Dissecting the Discom Dilemma

By Nidhi Mardi

As the newly elected NDA government sits on India’s driving seat and turns on the ignition, speculators and economists predict a bumpy road ahead.  The biggest of these bumps is the ‘discom dilemma’ i.e.  the poor performance of the power sector which continues to be a source of asset quality risk for public as well as private banks in India. It is believed that the State Electricity Distribution Companies (Discoms) have been suffering from years of poor financial profiles and perpetual losses due to operational inefficiencies, lack of tariff and lack of actual disbursements by states and Centre for subsidies and electrification schemes. Many see 2014 as dawn of the process of ‘MODI’-fication of India, an important indicator of which will be hordes of enthusiastic investors, pumping life into a slowing economy and revamping it in an atmosphere of improved financial health.  However a big hurdle in this agenda is the dismal performance of discoms, where World Bank recently suggested the urgent need of revitalization of discoms to draw in investors in India. Discoms are believed to be the weakest link in the Indian power sector and the aforementioned World Bank Study recommended expanding their accountability and freeing up regulators from external interference.

The primary reasons for this dilemma are the mounting debts of Discoms, with financial losses growing without respite since 2001. Despite the enactment of the Electricity Act, 2003, the situation hasn’t changed and these mounting losses are predicted to be over Rs. 1.16 lakh crores in FY 2014-15. Keeping the losses under consideration, the first problem to be looked are the Transmission and Distribution Losses which are mainly due to the inefficiency of the power sector and has mainly occurred due to feeder metering in the past, and these losses are mainly attributed to theft for agricultural consumption. Secondly, there are aggregate technical and commercial loss (AT and C) which are due to the difference between units input into the system and the units for which payment is collected. Both these losses have mainly augmented due to power theft, incorrect billing, inefficiency in collection, leakage in transmission and distribution business as well as lack of new technology and investment. To understand the problem, the Shunglu Panel was set up by the Planning Commission.  The cost of supplying electricity increased at a rate of 7.4% annually in the past decade while the average tariff increased by 7.4% per year. However this tariff per unit has always been lower than the average cost per unit of supply.  Also subsidy committed by the state government is not being paid to these discoms regularly. Thus these discoms have to borrow at market rates which increase their financial losses. Many believe that though India has a good regulatory and legal framework, its compliance has been a major issue. At the same time analysis reveals that there is an increase in consumer aspiration where even BPL consumers have started using more electric points, fans, TVs and heaters. Dealing with this increased electrification needs requires increased subsidy from the government as well as cross subsidy from subsidizing consumers.  Cost of supply at the same time is increasing due to the increase in the cost of generation, interest cost as well in the rise in the cost of importing coal, oil, gas as well as unfunded pension liabilities and wage revision.

There are many solutions to this discom dilemma, the primary being the need to restructure the short term liabilities in order to revamp their financial position. There is also a severe need to follow the footsteps of Gujarat power distribution model, where the dilemma is tackled by technological upgradation to cut down on transmission losses as well as taking effective measures to reduce power theft, especially in rural areas. Also there is a need to reduce the cost of exporting coal and researching out new and innovative methods to exploit locally available mineral resources. There is a need to allow private players in the distribution sector to enter the market in different forms like multi licensing model, outsourcing, and privatization as well as introducing franchisee models.  There is also a need to introduce new technologies like SAMBANDH which is an IT based application designed to provide a comprehensive and centralized record of the billing and revenue recovery from various consumer segments. Adoption of such technologies is imperative in the reduction of billing frauds.

Apart from these solutions, we can also look for new power generation prospects in the alternate sources of energy. The easiest option being the adoption of the solution that students of IIT Madras have proposed i.e. the idea of Uninterrupted Direct Current. Recognizing the problem of power-cuts faced by the citizens of Chennai, they have offered a solution of supplying 48 volts of direct current to the households whose electricity consumption is minimal. The project, which is in its pilot phase, simply connects the power-lines of these households to the substations and since the establishment of such a connection uses up not more than 100 watts of power, it does not hamper the existing electricity connectivity in any manner. Also India can harness its wind energy like the Jodhpur discom used wind energy when the Northern and Eastern grid failure occurred. A similar solution is solar energy where Discoms in places like Delhi could use a net metering system which will reduce the electricity bill of the consumers by the amount of solar energy that is generated by them, substantially bringing down the electricity bill that is to be paid.

Hence there is an urgent need for innovative technology coupled with stronger support and regulation by the government to bailout these loss making discoms from their financial turmoil. It is important to buck up state governments and motivate them for effective and timely implementation of their power subsidy schemes. There is an urgent need of new and effective technical upgradation of the power sector to reduce avoidable losses due to technical lapses and poor infrastructure.  The need of the hour is to make the discoms ‘investor-ready’ and make Indian business environment financially welcoming for investors, a primary step in the process of ‘MODI’-fication of the Indian economy.