Sarthak Advocates & Solicitors.

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