Post-UDAY, private sector may get a greater role in power distribution

The current financial year is the first year of nationwide operation of the ‘Ujjwal Discom Assurance Yojana’, or UDAY, which aims to improve the financial health of electricity distribution companies (discoms). Experts see a big role for private sector participation in electricity distribution, thanks to UDAY.

Today, 27 states – all but Odisha, West Bengal and Nagaland – have opted to join the Centrally-sponsored UDAY, which works by getting state governments to take over three-fourths of discoms’ debts, leaving the discoms with more funds for operations, and putting through incentives-backed measures to ginger up operations.

Tangible benefits The scheme was launched in November 2015, but as many as 17 states joined it only in 2016-17, nine of them in the last quarter of the year. Yet, some tangible benefits of the scheme are, according to the rating agency India Ratings and Research, already beginning to show up.

Green shoots are seen on the two crucial measures of performance of discoms – in reducing the gap between average cost of electricity supplied and the average revenue realisation and reduction in ‘aggregate technical and commercial’ (AT&C) losses, which is basically the loss of energy due to inefficiency of equipment and theft of electricity.

The gap between cost and realisation narrowed by 15 paise. Bridging this gap can be done by either raising tariffs, which is politically tough, or by reducing AT&C losses. These ‘line losses’ have no doubt come down but a lot more needs to be done. AT&C losses came down by 4.22 per cent in the first nine months of 2016-17 over the previous financial year, but that is an average figure. In the first nine months of 2016-17, twelve states saw higher AT&C losses than in the previous year, showing that the picture is not rosy everywhere.

Structural changes Devika Malik, analyst at India Ratings & Research, notes that the long-term success of UDAY will come only from “structural changes aimed at bringing down AT&C losses and improvement in billing and collection efficiency.” This essentially means installing smart meters and making sure that every consumer pays his dues.

Data shows that India has a long way to go in this. Information provided by the Ministry of Power pertaining to 22 states, shows that only 3 per cent of five lakh consumers who consume over 500 kWhr a month and only 1 per cent of 17.5 lakh consumers who take between 200 kWhr and 500 kWhr, are measured using smart meters.

AT&C losses In improving billing and collection efficiency experts see a greater role for the private sector. Recent experience has shown that in places where the private sector has been co-opted, things have gotten better.

For example, Feedback Energy Distribution Company (FEDCO), which operates distribution networks in four districts of Odisha, serving 5.45 lakh consumers, has been able to bring down AT&C losses by 23 per cent over the last four years.

Similarly, Torrent Power has brought down AT&C losses by 25 per cent in its area, Bhiwandi, in Maharashtra.

Companies such as FEDCO, Torrent Power and India Power (of SREI group, which operates in Gaya) are ‘distribution franchisees’, to whom the discom outsources operations.

FEDCO, as a distribution franchisee of the Odisha discom, CESU, is unique in that 90 per cent of the consumers in its area are rural. Yet, the company has been able to double collections to Rs 400 crore in its area in the last four years of its operation, when the input energy increased 22 per cent, thanks to 67 per cent increase in ‘average revenue per user’. This was done partly by installing smart meters that leave no scope for human intervention and hence prevent corruption by meter reading staff—a big problem in government-owned discoms.

Consumer resistance But the issue goes deeper than just installing smart meters. The big challenge is to overcome consumers’ resistance for metering. FEDCO’s Managing Director, Devtosh Chaturvedi, says that the company maps the villages and segregates the ‘problem villages’ from the rest.

A separate team that specialises in community engagement takes over the ‘problem villages’ well before roll-out of meters starts. In the last two years, the number of ‘most difficult villages’ has come down from 91 to 31, Chaturvedi says. As for collection, FEDCO created a women’s self help group, Sefali (for Society’s Empowerment for Assured Livelihood), whose job is to collect dues, facilitate new connections and lookout for theft.

On top of all this rides data analytics to detect anomalies that flag frauds like tampering with the meters. This has come in handy many times.

How to privatise The problem of privatisation of distribution is political. Until the Electricity Act of 2003, there were only two instances of privatisation. The first was Odisha, when the state was split into four; BSES (which became Reliance) bagged three and the American company, AES, got the fourth. The other was Delhi, which went to the Tatas.

However, the Electricity Act introduced the ‘distribution franchisee’ concept, where the assets remain with the government-owned discom, but the function is outsourced to a private company, which gets paid on the basis of the efficiency it brings into operations. This has made privatisation of distribution function less political.

PPP model More variants of public-private partnership in distribution are emerging, such as ‘management operator’ where the key managerial positions of the discom are manned by the private sector, and models where the private sector co-invests.

The imperative of bringing down AT&C losses is giving scope for these many variants of PPPs. “Today discoms want any help in reducing AT&C losses,” says Chaturvedi. “They want high accountability private sector participation.”

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