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POV : Role, Responsibility and Challenges of Proposed National Discom

By Team Infraline Megazine, 05 Nov 2018, delhi
Industry : Power

The central government has a presence in most of the power sector segments (generation, transmission and financing), but a very limited presence in the distribution space, which is a key necessity today. Power distribution has always been out of focus and a laggard in the entire system.

Mr. Ashok Upadhyay,Deputy Director (Generation),MPERC

The central government has a presence in most of the power sector segments (generation, transmission and financing), but a very limited presence in the distribution space, which is a key necessity today. Power distribution has always been out of focus and a laggard in the entire system. The need for last-mile connectivity, distribution losses that are much above the world average, service reliability, an enabling competitive environment, privatization and technology adoption necessitate a wellcoordinated and uniform approach to create a policy framework for the development of the distribution segment. In order to ensure timebound implementation of the Centre’s schemes, the government is planning to handhold state electricity distribution companies by setting up a National Electricity Distribution Company (NEDC). The consensus was that state distribution companies needed guidance and hand-holding. It is also a step forward in providing a structural framework for the segregation of the distribution side of the business into wires and supply, which in essence, is the functional separation of technical and commercial responsibility. The motivation for a national discom perhaps comes from the fact that some states or discoms are laggards in terms of not implementing regular tariff petitions (which also require regulatory efforts), procuring enough power from suppliers, reducing cross-subsidy surcharge, fulfilling RPOs, etc. The national discom could certainly pull laggard areas up. The proposal to set up the NEDC is being explored, given that the segment will be a key to the long-term fortunes of the power sector. Distribution companies have so far been the weakest link in the electricity value chain. Poor payment records of state-owned electricity distribution companies have not only adversely affected power generation companies but has contributed in causing stress in the banking sector as well. Rising non-performing assets (NPAs) in the power sector has been a major concern. The problem only multiplies with the states backing away from inking new power purchase agreements (PPAs), as they are not willing to buy more electricity. The development is well timed as the Centre is working on a war footing to provide electricity connections to more than 40 million rural and urban households under the Saubhagya scheme by March 2019. The Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or Saubhagya scheme, which was launched last year, is expected to boost electricity demand in the country. The proposed company may or may not obtain a distribution licence; it may not interfere in the working of state power distribution companies given the federal structure. But the utility will ensure implementation of central schemes for power sector in a timebound manner. It has been widely felt that there is a need for handholding and guiding state distribution companies, and a national distribution corporation may fill the gap. Objective The state electricity distribution companies are the weakest link in the power sector value chain. Inefficient operations with approved distribution loss levels, the absence of costreflective tariffs and the higher dependency on subsidy support from the state government all contribute to this. This has impacted their ability to offtake power from generation companies, leading to limited progress in the signing of long-term power purchase agreements over the past few years, and delays in payment of power purchase dues to the power generating companies. This has led to a large portfolio of stressed assets in the power sector, and in turn, rising nonperforming assets (NPAs) for the banking sector. In this context, the Government of India is exploring the idea of setting up of National Electricity Distribution Company. Proposed Framework There must be very strict limitations on what the National Electricity Distribution Company (NEDC) can and cannot do. It certainly cannot interfere with the state government on the question of ownership. However, to the extent that the power used in the state is interstate that is the power supplied comes from other states, the Centre obviously has full authority over that supply. Obviously, there are accounting complications here to be dealt with. However, the principle should be that the Centre uses its authority to make the state government more responsible in power distribution so that the state utilities do not remain lossmaking entities. Further, the NEDC could certainly ration the external power supply to the state in relation to the profitability of the local discoms, at least to the extent that the discoms can break even. The Centre must be very careful not to take away the power of the state government. At the outset, it must discuss with each state government the ways to improve the efficiency of the discoms. The incentive to make the state perform would be the reimbursement that the Centre could provide. The NEDC may be an apex body governing all entities engaged in the distribution function, particularly with guidance, policy formation for power purchase agreements, open access, enabling a competitive environment, and developing various business models for distribution in coordination with state discoms. Regarding the policy formation, it can formulate policies and plans pertaining to licensing, power procurement, tariff determination, metering, billing, collection and supply reliability. It can also review the demonstrated success of publicprivate partnerships and the reasons for slow implementation. It can help improve the government’s approach pertaining to franchises and reviewing distribution franchisee agreement clauses to ensure it is beneficial for all stakeholders. The NEDC will oversee the implementation of new technologies such as smart grids, electric mobility, artificial intelligence and block chain technology uses in distribution. The NEDC would be responsible for improving the financial attractiveness of the power sector. This involves focusing on the PPA and contract standardization, bankability of franchisee agreements for easier loan syndication and opening as a model point to approve investment plans for network expansion in states, either funded by the state or the Centre. The NEDC will be responsible for maintaining a standard operating procedure in terms of maintaining technical efficiency by attending to fuse calls, replacing burnt transformers and ensuring system availability and safety. All rural electrification programmes could be brought under the ambit of the NEDC, so that low-voltage complaints etc., are addressed properly. The NEDC counsel should be set up, wherein all stages agree to a milestone-based approach. This will iron out any differences and ensure a uniform approach. The role of the central and state governments should also be clearly delineated. The State Load Despatch Centre should operate as a separate entity and not under the state transmission utility. The jurisdiction of regulatory bodies on such an entity in terms of tariff determination (transmission charges, wheeling charges, surcharges) by region or state etc., must be determined. In light of the huge accumulated losses of the discoms, it is necessary that a decision is taken regarding the treatment of such losses. The same may be parked in a holding company and serviced through a charge over a period of 30 years. There has to be a robust internal dispute resolution mechanism, either at the Centre Electricity Regulatory Commission or the State Electricity Regulatory Commission level so that litigation is kept to a minimum. Benefits of NEDC The formation of the NEDC will help in the judicious use of central funds for standardization and revamping of network. This would lead to better quality supply, reduced network downtime and minimization of technical losses, spurring growth in electricity demand. The creation of NEDC will integrate the country for optimum network usage. In fact, consumers will have the freedom to choose their supplier. This will also reduce electricity theft as suppliers will remain vigilant, thereby weeding out corruption. Such a move will also open up huge job opportunity. NEDC will bring down the cost of electricity networks. Economies of scale will lead to significant cost savings for components, lower project costs and lower tariffs. Procuring power certainly at competitive prices and making it available to discoms will help address the issue of nonperforming assets in generation and improve the poor payment records of discoms. NEDC will facilitate non-discriminatory open access. The real competition, as envisaged in a multi-buyer, multi-seller environment, will lead to the availability of power at cheaper rates for the end consumer. The proposed National Electricity Distribution Company can procure electricity at competitive rates and help address the issue of stressed assets in power sector. Such a company would encourage competition in the distribution segment and would also improve the counter-party profile for the power generation companies. Challenges Some of the issues which need clarity before formation of the national discom are segregation of losses, provider of last resort, universal service obligations, standards of performance, ownership of metres and customer information, cross subsidy and subsidy transfer management. The formation of the NEDC involves several challenges, some of them are as follows: i. The government is yet to clarify the objective of such a company, that is weather such a company would obtain a distribution licensee, act as a power segregator for the state distribution utilities or just be an adviser to the state distribution utilities for the implementation of the various central government schemes. ii. Implementation of such a mechanism would require the segregation of infrastructure and supply business in the distribution segment, which has been proposed in the draft amendment to the Electricity Act, 2003. Moreover, this would require the support of the state governments and state discoms. iii. Some of the challenges in the implementation of this measure include segregation of losses between wires and supply business, subsidy transfer and the cross-subsidization impact due to transition of consumers between the existing state discoms and the national discom. iv. The electricity is a concurrent subject, wherein the responsibility of electricity distribution rests with the state government and therefore, the central government cannot do much in this area. This has resulted in political tariffs, that is, free power in the agricultural sector and below power-tariffs for various industries. v. There was practically no state utility that made a profit because the state government expected the utility to subsidize tariffs by charging proportionately higher tariffs to those who could afford it, this meant that the industry and consumers that were relatively better off paid a great deal. In essence, the idea of an NEDC is something that is certainly needed, but that will face challenges, as it cannot undertake activities contradiction to the constitution. vi. Political consensus followed by proper legislation is a prerequisite for ensuring the NEDC’s success. The roles and responsibilities of various entities have to be clearly defined. vii. In the cases of areas under multiple licensees, the formation of the NEDC will mean a merging of physical networks limiting the existing distribution licensees to supply licensees with capital assets. This issue needs to be clarified. viii. The various policies proposed to be introduced by the government must be aligned. Conclusion In the past few years, the government has taken significant initiatives to address the challenges in the distribution segment. It is now looking to set up National Electricity Distribution Company. Considering the poor payment records of state-owned discoms, the proposed NEDC is expected to support state discoms in power distribution, procure electricity at competitive rates and help deal with stressed assets.

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