At breaking point

The Indian power sector has undergone several changes after the Electricity Act, 2003 came into force. The sector has since seen substantial improvements in several areas, like in opening up generation, transmission and distribution to private investments, restructuring vertically integrated and state-owned electricity utilities, opening up the access to electricity from multiple and alternate sources through open access and in emphasising on renewable energy sources.

However, distribution and retail supply remains a laggard, and it can spoil the power sector story unless immediate corrective actions are taken. Mounting losses in the electricity distribution sector, the source of cash in the sector, is putting a question mark on all existing and future investments in the sector.


According to the Planning Commission's estimates, electricity distribution losses totalled R70,000 crore in 2010-11. It is projected that the losses will double to R1,40,000 crore by 2014-15, if the present trend continues. There are several reasons for this plight. Foremost among them is the lack of political will to charge appropriate consumer category-wise tariffs, which subsidies inefficiency in the guise of agricultural subsidy.


Another reason is regulation. Regulatory disallowances on genuine costs and the tendency to postpone essential annual tariff hikes through regulatory assets are serious disincentives.


Similarly, though the utilities are unbundled, restructured and corporatised, they still operate with archaic management practices, ageing employees, and non-existent customer services. There is also substantial information asymmetry – even after 15 years of reforms and restructuring, a majority of state-owned utilities does not have a handle on accurate energy information across the various administrative levels, voltage levels and consumer categories. The estimates always show a sharp correlation between agricultural consumption and losses; and there are also issues regarding the involvement and connivance of unscrupulous employees with consumers.


Short on cash, state power distribution utilities have borrowed to the tune of R1,50,000 crore over the last two to three years from banks without state guarantees. The loans include about R20,000 crore worth of long-term finances taken by the utilities against capital projects, but “diverted” to meet the working capital shortfall


Distribution companies of Tamil Nadu, Rajasthan and Uttar Pradesh account for nearly 85% of the R1,30,000-crore short-term borrowings from banks. More surprising is that the loans to each of these three discoms surpass their respective net worth by 150-350%. Disproportionate lending is reportedly most apparent in Rajasthan.


In a few states, reform programmes have seen the separation of erstwhile vertically integrated state electricity boards into corporatised, separated businesses handling generation; transmission and system operation; and distribution separately. Several donor-funded projects have been executed to develop institutional capabilities of electricity distribution utilities in business processes and human resources.


The central government has supported the sector starting with the accelerated power development programme (APDP) to the accelerated power development and reform programme (APDRP) to the latest restructured APDRP (R-APDRP), earmarking significant capital investments to make the electricity distribution sector viable. These measures are still to show a noticeable impact on the utilities' health, leading one to wonder if alternative steps should be taken, at the right pace, to rectify the problems in the distribution sector.


But political and administrative support is imperative to make distribution reforms work. Post-privatisation, the Delhi government continued its unstinted support to privatised utilities through subsidised power purchase, by setting up special courts and police stations, taking help of CRPF for managing errant consumers, easing the electrical inspectorate, etc. Improvement is also seen in states like Gujarat and West Bengal where government-owned utilities are showing signs of managing losses and improving revenues due to strong political will.


We also need stronger and balanced regulatory institutions with a will to execute what is needed for the survival of the sector. Efficiency and effectiveness of regulatory institutions should be monitored. A complete overhaul of the management processes and systems with the focus being on customer and employees needs to be undertaken, along with a new performance management system for employees.

Increased competition for acquiring and retaining customers—actualisation of open access and effective development of energy markets, as envisaged under the Electricity Act, 2003—need to be materialised. The focus on renewable and distributed generations, especially in the rural areas, will not extend rural distribution networks beyond the ability of utilities to operate and maintain.