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Distribution Sector Reform - Way Ahead, Shri R V Shahi, Former Power Secretary,, Ministry of Power

Among all the infrastructures of Indian economy, perhaps power sector is perceived to be the weakest link. With all the deficiencies of this sector, since it has a direct impact on all the economic activities, the effect of the weaknesses are obviously seen by all concerned in a magnified way. It is also true that anxiety of the Policy makers about the vulnerability of this sector has been reflected all along in trying to bring about changes so that situation improves. Power sector was among the few which, in pursuance of the New Economic Policy of 1991, was opened for private sector with the provision that in each area of power sector 100% FDI could be allowed. The Power Policy of 1991-92, however, started with an emphasis on generation, an approach which in last few years has been recognised to be a misplaced strategy. There appeared a general consensus, after about 10 years of this Policy, that the generation end of this industry was not the right end to start the reform from and instead Distribution should have been taken up fast.

Therefore, in the Tenth Plan the direction of reform was changed with emphasis on Distribution. It was rightly recognised that the cutting edge of power sector was distribution which has the direct interface with customers. The weaknesses of this element of power industry are adversely affecting not only all the economic activities but the public at large suffer the hardships caused by unreliable and erratic power supply. Though, with a few initiatives which were started in the Tenth Plan, there have been improvements in the distribution sector, and accordingly the level of confidence of investors and lenders has increased, we have a long way to go in setting right the distribution business of the Indian electricity industry. The pace of improvement has been rather slow and there is also an apprehension that the situation can slide back if this issue is not handled with the required degree of urgency and commitment. The Falcon Media, Publisher of ENERTIA, organised a one day Workshop "Distri Vision India 2009" at Delhi on January 28, 2009. I presented, a Keynote Address in the Workshop. A number of presentations were made by Senior Officers of Central Electricity Authority, Taurus Power Tronics, Ofil Ltd., Israel, Gujarat Urja Vikas Nigam Ltd., Honeywell Automation India, BSES, Delhi, Schneider Electric India and Southern Gujarat Chambers of Commerce and Industries etc.

I outline below the issues and suggestions brought out in my Keynote Address and a few other presentations:

  • The most important challenge for the distribution sector is to become commercially viable. This is the problem which stood in the way of India's Power Policy 1991 not delivering any visible results, in fact, in not taking off at all in any significant way. The Government of India brought out two powerful Schemes during the Tenth Plan, viz. Accelerated Power Development & Reform Programme (APDRP) to set right distribution business in towns and cities and the second Scheme - Rajeev Gandhi Grameen Vidyutikaran Yojna to expand rural electricity connectivity and improve electricity supply in villages.

  • With these efforts, though ever increasing financial losses of the Electricity Boards, which increased to almost Rs. 30,000 Crores annually by the year 2001-02 were arrested but the reduction was only marginal. The commercial losses of Rs. 29,331 Crores in 2001-02 did reduce to Rs. 27,446 Crores by 2006-07. No doubt, it was a remarkable achievement, though modest, considering the fact that during the period of 90's the losses were only increasing - from Rs. 3,000 Crores in 1990-91 to almost Rs. 30,000 Crores by the end of 90's. The process of distribution loss reduction could have been faster, resulting in larger quantum of reductions in the financial losses, had all the State Governments and State Utilities worked for it with seriousness.

  • The incentive component of APDRP which provided for cash reward to the State Utilities, which reduced financial losses to the extent of as much as half of the amount of loss reduction, did emerge popular quite motivating. A number of States made effective efforts to reduce their losses and thereby got the incentive grants. These States included Andhra Pradesh (cash loss reduction of Rs. 530 Crores), Gujarat (Rs. 2079 Crores), Haryana (Rs. 211 Crores), Kerala (Rs. 296 Crores), Maharashtra (Rs. 276 Crores), Punjab (Rs. 504 Crores), Madhya Pradesh (Rs. 595 Crores), Rajasthan (Rs. 275 Crores) and West Bengal (Rs. 993 Crores). These nine States put together succeeded in bringing down the annual loss, during a period of less than five years, by about Rs. 5,800 Crores and thereby got incentive approximately of the order of Rs. 2,900 Crores. If similar efforts had been made by other States and their Distribution companies, the result should have been different.

  • There is also an apprehension that seriousness in arresting the losses, in many States, has decreased and if efforts to control theft of electricity are not mounted appropriately, the viability of huge capital investments in generation projects, in transmission and in distribution would be subjected to considerable pressure. It is, therefore, essential that top priority is accorded to set right the commercials of electricity distribution business. After a lot of efforts we could get back investors and lenders to look at power sector. It would be a pity that they abandon this sector again, as they did by the year 2001.

  • The revised APDRP, in which the grant funding has been predicated to specific results with reference to the targets would, hopefully strengthen this process and State utilities would respond in a more effective way towards commercialisation of the electricity distribution business. The revised Scheme, which provides for loan to implement various distribution projects, stipulates that the loan can be converted into reward by way of grant only if the specific results as targeted are achieved.

  • Electricity Act 2003 itself provided a number of stringent measures for control of electricity theft. However, keeping in view the feedback of several efforts in some of the States, including in West Bengal where the new initiatives fetched better results, the Act was amended to further strengthen the electricity theft control provisions. These were made more stringent with harsher punishments. Some of the States have been able to derive better results while many others have been less serious. So far, sixteen States have set up Special Courts to deal with the cases of theft of electricity. These include Andhra Pradesh, Assam, Chhatisgarh, Delhi, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttaranchal and West Bengal. Eight out of these sixteen States have also set up Special Police Stations for electricity theft control. These, no doubt, have had positive impact on this subject. However, unless political commitments and support, in required measure, is provided, the outcome would be slow. Except for a few States, the situation can be characterised as lacking required political will and commitment to control the menace of electricity theft.

  • Privatisation of distribution was considered as a solution in Orissa and in Delhi. It was felt that so long as retail distribution of electricity remained under the control of Government organisations, expectation of public at large becomes different, particularly given the background that electricity has generally been a politicised commodity. Various States have used this as an instrument of giving political gift and favour at the time of election or as commitments in their manifestos. The nexus between electricity distribution and political interests has to vanish. In whichever State it has happened, and to the extent it has happened, the situation has improved.

  • By and large private sector distribution companies have been more effective in managing their distribution business. These companies operate in Ahmedabad, Calcutta, Mumbai and Surat. The recently privatised distribution in Orissa and in Delhi also succeeded in reversing the ever increasing trend of distribution losses. Orissa Government got rid of the usual obligation of providing subsidy to the State Electricity Board, ever since they got out of electricity distribution. Similarly, in Delhi the annual loss which had increased to almost Rs. 1,200 Crores from Rs. 400 Crores, in a period of five years would have definitely gone beyond Rs. 2,000 Crores in the subsequent five years if the change had not happened in the year 2002. Privatisation initiative in Delhi has experienced severe stresses and strains primarily because of the disconnect between the expectation of people to get results overnight and what could have been possible considering very strong legacy of the past several decades. In any case, the results have been rewarding. The losses (Technical and Commercial) have reduced in different areas from 50-60% as in 2001-02 to 25-30% now.

  • Because of variety of reasons Delhi Model has not been replicated. At one time it was felt that if Delhi initiative succeeded and secured a general acceptability among the people, more cities of India would go in for this. There would be pressures from people at large on political systems to adopt or adapt Delhi type of private intervention. In the near future it seems unlikely. There appears to be a general resistance against transfer of ownership to private sector. Without going into the merits or rationale of such an approach it is important to recognise such a resistance and to provide for an alternative strategy. It is in this context that the "Franchisee" model was considered as the next best Scheme which could deliver effective results in distribution and supply of electricity. The nearest to this architecture is the Bhiwandi initiative in the State of Maharashtra. The distribution in this area, having a load of about 600 MW, was considered one of the worst managed systems of Maharashtra Electricity Board having the largest incidence of technical and commercial losses (in the range of about 60%). In the last 3 years, there have been significant transformation in this area after this system was handed over, as Franchisee, to Torrent, the electricity supplier in the cities of Ahmedabad and Surat. Similar Schemes have been and are being extended to other towns and cities in Maharashtra. Short of privatisation, which, as mentioned earlier, has a number of problems and pockets of resistance, the Scheme of Franchisee, which does not get into the intricacies of ownership transfer, holds tremendous potential for transforming the electricity distribution business in our context. After we succeed on this model, privatisation could be the next step. Wherever we are able to communicate effectively with the people on the merits of privatisation, Delhi Model, no doubt, has its validity and relevance as a strong and important instrument of reform for electricity distribution.

  • Rural electricity distribution provides even greater challenge, both technically and administratively. One of the concerns at the time of formulation of the Rajeev Gandhi Grameen Vidyutikaran Yojna was that with less than 45% rural connectivity if we have been unable to effectively manage distribution, supply, metering, billing and collections how is it that if the balance 55% households are also provided connectivity, we would be able to manage such a massive responsibility. Will it not be even more too unwieldy to organise and manage? It is precisely for this reason that Franchisee System was provided as an important condition of this Scheme. If rural connectivity is extended and commercial issues continue to be managed as at present, losses are bound to escalate and the whole supply would be rendered unsustainable. Revenue sustainability of the rural electricity supply, therefore, requires its management through a network of Franchisees. This will, however, require massive efforts on capacity building. More than 600,000 villages of India to be looked after through this new approach would need thousands of Franchisees who would all need intensive training both on technical issues and more importantly on commercial aspects. A few States have launched the Franchisee Systems. But, in most cases each of them has done it without the required degree of seriousness. In many cases it has been done through a lukewarm approach just because the grant funding under the RGGVY is linked to this, but not because the State genuinely feels that it is in the commercial interest of distribution that it is needed. This Central Scheme can be used to motivate, induce and, wherever required, pressurise the State utilities to fall in line lest they would lose the benefit of grant funding. Only a serious enforcement and constant monitoring by the Ministry of Power to ensure Franchisee arrangements would deliver the expected results.

  • While talking of the rural electricity supply it is important to emphasise on the need for separation of Rural Domestic and Agricultural Feeders. This was also emphasised on various State Utilities during the early years of the Tenth Plan. There are a number of States which have implemented these Schemes and have been benefited. Load management in these States has helped them in ensuring more reliable power supply. In the off peak hours they have been able to supply to agriculture cheaper power because they were able to procure off peak power at comparatively lower rates. In many States Schemes of separation of Feeder are yet to be completed. Fund from Rural Electrification Corporation are available. State utilities need to be convinced that it is in their interest that this needs to be done.

  • Management of cross-subsidy is one of the most important needs on the issue of distribution reform. We must recognise and realise that absurd cross-subsidies in tariff structure, which went on getting skewed over a period of time, have led to a number of infirmities in the management of electricity distribution. Manufacturing suffered and so did commercial sector. In many places this was also responsible for rampant theft of electricity from industry and commercial segments whose tariff has been excessively high. Electricity Tariff Policy is unambiguously clear on this. Regulatory Commissions were to structure tariff in a manner so that the cross-subsidy should progressively reduce, and in a period of five years, i.e., by January 2011, the band of tariff would be between plus and minus 20% of average tariff. Very few Regulatory Commissions are on right track on this issue.

  • Innovative technologies can play meaningful roles in not only solving some of the highly complex technical problems but also a number of issues relating to management of energy audit, metering, billing, collections, consumer grievances, providing new connections to customers, maintenance etc. Taking a cue from how technology has transformed the whole gamut of management of not only technical aspects of mobile telephones and internets but also the commercial and consumer related issues, electricity distribution has a lot to assimilate into its working the tremendous strength of information technology. Under APDRP we provided that GIS Mapping and a number of other IT interventions can modernise the electricity distribution. In many places it happened with remarkable degree of success. This has to extend to most of the areas in the larger interest of distribution utilities and more importantly the consumers. Both APDRP and RGGY, which stipulate such I.T. orientation, must be used to modernise distribution systems and since these are Central Government Schemes, Ministry of Power would be in a better position to ensure this through proper monitoring.

Without radical and rapid transformation of electricity distribution, power sector has no sustainable future. This recognition has to sink across the utilities, political systems, consumers and all stakeholders. The euphoric response that got generated among investors and financial sector with reference to reforms initiated through Electricity Act and other policy instruments can be a lasting one with rewarding results only if the distribution sector demonstrates its commitment for commercial revival and even more importantly responds to the needs and aspirations of consumers for better quality of services, which can come only if a competitive market structure develops in the distribution sector. That should be the objective. The sooner we get there, the better would be the future of electricity industry.